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Commissioner Of Central Excise v. Gas Authority Of India Limited .
Factual and Procedural Background
The Department issued a show-cause notice on 1 April 1999 to Gas Authority of India Ltd. (GAIL) alleging that the company had cleared “lean gas” to various buyers as “natural gas” at a nil rate of duty under Chapter Sub-Heading 2611.21. The notice asserted that lean gas emerged as a by-product during the extraction of LPG from natural gas and, because Modvat credit had been taken on the inputs, GAIL was liable to pay an amount equal to 8% of the sale price under Rule 57-CC of the Central Excise Rules, 1944 for the period October 1998 to January 1999.
GAIL resisted the demand, relying on Rule 57-D, which protects Modvat credit when inputs are contained in waste, refuse, or by-products. The adjudicating authority and the Commissioner (Appeals) decided against the assessee; the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) reversed those orders. The Central Government, acting through the Department, filed the present civil appeals under Section 35-L of the Central Excise Act, 1944.
Legal Issues Presented
- Whether lean gas produced by GAIL is a by-product—entitling the assessee to retain Modvat credit under Rule 57-D—or a manufactured, marketable final product that attracts the adjustment mechanism of Rule 57-CC.
Arguments of the Parties
Assessee’s Arguments (GAIL)
- Lean gas is merely a by-product obtained while extracting LPG from natural gas.
- Under Rule 57-D, Modvat credit cannot be denied or varied on the ground that the inputs are contained in any by-product arising during manufacture; hence no 8% duty is payable.
Department’s Arguments
- Lean gas itself constitutes a final product; therefore Rule 57-CC applies and GAIL must pay 8% of the sale price because Modvat credit was availed on common inputs.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| ONGC v. CCE, 1995 Supp (4) SCC 541; (1992) 61 ELT 3 | Established the requirement that disputes between Government ministries and public sector undertakings be vetted by a High-Level Committee before litigation is instituted. | The Court noted that, although the Tribunal recorded committee clearance for GAIL, no such clearance existed for the Department. Nevertheless, the Court proceeded to decide because the appeals were dismissed on a factual ground. |
Court's Reasoning and Analysis
The Court confined itself to the contents of the show-cause notice, emphasising that such a notice forms the very foundation of any excise demand. The notice issued to GAIL unequivocally described lean gas as a “by-product” arising from the extraction of LPG. Because the Department’s own notice characterised the product as a by-product, the Department could not, at the appellate stage, alter its stance and treat lean gas as a final product.
Given this factual concession within the notice, the Court held that GAIL was automatically entitled to the protection of Rule 57-D, which forbids denial or variation of credit when inputs form part of a by-product. Consequently, the adjustment mechanism of Rule 57-CC, invoked only when the disputed goods are final products, was inapplicable.
The Court expressly refrained from deciding the larger legal question of whether lean gas is, in general, a final product or a by-product; its decision rested solely on the Department’s own averments in the show-cause notice.
Holding and Implications
Appeals Dismissed. No order as to costs.
Immediate Effect: The demand for payment under Rule 57-CC against GAIL fails; the assessee retains the Modvat credit claimed for October 1998–January 1999.
Broader Implications: The judgment reiterates that the Department is bound by the characterisation of goods in its own show-cause notice; however, no general precedent on the classification of lean gas is set because the Court expressly avoided deciding that substantive issue.
Order
1. The short question which arises for determination in these civil appeals filed by the Department under Section 35-L of the Central Excise Act, 1944 is: whether lean gas produced by Gas Authority of India Ltd. (GAIL) is a manufactured marketable final product or a by-product?
2. On 1-4-1999, show-cause notice was issued to the assessee by the Superintendent, Central Excise in which it was alleged by the Department that the noticee (the assessee) had cleared lean gas in bulk to M/s Indian Petrochemicals Corporation Ltd. (IPCL), M/s Vikram Ispat Ltd. and M/s Ispat Industries as natural gas under Chapter Sub-Heading 2611.21 claiming nil rate of duty. In the said show-cause notice, however, the allegation was based on the footing that lean gas was a by-product after due manufacturing process stood carried out on natural gas to extract LPG.
3. We quote hereinbelow the relevant portion from the show-cause notice, which reads as under:
“However, it is found that lean gas is a by-product after due manufacturing process on natural gas to extract LPG. Hence lean gas is a result of a manufacturing process and therefore attracts provisions of Rule 57-CC of the Central Excise Rules, 1944. Thus, the noticee has failed to pay Central excise duty on amount equal to 8% of the price charged on the sale of lean gas as required under sub-rules (1) and (8) of Rule 57-CC during the period October 1998 to January 1999, having availed Modvat credit on inputs used within the factory for the manufacture of final products.”
4. At this stage, we may mention that the assessee claimed Modvat credit under Rule 57-D which states that Modvat credit shall not be denied or varied except in certain circumstances. In other words, under Rule 57-D, credit of specified duty could not be denied at the relevant time in certain circumstances even where the final product stood exempted.
