The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Bangalore, has held that CENVAT credit cannot be denied merely because inputs used in manufacturing a principal product also contribute to the generation or further processing of a waste product or by-product.
The bench of R. Bhagya Devi (Technical Member) observed that the benefit of a concessional duty notification could not be withdrawn without evidence showing that credit had been availed on inputs or input services purchased and used exclusively for manufacturing the by-product.
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The appellant manufactured gelatin and availed CENVAT credit on inputs such as hydrochloric acid, furnace oil and acetic acid, as well as input services and capital goods. The credit was utilised for paying central excise duty on clearances of gelatin.
During the manufacturing process, sludge emerged as an inevitable waste product. The sludge was subsequently treated with acetic acid and processed into a fertiliser marketed as “Nutri Gold” or “Seedaid.” The product was classified under Tariff Heading 3105 5900 of the Central Excise Tariff.
Nutri Gold had earlier been exempt from central excise duty under Notification No. 4/2006-CE dated March 1, 2006. Following the withdrawal of that exemption, the appellant cleared the fertiliser on payment of concessional duty at 1% under Notification No. 1/2011-CE.
The concessional notification stipulated that its benefit would be available only where credit of duty paid on inputs or tax paid on input services had not been taken under the CENVAT Credit Rules, 2004.
The Revenue alleged that the appellant had manufactured Nutri Gold using inputs and input services on which CENVAT credit had been availed. On that basis, the authorities concluded that the company was not entitled to the concessional 1% duty rate and that the product was chargeable at 5% duty under Notification No. 2/2011-CE.
Accordingly, differential central excise duty was demanded after denying the benefit of the concessional notification. Equal penalties were also imposed. The adjudication orders were subsequently upheld by the Commissioner (Appeals), prompting the company to approach the Tribunal.
The appellant argued that gelatin was its only principal final product and that the sludge emerged unavoidably during its manufacture. Since the sludge was initially a hazardous waste, its disposal was not reported in the monthly ER-1 returns as clearance of an excisable product.
According to the appellant, the sludge was later treated with acetic acid and washed with hot water to remove part of the acid. Caustic soda was then added to correct its pH level, resulting in the fertiliser Nutri Gold.
It was contended that no CENVAT credit was availed on any input or input service used independently in the process of converting the sludge into fertiliser. The appellant maintained that inputs used in manufacturing gelatin could not be treated as inputs exclusively used for producing Nutri Gold merely because the sludge generated during gelatin production underwent further processing.
The company further pointed out that the authorities themselves had accepted that the sludge arose as a by-product during the manufacture of gelatin. They had also accepted that the provisions of Rule 6 of the CENVAT Credit Rules were not applicable to waste generated during the manufacturing process.
The appellant argued that the show-cause notices did not identify any particular credit-bearing input as having been purchased and used exclusively in the manufacture of Nutri Gold. It also submitted that the adjudicating authority travelled beyond the allegations in the notices by referring to inputs such as high-density polyethylene bottles even though no such allegation had been made in the show-cause notices.
The Revenue, on the other hand, contended that since the appellant had availed CENVAT credit on inputs, it could not claim the concessional duty benefit. The department therefore sought the continuation of the demands and penalties.
After examining the notices and the orders passed by the lower authorities, the Tribunal found that the department had failed to identify the inputs allegedly used exclusively for producing Nutri Gold.
The Tribunal noted that the adjudicating authority had merely stated that “some portion” of the inputs related to the manufacture of the fertiliser. No specific input was categorically identified, nor was any supporting evidence placed on record to establish that credit-bearing inputs were procured for the independent manufacture of Nutri Gold.
It further observed that the reference to HDPE bottles appeared for the first time in the adjudication orders and was not part of the allegations contained in the show-cause notices. The demand could not be sustained on grounds that were never specifically put to the assessee.
The Tribunal relied on the Supreme Court’s decision in Union of India v. Hindustan Zinc Ltd., which recognised the distinction between a final product and a by-product emerging as a technological necessity. The Supreme Court had held that provisions governing common inputs could not be applied by equating an unavoidable by-product with the principal final product.
Referring to that principle, CESTAT held that where inputs used in manufacturing the final product also contribute to the processing of waste into another dutiable product, CENVAT credit cannot automatically be denied.
The Tribunal emphasised that the relevant notifications allowed a concessional rate subject to the condition that CENVAT credit had not been availed on inputs or input services used for the specified product. Therefore, the department was required to establish that credit had actually been taken on inputs or services used to manufacture Nutri Gold.
In the present case, there was no evidence showing that any inputs had been purchased and used exclusively for manufacturing the fertiliser. The mere fact that inputs used in gelatin production were connected with the emergence of sludge was insufficient to establish a violation of the notification’s condition.
Consequently, the Tribunal held that the orders denying the concessional rate and confirming the differential duty demands could not be sustained. All three appeals were allowed.
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