@JUDGMENTTAG-ORDER
Govind Mathur, J.—On July 6, 2012, while taking note of the provisions of Para 9.51 of the Foreign Trade Policy (hereinafter referred to as ''FTP''), the Board of Approval for Export Oriented Unit Scheme, rejected the appeal preferred by the petitioner by arriving at a conclusion that electricity is not a "consumable" item and as such is not entitled for exemption as referred in Para 6.5.1 of the Hand Book Procedure (hereinafter referred to as ''HBP'') 2009-14.
2. The decision of the Board was communicated to the petitioner by the office of the Regional Joint Director General of Foreign Trade, Jaipur under a communication dated 10-10-2012. Being aggrieved by the communication aforesaid and the decision of the Board of Approval, this petition for writ is preferred.
Facts of the Case
3. The petitioner, a company incorporated under the Companies Act, 1956, claimed benefit of deemed export, as provided under Para 8.3 of the FTP, on the electricity consumed by its hundred per cent export oriented unit/ Hydro-1. The claim aforesaid was made on the count that the Domestic Tariff Area (hereinafter referred to as ''DTA'') Unit of the petitioner is having a captive power plant which supplies electricity to the export oriented unit (100%) that manufactures zinc. The zinc manufactured in the export oriented unit consumes electricity manufacturing process to obtain zinc.
4. The claim of the petitioner, at the first instance, under a letter dated 1-6-2010, was objected on following counts -
(a) no duty drawback on electricity in the past period,
(b) as to how the unit can claim deemed export benefit, when duty drawback on supply of electrical energy is NIL, and
(c) electric energy is not tangible goods, how and under which provision a unit can claim benefit of deemed export on use of electric energy.
5. The petitioner, under a letter dated 1-6-2010, provided all details and grounds to support the claim in terms as under :-
"(i) Petitioner''s (DTA Division) had filed application for deemed export benefit for the supply of electric energy to 100% EOU Unit for the period 8th May, 2008 to 30th Sept., 2008. The said claim is the first claim as there was no supply of electric energy to 100% EOU Unit before 8th May, 2008 (i.e. date of conversion into 100% EOU).
(ii) This claim has been filed for fixation of brand rate of drawback under Para 8.3.3 of HBP (Hand Book of Procedure) Vol. I which provides "Where All Industry Rate of Drawback is not available or��, an application in ANF 8 along with prescribed documents may be made to RA or Development Commissioner (DC) for fixation of brand rate. Further, as per Circular No. 13/2008, dated 29-8-2008 it has been clarified that where All Industry Rate of Duty Drawback is prescribed as NIL, the exporters are eligible for claiming brand rate of drawback under Rule 6 or 7 of the Customs, Central Excise Duties and Service Tax Drawback Rules, 1995 subject to the conditions mentioned therein.
(iii) Electricity is tangible goods as per several case laws under Sales Tax, Service Tax & Excise legislations.
* Electric energy is specified in Heading 27160000 in Central Excise Tariff and hence is goods. The supply of goods to EOU is entitled for deemed export drawback as per Para 8.3 of FTP. Moreover, the Petitioner''s DTA Unit has filed the claim as per Para 8.3.1(iii) of HBP vol. 1 which provides "in respect of supplies under Para 8.2(b) of FTP, where supplier wants to claim benefits from RA, RA shall allow deemed export benefits to DTA supplier, or receipt of certified copies of Central Excise attested invoice as proof of supplies made and/or Central Excise attested CT 3 form & proof of validity of LoP. In Policy Circular No. 75(RE-2008)2004-2009, dated 27-3-2009 regarding claiming deemed export benefits from Development Commissioner or RA concerned it is clarified that DTA units should submit claims only with the concerned RA as per Para 8.3.1 (iii) of HBP."
