Steel
Authority of India Ltd. Vs. Collector of Central Excise, Bolpur [1997] INSC 198
(20 February 1997)
S.B.
MAJMUDAR S.B. Mujmudar.
J.
ACT:
HEAD NOTE:
This
appeal under Section 35(L) of the Central Excise & Salt Act, 1994
(hereinafter referred to as `the Act') is brought by the appellant-assessee on
being aggrieved by the decision rendered by the Customs, Excise and Gold
(Control) Appellate Tribunal (CEGAT for short) dismissing the assessee's appeal
against the order in original passed by the Collector of Central Excise, Bolpur.
A few
relevant facts leading to this appeal deserve to be noted at the outset. The
appellant, Steel Authority of India Ltd. is a wholly owned Government of India
Company.
The
appellant-company has several steel plants and Durgapur Steel Plant (DSP),
situated at Durgapur in West Bengal, is one of the integrated steel plants of the
appellant-company.
DSP
manufactures pig iron, steel ingots and several steel products. These products
of DSP prior to 1983 were classified under the erstwhile Tariff Items 25, 26
and 26AA.
The
appellant-company has been paying excise duty on these items under reference
following the principles of "later the better". The appropriate
central excise duty was determined and paid on iron and steel products, when
cleared. The evidence led by the appellant explained the process of production.
That in the integrated steel plant of the appellant-company at Durgapur the process of production is as
under|- Iron ore Sinter Limestone put into Blast Manganese Ore Furnace Dolamite
BHQ Molten iron is produced in the blast furnace. Molten iron goes to steel
furnaces of steel melting shop (SMS) directly and other ingredients are mixed.
The product from SMS is steel. In other words, iron is converted into steel in
SMS. Raw materials like iron ore, sinter, coke limestone etc. are fed into
blast furnace which produces pig iron. At this stage, the molten metal is
called pig iron. Once this molten metal is fed into steel making furnace which
produces steel, the produce which comes out, out of the steel melting shop
(SMS) is known as steel and not iron and will fall into Tariff Item 26. It is
only when the steel ingots are further processed and the various products like structurals,
rails, wire-rods, etc. are produced, they would come under Tariff Item 26AA.
According to the appellant, the steel melting scrap is specifically covered
under Tariff Item 26 and once a produce comes out of SMS, it is known as steel
and not iron. In the process of production of steel at SMS, some scrap arises
which is known in the industry as `steel melting scrap'. While most of this
steel melting scrap is captively consumed by DSP itself, a small portion is
also sold to other steel plants manufacturing steel ingots, steel casting and
semi-finished steel with the aid of electric furnace. The procedure set out in
Chapter X of the Central Excise Rules, 1994 is followed while selling the steel
melting scrap which is cleared at nil rate of duty.
It is
the case of the appellant-company that the clearance of steel melting scrap was
being done in accordance with Chapter X of the Central Excise Rules and the
said Clearance was governed by the terms of Notification No.150/77 dated
18.6.1977 as amended by Notification No.209/77 dated 2.7.1977. This practice of
removal of steel melting scrap as per the procedure laid down by the aforesaid
notification was being followed by the appellant- company since the date of the
said notification i.e. 18.6.1977.
The
facts leading to the present proceedings stem out of the show cause notices
issued to the appellant-company by the Superintendent of Central Excise, Durgapur. The first show cause notice dated
21.11.1980 alleged that the appellant-company had not paid duty on the iron
contained in crude form in `steel melting scrap'. It was alleged in the said
show cause notice that as per Tariff Item 25 iron in crude form attracted
central excise duty @ Rs.70/- per metric ton and there was no clear exemption
from payment of duty on iron used for manufacturing of steel ingots and steel
melting scrap. That Notification No. 18/71-CE dated 27..3.1971 provided a set
off of duty paid on iron in crude form against the duty payable on steel ingots
and steel melting scrap. It was further alleged in the show case notice that
since specified steel melting scrap chargeable to nil rate of duty, the
question of set off of duty on steel melting scrap cleared without payment of duty,
was chargeable. The aforesaid notice was in respect of the period from
12.12.1977 to 30.9.1980. On similar terms another demand notice was issued for
the period from April 1981 to October 1981. The total duty so demanded was
about Rs.25.50 lakhs. The appellant-company submitted replies to the said show
cause notices and pointed out that the notices were misconceived and the demands
raised were not sustainable. The Collector of Central Excise by his order in
original dated 9.6.1987 confirmed the demand of Rs.25,50,593.87 on iron in
crude form used by the appellant- company in manufacture of 34,346.327 metric
tons of steel melting scrap which had been cleared without payment of duty.
