UNION OF INDIA & ORS.versusM/S. HINDUSTAN ZINC LTD.

                    [2014] 6 S.C.R. 287


                 UNION OF INDIA & ORS.                            A
                              v.
                MIS. HINDUSTAN ZINC LTD.
              (Civil Appeal No. 8621 of 2010)
                       MAY 06, 2014
                                                                  B
          [ANIL R. DAVE AND A.K. SIKRI, JJ.]

    Central Excise Rules, 1944:

     r.57CC r/w rr.57A, 578 and 570 -Adjustment of Modvatl        C
Cenvat credit on inputs used in exempted final products and
maintenance of separate inventory and accounts of inputs by
the manufacturer - Sulphuric acid, caustic soda, trichloro
ethylene, Phosphofyl A and Phosphoryl B, cleared by
assessees to fertilizer plants in terms of bonds executed by
latter - Held: Technologically, commercially and in common        D
parlance, sulphuric acid is treated as a by-product in
extraction of non-ferrous metals by companies not only in
India but all over the world -The facts regarding caustic soda,
trichloro ethylene, Phosphoryl A and Phosphoryl B are
identical - No doubt, r.57CC requires an assessee to              E
maintain separate records for inputs which are used in the
manufacture of two or more final products one of which is
dutiable and the other is non-dutiable - But in the case of the
respondents, the entire quantity of zinc concentrate has
indeed been used in the production of zinc and no part can        F
be traced in the sulphuric acid - It is for this reason,
respondents maintained the inventory of zinc concentrate for
the production of zinc and, therefore, there was no necessity
and indeed it is impossible, to maintain separate records for
zinc concentrate used in the production of sulphuric acid -       G
Therefore, High Court has rightly held that requirements of
r.57CC were fully met in the way in which respondents were
maintaining records and inventory and the mischief of

                             287
                                                                  H
    288       SUPREME COURT REPORTS               [2014] 6 S.C.R.


A   recovery of 8% under r. 57 CC on exempted sulphuric acid is
    not attracted - Notification No. 612002-CE.

          Constitution of India, 1950:

       Art. 226 - Alternative remedy and maintainability of writ
B petition - Writ petition filed challenging show cause notice
  issued alleging violation of r. 57CC of Central Excise Rule -
  Held: It was not merely the validity of show cause notice which
  was questioned - In the writ petition even the vires of r. 57 CC
  were challenged - That was a reason because of which the
C writ petitions were entertained, and rightly so, it is a different
  matter that while interpreting the rule, the High Court chose
  to read down the said rule and to give an interpretation which
  would save it from the vice of unconstitutionality - Central
  Excise Rules, 1944 - r. 57CC.
D
       The instant appeals, filed by the revenue, arose out
  of the judgments of the High Court and the Trtbunal
  allowing the claim of the respondents-assessees that
  they were_entitled to Modvat/Cenvat Credit on inputs
E used in producing sulphuric acid, caustic soda flakes,
  trichloro ethylene, Phosphory/ A and Phosphoryl B which
  they cleared to fertilizer plants under exemption in terms
  of bonds executed by fertilizer plants in terms of
  Notification No. 6/2002-CE.

F      The questions for consideration before the Court
  were: as to the entitlement of the respondents/
  assessees to Modvat/Cenvat Credit for the use of inputs
  rn the· manufacture of final products which are exempt or
  subject to NIL rate of duty; and the requirement of the
G assessee to maintain separate accounts with respect to
  inputs used in dutiable goods as well as exempted goods
  and the liability arising on the failure of the assessee to
  maintain such separate accounts.

          Allowing the appeals, the Court
H
             UNION OF INDIA v. HINDUSTAN ZINC LTD.             289


          HELD: 1.1. The respondent in CA Nos. 8621-8630/2010 A
    1
'   claimeed Modvat Credit on duties paid on inputs used at
    smelter by it vis-a-vis the part of sulphuric acid produced
    by it in its sulphuric acid plant and sold to IFFCO, a
    manufacturer of fertilizer, entitled to avail concession of
    acquiring sulphuric acid used by it as an input in B
    manufacture of fertilizers on payment of duties in terms
    of the exemption notifications issued from time to time. So
    far as the sulphuric acid is concerned; as an end product
    it is chargeable to duty under tariff head 28. The rate of
    duty provided under the Tariff Act is 16% ad valorem. There c
    is no exemption as such to the manufacturer from the
    payment of duty on manufacture of sulphuric acid when
    removed. Under General Exemption No. 66 issued under
    sub-s. (1) of s.5A of the Central Excise Act the Central
    Government has exempted exciseable goods of the D
    description specified in (3) of the table appended to the .
    said Exemption Order. In so far as sulphuric acid which is .
    used in the manufacture of fertilizers is concerned, nil duty
    is provided subject to condition No. 5 mentioned in
    Annexure appended to General Exemption No. 66. [para
                                                                  E
    10-11] [299-G-H; 300-A-C]
             1.2. Sulphuric acid is indeed a by-product. In fact, it
        is so treated by the respondents in their balance sheet
        as well as various other documents which were filed by
        them in the courts below. It is also a common case of the
                                                                       F
        parties that Hindustan Zinc Limited and Birla Copper
        were established to produce zinc and copper
        respectively and not for the production of sulphuric acid.
        Emergence of sulphur dioxide in the calcination process
        of concentrated ore is a technological necessity and then      G
        conversion of the same into sulphuric acid as a non-
        polluting measure cannot elevate the suiphuric acid to
        the status of final product. Technologically, commercially
        and in common parlance, sulphuric acid is treated as a
        by-product in extraction of non-ferrous metals by
                                                                       H
    290      SUPREME COURT REPORTS             [2014] 6 S.C.R.