6. The Joint Director General of Foreign Trade, under a letter dated 18-10-2010, informed the petitioner that the claim made under letter dated 18-10-2010 is not sustainable as the power is not covered under Para 6.6.1 (para material to Para 6.5.1 of HBP) of the Hand Book of Procedure Volume-I. After receiving the communication aforesaid, the petitioner submitted a detailed representation dated 28-10-2010 explaining that the electric energy is a "consumable" item in the manufacturing process of zinc and, therefore, is entitled to procure the same duty free and further to demand deemed export benefits.
7. The Deputy Director General of Foreign Trade, under a letter dated 10-12-2010, informed the petitioner that his case was thoroughly examined in consultation with the Department of Revenue and found that no approval from Board of Approval was taken, therefore, the claim as made to have duty free procurement of electricity cannot be extended.
8. The petitioner then submitted a detailed representation dated 3-10-2011, to the Chairman and Secretary, Board of Approval for Export Oriented Unit, Ministry of Commerce and Industries, which was responded by the Ministry of Commerce and Industries with information that the Board of Approval, in its meeting dated 28-11-2011, considered the representation and rejected the same.
9. The petitioner then preferred a review petition before the Board of Approval, which came to be considered and rejected on 6-7-2012. The Board of Approval refused to extend benefits on basis of the opinion given by NOIDA Special Economic Zone and Directorate General of Export Promotion with assertion that it will not be practicable to segregate the quantum of power used in relation to manufacturing zinc.
10. An appeal then was preferred by the petitioner, which also came to be rejected on 14-9-2012. The petitioner again made the claim, that too was rejected on 15-10-2012.
11. In this factual background, instant petition for writ is preferred.
The Foundation to claim "Deemed Export Benefit"
12. As per provisions of Section 5 of the Foreign Trade (Development and Regulation) Act, 1992 (hereinafter referred to as ''the Act of 1992''), the Central Government notified FTP, Chapter VI of that pertains to Export of Oriented Units (EOUs), Electronics Hardware Technology Parks, Software Technology Parks and Bio-Technology Parks. The provisions relevant for setting up EOUs, the import/export of goods, domestic procurement of goods i.e. from DTA, sale of goods in DTA, achievement of Net Foreign Exchange, etc. are given in this Chapter. This Chapter contains all provisions pertaining to the concept of deemed exports, categories of supplies, which can be regarded as deemed exports, benefits under supply of goods as deemed exports, etc.
13. As per Para 2.4 of the FTP, the Director General of Foreign Trade may specify procedure to be followed by an exporter or importer or by any licensing/regional authority or by any other authority for the purpose of implementing provisions of the Act of 1992 and the Rules/Orders framed thereunder. In pursuance of this para, the Director General of Foreign Trade notified a procedure which is compiled under HBP-I. The relevant provisions contained in FTP and HBP-I relating to the period 2008-09 deserve to be quoted and those are as follows :-
"(i) Para 6.11(a) of FTP : Supplies from DTA/EOU/EHTP/STP/BTP units will be regarded as "deemed exports" and DTA supplier shall be eligible for relevant entitlements under Chapter 8 of FTP
(ii) Para 8.2 of FTP : Supply of goods of EOU/STP/EHTP/BTP is regarded as deemed exports.
(iii) Para 8.3(b) of FTP : Deemed exports shall be eligible for the benefit of deemed export drawback in respect of manufacture & supply of goods qualifying as deemed exports subject to terms and conditions as in HBP Vol. I.
(iv) Para 9.15 of FTP : "Consumable" means any item which participates in or is required for a manufacturing process, but does not necessarily form part of end-product items, which are substantially or totally consumed during a manufacturing process, will be deemed to be consumables.
(v) Para 6.6.1 of the HBP Vol. I : Goods permitted to be imported/procured from DTA shall include :
(a) Raw materials components, consumables, intermediates, spares and packing materials.
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(f) Any other items not mentioned above with approval of Board of Approval (hereinafter referred to as BoA.)"
