Chartered Accountant
Bookmark and Share
click here to subscribe our newsletter
 
 
Corporate News *   Fixation of Tariff Value of Edible Oils, Brass Scrap, Poppy Seeds, Areca Nut, Gold and Sliver   *   Imposition of anti dumping duty "Ammonium Nitrate"originating in exported from Russia, Indonesia, Georgia and Iran *   Exemption to a person making inter-State taxable supplies of handicraft goods from the requirement to obtain registration granted  *   Exemption from registration to job-workers making inter-State supply of services to a registered person granted *  The notification amends the rates of compensation cess on various motor vehicles *   Clarifcation for classification and GST rate on lottery *   Directions to Bank regarding export to Algeria *   Implementation of Notification No. 19 dated 5.8.2017 *   Enlistment of Agricultural and Processed Food Products Export Development Authority (APEDA) under Appendix 2C & 2E *   Extension in last date of  Export of preferential quota sugar to USA under TRQ quota *   Correction / Amendments in Table 2 of Appendix 3B Foreign Trade Policy 2015-20 *   Proformae for submission of applications for export of Red sanders wood and import of sandalwood notified *   Amendment in import policy of raw sugar *   Revision in Policy condition no 2 to Chapter 95 of ITC(HS), 2017 *   Clarification on difficulties related to recent amendments in Customs Act, 1962. *   Implementation of electronic sealing for containers by exporters *   Rate of exchange of conversion of the foreign currency with effect from 08.09. 2017 {See notification no 84/2017-Cus (NT),dt. 07.09.2017 in What’s new} *   Jurisdiction of customs officers for the purpose of audit defined {See notification no 85/2017-Cus (NT),dt. 07.09.2017 in What’s new} *   GST Workshop for babus held *   GST cess hike on luxury cars approved by cabinet *   Punjab Govt unable to pay salary to its employees *   Narendra Modi Proposes GST Registration for small traders. *   Govt restricts imports of gold, silver from South Korea  *   West Bengal Sweetmeat Makers go on Hunger-strike Against GST *   Appointment of officers as the Principal Chief Commissioners of Customs or Chief Commissioners of Customs and allotted their jurisdiction *   Amendment in Para 4.32(i) of chapter 4 and in para 6.01 (a) of chapter 6 of the Foreign Trade Policy 2015-20 *   Supply of essential commodities to the Republic of Maldives during 2017-18 *   Rate of exchange of conversion of the foreign currency with effect from 18th August, 2017 notified  *   Classes of persons who shall pay customs duty electronically notified *   Change in AIRs of Duty Drawback on Gold Jewellery, Silver Jewellery and Silver Articles 
Subject News *   Extension in the last date for filing the return in FORM GSTR-3B for the months of August to December, 2017 *   Seventh amendment to the CGST Rules, 2017 *   Notifying section 51 of the CGST Act, 2017 for TDS *   Granting exemption from registration to a casual taxable person making taxable supplies of handicraft goods. *   Extension in the time limit for filing of GSTR-6. *   Extension in the time limit for filing of GSTR-1, GSTR-2 and GSTR-3. *   Amendment in certain customs notifications in pursuance to change made in Budget 2017-18. *   Exemptions to goods imported for organising FIFA under 17, world cup, 2017 *   Seeks to extend due dates for furnishing details/Returns for the months of July, 2017 and August, 2017. *   System based reconciliation of information furnished in FORM GSTR-1 and FORM GSTR-2 with FORM GSTR-3B *   Single point service Contact@DGFT eastablished. *   Imposition of CVD on imports of Certain Hot Rolled and Cold Rolled Stainless Steel Flat Products *   Reduction of BCD on raw sugar upto a quantity of 3 lakh MT {See notification no 74/2017-Cus,dt. 07-09-2017in What’s new} *  Seeks to continue anti-dumping inforce concerning imports of "Metronidazole" originating in exported from China PR *  seeks to levy definitive anti-dumping duty, on Castings for Wind Operated Electricity Generators *  seeks to impose anti-dumping duty on "Styrene Butadiene Rubber (SBR) *   What is Form GST TRAN-1 and when to File it *   How To Revise Invoice In GST *   Advertising space in print media to attract 5% GST *  Seeks to impose anti-dumping duty on " TexturedToughened (Tempered) Glass ", originating in or exported from China PR *  Seeks to amend notification No. 49/2012 - Customs (ADD) dated the 26th November,2012 to modify the amount of anti-dumping duty on import of Caustic Soda originating in or exported from Iran, Saudi Arabia and USA. *  Seeks to impose anti-dumping duty on the imports of "Sodium Nitrite" originating in or exported from China PR. *  Notification No.82/2017-Customs (N.T.) dated 24th August, 2017 *  Amendment in import policy of Beans of the species Vigna mungo (L.) Hepper or Vigna radiate (L.) Wilczek under Chapter 7 of the ITC (HS) 2017, Schedule â I (Import Policy) *  Amendment in Para 3.24(j) of Chapter-3 of FTP 2015-20 *  Amendment in Para 2.07 of Foreign Trade Policy 2015-2020. *  Amendment in import policy of gold and silver under Chapter 71 of the ITC(HS) 2017, Schedule -I (I) *   Seeks to modify the amount of anti-dumping duty on import of Caustic Soda originating in or exported from Iran, Saudi Arabia and USA *   Seeks to impose anti-dumping duty on the imports of "Sodium Nitrite" originating in or exported from China PR *   Amendment in the CGST Rules, 2017   