A   companies not only in India but all over the world. That
    is the reason why the department accepted the position
    before the Tribunal that sulphuric acid is a by-product. In
    the circumstances the position taken by the appellant
  . before this Court that sulphuric acid cannot be treated as
B a by-product cannot be countenanc~d. [para 16-17] [304-
    8-F]
         2.1. Rule 57CC of the Central Excise Rules, 1944
    requires an assessee to maintain separate records for
    inputs which are used in the manufacture of two or more
C   final products one of which is dutiable and the other is
    non-dutiable. In that event, r.57 CC will apply. But in the
    case of the respondents, it is not as though some
    quantity of zinc ore concentrate has gone into the
    production of sulphuric ac.i(j, that applicability of r.57 CC
D   can be attracted. On the other hand, the entire quantity
    of zinc ore concentrate has indeed been used in the
    production of zinc and no part of it can be traced in the
    sulphuric acid. It is for this reason, the respondents
    maintained the inventory of zinc concentrate for the
E   production of zinc and, therefore, there was no necessity
    and indeed it is impossible, to maintain separate records
    for zinc concentrate used in the production of sulphuric
    acid. [para 20-] [305-D-H; 306-A]

        2.2. Therefore, the High Court has rightly held that
F
    the requirements of r.57CC were fully met in the way in
    which the respondents were maintaining records and
    inventory and the mischief of recovery of 8% under r.57
    CC on exempted sulphuric acid is not attracted. [para 20]
G   [306-8]
        2.3. In the case of Birla Copper (C.A. No. 2337 of
    2011 ), the manufacturing process of copper from the
    copper ore concentrate is similar to that of zinc and the
    emergence of sulphuric acid as a by-product was
H   conceded by the department before the Tribunal. Birla
       UNION OF INDIA v. HINDUSTAN ZINC LTD.              291


Copper were selling the by-product sulphuric acid to A
various industries on payment of duties and clearing the
sulphuric acid without payment of duty to the fertilizer
plants based on the bonds executed by the latter. The
Tribunal has decided the matter in favour of the assessee
following the judgment in the case of Swadeshi Limited. 8
The facts in other appeals regarding caustic soda flakes,
trichloro ethylene, Phosphoryl A and Phosphoryl B
appear to be identical to the facts and the law laid down
in Swadeshi Polytex. Therefore, this judgment is squarely
applicable. [para 4,22 and 25) [306-A-C; 308-E]
                                                                 c
      Swadeshi Polytex Ltd. v. CCE; 1989 (44) ELT 794 - relied
on.
     2.4. Furthermore, the provisions of r.57CC cannot be
read in isolation. In order to understand the scheme of D
Modvat Credit contained in this Rule, a combined reading
of rr.57A, 578 and 570 alongwith r.57CC becomes
inevitable. It can be easily discerned from a combined
reading of these provisions that the terms used are
'inputs', 'final products', 'by-product', 'waste products' E
etc. These terms have been used taking into account
commercial reality in trade. In that context in terms of r.57
CC, reference to final product being manufactured with
the same common inputs becomes understandable. [para
26) [308-F-H; 309-A)
                                                                 F
     CCE v. Gas Authority of India Ltd.; 2008 (232) ELT 7 -
relied on.
    3. As regards the plea of alternative remedy and non-
maintainability of the writ petition filed by H_industan Zinc
Limited before the High Court, though it was filed at show G
cause stage, it was not merely the validity of show cause
notice which was questioned. In the writ petition even the
vires of r. 57 CC were challenged. That was a reason
because of which the writ petitions were entertained, and
                                                                 H
    292        SUPREME COURT REPORTS              [2014] 6 S.C.R.


A   rightly so, it is a different matter that while interpreting the
    rule, the High Court chose to read down the said rule and
    to give, an interpretation which would save it from the
    vice of unconstitutionality. Moreover, other statutory
    appeal filed by the Department is against the order of
B   CESTAT, which involves the same question. [para 28]
    [309-F-H]
        Sterlite Industries India Ltd. v. CCE 2005 (191) ELT 401;
    Binani Zinc Ltd. v. Commissioner of Central Excise, Cochin
    2005 (187) E.L.T. 390 (Tri. - Bang.); and Rallis India Ltd. v.
C   Union of India; 2009 (233) ELT 301 - cited.
                           Case Law Reference:
          2005 (191) ELT 401       cited                 para 4
          2005 (187) E.L.T. 390
D         tTri. - Bang.)          .cited                 para 6
          1989 (44) ELT 794        relied on             para 24
          2008 (232) ELT 7         relied on             para 24
          2009 (233) ELT 301       cited                 para 24
E       CIVIL APPELLATE JURISDICTION : Civil Appeal No.
    8621 of 2010.
          From the Judgment and Order dated 23.01.2007 of the
    High Court of Judicature for Rajasthan at Jodhpur in Civil Writ
    Petition No. 6776 of 2005.
F                                  WITH
    Civil Appeal No. 1181 of 2012
    Civil Appeal No. 2337 of 2011
    Civil Appeal Nos. 5322, 8622, 8623, 8624, 8625, 8626, 8627,
G   8628, 8629, 8630 and 8631 of 2010.
        K. Swami, Sunita Rani Singh, Sunita Rao, B.K. Prasad,
    B.V. Balaram Das, Anil Katiyar, B. Krishna Prasad, Arvind
    Kumar Sharma for the Appellants.
H
       Uf\llON OF INDIA v. HINDUSTAN ZINC LTD.                 293