The
appellant-company being aggrieved by the aforesaid order of Collector of
Central Excise, Bolpur, carried the matter in appeal before the CEGAT, New Delhi. The said appeal was partly allowed
by the CEGAT by its order dated 21.12.1990 whereby the CEGAT quashed the
demands in respect of the period prior to 6 months of the issue of the
respective show cause notices dated 21.11.1980 and 23.11.1981 on the ground
that for earlier period notices were time barred. However, the CEGAT upheld the
demand of the department for duty for the period of 6 months computed backward
from the dates of the respective show cause notices. As per the aforesaid order
of the CEGAT, total demands covered by both the notices worded out to about
Rs.6 lakhs. It is the aforesaid order of the CEGAT that has been brought on the
anvil of scrutiny of this Court in the present appeal.
RIVAL
CONTENTIONS :
Learned
counsel for the appellant in support of the appeal submitted that the CEGAT had
patently erred in upholding the demands for duty payable on iron in crude form
which had already resulted into duty paid steel ingots manufactured by the
appellant out of the said crude iron.
That
steel melting scrap which resulted in the process of manufacture of steel
ingots from crude iron was purely a by- product which was already exempted and
bore nil duty on account of Notification dated 18.6.1977 being Notification
No.150/77. That integrated steel plant like DSP was meant to produce pig iron
and various steel products but not scrap.
Scrap
was not a conscious production. That the iron in crude form which had not borne
duty at the time of its production had already resulted in the manufacture of
duty paid steel ingots. Even in the light of Notification No.18/71-CE dated
23.3.1971 full excise duty was paid by the appellant-company on the steel
ingots which were the ultimate product manufactured by the appellant by utilising
the entire input of iron in crude form. Hence, even if set off of duty on utilised
iron crude form was not available as duty was not paid at the relevant time
when iron in crude form was manufactured, save and except demanding full duty
on manufactured steel ingots, there would remain no occasion for the revenue to
bring to tax the very same utilised iron in crude form which during the process
of manufacture of the final product of steel ingots might have resulted in a
by- product like steel melting scrap which in its turn was fully exempted from
the excise duty because of Notification No.
150/77.
According to the learned counsel for the appellant, the impugned notices of
demand and the final order of adjudication even for a period of six months
immediately preceding the impugned show cause notices were ex facie unauthorised
and not sustainable in law.
Learned
counsel for the revenue, on the other hand, submitted that at the time when the
input of crude iron i.e. pig iron was produced, no duty was paid by the
appellant.
The
said input was utilised by the appellant for manufacturing two excisable items,
namely, (i) steel ingots and (ii) steel melting scrap though an excisable item,
did not bear any duty in view of the exemption Notification No.150/77.
Consequently, the input of pig iron to the extent to which it resulted into the
final product of steel melting scrap remained liable to pay excise duty as no
final duty on steel melting scrap was available for proportionately setting off
duty payable on the input to the extent of which it had resulted in the
manufacture of steel melting scrap. It was submitted that steel melting scrap
was itself an excisable item which had a market of its own and was not like a
by-product which had no value whatsoever and was not exigible to central
excise. Consequently, when the final product of steel melting scrap had not
borne excise duty because of the exemption notification, as aforesaid, the
non-duty paid input which was embedded in it, which in its turn was exigible to
tax had to be brought tax when the final product steel melting scrap got
cleared and that is precisely what the demand notices sought to do and hence
the adjudication order was correctly passed by the CEGAT.
