whether duty liability arise on capital goods which are sold as waste and scrap?

Case:- STEEL AUTHORITY OF INDIA LTD. Versus COMMISSIONER OF C. EX., RAIPUR

Citation:- 2015 (326) E.L.T. 321 (Tri. - Del.)

Brief facts:-As per the factual backdrop, the appeal filed by the appellant was allowed by the Tribunal vide Final Order No. 332/2006-Ex., dated 22-3-2006. On appeal by the Revenue, the said order was set aside and matter remanded.
It is seen that the matter was heard by the Division Bench on 7-1-2013, in remand proceedings and vide Interim Order No. 163/2013, there was opinion of difference between the Member (Technical) and Member (Judicial) on the point of limitation. However, Member (Technical) expressed his opinion as regards merits of the case as also on limitation, rejecting the both, whereas Member (Judicial) only considered the limitation issue and held that the demand was barred by limitation. When the matter was placed before the Hon’ble President, as third Member, on 6-9-2013, it was observed that inasmuch as the matter stands remanded by the Hon’ble Chhattishgarh High Court for decision on merits as also on limitation, both the Members should have decided on the merits of the case. As such, the appellant was advised to move an application before the Member (Judicial) to express her opinion on both the issues. It is in this background that the matter was heard afresh by them, as regards the merits of the case.
The detailed factual position stands mentioned in the order recorded by the learned Member (Technical). As is seen, the dispute is as to whether the used and old conveyor belts removed by the appellant as waste and scrap, are required to discharge its duty liability in terms of the provisions of Rule 57S(2)(C). The said rule reads as - “where capital goods are sold as waste and scrap, the manufacturer shall pay the duty ‘leviable’ on such waste and scrap”. There can be no dispute about the fact that the capital goods, when sold as waste and scrap, are liable to discharge duty on the same. This has also been the ratio of the Hon’ble Gujarat High Court in the case of GNFC Ltd.v. UOI [2007 (214)E.L.T.18 (Guj.)]as confirmed by Hon’ble Supreme Court reported as GNFC Ltd. v. UOI [2007 (214) E.L.T. A23 (S.C.)], as referred to by the learned Member (Technical) in his order. However as is seen from the said rule, the duty required to be paid by the assessee on the waste and scrap of such capital goods shall be the duty, which is “leviable” on such waste and scrap.
The appellant’s contention is that the conveyor belts, when sold, after being repeatedly used do not attract any duty of Excise inasmuch as no such duty is “leviable” on such used goods so cleared by them. Revenue has confirmed the demand of duty under Heading 40.04 of Central Excise Tariff. The said heading stands reproduced by the learned Member (Technical) in his order. As is seen, the same refers to waste and scrap of rubber as defined in Note 6 to the Chapter note of the said chapter. The Revenue’s contention is that the goods of rubber definitely not usable as such because of cutting up, wear or other reasons would fall under Chapter 40.

Appellant’s contention:-On the other hand, the appellant’s contention is that the conveyor belts were admittedly classifiable under Heading 84.28 as material handling equipment and after frequent use they cleared the same as old and used conveyor belts only. No cutting up or slitting, etc., of the said conveyor belts was undertaken by them. As is seen from the HSN Explanatory notes reproduced in the order of the learned Member (Technical), the waste and scrap arising out of worn out rubber articles would fall under the said headings only when certain further processes are taken up on the said worn out goods, by way of cutting, slitting, etc. Inasmuch as in the present case, there is no evidence to reflect that the appellant had undertaken the said processes of cutting or slitting of the conveyor belts into rubber pieces, the tariff entry under Chapter Heading 40.04 would not become applicable. Merely because of the repeated use of the conveyor belts, which were originally falling under Heading 84.28, the conveyor belts would not shift their classification under Heading 40.04, after their use, when they still remain the conveyor belts and do not get converted into any waste and scrap. For the above proposition, they have relied upon various decisions of the Tribunal as also of the courts.