      S.K. Bagaria, Alok Yadav, Praveen Kumar, Sunaina                 A
 Kumar, M.P. Devanath, Manish Bishnoi, Abhay A. Jena, Anuj
 Dhir, Ranjit Raut, Bina Gupta, Nitish Massey, Sanjeev K.
 Kapoor for the Respondent.      ·

      The Judgment of the Court was delivered by
                                                                       B
       A.K. SIKRI, J. 1. All these appeals raise identical question
  of law, which has arisen in almost similar circumstances. In
  fact, the issue involved was decided by the High Court in a
  batch of Writ Petitions filed by M/s. Hindustan Zinc vide
  judgment dated 23.1.2007 against which SLP. under Article 136        C
  of the Constitution was filed in which leave has been granted.
  In other case, same issue is decided by the CESTAT against
. which statutory appeal is r>referred. That is precisely the reason
  that all these appeals were bunched together and collectively
 hea~.                                                                 D
         \

       2. At the outset, 'the controversy involved may be reflected
 by pointing out that the questions for consideration are as to
 the entitlement of the Respondents/ assessees to Modvat/
 Cenvat Credit for the use of inputs in the manufacture of final
                                                                    E
·products which are exempt or subject to nil rate of duty and the
 requirement of the assessee to maintain separate accounts
 with respect to inputs used in dutiable goods as well as
 exempted goods and the liability arising on the failure of the
 assessee to maintain such separate accounts. In Civil Appeal.
 Nos. 8621-8630 of 2010, we are concerned with sulphuric acid. F
 In Civil Appeal No. 8631 of 2010, .it is caustic soda flakes and
 trichloro ethylene. In Civil Appeal No. 2337 of 2011, the product
 is again sulphuric acid and in the case of Civil Appeal No. 5322
 of 2010 and the other connected matter of M/s Rallis India Ltd,
 it is Phosphoryl A and Phosphoryl B. The issue is as to whether G
 the Assessees (respondents) are entitled to Modvat/ Cenvat
 Credit on inputs used in the manufacture of the aforementioned
 exempted (or subject to NIL rate of duty) final products.

      3. In all these appeals filed by the Revenue, it has taken       H
     294      SUPREME COURT REPORTS                [2014] 6 S.C.R.


A    the position with the common contention as to whether the
     Respondents are liable to pay 8% excise duty as an amount
     under Rule 57CC of the Central Excise Rules, 1944 or 57AD
     of the Central Excise Rules, 2000 or Rule 6 of the Cenvat Credit
     Rules, 2004 (hereinafter referred to as 'Rules') on the value of
8    by-product namely sulphuric acid which was cleared to fertilizer
     plants under exemption in terms of the bonds executed by the
     fertilizer plants.

          4: At this stage we would describe the manufacturing
     process in all three cases and the facts leading to the filing of
C    the present appeal.

     Hindustan Zinc Ltd. CC.A. No. 8621-8630/2010)

          (i) Hindustan Zinc Ltd. obtained zinc ore concentrate from
0    the mines on the payment of excise duty which is used as an
     input for the production of zinc. Zinc ore is predominantly
     available as Zinc Sulphide (ZnS).

         (ii) When ZnS is heated (calcined) at high temperature in
  the presence of oxygen, zinc oxide (ZnO) and sulphuric acid
E are produced. Zinc Oxide is further oxidised to produce zinc.
  Sulphur obtained as a technological necessity is a pollutant and
  is, therefore, converted into sulphur dioxide in the presence of
  catalysts like Vanadium Pentaoxide & Hydrogen Peroxide.·
  Sulphuric acid is converted into sulphur and the respondent
F does not take any Cenvat Credit on the inputs used after the
  emergence of sulphur dioxide. The sulphuric acid produced as
  a by-product is sold on payment of excise duty to various
  industries. Some quantities of sulphuric acid are sold to
  fertilizer plants in terms of notification No. 6/2002~CE on the
G execution of bonds by the fertilizer plants to the satisfaction of
  the excise authorities. The said sulphuric acid is used for the
  p'roduction of zinc.

         (iii) The excise department took a view that in terms of
     Rule 57 CC of the Rules, the respondents were obliged to
.H
       UNION OF INDIA v. HINDUSTAN ZINC LTD.                     295
                   [A.K. SIKRI, J.]

 maintain separate accounts and records for the inputs used in           A
 the production of zinc and sulphuric acid and in the absence
 of the same the respondents were obliged to pay 8% as an
 amount on the sale price of sulphuric acid to the fertilizer plants
 in terms of Rule 57 CC. The respondent defended the more
 by contending that the very purpose of the grant of exemption           B
 to sulphuric acid was to keep the input costs at the lowest for
 the production of fertilizers during the relevant period. Fertilizers
 themselves were wholly exempted from the payment of excise
 duty because the government wanted the farmgate price to the
 farmer should be at the lowest. In fact, the government grants          c
 subsidies to the fertilizer plants for the difference between the
 cost of production and sale price determined by the
 government. It was their defence that any duty demand on the
 sulphuric acid will defeat the very purpose of grant of exemption
 and make the fertilizer cost higher than the desirable level. In        D
 such a scenario, such higher cost will have to be compensated
 by the government as subsidy.

