Contributed by CA Manindar
Applicability of excise duty on waste and scrap is always been one of the perennial area of litigation under the Central Excise Law. With intent to subject waste and scrap to excise duty, many of the waste and scraps which arises during the process of manufacture of various excisable goods are included in the Central Excise Tariff. The definition of ‘Excisable Goods’ as appearing under Section 2(d) of the Central Excise Act, 1944 is also amended by inserting an explanation with effect from 10.05.2008 which deems that anything that can be capable of being brought to market and sold are deemed to be marketable and thus excisable. On the other hand, there is several waste and scrap which are subjected to nil rate of duty, thereby Department requiring assessee to reverse CENVAT Credit at 6%/7% of their value under Rule 6 of CENVAT Credit Rules, 2004. Let us abreast ourselves the latest legal position of this issue.
Prior to insertion of explanation to Section 2(d),several courts have interpreted that certain waste and scrap are not excisable goods despite mentioning them in Central Excise Tariff on the reason that they are not marketable as they are not known to commerce as marketable commodity. In the case of UOI vs.Indian Aluminum Co. Ltd, 1995(77)E.L.T268(SC) wherein excisability of aluminum dross and skimmings was examined and the Supreme Court has held as follows;
“13.……………………………………..Dross and skimmings may contain some small percentage of metal. But dross and skimmings are not metal in the same class as waste or scrap. It may be possible to recover some metal from such dross and skimmings. They can, therefore, be sold. But this does not make them a marketable commodity. As learned Single Judge of the Bombay High Court has pointed out, even rubbish can be sold. Everything, however which is sold is not necessarily a marketable commodity as known to commerce and which, it may be worthwhile to trade in. Learned Single Judge of the Bombay High Court, therefore, rightly came to the conclusion that the proviso to Rule 56A was not applicable as aluminium dross and skimmings are not excisable goods.”
Explanation inserted in Section 2(d) w.e.f. from 10.05.2008:
In order to overcome the challenge on marketability of waste and scrap, an explanation was inserted in the definition of ‘excisable goods’ under Section 2(d) of the Central Excise Act, 1944 by Finance Act, 2008 w.e.f 10.05.2008. The same is reproduced as under;
"excisable goods" means goods specified in the First Schedule and the Second Schedule to the Central Excise Tariff Act, 1985 as being subject to a duty of excise and includes salt;
Explanation. - For the purposes of this clause, "goods" includes any article, material or substance which is capable of being bought and sold for a consideration and such goods shall be deemed to be marketable.
Consequent to the amendment, Pune Commissionerate released Circular No. 904/24/2009-CX dated 28.10.2009 where in it has been stated that bagasse, aluminum/zinc dross and other such products termed as waste, residue or refuse which arise during the course of manufacture and are capable of being sold for consideration would be excisable goods and chargeable to payment of excise duty. Thus by virtue of the above amendment, Revenue sought to levy excise duty on various types of waste and scrap. Let’s see how successful they are!
Process should amount to manufacture apart from goods being excisable:
Excise duty is on the event of manufacture. In order to attract excise duty, apart from goods involved are excisable goods by finding place in Central Excise Tariff, they should also be manufactured. ‘Manufacture’ as defined under section 2(f) of the Central Excise Act, 1944 provides that it includes
1. any process incidental or ancillary to the completion of a manufactured product. or
2. any process which is specified in relation to any goods in the section or chapter notes of Central Excise tariff. or
3. any process involving labelling, re-labelling, packing or repacking of goods specified in third schedule to Central Excise Act, 1944
Process covered under point no 2 and 3 are deemed manufacture. Immediately upon the insertion of deeming fiction in the definition of ‘excisable goods’ under Section 2(d) to cover waste and scrap and above mentioned clarificatory circular, the contention came up that are they subject to excise duty even if the process involved in getting such waste and scrap does not amount to manufacture as discussed above.
