The main legal point established is that the show cause notice forms the foundation of the Demand under Central Excise Act, and the Department's allegations in the notice determine the scope of the dispute.

ORDER :

1. The short question which arises for determination in these civil appeals filed by the Department under section 35L of Central Excise Act, 1944 is: Whether Lean Gas produced by Gas Authority of India Limited (GAIL) is a manufactured marketable final product or by-product?

2. On April 1, 1999, show cause notice was issued to the assessee by the Superintendent, Central Excise, in which it was alleged by the Department that the fnoticee (assessee) had cleared Lean Gas in bulk to M/s. Indian Petrochemicals Corporation Limited (IPCL), M/s. Vikram Ispat Ltd., and M/s. Ispat Industries as Natural Gas under Chapter 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. 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 L.P.G. Hence Lean gas is a result of a manufacturing process and therefore attract provisions of rule 57CC of the Central Excise Rules, 1944. Thus the Noticee has failed to pay C.Ex. Duty on amount equal to 8% of the price charged on the sale of the Lean Gas as required under rule (1) and (8) of rule 57CC during the period October 1998 to January 1999, having availed Modvat credit on inputs used within the factory for the manufacture of final products."

3. At this stage, we may mention that the assessee claimed Modvat credit under Rule 57D which states that Modvat credit shall not be denied or varied except in certain circumstances. In other words, under Rule 57D, credit of specified duty could not be denied at the relevant time in certain circumstances even where the final product stood exempted. We quote hereinbelow Rule 57D of Central Excise Rules, 1944:

"Rule 57D. 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 57A.

(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 57Q and such intermediate products or capital goods are not chargeable to duty of excise."

4. 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 57CC of the said Rules. We quote hereinbelow Rule 57CC which referred to adjustment of credit if the final produce stood exempted.

"Rule 57CC. 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 there on 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