Comments

Print   |    |  Comment

PJ/Case Study/2016-17/112
26 November 2016

Whether proportionate amount of the CENVAT credit availed on imported brass scrap is to be repaid if its impurities are cleared in DTA?

CASE STUDY

 

Prepared By: Rakshay Tater

 
Introduction:
 
The assessee, M/s Shree Extrusions Ltd. were issued with show cause notice wherein it was alleged that they have not paid proportionate amount of the CENVAT credit availed on imported brass scrap, in terms of Rule 3(5) of CENVAT Rules. However the Shree Extrusions Ltd. has cleared such scrap on payment of Central excise duty on the transaction value. Department issued the S.C.N. on the basis of Board`s circular on “valuation of plastic waste & scrap by EOU/EPZ/SEZ Units or to the DTA Units-Reg.” in which it is described that if inputs imported are cleared as such then for the purpose of charging duty such scrap will be treated as unutilized material and valuation of such scrap & waste will have to be done on basis of their CIF value at time of import and it will not be treated as manufacture. Department alleged that Noticee have wrongly collected central excise duty in respect of such scrap instead of depositing the proportionate CENVAT credit. Department alleged that Noticee had deliberately suppressed facts with an intent to evade payment of duty hence the amount of Rs. 2,66,85,288/- is demanded. Subsequently four more S.C.N. issued in respect of same contention by department of 4978089/-,4770798/-,771604/- and 1429132/-. As regard to this it was submitted that manufacture also includes process incidental or ancillary to the completion of a manufactured product; and in present case removal of impurities which results into various type of scrap has to be treated as incidental process for manufacture of final product and is essential process. It was also submitted that materials imported were not as goods cleared in DTA. The adjudicating authority rejected departments contention and dropped the amount of duty demanded on assessee on basis of Board`s circular no. 1029/17/2016-CX,dated 10-05-2016 and Rule 3(5)of CENVAT credit rules 2004.
 
M/S  Shree Extrusions LTD. [OIO NO.  RAJ-EXCUS-000-PR.COM-34-16-17, DT. 14.10.2016]
 
Relevant Legal Provisions:
·         "(1) "manufacture" includes any process, -
(i)            incidental or ancillary to the completion of a manufactured product;
(ii)           which is specified in relation to any goods in the Section or Chapter notes of the First Schedule to central Excise Tariff Act, 1985 (5 of 1980) as amounting to manufacture; or
 
(iii)          which, in relation to the goods specified in the Third Schedule, involves packing or repacking of such goods in a unit container or labelling or re­labelling of containers including the declaration or alteration of retail sale price on it or adoption of any other treatment on the goods to render the product marketable to the consumer,
and the word "manufacturer" shall be construed accordingly and shall include not only a person who employs hired labour in the production or manufacture of excisable goods, but also any person who engages in their production or manufacture on his own account;
 