        (iv) Respond¥nt challenged the show cause notices by
. filing writ petitions under Article 226 before the Rajasthan High
  Court, primarily challenging the vires of Rule 57 CC on the            E
  ground that the Central Government by subordinate legislation,
  can not fix rates of duties which is the prerogative of the
  Parliament under Section 3 of the Central Excise Act, 1944 read
  with Central Excise Tariff Act, 1975. Other contentions
  regarding the vires of Rule 57 CC were also raised. As an              F
  afternative, it was pleaded that even if Rule 57 CC is to be held
  as intra vires, the demand raised in the show cause notices
  will not survive on proper interpretation of Rule 57CC of the
  Rules and hence is to be quashed. The High Court decided
  the petition in favour of the respondents on the interpretation        G
  of Rule 57CC a[ld Rule 57D itself, without going into the
  question relating to the vires. Department is in appeal before
  this Court against this judgment.

                                                                         H
    296       SUPREME COURT REPORTS                 [2014] 6 S.C.R.


A   Birla Copper (C.A. NO. 2337/2011)

           (i) The manufacturing process of copper from the copper
    ore concentrate is similar to that of zinc and the emergence of
    sulphuric acid as a by-product was conceded by the
B   department before the Tribunal. Here again, Birla Copper were
    selling the by-product sulphuric acid to various industries on
    payment of duties and clearing the sulphuric acid without
    payment of duty to the fertilizer plant based on the bonds
    executed by the fertilizer plants. The Tribunal in this case
C   decided the matter in favour of the respondent following its own
    judgment in the case of Sterlite Industries India Ltd. v. CCE
    reported as 2005 (191) ELT 401. In that case Sterlite was also
    a manufacturer of copper and a competitor for Birla Copper
    using the same process and the Tribunal held that excise duty
D   was not payable under 57 CC on the sulphuric acid cleared to
    fertiliser plants in view of this court's decision in the case of
    Swadeshi Polytex Ltd. v. CCE reported as 1989 (44) ELT 794.
    The Tribunal also in the case of Sterlite (supra) held that 57 CC
    will apply only when same inputs are being used in manufacture
    of two or more final products, one of which is exempt from
E   payment of excise duty and the assessee was not maintaining
    separate account and separate inventory. In this case, the
    Tribunal held that sulphuric acid was not a final product but only
    a by-product and hence Rule 57 CC will not apply, particularly
    when we read the same in the light of Rule 57D. Department's
F   appeal is against this order of the Tribunal. Significantly, the
    department has not disputed the emergence of sulphuric acid
    as a by-product. We are also informed that the Department did
    not file any appeal challenging the decision of Sterlite (supra)
    and the same has been accepted by the Department. In the
G   present appeal, the contention of the Department is that the
    Sterlite (supra) will apply for the period prior to 1.4.2000 when
    Rule 57 D was in force and post 1.4.2000, the Rule was
    deleted.

H
        UNION OF INDIA v. HINDUSTAN ZINC LTD.                  297
                                 .
                    [A.K. SIKRI, J.]
 Rallis India Ltd. (C.A. No. 5322/2010)                                A

       (i) Rallis India is engaged in the manufacture of Gelatin for
 use in pharmaceutical industry for manufacture of capsules.
 Gelatin is produced by reacting Hydrochloric Acid with bovine
 animal bones. During the reaction, the bone converts into             B
 ossein which in turn is used to produce gelatin. The inorganic
 substances like phosphorous etc. are washed with water which
·is called mother liquor, spent liquor or phosphoral liquor. When
 these by-products and waste products are cleared without
 payment of duty, the Excise Department demanded duty @ 8'.<i          C
 in terms of Rule 57 CC. Here again, whether the mother liquor
 is a waste product or by-product was not disputed by the
 Department before the Tribunal or before the Bombay High
 Court. The Tribunal decided the matter against the assessee
 by interpretating Rule 57 CC. The same was challenged before
 the Bombay High Court, which has reversed the decision of the         D
 Tribunal. The Department is in appeal against the decision of
 the High Court.

      The aforesaid narration discloses the identity of the issue
 in the three set of.appeals. Henceforth, in our discussion,           E
 reference would be to the Hindustan Zinc Ltd., as the
 respondent.

       5. The respondent herein is a Public Limited Company
  and it was disinvested in April, 2002. The respondent is
  engaged in the manufacture of non-ferrous metals like zinc, lead     F
  as well as Sulphuric Acid and Copper Sulphate. The said
  products are chargeable under Chapter Sub-heading No.
  2807 .00, 7901.10 and 2833.10 respectively of the First
  Schedule to the Central Excise Tariff Act, 1985 respectively
  among their other products. A show cause notice was issued           G
  on 15.3.2005 to the assessee respondent for recovery of Rs.
  48,39,883/- under Rule 12 of the erstwhile CENVAT Credit
  Rules, 2002 and Rule 14 of CENVAT Credit Rules 2004 read
. with Section 11 (e) of the Central Excise Act, 1944 along with
  interest and penal provisions.                                       H
    298     SUPREME COURT REPORTS                [2014] 6 S.C.R.


A       6. The respondent filed Writ Petition No. 6776 of 2005
  before the High Court, Jodhpur challenging the constitutional
  validity of Rule 6 of the Cenvat Credit Rules, 2004 as well as
  the impugned show cause notice dated 15.3.2005. The
  respondent submitted in the said writ petition that Sulphur
B Dioxide Gas is produced during the manufacture of Zinc and
  lead and due to environmental control requirements, they are
  prohibited from releasing the same in the air. Therefore,
  Sulphur Dioxide is used for manufacture of Sulphuric Acid
  which is the input for manufacture of non-ferrous metals like zinc
c and lead cannot be considered as common inputs for
  manufacture of Sulphuric Acid in as much as Sulphur is the only
  component in concentrate which goes into manufacture of
  Sulphuric Acid. Further, the respondent contended that Rule 6
  of the Cenvat Credit Rules is beyond the power of Central
D Government and hence ultra vires the provisions of the Act. The
  constitutional validity of Rule 57CC of the erstwhile Modvat I
  Credit Rules was also challenged. It was stated that the Tribunal
  in the judgment in the matter of Binani Zinc Ltd. v.
  Commissioner of Central Excise, Cochin - 2005 (187) E.L.T.
E 390 (Tri. - Bang.) has held that Rule 57CC does not make any
  distinction between exempted final product and exempted bye-
  product and hence, no useful purpose would be served by
  approaching the Tribunal.

