Duty demand on quantity of oxygen used in manufacture of sulphuric acid unsustainable

Hindalco Industries Limited Vs C.C.E-Bharuch (CESTAT Ahmedabad)

CESTAT Ahmedabad held that that appellants are eligible for benefit of Notification No. 67/95 and the duty demand on the quantity of oxygen so used in the manufacture of sulphuric acid, is liable to be set aside.

Facts- The appellant are engaged in manufacture of Copper Cathodes, Continuous Cast Copper Rods, Sulphuric Acid and Phosphoric Acid etc falling under CETH 74228 of Central Excise Tariff Act, 1985. The appellant has an oxygen gas producing plant within their factory premises and oxygen produced in the oxygen plant is further used in manufacture of Copper Cathodes and Sulphuric Acid. The manufacturing process involved is that the copper concentrate is mixed with the silica and charged in smelting furnace with oxygen. In the process the Sulphur present in the concentrate reacts with the oxygen to form Sulphur Dioxide. The Sulphur Dioxide is separated and again reacted with oxygen separately with the catalyst to form Sulphur Trioxide. The Sulphur Trioxide thus obtained is further absorbed with Sulphur Acid and Water to get concentrate Sulphuric Acid. The Sulphuric Acid produced is cleared by the appellant as final product at nil rate of duty under Notification No. 12/2012 dated 17.03.2012 for further manufacture of fertilizer.

It has been contention of the department that since the final product namely Sulphuric Acid is exempted from Central Excise Duty, the appellant should have discharged the duty on their intermediate product namely oxygen gas which is captively consumed by them.

The issue involved here is whether the oxygen captively consumed in the manufacture of dutiable Copper Cathodes as well as exempted Sulphuric Acid can be denied the benefit of exemption Notification No. 67/95- CE dated 16.03.1995.

Conclusion- Hon’ble Supreme Court in the case of Union of India Vs. Hindustan Zinc Ltd held that in the present case, the appellant manufactured oxygen used in the manufacture of excisable product and they had no obligation to maintain separate accounts for oxygen used in the manufacture of Sulphuric Acid. It is established that appellant did not use oxygen produced in the manufacture of Sulphuric Acid. Accordingly, conditions of Notification No. 67/95 are complied. We hold that appellants are eligible for benefit of Notification No. 67/95 and the duty demand on the quantity of oxygen so used in the manufacture of sulphuric acid, is liable to be set aside.

Since the facts of the matter at hand are similar to the one decided by this Tribunal on the basis of Apex Court decision in the case of Hindustan Zinc, we follow the same and hold that impugned Orders-In-Original are without any merit and we set aside the same.

FULL TEXT OF THE CESTAT AHMEDABAD ORDER

The brief facts of the case are that the appellant are engaged in manufacture of Copper Cathodes , Continuous Cast Copper Rods, Sulphuric Acid and Phosphoric Acid etc falling under CETH 74228 of Central Excise Tariff Act, 1985. The appellant has an oxygen gas producing plant within their factory premises and oxygen produced in the oxygen plant is further used in manufacture of Copper Cathodes and Sulphuric Acid. The manufacturing process involved is that the copper concentrate is mixed with the silica and charged in smelting furnace with oxygen . In the process the Sulphur present in the concentrate reacts with the oxygen to form Sulphur Dioxide. The Sulphur Dioxide is separated and again reacted with oxygen separately with the catalyst to form Sulphur Trioxide. The Sulphur Trioxide thus obtained is further absorbed with Sulphur Acid and Water to get concentrate Sulphuric Acid. The Sulphuric Acid produced is cleared by the appellant as final product at nil rate of duty under Notification No. 12/2012 dated 17.03.2012 for further manufacture of fertilizer.

2. It has been contention of the department that since the final product namely Sulphuric Acid is exempted from Central Excise Duty, the appellant should have discharged the duty on their intermediate product namely oxygen gas which is captively consumed by them. The department contended that exemption Notification No. 67/95- CE dated 16.03.1995 is not available to the oxygen gas since the same is used in the manufacture of exempted Sulphuric Acid.

3. Thus, the show cause notice was issued for the period December, 2008 to November,2013 demanding Central Excise Duty of Rs. 25,70,98,060/-. Further periodical show cause notices were also issued which got adjudicated. The details of the show cause notices along with appeals and Orders- In- originals is given here below in the table:-

4. The issue which is before us to answer is whether the oxygen captively consumed in the manufacture of dutiable Copper Cathodes as well as exempted Sulphuric Acid can be denied the benefit of exemption Notification No. 67/95- CE dated 16.03.1995.

