The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Hyderabad, has ruled that dolochar, fly ash, iron ore fines and other waste materials arising incidentally during the manufacture of sponge iron cannot be subjected to Central Excise duty merely because they are marketable or specifically mentioned in the Central Excise Tariff.
The Bench of Angad Prasad (Judicial Member) and A.K. Jyotishi (Technical Member) has observed that manufacture or production is the foundational taxable event under Section 3 of the Central Excise Act, 1944. Marketability and manufacture are separate statutory requirements, and proof that a material can be sold for consideration does not by itself establish that it was manufactured.
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M/s Maruti Ispat and Energy Private Limited is engaged in manufacturing sponge iron classifiable under tariff item 72031000 of the Central Excise Tariff.
During the manufacturing process, materials including dolochar, fly ash, iron ore fines and other waste emerged. These materials were cleared without payment of Central Excise duty.
The Department treated the materials as marketable excisable goods and issued a show cause notice dated February 4, 2016, covering the period from April 2010 to January 2015.
The adjudicating authority held that the disputed materials were excisable and confirmed the duty demand of ₹1.91 crore with interest. A penalty was imposed under Section 11AC of the Central Excise Act. Personal penalties were also imposed on the company’s managing director and authorised signatory under Rule 26 of the Central Excise Rules, 2002.
The Commissioner (Appeals), however, set aside the entire demand, interest and penalties after finding that the materials had not arisen from any process amounting to manufacture. The Department consequently approached the Tribunal.
The Department argued that the disputed materials had distinct names, possessed commercial utility and were regularly sold for consideration. It also contended that the materials were specifically covered under tariff entries.
Reliance was placed on the explanation to Section 2(d) of the Central Excise Act, under which an article, material or substance capable of being bought and sold for consideration is deemed marketable.
The Department further pointed out that the company subsequently began paying duty on fly ash and electrostatic precipitator dust. According to the Department, this conduct supported the excisability of the materials.
The company countered that duty under Section 3 could be imposed only when goods emerged as a result of manufacture or production. It maintained that dolochar, fly ash, iron ore fines and other waste were unavoidable residues generated during sponge iron manufacturing and were not products independently manufactured by it.
It was also argued that dolochar was unconditionally exempt under Notification No. 4/2006-CE dated March 1, 2006, and Notification No. 12/2012-CE dated March 17, 2012, as waste arising from the manufacture of iron or steel.
The Tribunal identified the principal issue as whether incidental waste materials could be subjected to Central Excise duty merely because they were marketable and found mention in the tariff.
It observed that Section 3 imposes excise duty on goods manufactured or produced in India. An activity amounts to manufacture only where it results in the emergence of a new and distinct commodity possessing a name, character or use different from the material from which it is produced.
The burden of proving that such manufacture had taken place rested on the Department.
The Tribunal clarified that the explanation to Section 2(d) expands the meaning of “goods” and the concept of marketability by including articles capable of being bought and sold. It does not eliminate the separate requirement that the goods must have been manufactured or produced.
“Marketability and manufacture are separate conditions and the existence of one does not establish the other,” the Tribunal observed.
Relying on the Supreme Court’s ruling in Moti Laminates v. Collector of Central Excise, the Bench said that the mere specification of an article in the tariff is insufficient unless it has emerged through a manufacturing process.
It also referred to the decisions in Union of India v. Ahmedabad Electricity Company Limited and Union of India v. DSL Sugar Limited, which recognised that residue or waste arising inevitably during the manufacture of another product cannot be subjected to excise duty unless the Department establishes a process amounting to manufacture.
Examining dolochar separately, the Tribunal explained that it is partially burnt coal or coal char remaining in a rotary kiln during the manufacture of sponge iron.
It arises inevitably in the manufacturing process and is not the result of any independent activity undertaken for producing dolochar.
The Tribunal held that the subsequent sale of dolochar as low-grade fuel did not establish that the company had manufactured a new and distinct commodity.
Referring to previous decisions concerning the same material, the Bench noted that dolochar generated during sponge iron manufacturing had consistently been treated as an inevitable residue rather than a manufactured product.
The Tribunal similarly held that fly ash comes into existence upon the burning of coal and is collected through pollution-control equipment.
Burning coal to generate heat or power could not be regarded as a process undertaken for manufacturing fly ash. Therefore, the material could not be treated as a manufactured commodity merely because it was capable of being sold.
The Bench relied on the Supreme Court’s decision concerning residue generated through coal combustion and the Madras High Court’s ruling in CBEC v. Mettur Thermal Power Station. It also referred to its decision in Principal Commissioner of Central Tax, Rangareddy-GST v. ITC Limited, which held that fly ash emerging from coal burning in a captive power plant was not excisable.
Addressing the company’s subsequent payment of duty on fly ash, the Tribunal said that payment made as a matter of caution could not constitute an admission against the correct legal position.
“There can be no estoppel against law,” the Bench stated.
In relation to iron ore fines, the Tribunal found that they arose through handling, screening or segregation of iron ore.
There was no evidence that the company had undertaken beneficiation, enrichment or any other process resulting in the emergence of a new and distinct product.
The mere reduction or segregation of iron ore according to size did not, by itself, amount to manufacture.
The Tribunal observed that crushing and screening resulting only in size reduction or segregation, without beneficiation or enrichment, could not be treated as manufacturing iron ore concentrate.
The same reasoning applied to other scrap and waste materials arising incidentally during the company’s manufacturing operations. In the absence of evidence establishing the emergence of a commercially distinct commodity through a manufacturing process, such materials could not be subjected to duty.
The Department had not identified any specific process undertaken by the company to manufacture the disputed waste materials. Nor had it established that commodities with a character and use fundamentally different from the original inputs had emerged.
The Department’s case was based mainly on marketability, sale for consideration and the presence of tariff entries. The Tribunal held that these factors could not sustain an excise levy in the absence of manufacture.
The Tribunal further considered the company’s alternative contention that dolochar was exempt from duty.
The relevant exemption entries covered “slag, dross, scaling and other waste from the manufacture of iron or steel” falling under Chapter 26.
The Bench observed that if the Department sought to classify dolochar under Chapter 26 as waste arising from sponge iron manufacturing, the corresponding unconditional exemption could not be denied.
Therefore, even if dolochar were assumed to be excisable, no effective duty liability would arise for the relevant period, subject to its classification under Chapter 26.
However, the Tribunal clarified that this was only an alternative ground because it had already concluded that dolochar did not arise from manufacture.
The Tribunal also rejected the invocation of the extended limitation period.
It noted that the dispute concerned the excisability of unavoidable waste and residue and had been the subject of divergent administrative views and substantial litigation.
The show cause notice itself relied on CBEC Circular No. 904/24/2009-CX dated October 28, 2009, which was subsequently rescinded through Circular No. 1027/15/2016-CX dated April 25, 2016.
According to the Tribunal, the administrative clarification, its subsequent withdrawal and the extensive judicial debate demonstrated that the dispute was interpretational.
There was no evidence of fraud, collusion, wilful misstatement or suppression of facts with the intent to evade duty. Mere non-payment of duty, without proof of the requisite intent, could not justify the invocation of the extended limitation period.
Since the demand failed both on merits and limitation, the Tribunal held that interest under Section 11AA and penalty under Section 11AC could not be sustained.
The personal penalties imposed on the company’s managing director and authorised signatory under Rule 26 were also set aside in the absence of any established duty liability or deliberate contravention.
Finding no infirmity in the Commissioner (Appeals)’s decision, the Tribunal dismissed the Department’s appeal and disposed of the company’s cross-objection.
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