Credit taken on molasses cannot be denied even if non-dutiable goods emerge subject to compliance of Rule 6(3)(i).

Case:-SAGAR INDUSTRIES & DISTILLERIES PVT LTD VERSUS COMMISSIONER OF CENTRAL EXCISE & CUSTOMS, NASIK

Citation:-2016-TIOL-1132-CESTAT-MUM

Brief facts:-A number of appeals were taken for disposal together as the issue in dispute is identical.

	Appeal No.	Party	Order-in-Original	Duty	Penalty
1	E/86643/2013	Sagar Industries & Distilleries Pvt. Ltd	03/CEX/2013 dated 21 st January 2013	Rs.13,72,83,114/-	Rs.13,72,83,114/-
2	E/85417/2014		29/CEX/2013 dated 05 th November 2013	Rs.2,75,24,733/-	Rs. 15,00,000/-
3	E/89187/2013		15/CEX/2013 dated 12 th July 2013	Rs.2,40,52,041/-	Rs. 24,00,000/-
4	E/89092/2013	Shree Satpuda Tapi Parisar Sahakar Sakhar Karkhana Ltd.	16/CEX/2013 dated 15 th July 2013	Rs.12,18,10,431/-	Rs.12,18,10,431/-
5	E/85361/2015		08 &09/CEX/2014 dated 31 st December 2014.	Rs.2,95,38,716/-	Rs 60 lakhs
6	E/85362/2015		08 &09/CEX/2014 dated 31 st December 2014.	Rs.3,10,57,659/-	Rs 60 lakhs
7	E/86504/2013	Niphad Sahakari Sakhar Karkhana Ltd	01/CEX/2013 dated 10 th January 2013	Rs.6,03,67,770/-	Rs.6,03,67,770/-
8	E/89136/2013	Niphad Sahakari Sakhar Karkhana Ltd	14/CEX/2013 dated 12 th July 2013	Rs. 7,60,077/-	Rs. 75,000/-
9	E/89510/2013	Madhukar Sahakari Sakhar Karkhana Ltd	25/CEX/2013 dated 10 th September 2013	Rs. 96,07,807/-	Rs, 9,00,000/-
10	E/87182/2013	Madhukar Sahakari Sakhar Karkhana Ltd	09/CEX/2013 dated 27 th February 2013	Rs.1,22,96,926/-	Rs. 10,00,000/-
11	E/89195/2013	Sahakarmaharshi Bhausaheb Thorat Sahakari Sakhar Karkhana Ltd	13/CEX/2013 dated 12 th July 2013	Rs.1,83,14,719/-	Rs. 18,00,000/-
12	E/86799/2013		07/CEX/2013 dated 24 th January 2013	Rs.8,29,92,493/-	Rs. 8,29,92,493/-