       7. The appellant contested the said Writ Petition by way
F of counter affidavit in which the appellant submitted that the
  respondent - assessee was not maintaining separate inventory
  and account for the receipt and use of inputs in relation the
  manufacture of final product i.e. Sulphuric Acid cleared at Nil
  rate of duty as required in terms of provisions of Rule 6(2) of
G the Rules. That it was mandatory to follow the provisions of the
  Rules if common inputs were used for the manufacture of
  dutiable final product and exempted goods. It was also
  contended that assuming without admitting that Sulphuric Acid
  is by-product, it was mandatory to reverse an amount equal to
H 8% of the value of exempted goods as the words used in the
       UNION OF INDIA v. HINDUSTAN ZINC LTD.                   299
                   [A.K. SIKRI, J.]
provisions of Rule 6 of the Rules "is exempted goods and not           A
exempted final product". By way of preliminary submission, it
was pleaded that the Writ Petition is pre-mature and the
assessee had not even replied to the show cause notice.

      8. The High Court after examining the manufacturing
                                                                       B
 process as well as Rule position, came to the conclusion that
 prohibition against claiming Modvat Credit on exempted goods
 or subject to nil rate of duty applies in case where such
 exemption from payment of duty or nil rate of duty on end
·product is predictably known at the time the recipient of inputs      C
 is entitled to take credit of duties paid on such inputs. The fact
 that due to subsequent notification or on contingency that may
 arise in future, the end product is cleared without payment of
 duty due to exemption or nil rate of duty does not affect the
 availing of modvat credit on the date of entitlement. If on the
 date of entitlement, there is no illegality or invalidity in taking   D
 credit of such modvaU Cenvat Credit, the right to utilize such
 credit against future liability towards duty become indefeasible
 and is not liable to be reversed in the contingency discussed
 above.
                                                                       E
     9. On these findings, the High Court has allowed the Writ
Petitions filed by the respondent-Hindustan Zinc. In the process
there is a detailed discussion of the relevant rules explaining
the scheme contained therein; on the aspe(ft of payment of 8%
excise duty under Rule 57 CC of Central ~1~cise Rules, 1944,           F
57AD of the Central Excise Rules, 2000 and Rule 6 of the
Cenvat Credit Rules, 2004.

      10. From the aforesaid narration, it becomes apparent that
 the respondent wants to avail Modvat Credit on duties paid on
 inputs used at smelter by it vis-a-vis the part of sulphuric acid     G
 produced by it in its sulphuric acid plant and sold to IFFCO, a
 manufacturer of fertilizer, who is entitled to avail concession of
 acquiring sulphuric acid used by it as an input in manufacture
 of fertilizers on payment of duties in terms of the exemption
 notifications issued from time to time. So far as the sulphuric
              SUPREME COURT REPORTS                   [2014] 6 S.C.R.
    300

A   acid is concerned, as an end product it is chargeable to du~y
    under tariff head 28. The rate of duty provided under the Tariff
    Act is 16% ad valorem. There is no exemption as such to the
    manufacture from the payment of duty on manufacture of
    sulphuric acid when removed. Under general exemption No. 66
B   issued under sub-section 1 of Section 5A of the Central Excise
    Act the Central Government has exempted exciseable goods
    of the description specified in (3) of the table appended to the
    said Exemption Order.

        11. In so far as sulphuric acid which is used in the
C   manufacture of fertilizers is concerned, nil duty is provided.
    However, table indicates that it is subject to condition No. 5.
    Condition No. 5 is mentioned in Annexure appended to General
    Exemption No. 66 which reads as under:-

D         "5. Where such use is elsewhere than in the factory of
          production the exemption shall be allowed if the procedure
          laid down in the Central Excise (Removal of Goods at
          Concessional Rate of Duty for manufacture of Excisable
          goods) Rules, 2001, is allowed."
E
         12. The appellant contends that clearance of sulphuric acid
    as a by-product to fertilizer plants attract nil rate of duty in terms
    of notification no. 6/2002-CE, though on the basis of bonds
    posted by the fertilizer plants, but nonetheless, the goods are
    cleared under total exemption or nil rate of duty and hence
F   57CC is attracted. It is their contention that Rule 57 D has no
    application.

