2025 (7) TMI 555 - AT - Central Excise

CENVAT Credit - manufacture of taxable as well as exempt goods - common inputs/input services which are used both in the manufacture of dutiable and exempted goods - non-maintenance of separate Modvat/Cenvat Account in respect of the exempted goods - Rule 6(3A) of Cenvat Credit Rules 2004 w.e.f. 01.04.2008 - HELD THAT - The issue as to whether the assessee can be fastened with huge demand on account of 5%/6%/8% of the duty demand on the exempted goods has been a point of litigation for many years. In the case of Hello Minerals Water Pvt.Ltd. v. Union of India 2004 (7) TMI 98 - ALLAHABAD HIGH COURT it has been held that reversal of Modvat credit would amount to non-taking of credit of inputs. This decision was followed by various Tribunals and High Courts. Considering the fact that the assesses were fastened with huge demands an amendment was brought in with retrospective effect in 2010 to enable the assesses to reverse the Cenvat credit on proportionate basis along with interest. In the present case the Appellant who is a reputed Public Sector Undertaking has followed the directions and has reversed Rs.21, 88, 437/- for the period April 1996 to March 2008 and Rs.48, 98, 788/- for the period September 2004 to March 2008. Apart from this they have also paid the interest of Rs.75, 11, 467/-. All these workings are properly certified by the Chartered Accountant. Therefore it is found that the confirmed demand is not legally sustainable and is set aside - appeal allowed.

Summary

The core legal questions considered in this judgment revolve around the applicability and scope of reversal of Cenvat credit in respect of inputs/input services used both in the manufacture of dutiable and exempted goods, particularly where the exempted goods are by-products or waste emerging incidentally during the manufacturing process. The issues include:

• Whether the manufacturer is liable to pay duty on exempted goods cleared without maintaining separate Cenvat accounts.
• The legal effect and applicability of retrospective amendments introduced by Rule 6(3A) of the Cenvat Credit Rules, 2004, and subsequent amendments under the Finance Act, 2010, allowing proportionate reversal of Cenvat credit along with interest.
• Whether the exempted goods in question (Ammonium Sulphate, Coal Tar, Burnt Dolomite, Molten Slag) qualify as by-products or waste generated in the course of manufacture and thus exempt from reversal provisions under Rule 6.
• The legitimacy of demands confirmed by the adjudicating authorities despite the appellant's compliance with proportionate reversal and payment of interest as per amended rules.
• The legal consequences of the appellant's bona fide compliance with amended provisions and the appropriate relief.

Issue-wise Detailed Analysis

1. Liability to pay duty on exempted goods and maintenance of separate Cenvat accounts

The appellant, a manufacturer of iron and steel products, produced certain exempted goods incidentally during manufacture. Revenue issued multiple Show Cause Notices alleging failure to maintain separate Cenvat accounts for exempted goods and demanded duty at rates ranging from 5% to 8% on the value of such exempted goods cleared. The adjudicating authorities confirmed these demands. The appellant challenged these orders before the Tribunal.

The legal framework initially required reversal of Cenvat credit on inputs used for exempted goods, but the appellant contended that the exempted goods were by-products or waste and that proportionate reversal of credit was permissible under subsequent amendments. The Tribunal had earlier remanded the matter, noting retrospective amendments allowing proportionate reversal.

2. Retrospective amendment to Cenvat Credit Rules and its applicability

The Finance Act, 2010, amended Rule 6 of the Cenvat Credit Rules, 2004, and Rule 57CC/57AD of the Central Excise Rules, 1944, retrospectively from 01.04.2008. These amendments introduced a mechanism whereby manufacturers could pay an amount equal to the proportionate Cenvat credit taken on inputs/input services used for exempted goods, along with interest at 24%. The appellant availed this option and paid proportionate amounts and interest certified by a Chartered Accountant.

The Tribunal noted the retrospective nature of the amendment and directed the adjudicating authority to consider the proportionate reversal and payments made. However, the adjudicating authority disregarded this direction and confirmed the entire demand, leading to the present appeal.

The Court emphasized that the confirmed demand was not legally sustainable given the appellant's compliance with the amended provisions, including payment of proportionate reversal and interest, and accordingly set aside the demand.

