By-Product,Scrap and Waste/ Residue

[Mourya Srinivas]

Goods

Includes any article, material or substance which is capable of being bought and sold for a consideration and such goods are deemed to be marketable [Explanation to Sec 2(d)]

Excisable Goods

Goods specified in the First Schedule and Second Schedule to the Central Excise Tariff Act, 1985 as being subject to a duty of excise.[Sec 2(d)]

Levy of Excise Duty

Excise Duty is levied on goods produced or manufactured in India. The term ‘manufacture’ is defined u/s 2(f) of Central Excise Act, 1944.

Meaning of Manufacture

The definition of manufacture is an inclusive one. It includes any process:-

1. Incidental or ancillary to the completion of a manufactured product; and
2. which is specified in any relation to any goods in section or chapter notes of the First Schedule to the Central Excise Tariff Act, 1985 as amounting to manufacture.
3. Involves packing or repacking of goods specified in Third Schedule in a unit container or labeling or re-labeling of containers incl. alteration or declaration of RSP or adoption of any other treatment on the goods to render the product marketable to the consumer.

Discussion on Scrap, Residue and By-product

Meaning of By-product: - An incidental or ancillary product made in the manufacture of something else. It is not the intention to produce by-product, but it is inevitable secondary result. These are the outputs

Meaning of Scrap:-Arisen from manufacture or mechanical workings of metals and metal goods not usable as such.

Meaning of Residue:-A small amount of something that remains after the main part has gone or been taken or used; a substance that remains after the process.

By-product

By-products are incidentally generated during the course of manufacturing of the main product. The generation of by-product is unintentional and inevitable. Nevertheless, by-products are generated in the process of manufacturing and hence become excisable.

Excise duty is to be paid when the by-products are removed from the factory.

If the by-product arisen is an exempted product then liability to pay 8% duty would not arise and also the provisions of Rule 6 of Cenvat credit are not attracted [UOI and Ors. Vs. M/s Hindustan Zinc Ltd (2014 (5) TMI 253 - SUPREME COURT)].

Scrap

Scrap according to dictionary means a small piece cut or broken from something, fragment. In commercial parlance, `scrap’ is normally understood as waste. However, it may be used for re-rolling or re-melting for bringing out raw material to be used for producing finished goods. Any waste arising from the processing of inputs in respect of which credit had been taken, may be removed on payment of duty as if such waste is manufactured in the factory. Scrap is normally understood as something which is not serviceable.

A sub-standard article is not scrap as understood in commercial parlance. It could be said that the part of the input which is not useable by the manufacturer (or is not used by them) for the manufacture of their final product, is disposed of to outside buyers and is useable by them as such without re-melting, in or in relation to the manufacture of their final product.

In the process of manufacture, some trimmings, shearings of uneven sides of sheets, etc. can arise. If this cannot be used as such, and had to be melted, demanding duty on such trimmings may not be proper. Those trimmings may have to be taken as waste in the manufacture of the finished excisable goods

For scrap to be excisable, scrap has to be generated during the course of manufacture only. Scrap generated during repair, reconditioning or maintenance is not excisable though it can be sold for a consideration and it is known as such in the common trade parlance. It was held in the case of Grasim Industries Ltd Vs. UOI 2011 (10) TMI 2 - SUPREME COURT OF INDIA that scrap or waste arising from repair and maintenance of capital goods installed is not dutiable as they are neither by-products of the final product nor subsidiary product. For scrap to become dutiable it must arise regularly and continuously in the course of manufacture. The goods have to be produced or manufactured in India.

Excise duty is payable on the scrap generated at the job workers premises also. The scrap generated at the job worker’s premises would either be brought back or removed on payment of excise duty. The liability to pay duty on the scrap generated at the job worker’s premises is on the job worker as he is the manufacturer and not on the supplier of the materials. [Preetam Enterprises vs. CCE - (2005 (10) TMI 528 - CESTAT MUMBAI)]. It is the job worker who is the manufacturer of waste and scrap under the Central Excise and the liability to pay duty is on the person who produces or manufacturer any excisable goods and duty liability has to be discharged by the job worker himself. The liability to pay excise duty and the manner of payment of duty are governed by Rules 4 and 8 of the Central Excise Rules.

Waste/ Residues

Usually residues are considered as waste products or not useful or rubbish and hence not excisable even when it is sold to an outsider for a consideration. This instance is aptly illustrated in the case of India Aluminium Ltd. Vs. UOI where it was mentioned that aluminum dross and skimming are residues which are left after the manufacturing process and contain very minimal percentage of aluminum in it. Even though there is a buyer for such goods, it cannot be held marketable as it is not known to the market in common usage. It is also held that merely there is an entry in the tariff does not make the product excisable when there is no manufactured involved in it.

On the other hand, residues are excisable when they can be re-processed to make a product and there is a market for that product. Even when these residues are sold as such, excise duty is liable because it can be further processed to manufacture other product. This was illustrated in the case of KumbhiKasari SSK Ltd. Vs. CCE, Pune-II wherein after the manufacturing process of sugar, brown sugar was left over as a residue and the company was removing this residue as such to outside buyers without paying excise duty. To note, brown sugar can be further re-processed to make it as standard sugar. Hence, it was held that brown sugar is excisable.

It was also held in the case of CCE, Kanpur Vs. Gayathri Glass Works that the broken and molten glass left after the manufacturing of glass is excisable because such glass can be further re-processed and used for manufacturing normal glass. The fact that molten and broken glass are different from the raw materials put into the manufacturing which means labour and energy is been employed in transformation of raw materials into finished goods. It is known as broken and molten glass itself in the market.

To conclude, if a residue is capable of being further processed to manufacture the same product or other product then it can be excisable. If the residue cannot be further processed and it is used as such then no excise duty is leviable on such residues.

Conclusion

It is important to decide the nature of the product arising during the course of manufacture apart from the main product whether it is scrap, residue or by-product. Once the decision as to the nature of such products is determined then liability to duty and eligibility of credit as well as restriction if any can be determined as well.

Acknowledgement to CA Roopa Nayak for vetting this article.