·         Sub-rule (5) of Rule 3 of CENVAT Rules reads as under:-
"(5) When inputs or capital goods, on which CENVAT credit has been taken, arc removed as such from the factory, or premise's of the provider of output service, the manufacturer of the final products or provider of output service, as the case may be, shall may an amount equal to credit availed in respect of such inputs or capital goods and such removal shall be made under the cover of an invoice referred to in rule 9 :
·         Circular No.62/2001-Cus dated 12-11-2001, from P. No.305/ 39/ 2001-FTT, the relevant portion of which is reproduced as under:
"Subject: Valuation of Plastic Waste 86 Scrap by EOU/EPZ/SEZ Units Sold/ Cleared to other EOU/EPZ/SEZ Units or to the DTA Units — Reg.
I am directed to invite your attention to Board's instructions (Issued from F.No. 268/35/92-Cx. 8), dated 17-8-1994 and 28-8-1997 (issued from F. No. 268/45/97-Cx. 8) regarding valuation of goods manufactured and cleared into DTA by 100% EOU. It was clarified that in case of DTA sales the invoice price can be accepted for purposes of assessment if the same is in nature of transaction value under the Customs valuation rules, 1988. It was also clarified that the above instructions would be applicable to assessment of waste scrap generated (in the unit) and cleared into DTA by EOUs/EPZ units. In this connection, a doubt has been raised regarding valuation of certain variety of plastic waste & scrap, which is not generated out of the manufacturing operations but emerges during segregation of such plastic waste 85 scrap after import.
2. The matter has been examined by the Board. It is seen that plastic waste & scrap reprocessors operating under EOU/EPZ/SEZ Scheme, who are producing plastic agglomerates out of imported plastic waste 86 scrap, use only a portion of such plastic waste & scrap for manufacture of plastic agglomerates. The balance quantity is sought to be cleared in DTA or to other EOU/EPZ/SEZ units. Paragraph 9.18 of the Exim Policy provides that in case an EOU/EPZ/ETHP/STP unit is unable, for valid reasons, to utilise the goods, imported or procured from DTA, it may dispose of them in DTA on payment of applicable duties. As per the notifications issued by the Government in these cases the value taken for Customs purposes is the CIF value of materials at the time of import. It is seen that waste and scrap sought to be sold/cleared to other DTA units or to other EOU/EPZ/SEZ units arises due to segregation of imported materials at a stage- prior to their being used in the production process and therefore the same cannot be treated as plastic waste and scrap generated out of the production process. Therefore, for the purpose of charging duty, such plastic waste and scrap will, have to be treated as unutilised material and valuation of such waste & scrap will have to be done on the basis of their CIF value at the time of import. Even for inter-unit or inter-zone transfer of such segregated un-utilised plastic waste & scrap, the goods will have to be assessed on the basis of CIF value of imported scrap."
 
Issue Involved:The issue involved in this case before the adjudicating authority was that - Whether proportionate amount of the CENVAT credit availed on imported brass scrap is to be repaid if its impurities are cleared in DTA?
 
Brief Facts:The issue involved in the following 5 S.C.N. is common and hence all these S.C.N are being decided by common order. Amount of duty involved is as under:
1.    26685288/-
2.    4978089/-
3.    4770798/-
4.    771604/-
5.    1429132/-
2. Briefly stated the facts of the case are that M/s. Shree Extrusions Ltd., Plot
 No. 217/ 218/219, GIDC Phase II, dared, Jamnagar (hereinafter referred to as   "the Noticee") are engaged in the manufacture of excisable products falling under Chapter heading 7407, 7408, 7409, 7204, and 7203 etc. of the First Schedule to the Central Excise Tariff Act, 1985 and are registered as a Central Excise assessee vide Registration No. AADCS0253PXM001. They are availing facility of CENVAT credit under CENVAT Credit Rules, 2004 (hereinafter referred to as "CENVAT Rules").
 
3. During the course of audit of the records maintained by the Noticee, it was
noticed that the Noticee were importing Brass scrap for manufacturing of their finished products i.e. Brass Extruded Rods/Bars, Brass Section, etc. They were paying Customs duties at the time of import of such "Brass Scrap" and availing credit of Counter-vailing Duty (CVD) under CENVAT Credit Rules, 2004, on the entire quantity of Brass Scrap received as input.
4. It appeared that during the course of manufacturing, the Noticee carry out
segregation of scrap by manual process initially and after sorting the metal scrap, only foundry scrap is transferred to furnace to produce final products. They clear various impurities into DTA after payment of Central Excise duty by classifying the same as "M.S. Scrap". The waste & scrap of Iron & Steel/M.S. scrap/various impurities, cleared by them is nothing but "as such" removal/clearance of the imported inputs i.e. Brass Scrap, which has not undergone through .any manufacturing process in terms of the definition of "manufacture" given under Section 2(f) of the Central Excise Act, 1944 (hereinafter referred to as "the Act"), which reads as under:
        (1) "manufacture" includes any process, -
(i)            incidental or ancillary to the completion of a manufactured product;
(ii)           which is specified in relation to any goods in the Section or Chapter notes of the First Schedule to central Excise Tariff Act, 1985 (5 of 1980) as amounting to manufacture; or
 