Having
given our anxious consideration to the rival contentions, we find that the
CEGAT has patently erred in sustaining the impugned demands of excise duty even
for the period of six months prior to the dates of respective show cause
notices. At the outset, we may note that it is not in dispute between the
parties that the appellant which is a wholly owned Government of India company,
in the process of manufacturing the final product at its Durgapur Steel Plant
produces as an input for captive consumption molten metal called pig iron. This
pig iron as an input results in manufacture of two excisable commodities,
namely, steel ingot as well as melting scrap. We may, for the purpose of the
present proceedings, proceed on the basis that steel melting scrap which gets
manufactured is an excisable commodity and has its own market if not captively
consumed.
However,
the moot question remains as to whether the input of pig iron ultimately bears
full burden of excise duty as leviable on the said pig iron at a stage when the
said input results into the final product. We may note at this stage that at
the relevant time, the tariff, item concerned which made the input of pig iron exigible
to excise duty was Tariff Item 25 and rate of duty was Rs.70/- per metric ton.
The
final products which resulted by utilising this input, as noted above, were
steel ingots as well as steel melting scrap. Both of them were covered by
Tariff Item 26 and were liable to tax @ Rs.350/- per metric ton. There was
Tariff Item 26AA which dealt with iron or steel products which were
manufactured by utilising steel melting scrap as an input by the
appellant-company and those steel products enumerated in the said Entry 26AA
were of various types and were liable to bear excise duty as mentioned in the
said tariff item. The short question for our consideration is whether pig iron
in crude form which was utilised as an input by the appellant- company in
manufacturing the final products of steel ingots and steel melting scrap had
been subjected to full payment of excise duty under Tariff Item 25, if not at
an earlier stage when it was manufactured, it least at a latter stage when it
got embedded in steel melting ingots and steel melting scrap. It has to be
appreciated that it is not the case of the department not is there anything on
record to indicate that out of the input of crude iron or pig iron, a
particular portion thereof was separately utilised by the appellant as an input
for manufacturing steel ingots was in uniform, composite and a combined process
and in the said process of manufacturing steel melting scrap. In fact the
entire process of manufacturing steel ingots was a uniform, composite and a
combined process and in the said process of manufacturing of steel ingots the
entire input of crude iron got exhausted and utilised but in the very same
process two commodities emerged, namely, steel ingot and steel melting scrap.
There is a substance in the contention of the learned counsel for the appellant
that the integrated steel plant like DSP owned by the appellant was meant to
produce pig iron and various steel products. However, the process was such that
certain amount of scrap arises due to technological necessity and it was not a
conscious production and, still it might be excise duty under the concerned
Tariff Item 26. We are not concerned in the present proceedings with the
taxability of the final product, the steel melting scrap, as admittedly the
said steel melting scrap as a final product is not liable to pay any liable
duty and is exigible to nil duty on account of exemption Notification no.150/77
dated 1.6.1977. It is not in dispute between the parties that steel melting scrap
which is the final by-product in the process of manufacture of steel ingots
undertaken by the appellant by utilising the input of pig iron has earned full
exemption from payment of excise duty under the aforesaid notification. In
fact, that is the very basis of the show cause notices. The department accepts
that steel melting scrap is not liable to pay any excise duty but its
contention is that the proportionate input of pig iron which was embedded in
the said field final product and which by itself did not bear any duty earlier
though it was liable to pay duty under Tariff Item 25 had escaped excise duty
thereon. If that is so, the question remains whether the remaining and the main
final product, namely, steel ingot, which was exigible to central excise as per
Tariff Item 26 @ Rs.350/- per metric ton and which had utilised the same input
of crude iron, namely, pig iron could be said to have accounted for payment of
excise duty on input of crude iron which was fully utilised by it when it got
manufactured in the steel melting furnace as a result of the same and uniform
manufacturing process. The basis of the impugned show cause notices which in
their turn got upheld by the CEGAT to the extent of six months demands prior to
the dates of issue of these notices, being Notification No.18/71 dated
27.3.1971 is, therefore, required to be reproduced. The said notification reads
as under|- "18/71-CE dt. 27.3.71: In exercise as of the powers conferred
by Rule. 8(1) of the Central Excise Rules, 1994, and in supersesion of the
notification of the Government of India in the M.F.(D.R.& I) No.67/78-CE dt.