       13. Since the answer depends on the question as to
  whether Rule 57CC applies or Rule 570 is attracted, as well
G as on the correct interpretation of these Rules, we reproduce
  these rules, at this juncture:-

    Rule 57CC -

          "Adjustment of credit on inputs used in exempted final
H         products or maintenance of separate inventory and
     UNION OF INDIA v. HINDUSTAN ZINC LTD.                   301
                 [A.K. SIKRI, J.]

    accounts of inputs by the manufacturer, (1) Where a              A
    manufacturer is engaged in the manufacture of any final
    product which is chargeable to duty as well as in any other
    final product which is exempt from the whole of the duty of
    excise leviable there on or is chargeable to nil rate of duty
    and the manufacturer takes credit of the specified duty on       B
    any inputs (other than inputs used as fuel) which is used
    as ordinarily used in or in relation to the manufacture of
    both the aforesaid categories of final products, whether
    directly or indirectly and whether contained in the said final
    products or not, the manufacture shall, unless the               c
    provisions of sub-rule (9) are complied with, pay an amount
    equal to 8% of the price (excluding sales. tax and other
    taxes, if any, payable on such goods) of the second
    category of final products charged by the manufacturer for
    the sale of such goods at the time of their clearance from       D
    the factory.
'   The amount mentioned in sub-rule(1) shall be paid by the
    manufacturers by adjustment in the credit account
    maintained under sub-Rule(?) of Rule 57G or in the
    accounts maintained under Rule 9 or sub-Rule 173G and            E
    if such adjustment is not possible for any reason, the
    amount shall be paid in cash by the manufacturer availing
    of credit under Rule 57A.

    The provisions of sub-rule(1) shall not apply to final           F
    products falling under Chapter 50 to 63 of the Schedule
    to the Central Excise Tariff Act, 1985 (5 of 1986).

    (4) The provisions of sub-rule (1) shall also not apply to-

    (a) Articles of plastics falling within Chapter 39;              G

    (b) Tyres of a kind used on animal drawn vehicles or
    handcarts and their tubes, falling withm Chapter 40;


                                                                     H
    302       SUPREME COURT REPORTS                  [2014) 6 S.C.R.


A         (c) Black and white television sets, falling within Chapter
          85 and

          (d) News print, in rools or sheets, falling within Chapter
          heading No. 48.01; which are exempt from the whole of
          the duty of excise leviable thereon or chargeable to nil rate
B
          duty.

          (5) In the case of final products referred to in sub rule (~)
          or sub-rule(4) and excluded from the provisions of sub-
          rule(1 ), the manufacturer shall pay an amount equivalent
c         to the credit of duty attributable to inputs contained in such
          final products at the time of their clearance from the factory.

          The provisions of sub-rule (1) shall also not apply to final
          products which are exported under bond in terms of the
D         provisions of Rule 13.

          The provisions of sub-rule (1) shall apply even if the inputs
          on which credit has been taken are not actually used or
          contained in any particular clearance of final products.

E         If any goods are not sold by the manufacturer at the factory
          gate but are sold from a depot or from the premises of a
          consignment agent or from any other premises, the price
          (excluding sales tax and other taxes, if any, payable) at
          which such goods are ordinarily sold by the manufacture
F         from such depot or from the premises of a consignment
          agent or from any other premises shall be deemed to be
          the price for the purpose of sub-Rule (1 ).

          In respect of inputs (other than inputs used as flue) which
          are used in or in relation to the manufacturer of any goods,
G
          which are exempt from the whole of the duty of excise
          leviable thereon or chargeable to nil rate of duty, the
          manufacturer shall maintain separate inventory and
          accounts of the receipt and use of inputs for the aforesaid'

H
      UNION OF INDIA v. HINDUSTAN ZINC LTD.                  303
                  [A.K. SIKRI, J.]

    purpose and shall not take credit 6f the specified duty paid     A
    on such inputs."

Rule 570 -

    "Credit of duty not to be denied or varied in certain
    circumstances - (1) Credit of specified duty shall not be        B
    denied or varied on the ground that part of the inputs is
    contained in any waste, refuse or by-product arising during
    the manufacture of, the final product, or that the inputs have
    become waste duri~g the course of manufacture of the final
    product, whether or not such waste or refuse or bycproduct       C
    is exempt from the whole of the duty of excise leviable
    thereon or charge~ble to nil rate of duty or is not specified
    as a final productunder Rule 57A."

     14. Mr. Parasaran, the learned Solicitor General, opened D
his submissions by challenging the very approach of the High
Court in entertaining the writ petitions as according to him, stage
therefor had not ripened. His contention in this behalf was that\
merely a show cause notice was issued and no final decision
was taken on the said show cause notice. However, instead
                                                                    E
of showing cause, writ petitions were filed seeking quashing
of the show cause notice which should have been dismissed
as premature. He referred to certain judgments of this court as
well, wherein it· is held that High Court, normally, should not
entertain writ petition questioning the validity of the show cause. F
notice.

     15. On merits, the learned Solicitor General argued that
the interpretation furnished by the High Court to Rule 57CC of
the Modvat Rules and Rule 6 of CENVAT Rules, respectively
was not correct. The High Court was required to apply literal        G
rule of interpretation when the language of these rules is clear
and unambiguous.

     16. Before we advert to the interpretations of the aforesaid
provisions and to discuss the argument of the Union of .India
                                                                     H
    304       SUPREME COURT REPORTS                   [2014] 6 S.C.R.


A   as to whether literal interpretation is to be given to Rule 57CC,
    it would be necessary to understand the properties of sulphuric
    ac;d. From what is explained above including the use of
    sulphuric acid for the production of zinc, i~ becomes apparent
    that sulphuric acid is indeed a by-product. In fact, it is so treated
B   by the respondents in their balance sheet as well as various
    other documents which were filed by the respondents in the
    courts below. It is also a common case of the parties that
    Hindustan Zinc Limited and Birla Copper were established to
    produce zinc and copper respectively and not for the production
c   of sulphuric acid. It was argued by the learned Counsel for the
    respondents, which could not be disputed by the learned
    Solicitor General, that emergence of sulphur dioxide in the
    calcination process of concentrated ore is a technological
    necessity and then conversion of the same into sulphuric acid
    as a non-polluting measure cannot elevate the sulphuric acid
0
    to the status of final product. Technologically, commercially and
    in common parlance, sulphuric acid is treated as a by-product
    in extraction of non-ferrous metals by companies not only in
    India but all over the world. That is the reason why the
    department accepted the position before the Tribunal that
E   sulphuric acid is a by-product.

