Whether excise duty is leviable on by-product arising during the course of manufacture?

PJ/CASE LAW/2015-16/2573

Case:- COMMR. OF C. EX. & CUS., AURANGABAD VERSUS COSMO FILMS LTD.

Citation:- 2014 (307) E.L.T. 961 (Tri. - Mumbai)

Brief facts:- The Revenue is in appeal against Order-in-Appeal No. BPS(333)187/2004, dated 23-9-2004 passed by the Commissioner of Central Excise & Customs (Appeals), Aurangabad.
Vide the impugned order, the learned lower appellate authority has set aside the demand of duty confirmed by the adjudicating authority in respect of waste and scrap of plastics which has arisen in the course of manufacture of BOPP films by the respondent, M/s Cosmos Films Ltd. Aggrieved of the same, the Revenue is before them.
Briefly stated, the facts relevant to the case are :
M/s. Cosmos Films Ltd., Waluj, Aurangabad are manufacturers of BOPP films falling under CETH 39.20. During the manufacture, waste and scrap of these films arise as a byproduct and these are classifiable under CETH 39.15. Vide serial No. 24 of the table annexed to Notification 53/88-C.E., waste arising from manufacture of plastic products are exempt from duty if they are manufactured from goods falling under Chapter 39 or any other Chapter on which the Central Excise duty or the additional duty of customs, as the case may be, has already been paid. The Revenue was of the view that inasmuch as these waste and scrap has been manufactured out of inputs on which duty has been paid and such duty paid on the inputs has been taken as credit by the respondent, the condition of exemption is violated. In other words, it is the Revenue’s contention that, once Cenvat credit is taken on the inputs, then the inputs become non-duty paid and, therefore, the condition of exemption prescribed under Notification 53/88 stands violated. Accordingly, show cause notices were issued and demands were confirmed. In appeal, the appellate authority took the view that the waste and scrap cannot be considered as final products and as per Rule 57D of the Central Excise Rules, 1944, even if the inputs are contained in waste arising in the course of manufacture and even if such waste is exempt from duty or chargeable to nil rate of duty, the credit need not be reversed. Therefore, he was of the view that it is Rule 57D which should apply to the facts of the case, contrary to the Revenue’s claim that as per Rule 57C if any final products are exempt then duty credit cannot be taken.

Appellant’s contention:-The learned Additional Commissioner (AR) appearing for the Revenue submits that as per the classification list filed by the respondent, waste and scrap was declared as final products and, therefore, Rule 57D has no application. Inasmuch as the waste and scrap has been manufactured out of inputs on which Cenvat credit has been taken, they cannot be considered as having been manufactured from inputs on which duty has been paid. He relies on the decision of the Tribunal in the case of Commissioner of Central Excisev. Gunnam Subbarao Investments (P) Ltd. - 2003 (159)E.L.T.1167wherein it has been held that in respect of scrap which emerged during the process of manufacture from modvatable inputs, exemption under Notification 53/88 would not be available.

Respondent’s contention:- The learned counsel for the respondent, on the other hand, submits that in respect of a show cause notice dated February 23, 1989, a proposal was made by the Revenue for seeking reversal of credit taken and the proceedings were dropped by the Assistant Commissioner. He submits that the adjudicating authority observed in the said order while dropping the demand, that in view of the Tribunal’s order in the case of MRF Ltd. v. Collector of Central Excise - 1999 (106)E.L.T.392 an identical issue was considered in the context of Notification 53/88 wherein it was held that the duty-paid character of the input is not lost, as the polyethylene sheets, falling under Chapter 39, had suffered duty when it was utilised as an input. After its use, it becomes a waste arising in the course of manufacture and has to be treated as arising out of process of manufacture in terms of Rule 57F(1)(ii). The waste was within the ambit of Rule 57D and the raw materials and component parts on which proforma credit has been taken under Rule 56 could not be treated as non-duty paid in character. Therefore, Notification 53/88 is available. This decision was based on the Tribunal’s earlier decision in the case of Metrosyl, Jesidih Industrial Areav. Collector of Central Excise - 1991 (53)E.L.T.93and also the Board’s circular. Therefore, in the present case, it cannot be held that the waste has arisen out of non-duty paid raw material and hence benefit of Notification 53/88 cannot be denied.
He further submits that the entire case would come under the purview of Rule 53D and there is no requirement of reversal of credit even if any duty paid raw material is contained in the waste, on which there is no excise duty liability. Therefore, he submits that the impugned order needs to be upheld and the appeal dismissed.

Reasoning of judgment:- As regards the contention of the Revenue that once credit has been taken, the inputs become non-duty paid, this contention is not based on any provisions of law. Nowhere in the Central Excise Act or Rules, it is stated that when credit is taken, the input becomes non-duty paid. Payment of duty is a question of fact and once duty is paid, the product remains duty-paid and that fact cannot be erased or obliterated on what happens subsequently. Therefore, as rightly observed by this Tribunal in the case of MRF Ltd. (supra) and Supreme Industries - 2002 (148)E.L.T.484, affirmed by the Apex Court [2003 (153) E.L.T. A91 (S.C.)] by taking credit, the inputs do not become non-duty paid. The very fact that credit has been allowed itself is a proof that duty has been paid on the inputs and without payment of duty, no credit can be taken. Therefore, benefit of Notification 53/88 cannot be denied on waste and scrap of plastics manufactured from duty-paid inputs.
As regards the question, whether waste and scrap is a final product or a by-product, this issue has been settled by the Hon’ble High Court of Allahabad [2013-TIOL-557-HC-ALL-CX = 2014 (300)E.L.T.372 (All.)]wherein it was held that bagasse which arose in the course of sugar is only a waste product and is not a final product. Adopting the ratio of the decision to the facts of the present case, plastic waste and scrap arising in the course of BOPP films cannot be considered as a final product and it is only a byproduct and therefore, provisions of Rule 57D is applicable to the facts of the present case and the respondent has rightly taken the credit on the inputs contained in the waste and scrap of plastics which has arisen as byproduct in the course of manufacture of BOPP films.
Rule 57D, as it stood at the relevant time, clearly laid down that credit of specified duty allowed in respect of any inputs 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 final product, whether or not such waste, refused or by-product is exempted from whole of the duty of excise thereon or is chargeable to nil rate of duty or is specified as a final product under Rule 57A.
Therefore, they do not find any merit in the appeal filed by the Revenue and accordingly, the same is dismissed. The cross-objection is also disposed of.

Decision:- Appeal dismissed.

Comment:- The analogy of the case is that plastic waste and scrap arising in the course of manufacture of BOPP films is a by-product and cannot be considered as final product so as to levy excise duty or demand credit reversal on the inputs contained in the said by-product.

Prepared by:- Monika Tak

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PJ/CASE LAW/2015-16/2573

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