30.3.68, the Central Government hereby exempts :
(a)
steel ingots falling under Item No.25 of the First Schedule to the Central
Excise and Salt Act, 1944 (1 of 1944), and (b) iron and steel products falling
under Item No.26AA of the First Schedule in which duty paid iron in any crude
form, including pig iron, scrap iron, molten iron or iron cast in any other
shape or size, is used, from so much of the duty as is proved to have been paid
on the said iron in any crude form;
(Provided
that in relation to the exemption under this notification the procedure set out
the Rule 56A of the aforesaid rules is followed)." Now a mere look at the
aforesaid notification shows that it seeks to permit a set off of excise duty
payable on the final product manufactured by the appellant by utilising the
input of pig iron to the extent of the amount of excise duty which might have
been paid by the assessee on the utilised input of pig which ultimately
resulted resulted into the final products. Those final products are either
steel ingots covered by Tariff Item 26AA. It is pertinent to observe that the
said exemption/set off notification does not cover final product of steel
melting scrap mentioned in Tariff Item 26 which obviously results as an
unplanned by- product. Learned counsel for the respondent is right when he
contends that on the facts of the present case, the benefit of the set off of
excise duty payable on pig iron would not be available to the appellant so far
as its liability to pay excise duty on the finished products was concerned as
the input of pig iron which emerging by-product of steel melting scrap. In the
absence of such bifurcation, the impugned notices would obviously result in
double taxation on the input of pig iron which embedded in steel ingots that
became liable to bear full excise duty and for which there is no dispute
between the parties. As the process for manufacturing steel ingots by utilising
the input of crude iron was a single uniform process, such birfurcation even
otherwise was not possible even if it was so attempted by the
respondent-department. The impugned show cause notices make clear, in this
connection, that they seek to levy basic excise duty for the relevant period on
the entire input of pig iron by seeking to bring it to tax on the basis of the
entire output of steel melting scrap. In other words notices seek to equate
total quantity of steel melting scrap with the embedded proportionate input of
pig iron. This is clearly impermissible. It is obvious that steel melting
scrap, as a final product, is exigible to nil rate of duty as there is no
dispute between the parties that it is fully covered by exemption Notification
No. 150/77 dated 18.6.1997. In fact, that is the very basis for the impugned
notices, as seen earlier. If that is so, the impugned notices indirectly seek
to bring to tax the entire quantity of steel melting scrap resulted into steel
ingots had not already borne the excise duty under Tariff Item 25 at the time
when it was manufactured. But the said fact does not improve the case of the
respondent-department any further.
The
reason is obvious. Even though such set off from duty payable on steel ingots
as finished product @ Rs.350/- per metric ton as per Tariff Item 26 might not
be available to the appellant-company, still the entire input of pig iron which
got utilised by the appellant in manufacturing steel ingots got reflected in
the full and final duty payable by the appellant on the final product, which
namely, steel ingots. All that resulted was the deferred payment of excise duty
@ Rs.350/- per metric ton without any set off. That was the only logical effect
of the non-availability of the benefits of Notification No.18/71 dated 27.3.1971.
In the absence of relevant data being available or even tried to be produced by
the respondent-department on the record of this case, it is impossible to
bifurcate and try to find out as to what part of the input of pig iron resulted
into the manufacturing of steel ingots and what part of the very same input of
pig iron got embedded in the by treating it to be resulting from the total
input of pig iron, which directly could not have been brought to tax. Once
entire quantity of steel melting scarp is exempted from excise duty as per
Notification of 18.6.1977, it is difficult to appreciate how the very same
quantity of scarp can be taken as a basis for levying tax on input of pig iron
embedded therein when admittedly a substantial part of the very same input had
resulted in a different duty paid product, namely steel ingots and for
manufacturing the same substantial quantity of pig iron had stood utilised.