The appellants are distilleries that source molasses, the primary input, from various sugar factories on payment of duty and on which CENVAT Credit under CENVAT Credit Rules, 2004 is taken upon receipt of inputs in factory of manufacture. The credit taken is reversed proportionately upon clearance of rectified spirit chargeable to state excise duty. The manufacturing process involves addition of water and yeast to the molasses which ferment to transform the mixture into raw ethyl alcohol and carbon dioxide. Carbon dioxide is piped out for sale to manufacturers of carbonated water and to users in industrial activity. Raw ethyl alcohol is subject to distillation which produces rectified spirit and waste water. Waste water is fed into bio-digesters to produce bio-gas which comprises methane, carbon dioxide and hydrogen sulphide. Rectified spirits finds use in production of alcohol for human consumption. Other industrial demand is catered to by denaturing of the rectified spirit to segregate the two owing to the control and monitoring of potable alcohol being assigned to state governments and in accordance with laws enacted by the state legislatures. Denatured spirit is subject to duties of central excise while potable alcohol is outside the purview of excise duty on manufactured goods.
The Seventh Schedule to the Constitution of India has by entry 84 in List I accorded jurisdiction to the Union to levy 'duties of excise on tobacco and other goods manufactured or produced in India except (i) alcoholic liquor for human consumption and (ii) opium, Indian hemp and other narcotic drugs and narcotics, but including medicinal and toilet preparations containing alcohol or any substance included in (ii)'. Entry 51 in List II accords jurisdiction states as 'duties of excise for following goods manufactured or produced within the state (i) alcoholic liquor for human consumption and (ii) opium, Indian hemp and other narcotic drugs and narcotics.'
The Schedule to the Central Excise Tariff Act, 1985 at heading no. 22.04 describes the relevant goods as 'ethyl alcohol of any strength whether denatured or not, but not including alcoholic liquor for human consumption' and segregates the taxable items as
- denatured ethyl alcohol of any strength (2204.10)
- other (2204.90)
Upon transformation from six digit code for tariff to eight digit code with effect from 28 th February 2005, the entry relating to ethyl alcohol was placed at 2207 as 'ethyl alcohol and other spirits, denatured, of any strength and to restrict further classification to
- Ethyl alcohol and other spirits, denatured, of any strength (2207 20 00)
Notification No. 3/2005-CE dated 24th February 2005 extended exemption from excise duty to all spirits other than denatured ethyl alcohol of any strength.
The issue in dispute relates to utilization of credit taken on the input under CENVAT Credit Rules, 2004 and the non-compliance with the conditions governing the Rules when exempted goods are manufactured using paid inputs on which credit has been taken. Rectified spirit cleared, as such, was considered as exempt goods and denatured spirit as excisable goods. The appellants resorted to reversal of credit in accordance with Rule 6(3)(a) of CENVAT Credit Rules, 2004 till 31st March 2008. Thereafter, the option of paying an amount equal to specified percentage of value of exempted goods or paying such amount as determined by formula in Rule 6(3A) of CENVAT Credit Rules, 2004 was being followed.
Rule 6 (1) of CENVAT Credit Rules, 2004 forbids recourse to credit of duty paid on inputs used in or in relation to manufacture and clearance of exempted goods except as provided for in the Rules. Subject to maintenance of separate accounts of receipt, consumption and inventory of inputs for manufacture of excisable and exempt goods, CENVAT credit is allowed to be taken under Rule 6(2) for manufacture and clearance of excisable goods. Should such separate accounts be not maintained, Rule 6 (3), manufacturers have the option to pay an amount equal to 6% of value of exempted goods or an amount determined under Rule 6 (3A).
Appellants were issued with show cause notices for varying period between April 2007 to March 2013 seeking to deny credit of duty paid on molasses during this period and to seek recovery of credit utilized for clearance of denatured rectified spirit. The claim of Revenue was that reversal of proportional CENVAT credit was not sufficient compliance of obligations under Rule 6 supra. The original authority rendered a finding that, with effect from 28 th February 2005, 'rectified spirit' was non-excisable owing to alteration of the tariff entry in the Schedule to the Central Excise Tariff Act, 1985 as discussed supra. He also disallowed the credit of duty paid on molasses on the ground that the final product is entirely non-excisable and, thus, exempt. Further holding that Rule 6(3)(i) was not required to be followed for non-excisable goods and conceding that the amount paid by the appellants in accordance with the said Rule, he permitted off-setting of the amount so paid towards the CENVAT credit disallowed.

Appellant contentions:-It was claimed on behalf of the appellants that ethyl alcohol continued in the tariff after February 2005 and hence was not an exempted product, that this is reinforced by exemption notification no. 3/2005-CE at serial no. 14 prescribing 'nil' rate for un-denatured spirits, that this exemption continued even under notification no. 12/12-CE dated 17 th March 2012, that the decision of the Tribunal in re Ugar Sugar Works Ltd. v Commissioner of Central Excise Belgaum [2007(214) ELT 337 (Tri-Bang)] = 2007-TIOL-2075-CESTAT-BANG is in their favour that this was accepted by Revenue inasmuch as the decision in Godavary Sugar Mills Ltd. and Others v. Commissioner of Central Excise [2007 (212) ELT 234 (T)] = 2007-TIOL-602-CESTAT-BANG, which relied upon the former, and which, having been dismissed in appeal by Hon'ble High Court of Karnataka, was accepted by Revenue. Alternatively, it was also submitted that the credit taken should have been allowed in accordance with restrictions in Rule 6 of CENVAT Credit Rules, 2004. The imposition of penalty was also challenged as no evidence of mens rea had been adduced in the impugned order. It was also contended that the changes in the Tariff with effect from 28 th February 2005 was not intended to bring about any substantive changes in taxation and that the proceedings initiated were, therefore, incorrect. Reliance was placed on the decision of the Tribunal in re VAM Organic Chemicals [1989 (39) ELT 72 (T)] to contend that MODVAT credit could not be denied or varied even if non-dutiable intermediate goods emerge. It was also submitted that ethyl alcohol is not the sole product that emerges from the manufacturing process as carbon dioxide is a by-product besides clearing of denatured spirit which is a dutiable item.

