The Hyderabad Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has set aside a central excise demand of ₹80.28 lakh against a sugar manufacturer, holding that bagasse is merely an agricultural waste or residue and not the result of a manufacturing process. Consequently, the Tribunal ruled that Rule 6 of the CENVAT Credit Rules, 2004, could not be invoked on that basis.
The Bench of Angad Prasad (Judicial Member) and P.V. Subba Rao (Technical Member) has observed that the statutory fiction relating to marketability could not dispense with the foundational requirement of manufacture. Unless the process resulting in the goods fell within the definition of “manufacture” under Section 2(f), bagasse could not be treated as an excisable manufactured product merely because it was capable of being bought and sold.
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The dispute covered the period from April 2008 to March 2013. Through a show-cause notice dated May 22, 2013, the department had sought recovery under Rule 6(3) of the CENVAT Credit Rules on the ground that the company had used common inputs and input services for dutiable goods as well as non-dutiable products without maintaining separate accounts.
The appellant/assessee manufactures sugar and molasses, on which central excise duty was paid. During the crushing of sugarcane, bagasse emerged as a by-product. The company used the bagasse to generate electricity, consuming a portion within its factory and selling the balance to the Andhra Pradesh power distribution company, APTRANSCO.
Press-mud also emerged during the manufacture of sugar. According to the order, the company did not sell the press-mud but distributed it free of cost to sugarcane growers for use as manure.
The department alleged that the company had not maintained separate records concerning the receipt, consumption and inventory of inputs and input services used in relation to dutiable sugar and molasses and the allegedly non-dutiable bagasse and press-mud. It therefore proposed recovery of an amount calculated at the applicable rate of 10%, 5% or 6% under Rule 6(3).
Of the total demand, ₹80,07,233 related to the value of electricity sold to APTRANSCO. A further ₹20,915 was demanded with reference to press-mud, despite it having been supplied free to cane growers. The Commissioner confirmed the aggregate demand of ₹80,28,148 along with applicable interest and imposed a penalty under Rule 15(2) of the CENVAT Credit Rules read with Section 11AC of the Central Excise Act, 1944.
Before the Tribunal, the company argued that the department could not itself select one of the alternatives available under Rule 6 and demand the amount prescribed under Rule 6(3). Relying on the Telangana and Andhra Pradesh High Court’s decision in Tiara Advertising v. Union of India, it submitted that the choice among the available compliance options belonged to the assessee.
The company alternatively relied on the Supreme Court’s ruling in Union of India v. DSCL Sugar Ltd., which held that bagasse is an agricultural waste or residue and does not emerge from a process of manufacture within the meaning of Section 2(f) of the Central Excise Act. Since bagasse was not a manufactured product, Rule 6 of the CENVAT Credit Rules could not apply, it contended.
It was further submitted that the company had, for the purposes of the proceedings, reversed proportionate CENVAT credit of ₹5,53,773 relating to the input services it had availed. Citing the Supreme Court’s decision in Chandrapur Magnets Pvt. Ltd. v. CCE, the company argued that reversal of the credit had the same legal effect as not having availed the credit in the first place.
The Revenue supported the Commissioner’s order and opposed the appeal.
After examining the record, CESTAT found the facts to be identical to those considered by the Supreme Court in DSCL Sugar Ltd. The Tribunal noted that the Supreme Court had treated bagasse as agricultural waste or residue rather than the outcome of a manufacturing process.
Since bagasse was not manufactured, the Tribunal held that Rule 6 of the CENVAT Credit Rules had no application. It observed that this finding alone was sufficient to set aside the adjudication order.
The Tribunal also accepted the company’s additional contention based on Tiara Advertising. It held that the department could not raise a demand by unilaterally selecting the payment mechanism under Rule 6(3), as the assessee was entitled to choose from the alternatives provided under Rule 6.
CESTAT further found merit in the argument concerning the reversal of proportionate credit. Referring to Chandrapur Magnets, the Bench observed that once the proportionate CENVAT credit was reversed, it was to be treated as though the credit had not been availed.
The Tribunal concluded that the Commissioner’s order could not be sustained. It allowed the appeal, quashed the demand together with the related interest and penalty, and granted consequential relief to Gayatri Sugars.
The final order was pronounced on September 16, 2026, following the hearing held on the same day.
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