14. The Director General of Foreign Trade, under a policy Circular No. 23, dated 28-7-2008, clarified that export benefits as per Chapter VIII of the FTP shall be given to the DTA suppliers in respect to permissible goods under Para 6.6.1 of HBP-I.
15. The claim of the petitioner is that it is 100% export oriented unit and for production of exportable goods i.e. zinc, electricity is an integral "consumable", therefore, is entitled to have benefits as per Chapter VIII of the FTP.
Arguments Advanced in Support of the Petitioner''s claim
16. Shri Dinesh Mehta, learned counsel appearing on behalf of the petitioner, submits that the Board of Approval, while examining claim made by the petitioner, failed to appreciate that electric energy is nothing but a "consumable" as per Para 9.15 of the FTP. The electricity, used for production of zinc, is a goods required for manufacturing process to manufacture zinc ingots. The electricity in this manufacturing process does not form part of end-product, but certainly satisfies the requirements as given in Para 9.15 of the FTP, the electricity being substantially consumed. Shri Dinesh Mehta explained the entire process of production of zinc ingots which is having different steps including electro winning process, melting and casting, leaching & purification and roaster. It is asserted that the basic principle to have zinc is electrolysis reaction. In this process, zinc sulphate is required to be broken by the process of electrolysis in zinc and sulfur oxide. The zinc is further required to be purified by the process of electrolysis. The details of the entire process, as given by the petitioner and accepted by the respondents, is as follows :-
"(1) Cell House (Electro winning) - Process Brief -
From Captive Power Plant, the Electric Energy is supplied at around 132 KV to the Rectifier where it gets converted into DC Current and the DC is supplied at approx 470 V to the Cell House at 192 KA (peak load). Electro-winning is carried out in electrolytic cells by passing D.C. Current. In cells, aluminium sheet is the cathode and high silver lead alloy is anode. The supply of Direct Current to the ZnSO4 in the Cells leads to deposition of Zinc on the Aluminium Cathode sheets. The zinc gets deposited on the aluminium cathode and is stripped after deposition. This process of extracting zinc where electric energy (DC) is used is known as Zinc Electro winning Process. The consumption of electric energy in this process, is passed through two rectifiers (Rectifier No. 1 & 2) in the EOU Unit by which the electro winning process is done. This high voltage electricity passed through rectifiers can only be consumed for industrial purposes and is being consumed entirely in the cell house (electro winning process). The electric energy consumed in this process is around 85% of the total energy consumed by the EOU Unit.
(2) Melting & Casting -
The zinc cathodes are melted in two induction melting furnaces and casted through Automatic Zinc Casting machine and wherein equipments and machines like conveyor belts inductor, casting conveyor motor, robot, cooling and seed conveyor, cooling pumps, etc. are run on electric energy.
(3) Leaching & Purification - Process Brief -
The calcine produced in Roaster Section is leached in the leaching section. This leached solution is sent to purification plant where impurities are removed and ZnSO4 (purified zinc sulpahte) solution is sent to cell House operation mentioned above. Leaching plant is having chain conveying system (electrically motor operated) wherein calcine is being transferred to day bins and then this calcine is transferred to various tanks & reactors where electrically operated equipments like agitators & pumps are being substantially used. In the entire process, electric energy is being consumed for the motorized equipments mentioned above being an integral part of the manufacturing process.
Concentrate is transferred from RMH section to Roaster day bin through motorized conveying system run on electric energy and sent to roaster furnace. The air flow is given in the roaster furnace through electrically operated motor which is an integral part of the process. The concentrate is converted into calcine in roaster furnace and this calcine is being transferred to storage silo through various electrically operated equipments like chain conveyors, rotary walls, ESP, drum coolers, ball mill, etc. which consume substantial electrical energy. The calcine is recovered in roaster section and the flew gases are being treated in gas cleaning plant through QT/PGCT & WET ESP equipments which are run on electrically energy. These gases are transferred to the acid plant where sulphuric acid is being produced."
17. It is also stated that the electricity used in the process of electrolysis stands consumed absolutely and that does not remain available for its reuse or use for any other purpose.