Respondent contentions:-Learned Authorized Representative took the Bench through the provisions of the Constitution of India demarcating taxation powers between Union and states and thereby rendering ethyl alcohol to be a non-excisable item; being non-excisable, the procurement of molasses would not be an input and, hence, eligibility for CENVAT credit was non-existent. Drawing upon technical material, he contended that ethyl alcohol was a distinct produce and that denaturing was a separate and distinct process of manufacture that used ethyl alcohol as an input; holding forth that such usage of ethyl alcohol was not captive consumption within the meaning of Central Excise Rules, it was submitted that this fresh process of manufacturing de-natured alcohol used ethyl alcohol, a non-excisable product, as input and hence, had to be cleared on payment of duty without the benefit of CENVAT Credit. Placing reliance on L'Oreal India Private Ltd. v. Commissioner of Central Excise, Pune -I [2012 (281) ELT 113 (Tri-Mumbai)] = 2012-TIOL-722-CESTAT-MUM, Orion Appliances Ltd. v. Commissioner of Service Tax, Ahmedabad [2010 (19) STR 205 (Tri-Ahmd)] = 2010-TIOL-752-CESTAT-AHM and Madhukar Sahakari Sakhar Karkhana Ltd v CCE&C, Nasik [2012 (281) ELT 552 (Tri-Mumbai)] = 2014-TIOL-2265-CESTAT-MUM, it was submitted that duty paid on inputs used to manufacture goods and render services that were outside the scope of the taxing statute could not be taken as credit. Relying on Ratnamani Metals & Tubes Ltd v Commissioner of Central Excise, Ahmedabad [2012 (285) ELT 274 (Tri-Ahmd)] and Rayalseema Hi-Strength Hypo Ltd. v. Commissioner of Customs & Central Excise, Tirupati [2012 (278) ELT 167 (AP)], the correctness of the adjudicating authority in invoking the extended period was canvassed.