4.1 We heard both the sides. We find that the matter is no longer res- integra . The issue has already been settled by the Hon’ble Supreme Court in the case of Union of India Vs. Hindustan Zinc Ltd reported under 2014 (303) ELT 321 (SC). The decision of the Hon’ble Supreme Court in the case of Hindustan Zinc has also been followed by this Tribunal in the case of Sterlite Industries India Ltd vs. CCE, Tirunelveli reported under 2016 (331) ELT 255 (Tri. Chennai). The relevant extract of above mentioned decision of M/s. Sterlite Industries (Supra) is reproduced below :-

“6. After careful consideration of the submissions of both sides and on perusal of records, we find the short issue involved in the appeal relates to denial of benefit of captive consumption Notification No. 67/95-C.E., dated 16-3-1995 on the oxygen gas produced and captively consumed in the manufacture of Copper Anode. The adjudicating authority in his de novo order denied the exemption only on the ground that Sulphuric Acid (H2SO4) is a final product cleared at ‘Nil’ rate and held that since oxygen is captively used in the manufacture of Copper Anode (dutiable) and Sulphuric Acid (exempted) they are not eligible for Notification No. 67/95. We find that H2SO4 was cleared at Nil rate the fertilizer plant claiming exemption under Sl. No. 28 of Notification No. 6/97, dated 1-3-1997.

7. On careful study of manufacturing process as explained in the proceedings, we find that the appellants have set up a plant only for manufacture of final product copper anode from the imported copper concentrate. It is seen that Oxygen is one of the essential inputs for conversion of Copper Concentrate into Copper Anode and it is used in the furnace and in the smelter converter to remove impurities contained in the copper concentrate. In the process of purification, sulphur dioxide SO2 emerges out as waste gas. However, due to stringent conditions imposed by the Environment Ministry, the sulphur dioxide cannot be let off by the industries. As per Environment (Protection) Rules, 1986, it is a mandatory requirement of appellant unit to process the harmful gases without letting out in the atmosphere. Further, as evident from their reply to SCN before adjudicating authority that oxygen is so generated in the plant is captively consumed only in the process of conversion of copper concentrate to copper anode and not in the manufacture of Sulphuric Acid.

8. During the process of conversion of SO2 to SO3, one more element of oxygen is added and this additional element of oxygen is not taken from the oxygen plant but from the atmosphere. The Sulphur Dioxide (SO2) combines with atmospheric oxygen and gets converted into Sulphur Trioxide (SO3). This Sulphur Trioxide is absorbed in Sulphuric Acid to form Oleum. This super-saturated Oleum is dissolved in water to produce 98% pure Sulphuric Acid (H2SO4) i.e. the fourth element of oxygen is derived from water. This fact is easily verifiable from the manufacturing process. It is evident that oxygen produced in their plant is captively consumed and used only in the copper concentrate for purification and not diverted elsewhere for process of conversion of SO2 or SO3 or to Sulphuric Acid. Therefore, on merit itself it is established that oxygen produced captively is not used as an input in the manufacture of Sulphuric Acid and appellant is eligible for Notification No. 67/95 on oxygen on merit.

9. Further, it is pertinent to state that so long as Oxygen produced in their plant is used captively in the manufacture of final product (i.e.) copper concentrate and cleared on payment of duty, the appellants are rightly eligible for exemption under Notification No. 67/95 for oxygen. The case of the department is that appellant used the inputs i.e. oxygen in the manufacture of Sulphuric Acid which is cleared at Nil rate under exemption notification. As discussed in the preceding paragraphs and it is established from the chemical process and from manufacturing process there is no justification for the revenue’s view that O2 is used in the manufacture of H2SO4. It is evident that oxygen so produced in their captive plant is used only in the purification of copper concentrate in the manufacture of copper anode. Therefore, appellants are eligible for captive consumption of Oxygen under Notification No. 67/95 as the final product copper anode is excisable which is cleared on payment of duty.

