Whether Excise is payable on Zinc dross and Flux skimming arising during galvanization of Steel sheets

Case:COLLECTOR OF CENTRAL EXCISE, PATNA VS. TATA IRON & STEEL CO.

Citation:2004(165) E.L.T. 386 (S.C.)

Issue:Whether Excise is payable on Zinc dross and Flux skimming arising during galvanization of Steel sheets

Brief Facts:The assessee is involved in the galvanization process of steel sheets and during that process Zinc dross and Flux skimming arises which assessee declared them as by- products arose during the galvanization process. The assessee sells these by-products to various customers without making any declaration in the classification list and without payment of duty and he also does not maintain any records as per Central Excise Act, 1944. Thus, the department has issued Show cause notice saying that the assessee has evaded the payment of duty. The department has also claimed that the assessee has not obtained the Central Excise License for the manufacture of Zinc dross and Flux skimming as per Rule 174 of the Central Excise Rules, 1944. Thus, assessee has suppressed the production and removals of the said goods with the intention of evade the payment of duty. Another show cause notice was also issued by the department to the assessee to show why penalty should not be imposed and why the duty should not be recovered under Rule 9 (2) of the Central Excise Rules, 1944.

Appellant’s Contention: The appellant submitted that under sub-heading 7902.00 of the Central Excise Tariff waste and scrap of zinc comes and waste and scrap of zinc include dross and ash. According to appellant the case of Indian Aluminium Co. Ltd. (supra) relates to aluminium dross and skimming and aluminium waste and scrap does not include dross and skimming. He would further submit that prior to 1-3-1988, as per Chapter Note 3 of Chapter 26 ash and residue other than dross and ash of zinc containing metals or metallic compounds applies only to the ash and residue of a kind used in industry either for the extraction of metals or as a basis for the manufacture of chemical compound of metal. This chapter note was subsequently amended w.e.f. 1-3-1988 by omitting the words “other than dross and ash of zinc containing metals of metallic compounds”. Thus he submits that prior to 1-3-1988, the said dross and ash of zinc containing metals or metallic compound were classifiable under 7902 and subsequent to 1-3-1988 the said product got classified under sub-heading 26.20. It was contended that a close reading of the above chapter note reveals that the heading 26.20 covers ash and residue which contain metal or metallic compounds and which are of kind used in industry either for the extraction of metal or metallic compound or as basis for the manufacture of chemical compound of metals.
Respondent’s Contention:In reply to show cause notice the assessee contended that Flux skimming is non- excisable as declared by the CEGAT based on the caseIndian Aluminium Co. Ltd. v. A.K. Bandyopadhyay [1980 (6)E.L.T. 146 (Bom.)]. Further, he has not manufactured Zinc dross and Flux skimming but the same arises during the galvanization process. These products are neither end products nor finished products attracting duty under item 25 of the Central Excise Tariff Act. Thus, need of issuing gate passes for removal of goods and submission of quarterly return and classification list does not arise at all. Further, the assessee has stated that he has submitted classification list and has a bona fide impression that these goods are non- excisable and he has not manufactured the same.
Further, the respondent submitted that zinc dross and flux skimming were waste products in the process of galvanization of steel sheets and the same are non excisable goods under the Central Excise Act, 1944 and further it is his submission that the process of galvanization merely involves the steel sheets through a batch of molten zinc whereby the said sheets acquire a coat of zinc on the surface resulting in galvanization and that zinc dross is merely the impurity which arises as a result of the process of galvanization and settle to the bottom. During the same galvanization process, ammonium chloride is used as a flux for cleaning the impurities from the sheets. This ammonium chloride when mixed with molten zinc also creates some impurities in the form of flux which floats to the surface. This flux is periodically skimmed off the surface of the zinc and these are known as ‘flux skimming’. The assessee further submits that zinc dross and flux skimming are nothing but waste products and these are not marketable. The assessee/ respondent relied on the decision of this Court being Indian Aluminium Co. Ltd. (supra) and submitted that this Court held that aluminium dross and skimming are neither goods nor marketable commodity and, therefore, not liable to excise duty and he, therefore, he pleads that the appeal of the appellant should be dismissed.
Further, the assessee submitted that Zinc dross and Flux skimming are non-excisable and not marketable. He submitted that dross is nothing but scum thrown off from metals in something; refuse and rubbish or worthless impure metal and skimming is that which is removed or obtained from the surface by skimming. In Union of India v. Delhi Cloth and General Mills Co. Ltd [1977 (1)E.L.T. (J199) (S.C.) = (AIR 1963 SC 791)] it was held that the “Goods” are something which generally come to the market and can be brought and sold and that the “manufacture” which is liable to excise duty under the Central Excises and Salt Act, 1944 must, therefore, be the “bringing into existence of a new substance known to the market”.