(iii)          which, in relation to the goods specified in the Third Schedule, involves packing or repacking of such goods in a unit container or labelling or re­labelling of containers including the declaration or alteration of retail sale price on it or adoption of any other treatment on the goods to render the product marketable to the consumer,
and the word "manufacturer" shall be construed accordingly and shall include not only a person who employs hired labour in the production or manufacture of excisable goods, but also any person who engages in their production or manufacture on his own account;
5.      In view of above definition of manufacture, it appeared that such scrap/impurities, which are not generated from the manufacturing operations but separated during segregation of imported brass scrap along with other impurities and if such scrap is removed/cleared "as such", the Noticee was required, the pay the proportionate amount of the CENVAT credit availed on the imported brass scrap, in terms of Rule 3(5) of CENVAT Rules. However, the Noticee has not followed the aforesaid provisions and cleared such scrap on payment of Central Excise duty on transaction value.
6. In this regard, the Board has issued a Circular No.62/2001-Cus dated 12-11-2001, from P. No. 305/ 39/ 2001-FTT, the relevant portion of which is reproduced as under:
"Subject: Valuation of Plastic Waste 86 Scrap by EOU/EPZ/SEZ Units Sold/ Cleared to other EOU/EPZ/SEZ Units or to the DTA Units — Reg.
I am directed to invite your attention to Board's instructions (Issued from F. No. 268/35/92-Cx. 8), dated 17-8-1994 and 28-8-1997 (issued from F. No. 268/45/97-Cx. 8) regarding valuation of goods manufactured and cleared into DTA by 100% EOU. It was clarified that in case of DTA sales the invoice price can be accepted for purposes of assessment if the same is in nature of transaction value under the Customs valuation rules, 1988. It was also clarified that the above instructions would be applicable to assessment of waste scrap generated (in the unit) and cleared into DTA by EOUs/EPZ units. In this connection, a doubt has been raised regarding valuation of certain variety of plastic waste & scrap, which is not generated out of the manufacturing operations but emerges during segregation of such plastic waste 85 scrap after import.
2. The matter has been examined by the Board. It is seen that plastic waste & scrap reprocessors operating under EOU/EPZ/SEZ Scheme, who are producing plastic agglomerates out of imported plastic waste 86 scrap, use only a portion of such plastic waste & scrap for manufacture of plastic agglomerates. The balance quantity is sought to be cleared in DTA or to other EOU/EPZ/SEZ units. Paragraph 9.18 of the Exim Policy provides that in case an EOU/EPZ/ETHP/STP unit is unable, for valid reasons, to utilise the goods, imported or procured from DTA, it may dispose of them in DTA on payment of applicable duties. As per the notifications issued by the Government in these cases the value taken for Customs purposes is the CIF value of materials at the time of import. It is seen that waste and scrap sought to be sold/cleared to other DTA units or to other EOU/EPZ/SEZ units arises due to segregation of imported materials at a stage- prior to their being used in the production process and therefore the same cannot be treated as plastic waste and scrap generated out of the production process .Therefore, for the purpose of charging duty, such plastic waste and scrap will, have to be treated as unutilized material and valuation of such waste & scrap will have to be done on the basis of their CIF value at the time of import. Even for inter-unit or inter-zone transfer of such segregated un-utilized plastic waste & scrap, the goods will have to be assessed on the basis of CIF value of imported scrap."
7.   Sub-rule (5) of Rule 3 of CENVAT Rules reads as under:-
"(5) When inputs or capital goods, on which CENVAT credit has been taken, arc removed as such from the factory, or premise's of the provider of output service, the manufacturer of the final products or provider of output service, as the case may be, shall may an amount equal to credit availed in respect of such inputs or capital goods and such removal shall be made under the cover of an invoice referred to in rule 9 :
Provided          
Provided further that ....................................  71
8. In view of the above, it appeared that the waste and scrap of Iron & Steel/M.S. Scrap/various impurities cleared by the Noticee is nothing but "as such" removal/clearance of the imported goods i.e. Brass Scrap, which has not undergone any manufacturing process in terms of the definition of the "manufacture", given under Section 2(f) of the Act. Thus, in view of the above provisions, such scrap/ impurities which are not generated from the manufacturing operations but separated during segregation of imported Brass Scrap along with other impurities and hence, such scrap was required to be removed/cleared after paying the proportionate amount of CENVAT credit availed in terms of Rule 3(5) of CENVAT Rules.
9. It further appeared that the Noticee has availed CENVAT credit on entire consignment of the Brass Scrap including impurities, and therefore, proportionate CENVAT credit in respect of such part quantity of the imported scrap, which they had removed/cleared as such, is required to be paid/reversed in terms of Rule 3(5) of CENVAT Credit Rules, as calculated in Annexure-A attached to the SCN dated 17-01-2014, for the period from April, 2009 to October, 2013, involving proportionate Cenvat credit amounting to Rs. 2,66,85,288/-, which appeared liable to be demanded/recovered from the Noticee along with appropriate interest, in terms of Rule 3(5) read with Rule 14 ibid.
10. Whereas, it further appeared that the Noticee has collected central Excise duty from their customers on clearances of such M.S. Scrap/other impurities on the basis of transaction value in terms of Section 4 of the Act and deposited the same with the Central Government within the stipulated time and which was actually not required to be collected and paid to the exchequer and hence in terms of the provisions of Section 11D of the Act, the amount thus paid cannot be appropriated against the aforesaid amount.
11. It further appeared that the Noticee, at no point of time, had disclosed the
aforesaid material facts to the department in any manner and supplied the particulars such as quantity/assessable value etc. shown in the Bills of Entry/ Input Scrap invoices and this fact came to the knowledge of the department only when audit of the records maintained by the Noticee was undertaken and the Noticee supplied the details vide their letters dated 20-02­2013, 21-02-2013 and 01-01-2014, in reply to the letter dated 08-01-2013 & 11-12-2013 of the Range Superintendent. Therefore, it appeared that the Noticee had deliberately suppressed the material facts from the department with an intent to evade payment of duty and hence the amount of Rs.2,66,85,288/-, is required to be demanded/recovered  from them by invoking extended period  under Section 11A of the Central Excise Act 1944 read with the provisions of Rule 14 of the CENVAT credit Rules 2004
12. Consequently, a Show Cause Notice F. No. V.74/AR-III-JMR/307/COMMR /2014  dated 17-01-2014, was issued to M/s. Shree Extrusions Ltd., Jamnagar, by the then Commissioner of Central Excise, Rajkot, asking them to show cause, as to why :
 (i) the amount of Rs. 2,66,85,288/-, Payable by them under Rule 3(5) of the CENVAT Credit Rules, 2004, should not be recovered from them under Rule14 of the CENVAT Credit Rules, 2004 rend with Section 11A(4) of the Central Excise Act, 1944;
(ii)_interest at the appropriate rate, should not be charged and recovered from them in respect of the amount demanded at Sl. No.(i) above, under Rule 14 of CENVAT Credit Rules, 2004 read with Section 11AA of the Central Excise Act, 1944;
      (iii) Penalty should not be imposed upon them under Rule 15 of the CENVAT Credit Rules, 2004 read with Section 11AC of the Central Excise Act, 1944
13. Subsequently, another 4 Show Cause Notices, as detailed in Table below, were issued to them on the same issue, for the subsequent period, by the Joint /Additional Commissioner, Central Excise, Rajkot, demanding amount equal to the CENVAT credit availed by them on the M.S. Scrap/impurities cleared by them "as such" and which were part of the imported Brass Scrap, along with interest and proposing imposition of penalty on them.
Sl: No. S.C.N. No. and date Period covered in
S.C.N.
Amount of
duty
demanded
(Rs.)
S.C.N. issued
by /
answerable
to.
  (2) (3) (4) (5)
1 V.74/AR-III-JMR/JC/ 153 / 2014 dated 13-10-2014 November, 2013
to
March, 2014
49,78,089/- Joint
Commissioner,
Central
Excise, Rajkot.
2 V.74/AR-II-JMN- /ADC(SS)/201/2014- 15, dated 12-01-2015 April, 2014
to
September, 2014
47,70,798/- Additional
Commissioner,
Central
Excise, Rajkot
 