The
moot question that survives for our consideration is as to whether the input of
pig iron which itself was an exigible commodity as per Tariff Item 25 had been
subjected to the requisite excise duty by way of deferred payment of duty not
at the time of manufacture of crude iron but at the time when it got embedded
in the final product of steel ingots. In order to answer this question, we may
take a single illustration. Let us assume that 100 metric tons of iron in crude
form i.e. pig iron manufactured by the appellant at a given point of time which
was being utilised by it in the uniform manufacturing process for ultimately
producing the steel ingots out of it. As per Tariff Item 25 the rate of excise
duty was Rs.70/- per metric ton on pig iron. Therefore, 100 metric ton of pig
iron when manufactured would have been liable to pay excise duty of Rs.7,000/-.
would have been available to the appellant to be adjusted against the final
product, namely, the steel ingot was cleared by it. For the purpose of this
illustration, let us assume that by utilising 100 metric tons of pig iron, 90
metric tons of steel ingot and 10 metric tons of steel melting scarp emerged.
So far as 10 metric tons of scarp was concerned, it was not exigible to excise
duty payable thereon as per Tariff Item 26 was Rs. 350/- per metric ton.
Therefore,
accordingly 90 metric tons of steel ingots would have been required to bear
total excise duty of Rs.31,500/- (90 metric tons x Rs.350/-). Towards this
total liability of Rs. 31,500/- of excise duty on the final product of the
steel ingots, the appellant would have been entitled to a set off Rs.7,000/- in
all as it had utilised 100 metric tons of pig iron as input for manufacturing
this 90 metric tons of steel ingots especially in the absence of there being
any bifurcation of the input of pig iron between the final emerging products,
namely, 90 metric tons of steel ingots on the one hand and 10 metric tons of
steel scarp on the other.
But
that would have been possible if the input of 100 metric tons of pig iron had
already been subjected to payment of excise duty at the time of clearance for
captive consumption. Then in that case the net duty liability on 90 metric tons
of steel ingots would have been Rs.24,500/- only (Rs.31,500- Rs.7,000/-).
However, the set off of Rs. 7,000/- in all is not available to the appellant on
the excise duty payable on 90 metric tons of steel ingots as at the relevant
time when the input of pig iron was manufactured, the same had admittedly not
borne any duty and the payment of duty was deferred. Therefore the notification
No.18/71 dated 23.3.1971 could not be of any avail to the appellant. The net
result was that the appellant had to pay the full duty of Rs.31,500/- on the 90
metric tons of steel ingots which had utilised non-duty paid 100 metric tons of
pig iron. In the process the appellant accounted for full duty payable on steel
ingots of 90 metric tons i.e. Rs.24,500/- and also accounted for full duty on
the input of 100 metric tons of pig iron i.e. Rs.7,000/-. A conjoint operation
of Notification No.18/71 dated 23.7.1971 and Tariff item 26, therefore,
projects the following picture. Excise duty payable on final output of steel
ingots would work out to Rs.350/- per metric ton consisting of Rs. 70/- per
metric ton being the duty on the embedded input of pig iron had suffered the octroi
duty at the time of its clearance for captive consumption, the appellant would
have been required to pay only Rs.280/- per metric ton as excise duty on the
final product of steel ingots. On the other hand, if input of pig iron had not
borne such duty on its clearance for captive consumption, and the duty thereon
was deferred, the steel ingots on clearance would bear full bear duty Rs.350/-
per metric ton which in its turn would result in deferred payment of excise
duty on input of pig iron on Rs. 70/- per metric ton. Thus as per the illustration
under consideration, if the Notification No.18/71 dated 23.3.1971 operated in
the field, the department would have got Rs. 7000/- by way of excise duty on
the manufacture of input of pig iron of 100 metric tons when it was cleared for
captive consumption and it would have got excise duty of Rs.24,500/- on 90
metric tons of steel ingots in the light of the set off permissible under the
said Notification i.e. in all Rs.31,500/-. If the benefit of the said
notification was not available . As a matter of fact it is not available as the
input of 100 metric tons pig iron had not borne any duty at the relevant time
and the department had permitted the appellant to adjust it ultimately at the
stage of manufacture of final product of 90 metric tons steel ingots which utilised
the entire 100 metric tons of pig iron for its production, in the absence of
separate bifurcation, the net result would still remain the same. Full excise
duty of Rs.31,500/- on 90 metric tons of steel ingots @ Rs.350/- per metric ton
without giving any benefit of adjustment would become available to the
department. In either case, the appellant would be out of pocket to the
requisite amount of Rs. 31,500/- by way of excise duty which would fully meet
the department's demand of the full excise duty of Rs. 7000/- payable on the
total input of 100 metric tons of pig iron. When the amount of excise duty so
recovered on 90 metric tons of steel ingots which had exhausted the entire pig
iron, accounted for fully duty on the entire quantity of input of pig iron, it
is difficult to appreciate as to how the very same quantity of 100 metric tons
of pig iron as input can again be subjected to excise duty because a further
unintended product of 10 metric tons of steel scarp also resulted from the very
same process of manufacture undertaken by the appellant in its steel making
furnace.