Reasoning of Judgment: In Civil Appeal Nos. 524 and 525 of 1998, the Collector of Central Excise, Patna ordered for confiscation of the zinc dross. However, the Collector gave the manufacturers the option to redeem the goods on payment of redemption fine. A penalty was also imposed on the manufacturer. The assessee preferred an appeal to the CEGAT, New Delhi which set aside the order of the Collector, Central Excise relying upon the decision of this Court in the case of Union of India v. Indian Aluminium Co. Ltd. [1995 (77)E.L.T. 268 (S.C.)] Aggrieved by the said decision, the Commissioner of Central Excise, Patna preferred the above two appeals.
In Civil Appeal No. 5262 of 2003 - M/s. National Steel Industries Limited now known as M/s. National Steel and Agro Industries Limited filed declaration in the classification list that the zinc dross is classifiable under Heading 7902.00 of the Schedule to the Central Excise Tariff Act, 1985. According to the assessee, the Zinc dross are non-excisable and he continued to remove the same goods without payment of duty up to December, 1997. Later on, they paid duty under protest. A show cause notice was issued as to why zinc dross should not be classified under Heading 7902.00 and why excise duty should not be recovered. The Deputy Commissioner of Central Excise held the goods classifiable under Heading 7902 of the Central Excise Tariff Act, 1985 and confirmed the payment of penalty which was imposed. Thus, the Commissioner (Appeals) rejected the appeal filed by the assessee. Then after the assessee made an appeal to the Tribunal in which the Tribunal set aside the order in appeal holding that zinc dross and flux skimming are non- excisable goods following the decision of this Court in Indian Aluminium Co. Ltd. (supra). The Tribunal further relied on the decision in the case of Tata Iron and Steel Company Limited v. CCE, Patna [2001 (135)E.L.T. 1142] and Siddarth Tubes Limited v. CCE, Indore dated 8-4-2002 which referred to the judgment in the case of Indian Aluminium Co. Ltd. (supra).
Civil Appeal No. 5664 of 2002 also deals with similar situations. In this appeal, according to the assessee, zinc dross and zinc scalling does not constitute to be excisable goods as defined in Section 2(d) of the Central Excises and Salt Act, 1944 and, therefore, they filed refund claims for amount of duty paid on zinc scalling.
Here also a show cause notice was issued and the Assistant Commissioner rejected the refund claim holding that the ash cleared by the noticee (assessee) contains metals and oxide of zinc and the same is also used for the extraction of metal as a basis for the manufacture of chemical compounds of metal and they are marketable and also answer of the description of chapter heading. Therefore, they contended that the same is correctly classifiable under Chapter heading No. 26.20 of the Central Excise Tariff Act, 1985. The assessee’s appeal before the Commissioner was also rejected and the further appeal by the assessee before the CEGAT was allowed relying on the judgment of this Court in Indian Aluminium Co. Ltd. (supra). The Tribunal, following the judgment of this Court, categorically held that zinc dross and zinc scalling are not goods, hence not excisable.
Supreme Court is of the opinion that the dross and skimming are merely the refuse, scum or rubbish throughout in the process of manufacture of aluminium sheets and, therefore, cannot be said the result of treatment, labour or manipulation whereby a new and different article emerges with a distinctive name, character or use which can ordinarily come to the market to be brought and sold. Merely because such refuse or scum may fetch some price in the market does not justify it being called a by-product, much less an end-product or a finished product.
The following cases were referred –
In Collector of Central Excise, Patna v. Indian Tube Co. Ltd. [1995 (77)E.L.T. 21 (S.C.)],it was held that diluted sulphuric acid i.e. the liquid which remains after user does not constitute a manufactured product and thus, not liable to duty.
Commr. of C. Ex., Chandigarh-I v. Markfed Vanaspati & Allied Indus. [2003 (153)E.L.T. 491 (S.C.)] this case is related to whether “Spent Earth” is liable to duty or not . In this case, the Supreme Court held that burden to prove that there is manufacture and what is manufactured are on the Revenue and it is not merely the basis for the manufacturing that an item falls under the tariff heading.
Union of India v. Ahmedabad Electricity Co. Ltd. [2003 (158)E.L.T. 3 (S.C.)], it is the case in which issue regarding excisabaility of ‘Cinder’. Cinder means half burnt or unburned portion of coal used in the boilers. The Cinder is not fully burned due to its combustible quality. In this case the Supreme court held that the Cinder will be non-excisable.
Further, the Supreme Court held that merely selling the rubbish does not amount to marketing commodity. Thus, Zinc dross and Flux skimming, arises during the process of galvanization of Steel sheets, are not excisable.
Decision: The appeal is disposed of. The assessee is entitled to refund of the duty paid and penalty, if paid.

Comment:- This was very good decision but the Board came with the amendment in definition of Section 2(f) that everything which is sold for consideration will amount to manufacture. This amendment came in year 2008. But the retrospective amendment was not given to this notification. Everyone was paying duty on the same prior to this amendment and the credit was being availed by the buyers of this product. Now, the department has issued show cause notice for the recovery of this credit as supplier should not have paid the duty on the same. Though it is settled principle that the duty paid by supplier cannot be assessed at buyer’s end. Hence the credit will be admissible. But the departmental authorities are not agreeing the same. The litigation will go on. The board should issue a notification that the cenvat will not be disallowed to the parties and end this litigation.

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PJ/Case Laws/2012-13/1150

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