10. Notwithstanding above, we find that Hon’ble Supreme Court in the case of UOI v. Hindustan Zinc Ltd. (supra) clearly held that what is manufactured in the final product is only copper only. In that case, Sulphur Dioxide was converted into sulphuric acid which cannot be considered as a final product but it is only a by-product. In view of the above facts, appellants are eligible for Modvat credit. The relevant paragraph of the Apex Court judgment is reproduced as under:-

“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 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. 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 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.

….             ….             ….

16. Before we advert to the interpretations of the aforesaid provisions and to discuss the argument of the Union of India as to whether literal interpretation is to be given to Rule 57CC, it would be necessary to understand the properties of sulphuric acid. From what is explained above including the use of sulphuric acid for the production of zinc, it becomes apparent that 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 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 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 non­polluting measure cannot elevate the sulphuric 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 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.

…. ….. …..

20. Let us now examine the position contained in Rule 57CC on the touchstone of the aforesaid position. No doubt, Rule 57CC requires an assessee to 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. In that event, Rule 57CC 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 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 assessees are mandated to maintain separate records to avoid the duty demand of 8% on exempted tyres. But when we find 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 57CC 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 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 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 57CC on exempted sulphuric acid is not attracted.

…. ….. …..

25. These arguments may seem to be attractive. However, 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 the judgment in the case of Swadeshi Limited (supra). In that case, Ethylene Glycol was reacted with DMT 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 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 ruled that the emergence of methanol was a technological necessity and no part of ethylene glycol could be said to have been used 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.

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 Rules 57A, 57B and 57D along with Rule 57CC becomes inevitable. We have already reproduced Rule 57D above. It can be easily 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 57CC, reference to final product being manufactured with the same common inputs becomes understandable. This Rule did not talk about emergence of final product and a by-product and still said that Rule 57CC 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 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 department.”

The Hon’ble Apex Court is clearly applicable to the facts of the case as in the present case the sulphuric acid is cleared as by-product as explained in the preceding paragraphs and the final product is only copper anode and not sulphuric acid. The waste gas which emerges out out of process of purification of copper concentrate in Sulphur Dioxide which is further converted into Sulphur Trioxide which is absorbed in Sulphuric Acid to form Oleum. This Oleum is dissolved in water to get purest form of Sulphuric Acid. It is pertinent to state that under the Environment (Protection) Rules, 1986 vide sub-rule (2) of Schedule I and as per Sl. No. 21 of the Schedule I of the Environment Rules, it is mandatory for the appellant to prevent emission of oxides of sulphur in Smelter and Convertor of copper and it stipulates that waste gases are to be utilized in the manufacture of Sulphuric Acid so as to prevent emission of Sulphur Dioxide. The Apex Court decision cited supra dealt with the identical issue of conversion of Sulphur Dioxide and Sulphur Trioxide into sulphuric acid and held it is only a by-product and not final product.

9. Further, we find this Tribunal Bench in an identical issue of captive consumption Notification No. 67/95 in the case of Ultratech Cement and Others v. CCE – 2015-TIOL-2110-CESTAT-MAD had allowed the benefit of Notification No. 67/95-C.E.

10. Further, we find that as per Notification No. 67/95, both input oxygen and the final products are rightly covered in the Table of the Notification. Proviso (vi) of the notification stipulates that this notification is applicable provided appellant complied with Rule (6) of CCR, 2001. The only condition is that sub-rule (2) of Rule 6 of CCR is required to be complied with. In the present case, as per sub-rule (2), appellant manufactured oxygen used in the manufacture of excisable product and they had no obligation to maintain separate accounts for oxygen used in the manufacture of Sulphuric Acid. It is established that appellant did not use oxygen produced in the manufacture of Sulphuric Acid. Accordingly, conditions of Notification No. 67/95 are complied. By respectfully following the Apex Court decision in the case of UOI v. Hindustan Zinc Ltd. (supra), we hold that appellants are eligible for benefit of Notification No. 67/95 and the duty demand on the quantity of oxygen so used in the manufacture of sulphuric acid, is liable to be set aside. Consequently, no penalty survives and it is set aside. Impugned order is set aside and the appeal is allowed.”

5. Since the facts of the matter at hand are similar to the one decided by this Tribunal on the basis of Hon’ble Apex Court decision in the case of Hindustan Zinc (Supra), we follow the same and hold that impugned Orders-In-Original are without any merit and we set aside the same. Accordingly, the appeals are allowed.

(Pronounced in the open court on 08.06.2023 )