         17. In these circumstances the position taken now by the
    appellant that sulphuric acid cannot be treated as a by-product
    cannot be countenanced. Mr. S.K. Bagaria, learned Senior
F   Counsel appearing for the respondent while explaining the
    manufacturing process in detail, also pointed out that the ore
    concentrates (Zinc or Copper) are completely utilised for the .
    production of zinc and copper and no part of the metal, zinc or
    copper forms part of the sulphuric acid which is cleared out. It
G   was submitted that the extraction of zinc from the ore
    concentrate will inevitably result in the emergence of sulphur
    dioxide as a technological necessity. It is not as though the
    Respondents can use lesser quantity of zinc concentrate only
    to produce the metal and not produce sulphur dioxide. In other
H   words, a given quantity of zinc concentrate will result in
      UNION OF INDIA v. HINDUSTAN ZINC LTD.                305
                  [A.K. SIKRI, J.]
emergence of zinc sulphide and sulphur dioxide according to        A
the chemical formula on whic~ respondents have no control.

    18. On these facts this ~ourt is inclined to accept the
version of the respondents that the ore concentrate is
completely consumed in the e~raction of zinc and no part of
                                                                   8
the metal is forming part of sulphuric acid.

     19. Once we proceed keeping in mind the aforesaid .
factual, technological and commercial position available on the
records, it has to be accepted that the respondents have
consumed the entire quantity of zinc concentrate in the C
production of zinc.

     20. Let us now examine the position containe·d in Rule 57
CC on the touchstone of the aforesaid position. No doubt, Rule
57CC requires an assessee to maintain separate records for         D
inputs which are used in the manufacture of two or more final
products bne of which is dutiable and the other is non-dutiable.
In that event, Rule 57 CC will apply. For example, a tyre
manufacturer manufactures•different kinds of tyres, one or more
of which were exempt like tyre used in animal carts and cycle
                                                                   E
tyre, where car tyres and truck tyres attract excise duty. The
rubber, the accelerators, the retarders, the fillers, sulphur,
vulcanising agents which are used in production of tyres are
indeed common to both dutiable and exempt tyres. Such
assesses are mandated to maintain separate records to avoid
the duty demand of 8% on exempted tyres. But when we find          F
that in the case of the respondents, it is not as though some
quantity of zinc ore concentrate has gone into the production
of sulphuric acid, applicability of Rule 57 CC can be attracted.
As pointed out above, the entire quantity of zinc has indeed
been used in the production of zinc and no part can be traced      G
in the sulphuric acid. It is for this reason, the respondents
maintained the inventory of zinc concentrate for the production
of zinc and we agree with the submission of the respondents
that there was no necessity and indeed it is impossible, to
                                                                   H
    306      SUPREME COURT REPORTS                [2014] 6 S.C.R.

A maintain separate records for zinc concentrate used. in the
  production of sulphuric acid. We, therefore, agree with the High
  Court that the requirements of 57CC were fully met in the way
  in which the Respondent was maintaining records and inventory
  and the mischief of recovery of 8% under Rule 57 CC on
B exempted sulphuric acid is not attracted.

        21. As already pointed out, argument of the learned
  Solicitor General was that Rule 57CC and Rule 6 of the Modvat/
  CENVAT Rules respectively require the literal rule of
  interpretation which needs to be applied, as the language of
C these was unambiguous in this behalf. We may record that as
  per the learned Solicitor General, the provisions of Rule 57CC
  or Rule 6 envisage common use of inputs in two final products
  i.e. one.dutiable and other exempted from the applicability of
  the same. He submitted that when two final products emerge
D out of use of common inputs, one excisable and the..pther
  exempt, the provisions will apply. The question of intention of
  the assessee to manufacture the exempted product is' not
  relevant. It may be intended or unintended but if what results in
  the course of a manufacturing process is a "final product" falling
E within the meaning of the said provisions, the provisions will
  apply in full with the attendant consequences. He also argued
  that Rule 570 uses the words 'waste and refuse' alongwith "by-
  products". The word 'by-product' will necessarily have to take
  its colour and meaning from the accompanying words "waste
F and refuse". "By-products" cannot, in any event, mean "final
  products". This Rule only means that Modvat Credit cannot be
  denied on the ground that in the course of manufacture, non
  excisable goods also arise.

       22. Elaborating this contention, the learned Solicitor
G General submitted that the words "final products" in the context
  of Modvat and Cenvat Credit have to be understood giving the
  meaning as assigned to it in the Modvat/ Cenvat Rules. Rule
  57 A inter alia states that the provisions of this Section shall
  apply to such finalised excisable goods (referred to in that
H
      UNION OF INDIA v. HINDUSTAN ZINC LTD.                 307
                  [A.K. SIKRI, J.]
section as final products). Again, Rule 2(c) of the Cenvat Credit   A
Rules, 2002 defines "final products" as meaning excisable
goods manufactured or produced from inputs except matches.
Rule 2(h) of the Cenvat Credit Rules, 2004 defines "final
products" as meaning excisable goods manufactured or
produce.d from input, or using in input service. Thus, final        8
products referred to in the aforesaid provisions can only mean
to be excisable goods produced or manufactured. In the
present set of cases, sulphuric acid, caustic soda flakes,
trichloro ethylene and Phosphoryl A and Phosphoryl B are
excisable goods manufactured and produced in India falling          C
under different headings of the Central Excise Tariff Act. The
submission was that if these products are exempt or subject
to NIL rate of duty, then the inputs on which ModvaU Cenvat
Credit are claimed used in the manufacture of the aforesaid
final products will attract the rigor of Rule 57CC/ Rule 6 of the   D
ModvaU Cenvat Credit Rules.