5. We quote hereinbelow Rule 57-D of the Central Excise Rules, 1944:
“57-D. Credit of duty not to be denied or varied in certain circumstances.—(1) Credit of specified duty shall not be 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 during the course of manufacture of the final product, whether or not such waste or refuse or by-product is exempt from the whole of the duty of excise leviable thereon or chargeable to nil rate of duty or is not specified as a final product under Rule 57-A.
(2) Credit of specified duty shall also not be denied or varied in case any intermediate products have come into existence during the course of manufacture of final products or the inputs are used in the manufacture of capital goods as defined in Rule 57-Q and such intermediate products or capital goods are not chargeable to duty of excise.”
6. On the other hand, the Department contended that since lean gas was itself a final product, the assessee was not entitled to the benefit of Modvat credit under Rule 57-CC of the said Rules.
7. We quote hereinbelow Rule 57-CC which referred to adjustment of credit if the final produce stood exempted:
“57-CC. Adjustment of credit on inputs used in exempted final products or maintenance of separate inventory and accounts of inputs by the manufacturer.—(1) Where 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 thereon or is chargeable to nil rate of duty and the manufacturer takes credit of the specified duty on any input (other than inputs used as fuel) which is used or 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 manufacturer shall, unless the provisions of sub-rule (9) are complied with, pay an amount equal to eight per cent 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 the factory.
(2) The amount mentioned in sub-rule (1) shall be paid by the manufacturer by adjustment in the credit account maintained under sub-rule (7) of Rule 57-G or in the accounts maintained under Rule 9 or sub-rule (1) of Rule 173-G and if such adjustment is not possible for any reason, the amount shall be paid in cash by the manufacturer availing of credit under Rule 57-A.
(3) The provisions of sub-rule (1) shall not apply to final products falling under Chapters 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;
(b) Tyres of a kind used on animal drawn vehicles or handcarts and their tubes, falling within Chapter 40;
(c) Black and white television sets, falling within Chapter 85; and
(d) Newsprint, in rolls or sheets, falling within Chapter Heading 48.01;
which are exempt from the whole of the duty of excise leviable thereon or chargeable to nil rate of duty.
(5) In the case of final products referred to in sub-rule (3) or sub-rule (4) and excluded from the provisions of sub-rule (1), the manufacturer shall pay an amount equivalent to the credit of duty attributable to inputs contained in such final products at the time of their clearance from the factory.
(6) The provisions of sub-rule (1) shall also not apply to final products which are exported under bond in terms of the provisions of Rule 13.
(7) 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.
(8) 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 manufacturer 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).
(9) In respect of inputs (other than inputs used as fuel) which are used in or in relation to the manufacture of any goods, 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 purpose and shall not take credit of the specified duty paid on such inputs.”
8. Therefore, the short question which arises for determination before this Court is whether lean gas was a by-product or a final product. If it is a by-product then the assessee would be entitled to the benefit of Rule 57-D. On the other hand, if lean gas is a final product, then the assessee would not be entitled to the benefit of Rule 57-D in view of the provisions of Rule 57-CC as it refers to set off/adjustment of duty payable. We are not required to examine the above issue for the simple reason that on the facts of the present case, as can be seen from the extract quoted from the show-cause notice, which is the foundation of the demand made by the Department, lean gas is a by-product which emerges when LPG is extracted from natural gas.
9. If the case of the Department itself in the show-cause notice was that lean gas is a by-product, then we fail to understand as to the basis for denying the benefit of Modvat credit to the assessee during the relevant period (October 1998 to January 1999) under Rule 57-D. As repeatedly held by this Court, show-cause notice is the foundation of the demand under the Central Excise Act and if the show-cause notice in the present case itself proceeds on the basis that the product in question is a by-product and not a final product, then, in that event, we need not answer the larger question of law framed hereinabove.
10. On this short point, we are in agreement with the view expressed by the Tribunal that nowhere in the show-cause notice it has been alleged by the Department that lean gas is a final product. Ultimately, an assessee is required to reply to the show-cause notice and if the allegation proceeds on the basis that lean gas is a by-product, then there is no question of the assessee disputing that statement made in the show-cause notice.
11. We express no opinion on the merits of the question framed hereinabove. We are dismissing these appeals only on the facts of the present case and only on the ground that there is no allegation made in the show-cause notice that lean gas is the final product.
12. Before concluding, we may mention that in ONGC v. CCE 1995 Supp (4) SCC 541, (1992) 61 ELT 3 this Court directed the Government of India to set up a Committee consisting of representatives from the Ministry of Industry, Bureau of Public Enterprises and Ministry of Law to monitor disputes between the Ministry and the Government of India, Ministry and public sector undertakings and public sector undertakings in between themselves to ensure that no litigation comes to court or to the Tribunal without the matter being first examined by the Committee.
13. In the present case, the Tribunal has recorded that clearance was given to GAIL to prefer an appeal to the Tribunal against the order passed by the adjudicating authority and the Commissioner, Appeals. However, no such clearance has been given in favour of the Central Government which had preferred the present civil appeals. However, we do not wish to await the said clearance for the simple reason that in the present case we are dismissing the civil appeals filed by the Department on the factual aspect, namely, that in the show-cause notice, there is no allegation that lean gas is the final product.
14. For the aforestated reasons, the appeals stand dismissed. No order as to costs.
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