The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Kolkata Bench, has set aside a central excise duty demand of ₹98 lakh raised against Steel Authority of India Limited (SAIL), holding that used refractory bricks cleared as waste and scrap after consumption in the manufacturing process cannot attract reversal of CENVAT credit under Rule 3(5A) of the CENVAT Credit Rules, 2004.

The bench of Ashok Jindal (Judicial Member) and K. Anpazhakan (Technical Member) upheld the demand of central excise duty amounting to ₹98,00,064 along with interest and equivalent penalty. 

The appellant/assessee manufactures various iron and steel products such as billets, blooms and TMT bars and avails CENVAT credit on inputs, capital goods and input services used in the manufacturing process. Among the items used by the company were refractory bricks, which are consumed in steel-making operations and eventually become unusable waste after prolonged use.

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The company had been clearing waste and scrap arising from used refractory bricks without payment of excise duty, relying on earlier Tribunal decisions which held that waste refractory materials were not specifically classifiable under the Central Excise Tariff and therefore were not excisable goods.

The department alleged that the company had violated Rule 3(5A) of the CENVAT Credit Rules by clearing refractory bricks as waste and scrap without paying an amount equivalent to the duty leviable on such goods. Based on this allegation, four show cause notices covering the period from May 2005 to March 2011 were issued.

The notices collectively demanded excise duty of ₹98,00,064, comprising: ₹78.23 lakh for May 2005 to May 2009; ₹13.75 lakh for June 2009 to March 2010; ₹3.02 lakh for April 2010 to December 2010; and ₹2.98 lakh for January 2011 to March 2011.

The Joint Commissioner confirmed the demand along with interest and equivalent penalty, and the Commissioner (Appeals) subsequently upheld the order.

The central question before the Tribunal was whether SAIL was required to reverse CENVAT credit under Rule 3(5A) when refractory bricks, on which credit had originally been availed, were cleared as waste and scrap after being used in the manufacturing process.

The company argued that Rule 3(5A) applies only where capital goods are removed “as such” or where capital goods are cleared as waste and scrap. According to SAIL, the refractory bricks had already been consumed during manufacture and were not being removed in their original form. Therefore, the provision had no application.

The Tribunal examined Rule 3(5A) and noted that the Revenue’s entire case rested on treating the refractory bricks as “capital goods.” However, the Bench found that the refractory bricks were actually inputs used in the manufacturing process and, after use, merely turned into waste and scrap. As such, they could not be regarded as capital goods for the purpose of invoking Rule 3(5A).
The Bench further observed that Rule 3(5) applies where goods are removed “as such.” In the present case, the refractory bricks had undergone use and deterioration before being discarded as waste. Therefore, the condition of removal “as such” was not satisfied.

Relying on earlier precedents, including Vasavadatta Cement v. Commissioner of Central Excise, Belgaum and Century Cement v. Commissioner of Central Excise, Raipur, the Tribunal reiterated that waste refractory materials are not specifically covered under the tariff and that demands under Rule 3(5A) cannot be sustained where such waste lacks independent excisable classification.

The Tribunal concluded that Rule 3(5A) of the CENVAT Credit Rules, 2004 was not applicable to the facts of the case. Consequently, SAIL was not liable to reverse the CENVAT credit availed on refractory bricks, and the duty demand raised by the Revenue could not survive.

The Bench also held that once the demand itself was unsustainable, the associated penalty and interest liabilities could not be imposed. Accordingly, the impugned order was set aside and the appeal was allowed with consequential relief.

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