Respondent’s contention:- Revenue has confirmed the demand of duty under Heading 40.04 of Central Excise Tariff. The said heading stands reproduced by the learned Member (Technical) in his order. As is seen, the same refers to waste and scrap of rubber as defined in Note 6 to the Chapter note of the said chapter. The Revenue’s contention is that the goods of rubber definitely not usable as such because of cutting up, wear or other reasons would fall under Chapter 40.

Reasoning of judgment:- Though the Hon’ble Supreme Court’s decision in the case of Grasim Industries Ltd.v. UOI - 2011 (273)E.L.T.10 (S.C.)is not exactly on the point but they would like to refer to the same, for the purpose of adopting certain observations made by the Hon’ble Supreme Court. It stands held by the Apex Court that the scrap or waste arising from repair and maintenance of plant and machinery (capital goods) installed in cement factory is not dutiable as they are neither by-products of the final product nor subsidiary product. To be dutiable, waste and scrap must arise regularly and continuously produced in the course of manufacturing business of the product manufactured by the assessee. It further stands observed by the Hon’ble Supreme Court that the metal, scrap and waste specified under Heading 74.02 of Central Excise Tariff and read with Section Note 8(a) to Section XV of Central Excise Tariff has a very limited purpose of extending coverage to the particular item to the relevant tariff item in the Schedule for determining the applicable rate of duty and this note cannot be construed to have any deeming effect in relation to the process of manufacture as contemplated by Section 2(f) of the Central Excise Act, 1944.
Further they find that the Tribunal in the case of Mysore Cements Ltd. v. CCE, Bangalore - 2004 (165)E.L.T.307 (Tri.-Bang.)has held that the sale of old used material i.e. fire bricks and conveyor belts, furnace oil waste, etc., would not attract any duty of Excise. The said decision was arrived at by the Tribunal by relying upon the earlier decision of the Tribunal in the case of Hindustan Petroleum Corporation Ltd.v. CCE, Visakhapatnam - 2002 (144)E.L.T.555as also the Tribunal decision in the case of CCEv. West Coast Industrial Gases Ltd. - 1999 (108)E.L.T.383 (Tribunal)and the confirmation of the said decision by the Hon’ble Supreme Court reported as CCEv. West Coast Industrial Gases Ltd. - 2003 (155)E.L.T.11 (S.C.). The said decision of the Tribunal in the case of Mysore Cements Ltd. was confirmed by the Hon’ble High Court of Karnataka.
The said decision in the case of Mysore Cements Ltd. stands taken note of by my learned brother Member (Technical) but he has observed that the waste and scrap in that case has arisen on account of dismantling of the equipment and the issue was excisability of such scrap and waste whereas the issue in the present case is demand of duty in respect of waste and scrap of conveyor belts in terms of Rule 57S(2)(C). On going through carefully the decision of the Tribunal in the case of Mysore Cements Ltd., they find that the first para of the said decision refers to one of the issues as reversibility of the CENVAT credit on the sale of old and used conveyor belts. The contention of the appellant is that Rule 57S(2)(C) was introduced w.e.f. 1994 and was omitted in the new rules w.e.f. 1-7-2001. As such, the said rule was available from 1994 to 2001. The decision of the Tribunal in the case of Mysore Cements Ltd., having been decided in 2003, would relate to the period between 1994 to 1-7-2001 only, though the period is not specifically mentioned in the said decision. However they find in Para 2 of the said decision, it stands mentioned that the credit was availed on 27-10-2001. As such, it can be safely concluded that the period involved in the Mysore Cements Ltd. case was after 1994 and before 1-7-2001, when the provisions of Rule 57S(2)(C) were in the statutory book. As the said decision specifically deals with the conveyor belts and as the said decision stands upheld by the Hon’ble High Court of Karnataka, I am of the view, that the sale of old and used conveyor belts would not attract any further levy of duty under Chapter 40.