3 V.74/AR-II/DIV-JMN/ ADC(PV)/56/2015-16, dated 09-10-2015 October, 2014
to
March, 2015
7,71,604/- Additional
Commissioner,
Central
Excise, Rajkot
4 V.74/AR-III/JAM/ ADC(PV)/ 14/2016-17, dated 21-04-2016 April, 2015
to
September, 2015
14,29,132/- Additional
Commissioner,
Central
Excise, Rajkot
           
                                                                                                                                                                                                                                                                                                                         
14. The SCNs dated 13-10-2014, 12-01-2015, 09-10-2015 and 21-04-2016 have been issued by/made answerable to the Joint/Additional Commissioner, Central Excise, Rajkot Commissionerate. However, in view of the instructions issued by the Board, vide Circular No. 1049/37/2016-CX, dated 29-09-2016, wherein it has been clarified that where different show cause notices have been issued on the same issue answerable to different adjudicating authorities, Show Cause Notices involving the same issue shall be adjudicated by the adjudicating authority competent to decide the case involving the highest amount of duty, and therefore the aforesaid SCNs dated 13-10-2014, 12-01-2015, 09-10-2015 and 21-04­2016, are also being taken up for adjudication through this common order.
 
Assessee’s Contention: The assessee made following submissions before the adjudicating authority:- 
 
15. The assessee submitted as under:
(i)            that the definition of the word "manufacture" does not cover only the process which results into manufacture of some product but also includes the process incidental or ancillary to the completion of manufactured product;
(ii) that the scrap being imported by them is always with some impurities and the same are bound to be removed with help of tools and almost clean scrap is to be used in manufacture of billets;
(iii) that the removal of impurities which results into various type of scrap has to be treated as an incidental process for manufacture of final product and therefore it can never be said that the impurities removed under payment of appropriate duty on transaction value is removal of scrap in “as such” condition;
(iv) the removal of ferrous impurities is a very crucial process of their manufacturing activity and it is part of their manufacturing process.
(v) that for removal of impurities, they carry out processes like magnetic separation, cutting, hammering/peeling, etc. and all these activities are very complex methods for segregation/ sorting and they are essential
(vi) that as per definition of 'manufacture', as provided under Section 2(1) of the Central Excise Act, 1994, include any process incidental and ancillary to the completion of manufactured product;
(vii) that thus, the waste and scrap generated during segregation/sorting process generated during segregation would be treated as that generated during the course of manufacture of final products;
(viii) that accordingly it cannot be said that the clearance of waste and scrap is 'as such' Clearance of the inputs and reversal is required to be made as per Rule 3(5) of the,Cenvat Credit Rules, 2004; '
 
(ix) that the brass scarp imported by them are Mixed Brass Scrap with impurities and after being subjected to various processes and the materials cleared by them on appropriate payment of Central Excise duty was "waste/scrap" of various unwanted materials such as rubber, plastic, iron, etc. thus, the material imported by them were different from the material cleared by them.
 
