Whether carbon scrap generated before reaching finished goods stage leviable to duty and merits input credit reversal?

PJ/Case Law/2014-15/2237

Case:-M/s EVEREADY INDUSTRIES INDIA LTD Vs COLLECTOR OF CENTRAL EXCISE, KOLKATA-I

Citation:-2014-TIOL-1198-CESTAT-KOL

Brief facts:-Briefly stated the facts of the case are that the Appellant, M/s Eveready Industries India Ltd., are engaged in the manufacture of Projector Arc Carbon, Dry Cell Electrodes and Industrial Electrodes falling under Chapter Sub-heading No.8545.00. During the course of manufacture of the said finished excisable goods, rejected waste material are generated, viz. waste/scrap, baked, unbaked, black carbon (broken & hammered/crushed), cuts, copper coated etc. The Department has issued demand notice on the clearance of said waste and scrap alleging that the said waste & scrap attract Central Excise duty and also, it has been alleged that they had failed to reverse the cenvat credit availed on such inputs, which had gone into the generation of waste and scrap. In the Department's Appeal, the period involved is from July, 1987 to May, 1991, involving a total duty of Rs.1,28,381/-. Whereas, the Appeal filed by the Assessee, M/s Eveready Industries India Ltd., the period involved is from October, 1999 to March, 2000 and the total duty confirmed is Rs.25,138/-.

Appellant’s contention:-The ld. Advocate for the Appellant, submitted that the scraps were generated at the stage of baking of Arc Carbon due to breakage on surface defects and hence, becomes unusable and it occurs before reaching the finished stage and accordingly, the same are hammered & broken into small bits. It is his contention that similarly, in respect of waste and scrap of unbaked "Carbon" (Broken & Hammered/Crushed), these scraps are generated at the stage of extrusion of Arc Carbon before it reaches the finished stage. He submitted that these scraps are technically not reusable and are hammered & broken into small bits before disposal and the other kinds of waste and scrap are collected after daily sweeping of floor, which usually comprises of bits and pieces of wood, carbon dust, nuts and screws and such other rubbish, which cannot be used in any manner and disposed of as scrap to scrap vendors. He submitted that the waste and scrap cannot be considered as excisable goods.

In support of his submission, he has referred to the following judgements of the Hon'ble Supreme Court:

(i) Union of India Vs. Indian Aluminium Company Ltd.: 1995 (77) ELT 268 (SC);

(ii) CCE, Patna Vs. Tata Iron & Steel Co. Ltd.: 2004 (165) ELT 386 (SC) = 2004-TIOL-25-SC-CX

(iii) Union of India Vs. Ahmedabad Electricity Co. Ltd.: 2003 (158) ELT 3 (SC) = 2003-TIOL-17-SC-CX;

(iv) Elphinstone Metal Rolling Mills Vs. CCE: 2004 (167) ELT 481 (SC) = 2004-TIOL-60-SC-CX.

He has further submitted that these waste and scraps are not classifiable under Heading 85.45 nor Heading 28.03 as alleged by the Department. It is his submission that the goods in question do not in any manner conform to the items mentioned under Heading No.85.45, which are used for electrical purposes. He has further submitted that in the present case, the waste and scrap are not in the form of electrodes, brushes etc., accordingly, its classification proposed under Heading 85.45 is incorrect and not sustainable. Similarly, it is also incorrect to classify the product under Heading 28.03 as the present goods are merely waste and scrap and are not primary products. Further, he submitted that there is no specific entry for waste and scrap of carbon, accordingly, the goods cannot be classified under Chapter Heading 28.03 of CETA, 1985.

Respondent’s contention:-The ld. Commissioner (Appeals) vide his Order dated 9th January, 2007, held that such waste & scrap cannot be classifiable under Chapter Sub-heading No.8545.00 applicable to Electrodes and accordingly, allowed the appeal filed by the assessee, M/s Eveready Industries India Ltd. In the subsequent order dated 27th July, 2007, the ld. Commissioner (Appeals) held a different view from the earlier observation and held that waste & scrap generated during the course of manufacture, are chargeable to duty. Hence, the counsel for the revenue pleaded to follow the subsequent order passed by the Commissioner Appeals. The ld. A.R. for the Revenue, reiterated the findings of the ld. Commissioner (Appeals) dated 27.07.2007. He submitted that the ld. Commissioner (Appeals) in his order dated 09.01.2007, erroneously held that waste and scrap arose during the manufacture of finished product, are non-excisable/non-dutiable since these are not classifiable. The ld. A.R. submits that during the material time, waste and scrap of carbon were covered under Heading 28.03 of CETA, 1985 and the demand ought to have been confirmed.

