2025 (6) TMI 1164 - AT - Central Excise

Levy of central excise duty on fly ash generated as waste during generation of electricity from coal in their factory of production - HELD THAT - From the facts it is apparent that though the fly ash is not being sold by the appellant we agree with the observation of Adjudicating Authority and the submission of the Learned AR that merely because it has not been sold by the appellant it cannot be said to be non-marketable. The concept of marketability is whether the product is capable of being sold or not. However it is found that the marketability is only one of the criteria for considering whether the goods are excisable goods within the scope of Section 3 of Central Excise Act. The other criteria is whether it is a manufactured product or not. It is found that in the case of Ahmedabad Electricity Company Ltd. 2003 (10) TMI 47 - SUPREME COURT the issue of cinder was taken up which was emerging in the course of generation of electricity from coal and relying on various judgments on the issue of manufacture Hon ble Supreme Court held that the emergence of cinder would not tantamount to manufacture of goods and therefore not leviable to duty. Hon ble Supreme Court considered Board s Circular dated 06.06.1975 wherein it was held that coal ash left out in burning of coal would not attract duty for the reason that in the burning of coal as fuel resulting in coal as waste product; no manufacturing process is involved. It is found that fly ash and cinder both are emerging in the course of electricity generation from coal as an inevitable waste and not an outcome of conscious manufacturing activity. Admittedly Department noticed that Fly Ash is resultant solid waste arising from coal which is used to fire boiler which are used for generation of electricity which in turn is used to manufacture final product i.e. Paper Paper Board - there is no deemed manufacture concept involved in holding fly ash generated in the course of generation of electricity from coal as a manufactured good. So it cannot even be considered as deemed manufacture. There is only difference in the size of cinder and fly ash as both are emerging as waste from burning of coal in boiler for generation of electricity. Conclusion - The fly ash emerging in the course of generation of electricity from coal would not be leviable to central excise duty merely because an exemption partially exempting the same exists. The order passed by the Adjudicating Authority is not legal and proper and is accordingly set aside - Appeal allowed.

Summary

The primary legal issue considered by the Tribunal was whether fly ash generated as waste during the production of electricity from coal in the appellant's factory constitutes excisable goods liable to central excise duty under the Central Excise Act. This core question involved determining if fly ash qualifies as a "manufactured product" within the meaning of Section 2(f) of the Central Excise Act and whether it meets the twin tests of manufacture and marketability to attract excise duty.

Ancillary issues included whether the mere mention of fly ash in the First Schedule to the Central Excise Tariff Act automatically renders it liable to duty, the applicability of relevant notifications partially exempting fly ash, the correctness of classification under tariff headings, and whether the duty demand based on third-party prices was justified despite no actual sale by the appellant.

Regarding the principal issue of excisability, the Tribunal examined the legal framework defining "manufacture" and "excisable goods" under the Central Excise Act. Section 2(f) defines manufacture to include any process incidental or ancillary to the completion of a manufactured product. The Court emphasized that excise duty is an incidence on manufacture; hence, the product must be the result of a process that transforms raw material into a new product with a distinct identity.

The Tribunal extensively relied on the Supreme Court's judgment in Union of India Vs Ahmedabad Electricity Company Ltd., which dealt with "cinder" generated from burning coal for electricity. The Supreme Court held that burning coal as fuel does not constitute manufacture of cinder or ash, as coal is not a raw material for the end product (electricity), and the residue does not acquire a new identity through skillful manipulation. The Court reasoned that the by-products like cinder or ash are inevitable waste and not manufactured goods, thus not excisable. The Tribunal found this precedent directly applicable to fly ash, which is similarly an incidental waste product from coal combustion.

Further, the Tribunal noted the Supreme Court's consideration of the Board's Circular dated 06.06.1975, which clarified that coal ash resulting from burning coal as fuel is not subject to excise duty due to the absence of a manufacturing process.

The Tribunal also reviewed the Madras High Court's decision in Mettur Thermal Power Station Vs CBEC, which held that fly ash, although marketable and capable of being bought and sold, is not a manufactured product under Section 2(f) since it is a by-product formed during electricity generation. The Court clarified that "manufacture" includes processes incidental or ancillary to the completion of the manufactured product (electricity), but the by-product fly ash itself does not qualify as a manufactured product liable to excise duty. The Madras High Court's decision was upheld by the Supreme Court, dismissing the Department's appeal, thereby reinforcing the principle that incidental by-products in the process of manufacture do not automatically attract excise duty.

On the question of marketability, the Tribunal agreed with the Department's submission that non-sale by the appellant does not negate marketability. Marketability is the capability of the product to be sold, not the fact of actual sale. However, marketability alone is insufficient to attract excise duty; the product must also be manufactured. Thus, fly ash's marketability was acknowledged but distinguished from the requirement of manufacture.

Regarding the Department's reliance on tariff classification under Heading 2620 9900, the Tribunal found this classification incorrect. The appellant argued, supported by relevant Chapter Notes and judicial precedents, that fly ash falls under Heading 2621 rather than 2620. Moreover, there was no evidence that the fly ash contained arsenic, metals, or their compounds to justify classification under 2620. This misclassification further undermined the Department's demand.

The appellant also contended that notifications granting partial exemption cannot create a levy where no levy exists initially. The Tribunal agreed with this legal principle, citing precedents that notifications cannot impose tax liability absent a statutory basis for levy.

Concerning the Department's calculation of duty based on third-party prices for fly ash generated in unrelated manufacturing contexts, the Tribunal found this approach unsustainable. Since the appellant did not sell the fly ash, and the product itself was not manufactured excisable goods, the demand based on such pricing was unjustified.

The Tribunal thoroughly considered competing arguments. While the Department emphasized that fly ash is covered under the tariff and partially exempted by notification, the Tribunal underscored that coverage in the tariff and partial exemption presuppose the product's excisability. The absence of manufacture negates excisability regardless of tariff inclusion. The appellant's reliance on authoritative Supreme Court and High Court decisions decisively influenced the Tribunal's reasoning.

In conclusion, the Tribunal held that fly ash generated during electricity production from coal is an inevitable waste by-product, not a manufactured product within the meaning of Section 2(f) of the Central Excise Act. It does not acquire a new identity through a manufacturing process and therefore cannot be subjected to central excise duty. The Tribunal also found the classification under Heading 2620 incorrect and the duty demand based on third-party pricing unsustainable. Consequently, the impugned order confirming the excise duty demand was set aside, and the appeal was allowed.

Significant holdings include the Tribunal's adoption of the Supreme Court's reasoning that burning coal for electricity generation does not amount to manufacture of by-products such as fly ash or cinder. The Tribunal emphasized: "Excise duty is an incidence of manufacture and, therefore, it is essential that the product sought to be subjected to excise duty should have gone through the process of manufacture." Further, the Tribunal highlighted that "merely because it has not been sold by the appellant, it cannot be said to be non-marketable," but marketability alone does not suffice to impose duty.

The core principles established are that incidental by-products or waste generated during manufacture, which do not undergo skillful manipulation to acquire a new identity, are not excisable goods. Notifications granting partial exemptions cannot create a levy where none exists. Classification must be correct and supported by evidence. Finally, the burden to establish manufacture and excisability lies with the Department, which failed in this case.

The final determination was that fly ash generated during captive electricity production is not liable to central excise duty, and the demand confirmed by the Adjudicating Authority was quashed.