Consequently,
it must be held that the impugned demands of excise duty twice on the input of
pig iron utilised by the appellant in manufacturing the final product of steel
ingots and which in the same process as a by-product of steel ingots and which
was fully exempted from excise duty on account of the concerned exemption
notification.
In
this connection, we may note that the reasoning of the CEGAT as noted in
paragraph 7 of the impugned judgment is clearly unsustainable. The CEGAT has
observed that in this case steel melting scarp falling under Tariff Item 26 has
been cleared without paying the duty or following the procedure of Chapter X as
stipulated in Notification No. 150/77 dated 18.6.1977. It has been further
observed that the department was justified in recovering duty at the stage
prior to the last stage as in the last stage the produce, i.e. steel melting
scarp is subject to nil rate of duty.
With
respect, the error committed by the CEGAT is to the effect that it had failed
to appreciate that though duty on the input of pig iron at prior stage was not
paid, whole of that duty got paid on clearance of steel ingots which were the
main final product and the emergence of a minor by- product like steel melting
scarp which might have been cleared on payment of nil duty had no impact
whatsoever for enabling the department to once again bring to tax the same
input of pig iron.
We may
also note that the reliance placed by the learned counsel for the appellant on
two decisions of this Court in M/S Swadeshi Polytex Ltd. vs. Collector of
Central Excise[(1990) 2 SCC 358] and in Union of India & Ors. etc. vs.
Indian Aluminium Co. Ltd. etc. [(1995) Supp. (2) SCC 465] may not be strictly
apposite on the facts of the present case as the by-products which were dealt
with in these cases were not excisable goods at all and had no independent
market. In the present case even according to the appellant steel melting scarp
had a market value and was capable of being sold outside if not captively
consumed by the appellant. In ground no.(v) B in the memo. of appeal the
appellant in this connection, has averred as under|- " Because Steel
Melting scarp was exempted in terms of Notification No.150/77 dated 18.6.1977
upon conditions mentioned therein. The conditions having been fulfilled, no
central excise duty can be determined or demanded, on the said `steel melting
scarp' when sold to the steel plants following the Chapter X procedure."
It, therefore, cannot be urged by the learned counsel for the appellant that
steel melting scalp was not an excisable commodity or that it could not be sold
in the market. Consequently, the aforesaid decisions cannot be pressed in
service by the appellant in the present case.
However
as discussed earlier the impugned demand of duty on the supposed embedded input
of pig iron which resulted into the steel melting scarp were clearly unauthorised
and incompetent. The appellant is entitled to succeed on this ground alone. In
the result, the appeal is allowed, the judgment and order of the CEGAT is set
aside, the impugned demands pursuant to both the notices dated 21.11.1980 and
23.11.1981 and the consequential adjudication thereon as confirmed by the CEGAT
are quashed and set aside. The question of refund of Rs. six lakhs deposited by
the appellant pursuant to the order of the CEGAT will have to be processed by
the Collector of Central Excise, Bolpur in accordance with law and in the light
of the decision of this Court in Mafatlal Industries Ltd. vs. Union of India
(1977 ELT 247). The proceedings for this aforesaid limited purpose will stand
restored to the file of the Collector, Central Excise, Bolpur. Ordered
accordingly. In the facts and circumstances of the case, there will be no order
as to costs.
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