In the case of Grasim Industries Ltd vs. UOI, 2011(273)E.L.T.10(SC) wherein the issue whether the metal scrap or waste generated while repairing of worn out machineries or parts of cement manufacturing plant amounts to manufacture for levying excise duty? In this case, Revenue proceeded to levy excise duty on the basis of Note 8(a) to Section XV of the Tariff Act which states – ‘Metal waste and scrap from the manufacture or metal waste and scrap from mechanical working of metal’.
In this case, the Supreme Court has held that section note has very limited purpose of extending coverage to the particular items to the relevant tariff entry in the schedule for determining the applicable rate of duty and it cannot be readily construed to have any deeming effect in relation to process of manufacture as contemplated by Section 2(f) of the Act, unless expressly mentioned in the said Section Note.
The Supreme Court held that the goods must be produced or manufactured in India in order to be subject to excise duty. Simply because a particular item is mentioned in tariff, it cannot automatically become exigible to excise duty. Vide para 8, it was held as under;
“…………………………….In our opinion, the charging section 3 of the Act comes into play only when the goods are excisable goods under section 2(d) of the Act falling under any of the tariff entry in the schedule to the tariff act and are manufactured in terms of Section 2(f) of the Act. Therefore the conditions contemplated under Section 2(d) and Section 2(f) has to be satisfied conjunctively inorder to entail the imposition of excise duty under Section 3 of the Act……………………”.
Thus even after the insertion of explanation in Section 2(d) for deemed marketability, ‘process amounting to manufacture’ is still an essential condition to be satisfied in order to levy excise duty on waste and scrap. Thus waste and scrap which can fetch some amount if sold though become excisable goods but subject to excise duty only if the process or processes out of which such waste and scrap arise either amounts to manufacture as conventionally understood i.e. distinct article from raw material emerge having distinctive name, character and usage must emerge or the said process amounts to deemed manufacture as defined under Section 2(f)(ii) and (iii) of the Central Excise Act,1944.
Many of the wastes and scrap arises in the course of manufacture of excisable goods. They arise inevitably but are not intended to be manufactured or produced by manufacturer. Of course, they may fetch some value but in most cases their value would be minimal compared to the final products manufactured and their removal costs would be higher than their value. The process involved in generation of many of the wastes and scraps may not amount to manufacture as defined under Section 2(f). Examples of such wastes and scraps are as follows;
Bagasse upon extraction of juice from sugarcane:
In the process of manufacture of sugar, sugarcane is crushed, its juice is extracted and bagasse emerges as residual waste and scrap of sugarcane. The said bagasse is specified in Central Excise Tariff under tariff item 23032000 and is subjected to Nil rate of duty. The Allahabad High Court in the case of BalrampurChini Mills Ltd vs. UOI, 2014(300)ELT372(All) wherein it was held that bagasse is not a manufactured goods and it is never manufactured, but it only emerges in the process of final product, namely, sugar.
Sludge arising in the course of manufacture:
Sludge emerging from effluent treat plant cannot be avoided in manufacture of final products. The same cannot be said to have manufactured as held in the case of CCE vs. Oxygen Equipment and Engg. Co. P. Ltd, 2002(143)ELTA82(SC).
Aluminum skimmings and dross during manufacture of aluminum sheets:
In the course of manufacture of aluminum sheets out of aluminum ingots, dross and skimmings arise. These are the impurities/foreign matter formed on molten metal for use in manufacture. The Bombay High Court in the case of Hindalco Industries Limited vs. UOI, 2015(315)ELT10(Bom) wherein it was held vide para 24 –“It may be that dross and skimmings may be capable of fetching some sale price, for that matter any rubbish can be sold. But that is not the criterion. It cannot be said that dross and skimmings are the result of treatment, labour or manipulation whereby the end-product is dross and skimmings. They are merely the scum thrown out in the process of manufacture of aluminum sheets. Therefore, it cannot be said that dross and skimmings are transformation resulting in a new and different article with a distinctive name, character or use or that they ordinarily come to the market to be bought and sold and are known to the market. The article or goods manufactured from the aluminum ingots was not dross and skimmings but the aluminum sheets”. Therefore no duty is leviable on waste and scrap.