(xi) that the material imported by them were 'Mixed Brass Scrap" whereas they have cleared "waste and scrap of plastic, rubber, iron, etc." which is not same as imported by them, therefore there is no question of 'as such clearance' of imported inputs;
 
(xii) that the provisions of Rule 3(5) of CENVAT Rules provide that if 'input' on which CENVAT credit has been availed are removed 'as such' then the manufacturer shall pay an amount equal to the credit availed on such 'input' namely Brass Scrap (falling under CETSH 7404 0022) and have cleared/removed resultant Iron/M.S. scrap (falling under CETSH-7204 4900), which were generated during the manufacturing process and therefore, the same cannot be treated as 'removal as such' and hence the impugned notice, invoking the provisions of Rule 3(5) of the CENVAT Rules, is untenable in law;
 
(xiii) that Brass Scrap which was originally brought as 'input', has not been cleared as such' from factory (as a matter of fact what was cleared was Iron/MS scrap') and therefore, invoking provisions of Rule 3(5) of CENVAT Rules in the present matter is not tenable in law;
(xiv) that it is not the case of the department that 'input', namely Brass Scrap, originally brought in the factory have not undergone any process at all and that they have removed brass Scrap under the guise of ‘Iron/MS Scrap.
 
(xv) that it is settled legal position that 'waste and scrap' (iron/MS scrap in this - case) arising in the course of processing of 'input' (Brass Scrap in this case), has to be cleared on payment of duties as if such 'waste and scrap' is manufactured in the factory and such 'waste and scrap' are to be treated as 'final products';
 
(xvi) that here has been no suppression on their part as they are registered assessee and regularly filing excise returns and they were regularly audited by the department; that in their 'Registration Certificate, in Schedule specifying the description of excisable goods to be cleared, "Ferrous Waste and Scrap", "Residual Ash" have been clearly mentioned also in subsequent amendment in the Certificate the same has been declared by them in respective applications, thus, there is no suppression and hence, extended period cannot be invoiced in their case;
 
(xvii) that the generation of iron/MS scrap' was always known to the department since the same were removed on payment of Central Excise duty and its production and clearances were duly reflected in the relevant records and in periodical returns; that they are engaged in manufacturing since long and from time to time departmental officers have audited their statutory and excise records however, audit had neither raised any objection, whatsoever, about: clearances of such iron/MS scrap nor had objected about quantum of duty payable thereon therefore, the SCN is time barred;
 
(xviii)  that proposal for recovery of interest and imposition of penalties under various provisions of law is unwarranted and unsustainable in law, both oil merits and limitation.
 
16. M/s. Shree Extrusions Ltd., Jamnagar, have subsequently filed their written submissions to the S.C.Ns. dated 12-01-2015 and 09-10-2015, vide their written submissions dated 19-02-2015 & 18-05-2016 and 22-10-2015 & 18-05-¬2016 respectively, in which they have inter alia, submitted similar grounds as mentioned in their earlier reply dated 24-03-2014, as stated in paras 15 above. However, the Noticee has not submitted any reply till date in respect of S.C.Ns. dated 13-10-2014 and 21-04-2016.