Response by the Respondents to the Contention of the Petitioner
18. The submissions made by learned counsel for the petitioner are vociferously contested by learned counsel for the respondents with assertion that the electric energy is not a "consumable" as defined under Para 9.15 of the FTP. It is submitted that the electric energy is intangible in nature and cannot be regarded as consumable, hence, that is not eligible for benefits allowed to "deemed exports". The Drawback Directorate, Department of Revenue, under its memorandum dated 18-12-2008 clarified the entire issue by extending the explanation as under :-
"(a) The DGFT issued the policy circular no. 23/2008, dated 28-7-2008 which clearly states that the deemed export benefits under Chapter 8 of the FTP should be allowed only in respect of permissible goods as per para 6.6.1 of HBP Vol.I.
(b) Being intangible in nature, its usage for manufacturing process cannot be clarified.
(c) The eligible goods for deemed export benefits are not essentially excisable goods as goods covered under FTP are not governed by Central Excise definition. Case laws relied upon in favour of the contention that Electric Energy is goods are not relevant as para 6.6.1 of the HBP Vol. I clearly describes the goods eligible for deemed exports benefit. This para covers raw materials, components, consumables, spares, drawing prototypes and samples, charts, office equipments, etc. and not intangible goods like power.
(d) The Board''s Circular No. 27/2005 customs is also not relevant to the issue concerned as it pertains to factoring of Fuel (HSD and Furnace Oil) in the AIR and brand rate fixation.
(e) In view of the above cited clarification, power cannot be considered as ''goods'' for the purpose of deemed export benefits."
19. Learned counsel, while relying upon the explanation extended by the Drawback Directorate, Department of Revenue, emphasised that the electric energy is certainly a goods, but not entitled to have duty drawback benefits which are available only for supply of certain restricted goods mentioned in Para 6.6.1 of HBP-I. Para 6.6.1(b) of HBP-I nowhere mentions electricity. The term "consumable" also, as per learned counsel, is not open to be widened to include an intangible item i.e. electric energy in it. According to learned counsel the exclusion of electric energy in Para 6.6.1 and inclusion of electricity generated equipments, such as DG sets, captive power plant and transformer, clearly indicates that it was never intended under DTP to treat the electric energy as a "consumable". Appreciation of the issue by us
20. Precisely, the issue under consideration is that whether in production of zinc, the electricity power is a "consumable" as defined under Para 9.15 of the FTP and as referred in Para 6.6.1 of HBP-I (6.5.1 of HBP)?
21. To appreciate the issue, it is necessary to understand the entire process of obtaining the final product i.e. zinc. As per the material supplied by counsel for the parties, the zinc is processed either of two primary processing methods, electrolytic or pyrometallurgical. 85-90% of the world''s zinc is produced by the electrolytic method. The appellant is also producing the zinc by adopting electrolytic method. The first stage, as already referred, is to roast the zinc sulphide concentrate to zinc oxide in the presence of oxygen (i.e. in air), the sulphur being converted to sulphur dioxide. The sulphur dioxide is then further oxidised to sulphur trioxide which is dissolved in strong sulphuric acid. The strong sulphuric acid is then diluted with water for reuse. Some impurities in the original concentrate have to be removed in order not to contaminate the sulphuric acid. Sulphuric acid, as such, is a major by-product of zinc smelting. The impure zinc oxide, called calcine, is then leached sulphuric acid to dissolve the zinc, producing impure zinc sulphate. In practise, the leaching process is carried out in several steps, the first step invariably being only very weakly acid. The zinc sulphate so produced is separated from the remaining solids and passes to the next step, which is purification. The purpose of purification is to remove the impurity metals that have dissolved with the zinc. The principal ones are cadmium, copper, cobalt and nickel. Because zinc is a highly reactive metal this property can be used to remove them. By adding powdered zinc to the solution the zinc is oxidised and dissolves, with the opposite side of the reaction being the reduction of the other dissolved metals back to their metallic form. This is analogous to the schoolboy trick of putting brass coins into silver nitrate - because silver is a noble (un-reactive) metal the coins become silver-plated with, behind the scenes, a small amount of the more reactive copper dissolving. Removal of impurities from the zinc sulphate is most important. If they remain, not only will the zinc produced from the subsequent electrolysis be insufficiently pure, but their presence will interfere with the smooth running of the electrolysis process itself.