Thus unless the process involving amounts to manufacture or deemed manufacture as the case may be, excisability of waste and scrap do not arise.
Is sale of such waste and scrap requires compliance under Rule 6 of CENVAT Credit Rules, 2004?:
Many of the waste and scrap specified in the Central Excise Tariff are subjected to Nil rate of duty. Revenue treating these wastes and scraps as exempted goods and on the premise that the input material is used both in manufacturing dutiable final products and exempted waste and scrap, are demanding reversal/payment of excise duty at 6%/7% on sale price of waste and scrap in terms of Rule 6 of the CENVAT Credit Rules, 2004. Further, many assessee prepare to pay excise duty on such waste and scrap though not emerged out of manufacturing process as they are under the impression that non- payment would require them to undertake complex compliance burden under Rule 6 of the CENVAT Credit Rules, 2004.
This rule requires maintenance of separate books of accounts for inputs and input services that are used for manufacture of exempted goods and dutiable goods or for provision of exempted services and taxable services. Credit is allowed only on those inputs and input services that are used for manufacture of dutiable goods or for provision of taxable services. Otherwise an amount equal to six percent of the value of exempted goods or exempted services is required to be paid.
As discussed above bagasse emerges as residual waste and scrap of sugarcane. The said bagasse is specified in Central Excise Tariff under tariff item 23032000 and is subjected to Nil rate of duty. Considering bagasse as exempted good, department demanded duty under Rule 6 of the CENVAT Credit Rules, 2004. In the case of Balarampur Chini Mills Ltd vs. UOI, (supra) where in the Allahabad High Court held that for applicability of rule 6, the manufacture of dutiable goods and manufacture of exempted goods are the conditions precedent. Since waste is never manufactured and it only emerges in the process of manufacture of final product and cannot be considered as manufacture of exempted goods, Rule is not applicable to bagasse which is admittedly an inevitable waste emerging from the crushing of sugarcane.
Even assuming they were exempted goods, still reversal is not required under Rule 6 by applying the position laid out by Supreme Court in the case of UOI vs. Hindustan Zinc Ltd, 2014-TIOL-55-SC-CX. The respondent in this case is engaged in manufacture of non-ferrous metals like zinc out of zinc ore. In the process, sulphuric acid is emerged as by-product which is exempted. Department required the respondent to pay an amount equal to 8% (as in force at relevant point of time) of the sale price of exempted goods (Sulphuric acid)under Rule 57CC of erstwhile Central Excise Rules and Rule 6 of the CENVAT Credit Rules, 2004.
The Supreme Court observed in para 20 “Sulphuric acid is indeed a byproduct. It is not as though some quantity of zinc ore concentrate has gone into the production of sulphuric acid, applicability of Rule 57 CC can be attracted. 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 there was no necessity and indeed it is impossible, to maintain separate records for zinc concentrate used in the production of sulphuric acid. The mischief of recovery of 8% under Rule 57 CC on exempted sulphuric acid is not attracted”.
Thus even assuming waste and scrap of the nature discussed above are exempted goods, they are just the inevitable by-products which emerge in the course of manufacture of final products and in such circumstances it cannot be assumed that the inputs are used for manufacture of both final products and these wastes and scraps. Accordingly, compliance under Rule 6 of the CENVAT Credit Rules, 2004 is also not warranted.
To sum up, it is important to give an appropriate treatment to the waste and scrap arising in the factory during manufacture. Mere mentioning of waste and scrap in Central Excise Tariff and the fact that it fetches some price if sold in market is not sufficient to attract excise duty. In addition, the process out of which the waste and scrap emerge should also amount to manufacture.Only then excise duty is attracted. As no manufacture is involved, the same cannot be construed as exempted goods for reversal of CENVAT Credit under Rule 6 of CENVAT Credit Rules, 2004.
This article is contributed by CA Manindar, Partner at SBS and Company LLP, Chartered Accountants. The author can be reached at firstname.lastname@example.org