They have already observed that the old and used rubber goods would fall under Chapter 40 only when they are converted into waste and scrap before their removal. Merely on account of repeated use, old and used conveyor belts would not be shifted to Chapter 40, from their maiden classification under Chapter 84. The fact that no processing was undertaken on the conveyor belts at the time of their clearances, is clear from the allegations made in the show cause notice. Para 2 of the notice details as under : “..Conveyor belts are used by the noticee as capital goods which has got certain life and due to its repeated use conveyor belts get broken and worn out so become unfit for further use. The noticee treat broken and worn out conveyor belts as waste and scrap which are sold by them in the market without payment of Central Excise duty.” As such, it is clear from the above that the conveyor belts are cleared as used and worn out conveyor belts without converting the same into waste and scrap. A specific contention stand taken by the learned advocate that the appellant might treat the said old and used conveyor belts as waste for them but the same may be used by the buyers, after some reprocessing, etc., as conveyor belts only, in which case it cannot be held that it is waste and scrap falling under Chapter 40.
At this stage, a common life example coming to their mind is a used and worn out wooden chair. It may happen that one leg of the chair gets broken and the owner of the same may treat as a waste for himself and clear the broken chair, as such. The buyer of the chair may choose to get the leg refixed and use the chair as chair. The question is whether in such circumstances, the wooden chair has to be treated as scrap of wood or as chair only. The answer would be clear that the broken chair, cleared as chair and further usable as chair, is required to be treated as chair only and not as waste of wood. In the absence of any evidence to show that the conveyor belts were not used as conveyor belts, in their view the shifting of the classification of the same to Chapter 40 so as to hold that such goods would be “leviable” to duty of Excise under the said chapter heading is not proper. This also answers the Revenue’s plea that Chapter 40.04 also takes into ambits the goods of rubber definitely “not usable as such” because of cutting up, wear and “other reasons”. Learned DR had pleaded that even if the said conveyor belts of rubber have not undergone any further process by cutting, etc., if they do not remain usable as such on account of any other reason, even then such goods would be classifiable under Chapter 40. Before examining the expression “other reasons”, a finding has to be arrived at that such goods which are being cleared are not usable “as such”. As they have already observed that there is no allegation in the show cause notice that the used conveyor belts became unusable as such, by any other reason, the said expression appearing in Chapter 40 would not get attracted. Reverting back to the example of wooden chair, it may not be usable for the owner of the chair, on account of any number of reasons, but still the same may be used as chair by the buyer of the same. Inasmuch as the conveyor belts have been cleared as conveyor belts, it cannot be concluded that the same were not usable as such.
They may like to clarify here that they have not examined the aspect of duty payment on old and used conveyor belts, under Chapter 84 of the Central Excise Tariff, as the same was neither the Revenue’s case in the show cause notice nor the any submissions were made in respect of the same.
In view of the above, they find that the provisions of Rule 57S(2)(C) of the [Central Excise] Rules are not attracted in the present case inasmuch as the goods cleared by the appellant are leviable to duty of Excise. In view of the above, they hold in favour of the appellant on merits.

Decision:- Appeal disposed of.

Comment:- The analogy of the case is that Old and used conveyor belts when not converted into waste and before their removal, not attract any further levy of duty under Chapter 40 of Central Excise Tariff as waste. It is observed that old and used rubber goods would fall under Chapter 40 ibid only when they are converted into waste and scrap before their removal. Merely on account of repeated use, old and used conveyor belts would not be shifted to Chapter 40 from their classification under Chapter 84. The fact that no processing was undertaken on the conveyor belts at the time of their clearances. The appellant might treat the said old and used conveyor belts as waste for them but the same may be used by the buyers, after some reprocessing, etc., as conveyor belts only, so it cannot be held that it is waste and scrap falling under Chapter 40.

Prepared by:- Monika Tak

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PJ/CASE LAW/2015-16/2973

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