22. The purified zinc sulphate is now ready for electrolysis. In this step the zinc sulphate is passed continuously through tanks containing a series of alternate aluminium cathode (blanks) and lead anodes. Current is passed between the anodes and cathodes and metallic zinc is plated onto the cathodes by a reduction reaction; in electrolysis there always has to be an opposing oxidising reaction at the anode and, in this case, it is the liberation of oxygen gas. Periodically the cathodes are removed and the metallic zinc is harvested i.e. peeled away from the aluminium blanks, which are then replaced in the tanks for another cycle. For electrolysis alone the electric power requirement is approximately 3300kWh per tonne of zinc produced for sale and including other electrical requirements of the smelter the total requirement is approximately 4000kWh per tonne. The metallic sheets peeled from the aluminium cathode blanks are finally melted in a furnace and then cast into ingots for sale.
23. The process, discussed above, clearly indicates that the electrolytic process is necessary to have final produce i.e. zinc. For electrolytic process the essential input is electricity. It is not in dispute that the electricity is a goods and that goods, though intangible, is consumed in obtaining the final product. True it is, the electricity is not a part of end-product, but it is substantially consumed in the process to manufacture the end-product. Para 9.15 of the FTP in specific terms provides that any item, which participates in or is required for manufacturing process, but does not necessarily form part of end-product items, but substantially or totally consumed in the process aforesaid, is a "consumable". The electricity, in our considered opinion, not only participates, but is substantially consumed in manufacturing process of zinc, thus, is a "consumable" as per Para 9.15 of FTP.
24. We do not find any merits in the argument advanced on behalf of the respondents that the electricity being intangible cannot be treated as a "consumable". There may be hundred kinds of goods including several gases, which may not be intangible but fulfilling all the requirements of goods. Electricity itself is a production which can be measured and quantified in physical units. It also participates actively in manufacturing process. The intangibility, as such, cannot be a reason for not treating the goods as "consumable".
25. We also do not find any merits in the argument that in Para 6.6.1 of HBP-I (6.5.1 of HBP) is not specifically referred and, therefore, it cannot be treated as a article permitted to be imported/procured from DTA. Clause (a) of Para 6.6.1 of HBP-I mentions raw materials, consumables, intermediates, spares and packing materials. All these terms give a general connotation and each and every term may include several goods. The electricity, as already discussed above, comes within the purview of "consumables" as defined under Para 9.15 of the FTP, hence, we are of considered opinion that it is nothing but a goods permitted to be imported/procured from DTA.
26. True it is, in Para 6.6.1 of HBP-I, certain electricity equipments including DG sets, Captive Power Plants and transformers are specifically mentioned, but these are the equipments to generate electricity, whereas the electricity is a goods "consumable" for production of zinc. In view of it, it is having its separate identity which is required to be appreciated with its own qualities.
27. In the case in hand, the process of electrolytic cannot take place without consuming electricity and, therefore, its consumption in production of zinc is apparent.
28. In view of whatever discussed above, we are satisfied that the electric power being a "consumable" as per Para 9.15 of FTP deserves to attract Clause 6.6.1 of HBP-I (6.5.1 of HBP).
29. Accordingly, the petition for writ is allowed. The orders dated 6-7-2012 (Anx. 23) and 14-9-2012 (Anx. 26) are quashed. It is declared that the petitioner is entitled to have deemed export benefit for its Domestic Tariff Area Unit to hundred per cent Export Oriented Unit.
30. No order to costs.