Reasoning of judgement:-We have carefully considered the submissions from both sides. We find that the ld. Commissioner (Appeals) in his order dated 09.01.2007, has observed as under:

“I have carefully gone through the records of the case and submissions made thereof. Here, the issue involved is whether waste/scrap broken and hammered black carbon can be treated as defective arc-carbon under Tariff Sub-heading No.8545.00 and Central Excise duty, can be levied ipso-facto on such clearances of waste/scrap. The Adjudicating Authority viewed in both 1st & 2nd order that the appellants resorted to consciously breaking and hammering of such arc-carbon into waste thereby claiming the said goods to be non-excisable. I find that there is no dispute regarding the fact that the impugned goods were cleared in scrap/waste, baked and unbaked, broken and hammered form. Thus, the cleared item has no distinctive name, use and character in common parlance excepting the fact that it fetches some commercial value in the form of waste/scrap. The fact remains uncontroverted that whatever goods may emerge during the manufacture of intended finished product, may it be defective arc-carbon as termed by the Adjudicating Authority or scrap waste baked/un-baked carbon (broken) by the Appellants, the impugned goods cannot be processed further to generate commercial goods. Clearly, it is an unintended product that emerges during the course of manufacture of excisable commodity Projector/Cinema are carbons, dry cell electrodes. It is not department's case to establish that the appellants resorted to conscious breaking and hammering of defective are carbon into waste to avoid dutiability. Rather, it is the residue, broken pieces, waste and various mixed scrap arose as unusable scrap and unsuitable for further use in the process of manufacture of finished goods. I find logic in appellant's contention that a factory is not set for production of waste/scrap and such waste/scrap arises in spite of factory's effort to prevent their appearance because the rejects are incapable of fetching the pieces of the prima products. Following the decision of Apex Court in the case of U.O.I Vs Delhi Cloth and General Mills Co. Ltd. - 1997 (92) ELT 315 (SC) = 2002-TIOL-13-SC-CX-LB and U. O. I. Vs. J. G. Glass Industries Ltd. - 1998 (97) ELT 5 (SC) = 2002-TIOL-112-SC-CX, it becomes a settled issue of law that Central Excise duty is leviable on the goods in the form they are at the time they leave the factory gate. The subject goods at the point of clearances are in broken, hammered, crushed waste/scrap form and accordingly they should be treated as waste/scrap.

Views taken by the adjudicating authority to classify such waste/scrap under Tariff Sub-Heading No.8545.00 is erroneous as is evident from the Explanatory Notes to Harmonized Commodity Description given below:

8545.00.

This heading covers all articles of graphite or other carbon which are recognizable by their shape, dimension or otherwise, as being for electrical purposes, whether or not they contain metal.

Clearly, from the points of purposes of use as well as shape and dimension, the impugned goods traversed beyond the scope of being classifiable under TSH No.8545.00. In fact the question of excisability of waste has already been well settled in a number of decisions where it has been held that where the legislative intended to provide for excisability of waste, it has done so by specific entry in Tariff Act. There is no such entry in Central Excise Tariff providing for scrap waste baked/unbaked black carbon. Hence, I am of the view that the impugned goods are non-excisable/non-dutiable since these are not classifiable.

Another issue remains to be resolved i.e. whether the appellants availed unintended benefit by availing credit on input material contained in such waste/scrap. I am inclined to mention below the context of Rule 57D (1) of Central Excise Rules, 1944 in this regard "Credit of specified duty shall not be denied or varied on the ground that part of the inputs is contained in any waste, refuse or by-product arising during the manufacture of the final product, or that the inputs have become waste during course of manufacture of the final product, whether or not such waste or refuse or by-product is exempted from whole of the duty of excise leviable thereon or chargeable to nil rate of duty or is not specified as final product under Rule 57A". Issue of Board's Circular No.B4/7/2000-TRU dated 03.04.2000 reflected the same view and this clinched the issue in favour of the appellants.

Considering my discussion supra, I set aside the impugned 1st & 2nd Order and allow the appeals. Both the appeals stand disposed of."

In the subsequent order dated 27.07.2007, the ld. Commissioner (Appeals), has recorded a different finding that the defective goods are Arc carbon which were later hammered/crushed to convert into waste and scrap and removed from the factory without payment of duty. It is his observation that after completion of manufacturing processes, when defective arc-carbon emerged, the same ought to have been entered into RG-1 for discharging duty liability at the time of removal and in case it is found unfit, it is necessary that a remission application be filed under Rule 49 of erstwhile Central Excise Rules, 1944. We do not find merit in the observation of the ld. Commissioner (Appeals) in the impugned order-in-appeal dated 27.07.2007, in as much as, all along the Assessee, M/s Eveready Industries India Ltd. have been claiming that the goods under process do not reach final stage and become unusable being defective. In other words, the claim of the Appellant was that the goods do not reach the RG I stage, accordingly, not to be considered as finished excisable goods. We find substance in the observation of the ld. Commissioner's (Appeals) order dated 09.01.2007. Hence, we do not see any reason to interfere with the said order which is in consonance with the principle of law laid down on the subject by the Hon'ble Supreme Court in various cases referred to in the said order.

In the result, we upheld the order-in-appeal dated 09.01.2007 and set aside the order-in-appeal dated 27.07.2007. Consequently, the Appeal filed by the Revenue is rejected and the Appeal filed by the Assessee is allowed.

Decision:-Revenue appeal is rejected and the appeal filed by the assessee is allowed.

Comment:-The scrap of carbon generated at the stage of baking of Arc Carbon due to breakage on surface defects before reaching the finished goods stage is not excisable and so not leviable to excise duty. The said scrap does not find any place in the Central Excise Tariff and so is not leviable to the excise duty. Moreover, the credit of input taken is also not required to be reversed in view of various decisions.

Prepared by :- Lovina Surana

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PJ/Case Law/2014-15/2237

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