Reasoning adopted by the adjudicating authority: -
They have carefully gone through the evidence available on record including the SCN, as mentioned in para 1 above, as well as the replies dated 24-03-2014, 19-02-2015 and 18-05-2016 filed by the Noticee, with reference to the respective SCNs.
They found that the issue involved in these SCNs is regarding clearance of non-foundry scrap, obtained by segregation of Mixed brass Scrap, by the Noticee, on payment of transaction value by classifying the same as M.S. scrap, Rubber Scrap, Plastic scrap etc. The SCNs proposed demand and recovery of amount equal to CENVAT credit availed by the Noticee on the Mixed Brass Scrap received by them and on which CENVAT Credit has been availed by them.
It is proposed in the SCNs that segregation of Mixed Brass Scrap is not a manufacturing process and thus the non-foundry scrap obtained by segregation is not a finished product or by-product. Thus, since no manufacturing activity was involved, the non-foundry scrap was nothing, but their "input as such" and in such case, on clearance thereof, the Noticee were required to pay an amount equal to the CENVAT credit availed on the--inputs, under Rule 3(5) of the CENVAT Credit Rule 2004.
The SCNs have relied upon the clarification issued by the Board vide Circular No. 62/2001-Cm. dated 12-11-2001, issued from F. No. 305/39/2001-FTT, Which is reproduced as under :
"Subject: Valuation of Plastic Waste & Scrap 1)y EOU/EPZ/SEZ Units Sold/ Cleared to other EOU/EPZ/SEZ Units or to the DTA Units - Reg.
1 am directed to invite your attention to Board's instructions (Issued from No. 268/35/92-Cx. 8), dated 17-8-1994 and 28-8-1997 (issued from F. No. 268/45/97-Cx. 8) regarding valuation of goods .manufactured and cleared into DTA by 100% EOU. It was clarified that in case of DTA sales the invoice price can be accepted for purposes of assessment if the same is in the nature of transaction value under the Customs Valuation Rules, 1988. It was also clarified that the above instructions would be applicable to assessment of waste & scrap generated tin the unit) and cleared into DTA by EOUs/EPZ units. In this connection, a doubt has been raised regarding valuation of certain variety of plastic waste & scrap, which is not generated out of the manufacturing operations but emerges during segregation of such plastic waste & scrap after import.
2. The matter has been examined by the Board. It is seen that plastic waste scrap reprocessors operating under EOU/EPZ/SEZ Scheme, who are producing plastic agglomerates out of imported plastic waste & scrap, use only a portion of such plastic waste & scrap for manufacture of plastic agglomerates. The balance quantity is sought to be cleared in DTA or to other EOU/EPZ/SEZ units. Paragraph 9.18 of the Exim Policy provides that in case an EOU/EPZ/ETHP/STP unit is unable, for valid reasons, to utilise the goods, imported or procured from DTA, it may dispose of them in DTA on payment of applicable duties. As per the notifications issued by the Government in these cases the value taken for Customs purposes is the CIF value of materials at the time of import. It is seen that waste and scrap sought to be sold/cleared to other DTA units or to other EOU/EPZ/SEZ units arises due to segregation of imported materials at a stage prior to their being used in the production process and therefore the same cannot be treated as plastic waste and scrap generated out of the production process. Therefore, for the purpose of charging duty, such plastic waste and scrap will have to be treated as unutilised material and valuation of such waste & scrap will have to be done on the basis of their CIF value at the time of import. Even for inter-unit or inter-zone transfer of such segregated un-utilised plastic waste & scrap, the goods will have to be assessed on the basis of CIF value of imported scrap."
However, on plain reading of the above Circular, they found that the said clarification has been issued by the Board in respect of valuation of Plastic Waste & Scrap by EOU/EPZ/SEZ Units, which are sold/cleared to other EOU/EPZ/SEZ Units or to the DTA Units. However, the Noticee in this case, is neither an EOU/EPZ/SEZ,. nor are they engaged in clearance of Plastic Waste & Scrap. Therefore, the said clarification does not cover the issue involved in the subject S.C.N’s.
They further found that the issue involved in the subject SCNs has been recently clarified by the Board, vide Circular No.1029/17/2016-CX, dated 10-05-2016, issued from F.No.267/33/2014-CX.8, wherein it has been clarified that the clearance of segregated materials namely iron, steel, rubber, plastic, dust etc. from honey grade brass scrap before feeding in the furnace cannot be treated as removal of "inputs as such", as envisaged under Rule 3 (5) of the CENVAT Credit Rules, 2004. For case of reference, the relevant paras of the said Circular is reproduced here:
"Representations have been received from the members of the trade involved manufacture of brass products, regarding applicability of provisions relating to clearance of segregated foreign materials as "inputs as such” from imported honey grade brass scrap.  The said imported scrap mainly contains brass metal but it also contains impurities like iron, steel, rubber, plastic, dust etc. which is integrally attached to the main material/brass scrap. Before feeding resultant brass scrap in the furnace during the manufacturing  process, the said materials (impurities) attached to the honey grade brass scrap is segregated manually and then such sorted ,material is issued for further process like breaking, cutting etc. wherein big pieces of scrap are converted into small pieces so that the same can be fed into the furnace. Ultimately the brass scrap is fed into furnace where brass melts but materials like steel, iron etc. do not as they have higher melting point. Molten brass is poured for manufacturing whereas foundry waste of iron, steel, slag is cleared and sold separately. Such foundry waste is quite clearly process waste.
2.       However, there is another category of waste viz. foreign materials segregated initially and not fed in furnace. The issue is when such segregated foreign material is cleared by the brass manufacturers, can’t be treated as clearance of "inputs as such" and accordingly are the manufacturers required to pay an amount equal to the credit availed in respect of such inputs in terms of Rule 3(5) of CENVAT Credit Rules, 2004.
3.       The issue has been examined. Segregation from honey grade brass scrap in order to weed out other foreign materials before the process of melting in the furnace is an essential process relating to manufacture of brass articles. The ,foreign materials, emerging during the process of segregation have to be treated as process waste and cannot be treated like removal of inputs as such. The segregated foreign material has an altogether different character and use vis-a-vis brass scrap. Value per unit and classification of the segregated foreign material is also different from that of imported brass scrap, Accordingly, clearance of foreign material such as iron, steel, rubber, plastic, dust etc. cannot be treated as clearance of inputs as such. It may be noted that circular no. 62/2001-Cus dated 12.11.2001 does not apply to the issue at hand as the facts at hand are different.
4.       In view of above, it is clarified that the clearance of segregated foreign materials namely iron, steel, rubber, plastic, dust etc. from honey grade brass scrap before feeding in the furnace cannot be treated as removal of "inputs as such" as envisaged under Rule 3 (5) of CENVAT Credit Rules, 2004. The segregated foreign material in such situation, as has been explained above, shall be cleared on payment of Central excise duty on transaction value as per Its appropriate classification and rate of duty determined on merits."
(Emphasis supplied)
They further found that the issue involved in the subject SCNs is squarely covered by the clarification issued by the Board vide above Circular dated 10-05-2016. The authority therefore held that the non-foundry materials, emerging during the process of segregation have to be treated as process waste and the same cannot be treated as removal of inputs as such. The segregated non-foundry materials have different character and use vis-à-vis brass 'Scrap. As clarified in the above circular, the value per unit and classification of the segregated foreign materials is different from the imported brass scrap. Accordingly, clearance of non-foundry materials by the Noticee cannot be treated as "clearance of inputs as such". It has as been further clarified by the Board, in the said Circular that Circular No.62/2001-Cus, dated 12-11-2001, (which has been relied upon while issuing the impugned SCNs) does not apply to the issue at hand, as the facts at hand are different
It was therefore held that the segregated non-foundry materials such as iron, steel, rubber, plastic, dust etc., segregated from honey grade brass scrap (on which the assessee has availed CENVAT credit), before feeding in the furnace, cannot be treated as removal of "inputs as such", as envisaged under Rule 3 (5) of the CENVAT Credit Rules, 2004 and hence the demand of recovery of CENVAT credit, issued vide impugned SCNs, is not legally sustainable & hence liable to be dropped.
Accordingly the following order was passed:
ORDER
The proceedings initiated vide following S.C.Ns. issued to the Noticee i.e. NI's. Shree Extrusions Ltd., Plot No. 217/ 218/219, 0I17C Phase II, Dared, Jamnagar were dropped :
Sl. No. Name of the Noticee SCN No. and Date Period covered in SCN Amount of CENVAT Credit demanded
(1) (2) (3) (4) (5)
1. M/s. Shree
Extrusions Ltd., Jamnagar
V.74/AR-111-JMIZ/ 307 / Commr / 2014 dated 17-01-2014 Apr 11, 2009
to
October, 2013
 
