Goods Made from Scrap-Processed Inputs Qualify as ‘Wholly Manufactured in India’: CESTAT Allows EOU’s Exemption Claim

The Delhi Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has set aside excise duty demands confirmed against an Export Oriented Units (EOUs) and held that goods manufactured from scrap-processed inputs are eligible for exemption under Notification No. 23/2003-CE, provided the immediate raw materials are produced or manufactured in India. The bench of Justice Dilip Gupta (President) and Hemambika R. Priya (Technical Member) has observed that scrap emerges as a technological necessity and no portion of imported inputs could be artificially attributed to it for denying benefits. The Bench further observed that the exemption notification required the final goods to be manufactured from raw materials produced or manufactured in India—not that every original input in the manufacturing chain must be indigenous. The dispute arose from two Orders-in-Original passed by the Commissioner, CGST, Alwar, denying the benefit of Notification No. 23/2003-CE dated March 31, 2003, to the appellant’s Machining Division, which functioned as a 100% EOU engaged in the manufacture of automotive cylinder heads. The department alleged that the appellant was not entitled to concessional excise duty on Domestic Tariff Area (DTA) clearances because the finished goods were not “produced or manufactured wholly from the raw materials produced or manufactured in India,” as mandated under Condition No. 3 of the exemption notification. The controversy centred on a particular manufacturing chain. The appellant used aluminium ingots—some imported and some procured domestically—for production. During machining, scrap was generated. This scrap was sent to job workers for conversion into processed aluminium ingots, which were then used to produce castings that ultimately formed the automotive cylinder heads cleared into the DTA. The department contended that since the scrap arose from both imported and indigenous ingots, and no separate records were maintained to establish that the scrap used in DTA-cleared goods was derived solely from indigenous inputs, the exemption condition stood violated. It further invoked the extended period of limitation under Section 11A(4) of the Central Excise Act, 1944, alleging suppression of facts. Rejecting the department’s stand, the Tribunal held that the “immediate raw material” for manufacturing automotive cylinder heads was the castings, which were produced in India by the Foundry Division. Even the processed ingots were manufactured in India by job workers. Therefore, the finished goods were manufactured wholly from raw materials produced or manufactured in India. The Bench drew support from its earlier ruling in Gujarat Ambuja Exports Ltd., where it was held that cotton waste generated during manufacturing constituted a distinct raw material for further products, even if the original cotton had been imported. Applying the same reasoning, the Tribunal observed that scrap generated during machining was a separate commercially identifiable input and could not be traced back to imported material for denying the exemption. On the limitation issue, the Tribunal ruled in favour of the assessee. It held that the extended period of limitation could not be invoked merely because the issue came to light during audit. The Bench noted that the appellant was an EOU operating under close monitoring by the Development Commissioner and the excise authorities, and that monthly returns had been regularly filed. Relying on the Supreme Court’s decision in Commissioner of Central Excise & Customs v. Reliance Industries Ltd., the Tribunal observed that where an assessee entertains a bona fide belief based on plausible interpretation of law, invocation of the extended limitation period is unjustified. The matter involved interpretation of an exemption notification, and there was no evidence of fraud, wilful misstatement, or suppression with intent to evade duty. The Tribunal categorically held that mere discovery of an issue during audit does not establish intent to evade tax. Since the demand itself was unsustainable, the consequential interest and penalty under Section 11AC were also set aside. Case Details Case Title: M/s. Continental Engines Ltd. Versus The Commissioner Citation: JURISHOUR-143-CESTAT-2026(Del) Case No.: EXCISE APPEAL NO. 51949 OF 2017 Date: 27.02.2026 Counsel For Appellant: K.S. Naveen Kumar Counsel For Respondent: Rakesh Agarwal Click Here To Read Order Read More: Whether Cancellation of Captive Coal Block Constitutes ‘Change in Law’ Under PPA? Supreme Court

Goods Made from Scrap-Processed Inputs Qualify as ‘Wholly Manufactured in India’: CESTAT Allows EOU’s Exemption Claim

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