3. Nature of exempted goods as by-products or waste and applicability of Rule 6

The exempted goods in question-Ammonium Sulphate, Coal Tar, Burnt Dolomite, and Molten Slag-were found to be by-products or waste generated incidentally during the manufacture of dutiable finished products. There was no evidence that the appellant consciously manufactured these goods as final products.

Precedents were extensively relied upon to establish this position:

• In a decision by the Calcutta High Court, Ammonium Sulphate was held to be a by-product recovered during cleaning of waste coal gas from a Coke Oven Unit.
• The Tribunal in JSW Steel Ltd. held non-granulated slag arising during steel manufacture as a by-product or waste, not a final product, and thus Rule 6(3) of the Cenvat Credit Rules would not apply.
• Board's Circular clarified that Cenvat credit is admissible on inputs contained in waste, refuse, or by-products, and credit should not be denied if inputs are used in intermediates or exempt products, provided they relate to the manufacture of final products.
• In Mukand Ltd., the Tribunal upheld that slag arising during manufacture is waste and that Rule 6 of CCR, 2004 does not apply to exempted by-products or waste emerging in the course of manufacture of dutiable goods. This view was supported by Supreme Court rulings confirming that by-products or lean gas arising incidentally do not attract reversal under Rule 6.

The Court found that the goods in question fell within this category of by-products/waste, and thus the provisions mandating reversal of credit under Rule 6 were not attracted.

4. Treatment of appellant's compliance with proportionate reversal and interest payment

The appellant, a Public Sector Undertaking, had reversed Cenvat credit amounting to Rs.70,87,225/- and paid interest of Rs.75,11,467/- as per the retrospective amendments. The calculations were duly certified by a Chartered Accountant. The Court recognized this as evidence of bona fide compliance with the law and rejected the Revenue's demand for the entire duty amount on exempted goods.

The Court also set aside the penalty imposed, considering the appellant's adherence to the amended provisions and the nature of the goods involved.

5. Legal conclusions and relief granted

Based on the above analysis, the Court concluded that:

• The confirmed demands for duty on exempted goods were not sustainable in law, especially in light of retrospective amendments allowing proportionate reversal of Cenvat credit.
• The exempted goods were by-products/waste arising incidentally in manufacture, not final products, and thus Rule 6 provisions for reversal of credit do not apply.
• The appellant's payment of proportionate reversal and interest demonstrated compliance with the law, negating the basis for further demand or penalty.
• The impugned orders confirming the demands and penalties were set aside, and the appeal was allowed with consequential relief.

Significant Holdings

The Court's reasoning included the following crucial legal principles and determinations:

"The issue pertains to the reversal of Cenvat credit when the same is availed in respect of common inputs/input services which are used both in the manufacture of dutiable and exempted goods. ... Considering the fact that the assesses were fastened with huge demands, an amendment was brought in with retrospective effect in 2010 to enable the assesses to reverse the Cenvat credit on proportionate basis along with interest. ... We find that the confirmed demand is not legally sustainable and we set aside the same and allow the Appeal on merits."

"The goods in question i.e. Ammonium Sulphate, Coal Tar, Burnt Dolomite and Molten Slag etc. are by-products which emanate in the course of manufacture of the finished goods. There is nothing to suggest that the Appellant consciously manufactured these goods. Some of the above goods are in fact scrap being generated in the course of manufacture."

"Cenvat credit shall be admissible in respect of the amount of inputs contained in any of the aforesaid waste, refuse or by-product. Similarly, Cenvat should not be denied if the inputs are used in any intermediate of the final product even if such intermediate is exempt from payment of duty. The basic idea is that Cenvat credit is admissible so long as the inputs are used in or in relation to the manufacture of final products and whether directly or indirectly."

"Rule 6 will not apply in the case where the exempted by-product or waste emerges in the course of manufacture of dutiable products. It is well settled that slag arising in the course of manufacture of iron and steel is a waste and that the provisions of Rule 6 of CCR, 2004 are not attracted."

"The amount of Rs.70,87,225/- along with interest of Rs.75,11,467/- is to be appropriated by the Revenue. The penalty imposed stands set aside."

These holdings establish that retrospective amendments enabling proportionate reversal of Cenvat credit with interest must be recognized by adjudicating authorities, and that by-products or waste arising incidentally during manufacture do not attract duty or reversal under Rule 6. The decision underscores the principle that a manufacturer who complies with such provisions in good faith cannot be subjected to demands for duty and penalties on exempted by-products or waste.