2,60,85,238/-
2. M/s. Shree
Extrusions Ltd., Jamnagar
V.74/AR-111-JMR/
JC/153 / 2014 dated
13-10-2014
November,
2013 to March, 2014
19,78,089/-
3. M/s. Shree
Extrusions Ltd., Jamnagar
V.74/AR-1l-JMN- /ADC(SS)/201/2014-15, dated 12-01-2015 April, 2014
to September,
2014
17,70,798/-
4. M/s. Shree
Extrusions Ltd., Jamnagar
V.74/AR-11/DIV-JMN/ ADC(PV)/56/2015-16, dated 09-10-2015 October, 2011
to
March, 2015
7,71,604/-
5. M/s. Shree
Extrusions Ltd., Jamnagar
V.74/AR-III/JAM/ ADC(PV)/ 14/2016-17, dated 21-04-2016 April, 2015
to September,
2015
14,29,132/-
 
 























Decision: Show Cause Notice Dropped.

Conclusion
: The analogy that is drawn from this case is that as according to Board’s Circular no. 1029/17/2016-CX.8,dated 10.05.2016, issued from F.No.267/33/2014-CX.8M, wherein it has been clarified that the clearance of segregated materials namely iron, steel, rubber, plastic, dust etc. from honey grade brass scrap before feeding in the furnace cannot be treated as removal of “inputs as such”, as envisaged under Rule 3 (5) of the CENVAT Credit Rules, 2004. 
 

****************

Department News


Query

 
PRADEEP JAIN, F.C.A.

Head Office : -

Address :
"SUGYAN", H - 29, SHASTRI NAGAR, JODHPUR (RAJ.) - 342003

Phone No. :
0291 - 2439496, 0291 - 3258496

Mobile No. :
09314722236

Fax No. :0291 - 2439496


Branch Office : -

Address:
1008, 10th FLOOR, SUKH SAGAR COMPLEX,
NEAR FORTUNE LANDMARK HOTEL, USMANPURA,
ASHRAM ROAD, AHMEDABAD-380013

Phone No. :
079-32999496, 27560043

Mobile No. :
093777659496, 09377649496

E-mail :pradeep@capradeepjain.com