      23. In this very direction, his further submission was that
the term "by-products" is not defined either in the Act or in the
Rules. Dictionary meanings cannot be resorted to in this case
as it would then mean that final products would be treated as       E
by-products defeating the plain language of Rule 57CC and
Rule 6 which are applicable to final products. The only test is
"excisability of goods manufactured or produced" and only if the
requirements of this test are satisfied, the goods can be 'final
products' and never 'by-products'. On this basis, the learned       F
Solicitor General submitted that even an admission made
before the Tribunal in the Birla Copper case of the goods being
a 'by-product', cannot be relied on by the respondent.

     24. While pleading that the aforesaid interpretation to        G
these Rules be accepted by this Court, submission of Mr.
Parasaran was that in such an eventuality the judgment in the
case of Swadeshi Po/ytex Ltd. v. CCE; 1989 (44) ELT 794was
not applicable, nor was the judgment in CCE v. Gas Authority
of India Ltd.; 2008 (232) ELT 7 relied upon the by the
                                                                    H
      308      SUPREME COURT REPORTS                [2014] 6 S.C.R.


 A    respondent. Likewise his submission was that judgment of the
      Bombay High Court in the case of Rallis India Ltd. v. Union of     1



      India; 2009 (233) ELT 301 was erroneous wherein view taken
      is contrary to the aforesaid submission.

            25. These arguments may seem to be attractive. However,
 8    having regard to the processes involved, which is already
      explained above and the reasons afforded by us, we express
      our inability to be persuaded by these submissions. We have
      already noticed above that in the case of Birla Copper (C.A.
      No. 2337 of 2011) the Tribunal has decided the matter following
 C    the judgment in the case of Swadeshi Limited (supra). In that
      case, Ethylene Glycol was reacted with OMT to produce
      polyester and ethanol. Methanol was not excisable while
      Polyester Fibre was liable to excise duty. Credit was taken of
      duty paid on ethylene glycol wholly for the payment of duty on
 0    polyester. The department took a position that Ethylene Glycol
      was used in the production of Methanol and proportionate credit
      taken on ethylene glycol was to be reversed. This Court'f,IJled
      that the emergence of Methanol was a technological necessity
      and no part of ethylene glycol could be said to have been used
- E   in production of Methanol and indeed it was held that the total
      quantity of ethylene glycol was used for the production of
      polyester. The fact in all these three appeals appear to be
      identical to the facts and the law laid down in Swadeshi Polytex
      (supra). Therefore, this judgment is squarely applicable.
 F
        26. Furthermore, the provisions of Rule 57CC cannot be
   read in isolation. In order to understand the scheme of Modvat
   Credit contained in this Rule, a combined reading of Rule 57A,
   578 and 570 alongwith Rule 57CC becomes inevitable. We
   have already reproduced Rule 570 above. It can be easily
 G discerned from a combined reading of the aforesaid provisions
   that the terms used are 'inputs', 'final products', 'by-product',
   'waste products' etc. We are of the opinion that these terms'
   have been used taking into account commercial reality in trade.
   In that context when we scan through Rule 57 CC, reference to
 H
      UNION OF INDIA v. HINDUSTAN ZINC LTD.                    309
                  [AK. SIKRI, J.]

finar product being manufactured with the same common inputs           A
becomes understandable. This Rule did not talk about
emergence of final product and a by-product and still said that
Rule 57 CC will apply. The appellant seeks to apply Rule 57CC
when Rule 57D does not talk about application of Rule 57CC
to final product and by-product when the by-product emerged            B
as a technological necessity. Accepting the argument of the
appellant would amount to equating by-product and final
product thereby obliterating the difference though recognised
by the legislation itself. Significantly this interpretation by the
Tribunal in Sterlite (supra) was not appealed against by the           c
department.

      27. We are also unable to agree with the submission of
the learned Solicitor General that judgment in GAIL's Case is
not applicable. Significantly, the question as to whether Rule
57 CC will apply when by-products are cleared without payment          D
of d!Jty came for discussion in thqt case. It was held that so long
as the lean gas was obtained as a by-product and not as a final
product, Rule 57 CC will not apply. We are, therefore, of the
view that the respondent's case is squarely covered by the
judgment in GAil's case.                                               E

     28. At the stage we should deal with the argument of non
maintainability of the writ petition filed by Hindustan Zinc
Limited before the High Court. No doubt, it had filed writ petition
at show cause stage. However,_ it was not merely the validity          F
of show cause notice which was questioned. In the writ petition
even the vires of Rule 57 CC were challenged. That was a
reason because of which the writ petitions were entertained,
and rightly so, it is a different matter that while interpreting the
rule, the High Court chose to read down the said rule and to           G
give an interpretation which would save it from the vice of
unconstitutionality. Moreover, other statutory appeal filed by the
Department is against the order of CESTAT, which involves
same question. Matter is argued in appeal before us also at

                                                                       H
    310      SUPREME COURT REPORTS              [2014] 6 S.C.R.

A   length and we are deciding the same on merits. For all these
    reasons the argument of alternate remedy has to be discarded.

         29. As a result of aforesaid discussion, we find no merit
    in these appeals and dismiss the same with costs.

B   Rajendra Prasad                                Appeals allowed.