Reasoning of Judgment:-Having heard the rival contentions and perused the records, CESTAT observe that the issue, notwithstanding the various contentions regarding 'stop-start' manufacture and erasure of 'intermediate output' canvassed by the learned Authorised Representative which, in a way, extends beyond the show cause notices and the impugned orders, is limited to the issue of eligibility to take CENVAT credit on inputs and utilize such credit towards clearance of dutiable goods. The existence of rectified spirit, even if not excisable, is not deniable. Merely owing to non-dutiability or coverage under the entry empowering taxation as a duty of excise by the Union, it does not transform as a figment of the imagination. That it finds a place in the tariff as it stood prior to 28 th February 2005 and in its altered form thereafter clearly evidences so. That it finds a place in an exemption notification reinforces the position. Admittedly, an exempted good does emerge from the distillation. Most of these may have been cleared under the excise laws of the state; to the extent that they have been, it is akin to clearance of goods on which exemption notification has been claimed.
Denaturing of ethyl alcohol is an extension of the process of manufacturing a dutiable product commencing with molasses. Therefore, there can be no doubt that the appellants manufacture both exempted and dutiable goods using duty-paid molasses. It would appear that the appellants have been following the procedure laid down in Rule 6 of CENVAT Credit Rules, 2004 and reversing credit taken on inputs at the time of clearance of rectified spirit.
The Tribunal has consistently been taking the stand that in case of molasses used for manufacture of rectified spirit and de-natured alcohol by distilleries, compliance with Rule 6 of CENVAT Credit Rules, 2004 is sufficient. In Vishwanath Sugars Ltd. v. Commissioner of C. Ex Belgaum [2010(250) ELT 390 (Tri-Bang)] = 2010-TIOL-264-CESTAT-BANG, the Tribunal held that clearance of dutiable de-natured spirit even for a part of the year was sufficient for allowing proportionate credit of duty paid on inputs used in common with exempted goods.
Our attention is drawn to decision of the Hon'ble Supreme Court in the matter of Commissioner of Central Excise, Salem v. M/s Sakthi Sugars Ltd. in CA D. No. 28938 of 2015 filed by Revenue against order of Tribunal in Sakthi Sugars Ltd. v. Commissioner of Central Excise, Salem, (Final Order No. 802/2007 dated 26 th June 2007) [2008 (23) ELT 676 (Tri-Chennai)]. The Hon'ble Supreme Court has accorded its approval to the order of the Tribunal by declaring that there were no sound reasons for interference with it. The decision of the Tribunal in that matter, therefore, acquires significance in resolving the present dispute. We also notice that in re Sakthi Sugars Ltd. the Tribunal placed reliance on Godavary Sugar Mills Ltd and Others v Commissioner of Central Excise [2007 (212) ELT 234 (T)] which has been discussed supra.
In the matter before the Hon'ble Supreme Court, the Tribunal had ruled in favour of the assessee who manufactures rectified spirits and de-natured alcohol from molasses produced by the assessee as a by-product of manufacture of sugar. The molasses was eligible for exemption from duty upon being captively consumed for manufacture of de-natured spirits under notification no. 67/95-CE dated 16 th March 1995. No separate accounts were being maintained even though the molasses was also used to manufacture and clear rectified spirit which is non-excisable. Citing the decision of the Tribunal in re Godavary Sugars Pvt Ltd., it was observed that:
We have carefully considered the case records and the rival submissions. We that disposing a couple of appeals involving similar facts the Bangalore Bench of the Tribunal in para 7.2 of its Final Order No. 56 to 59/07 dated 30-11-06 [2007 (212) ELT 234 (T)] made the following observations:
"7.2 Notification 67/95 grants exemption from payment of duty on an intermediary product which is captively consumed for manufacture of excisable goods. Molasses is an excisable product. When molasses is used in the manufacture of some other excisable product, then the molasses captively consumed need not discharge any duty burden. However, the entitlement to Notification 67/95 is subject to a condition. The condition is that the final product should be dutiable or otherwise the exemption would not be applicable. Our attention was invited to amendment to Notification No. 67/95 Central Excise by Notification No. 31/2001 Central Excise dated 1.1.2001. In terms of the said amendment, the appellants are entitled for the benefit of exemption Notification in a situation where there is manufacture of both dutiable and exempted final products, provided the manufacturer discharges the obligation prescribed in rule 57 AD of the Central Excise Rules, 1944, which is pari material with Rule 6 of the Cenvat credit rules, 2002. What is the obligation under Rule 6 of the Cenvat Credit Rules, 2002? The obligation under rule 6 of Cenvat Credit Rules, is that when a manufacturer uses input both for exempted and dutiable final products, he should maintain separate accounts because no Cenvat credit is available for the inputs used in exempted products. There is an option for the manufacturer not to maintain two separate accounts. Where the final product is ethyl alcohol and other spirits denature of any strength, it is sufficient if the Cenvat credit attributable to inputs in the exempted product is reversed or paid. Therefore, the appellants are entitled to the benefit of Notification No. 67/95 in respect of molasses used captively for manufacture of Rectified Spirit and Denatured Spirit. Therefore, the demand of duty in respect of the credit taken on molasses is not correct."
The above observations squarely cover the subject case. Following the ratio of the above decision, we allow the subject appeal filed by SSL'.
From the above decision, it is clear that denatured alcohol is acknowledged as an excisable goods and 'output' in terms of CENVAT Credit Rules, 2004. There cannot be discriminatory treatment in the treatment accorded to two manufacturers of the same product merely on the ground that one used captively produced molasses and the other procures from external sources. The above decision approved by the Hon'ble Supreme Court would be applicable to both. It is, thus, amply clear that rectified spirit is an exempt goods and as the appellants do manufacture dutiable goods also, CENVAT Credit Rules does permit them to take credit of duty paid on molasses subject to compliance with Rule 6 of CENVAT Credit Rules, 2004. There is no finding that they have not reversed the CENVAT Credit taken on inputs that have gone into the exempt goods. This is sufficient compliance of Rule 6. They are, consequently, not required to be subject to recovery of duty on goods cleared by utilization of CENVAT Credit and not required to make the good the credit taken on inputs.
For the above reason, we set aside the impugned orders and allow the appeals. MA (Extension) disposed off.

Decision:-Appeal allowed.

Comment:-The essence of this case is that cenvat credit cannot be denied even if non-dutiable goods emerge with the condition of compliance of Rule 6(3)(i). In the view of that ethyl alcohol which is non-excisable goods is not the sole product that emerges from the manufacturing process as carbon dioxide is a by-product besides clearing of denatured spirit which is a dutiable item. Thus, it is amply clear that rectified spirit is exempt goods and as the appellants do manufacture dutiable goods also, CENVAT Credit Rules does permit them to take credit of duty paid on molasses subject to compliance with Rule 6 of CENVAT Credit Rules, 2004.

Prepared By:Hushen Ganodwala

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