The Customs, Excise & Service Tax Appellate Tribunal (CESTAT), Mumbai Regional Bench, has set aside a Central Excise demand of ₹2.03 crore against a sugar manufacturer, holding that electricity generated from bagasse and sold to the Maharashtra State Electricity Distribution Company Ltd. (MSEDCL) cannot be subjected to the 6% reversal/payment requirement under Rule 6(3) of the CENVAT Credit Rules, 2004.

The Tribunal relied upon the settled legal position emerging from earlier Tribunal decisions as well as the Supreme Court’s ruling in Union of India v. DSCL Sugar Ltd., which held that bagasse, being an agricultural waste/residue and not a manufactured product, would not attract Central Excise duty. 

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The appellant/assessee was engaged in the manufacture of sugar, molasses, denatured ethyl alcohol and other products falling under Chapters 17 and 22 of the Central Excise Tariff Act, 1985. It was registered with the Central Excise authorities and availed CENVAT credit of Central Excise duty paid on inputs and capital goods as well as service tax paid on input services. 

During the sugar manufacturing process, sugarcane is crushed, resulting in products including sugar juice, molasses, bagasse and press mud. Bagasse, which is generated as waste during the manufacturing process, is used as fuel in the boiler.

The burning of bagasse generates steam, which is used to generate electricity through a turbine. The electricity is partly consumed captively by the sugar factory during the crushing season, while the surplus electricity is sold to MSEDCL. 

The dispute arose because the Department treated the electricity sold outside the factory as an exempted product for purposes of Rule 6(3) of the CENVAT Credit Rules, 2004.

According to the Department, since electricity generated and supplied to MSEDCL was not subjected to Central Excise duty, the appellant was required to pay an amount equivalent to 6% of the value of the electricity sold.

On this basis, a show cause notice dated 2 April 2016 was issued demanding Central Excise duty of ₹2,03,56,997 for the period from March 2015 to February 2016.

The demand was raised under Rule 14 of the CENVAT Credit Rules, 2004 read with Section 11A(1) of the Central Excise Act, 1944, along with applicable interest.

The adjudicating authority confirmed the entire demand and also imposed a penalty of ₹20,35,699 under Section 11ACof the Central Excise Act, besides a further penalty of ₹5,000 under Rule 27 of the Central Excise Rules, 2002. 

Before CESTAT, the appellant contended that the issue had already been examined and decided in its favour in several judicial decisions.

The appellant relied, among others, upon:

• Gularia Chini Mills v. Union of India
• Union of India v. DSCL Sugar Ltd., 2015 (322) E.L.T. 769 (S.C.)
• Olam Agro India Pvt. Ltd. & Others v. Commissioner of CGST & Central Excise, Pune-I
• Indreshwar Sugar Mills Ltd. v. Commissioner of Central Tax (Appeals), Pune-II

On this basis, the appellant argued that the impugned demand was legally unsustainable and consequently no penalty could survive. 

The Tribunal identified the central issue as whether the appellant was required to make a CENVAT reversal/payment in respect of electricity cleared outside its factory and whether the demand confirmed by the Commissioner was legally sustainable. 

The Bench noted that both sides accepted that the same issue had already been decided in favour of assessees in several earlier cases.

The Tribunal specifically recorded that a consistent view had been taken that electricity produced from bagasse and sold to a State Government electricity authority cannot be subjected to payment equivalent to 6% of the value of electricity under Rule 6(3) of the CENVAT Credit Rules, 2004. 

CESTAT examined the earlier decision in Indreshwar Sugar Mills Ltd., which had relied upon the Tribunal’s decision in Olam Agro India Pvt. Ltd.

In Olam Agro, the dispute similarly concerned sugar manufacturers generating electricity from bagasse, consuming part of the electricity captively and selling the surplus to MSEDCL without payment of Central Excise duty.

The Department had taken the view that because the electricity was non-dutiable and the assessees had not maintained separate records for inputs and input services used in the manufacture of excisable goods and generation of electricity, Rule 6(3) applied and 6% of the value of electricity sold was payable. 

However, the Tribunal noted that in an earlier adjudication concerning Vaidyanath SSK Ltd. and others, the Commissioner of GST, Aurangabad had dropped similar proceedings after considering the Supreme Court’s decision in DSCL Sugar Ltd. and decisions of the Allahabad and Delhi High Courts.

That adjudication covered the period February 2015 to June 2017. The Commissioner had concluded that electricity produced from bagasse and sold to MSEDCL could not be subjected to the 6% payment under Rule 6(3). 

Importantly, the Tribunal noted that the adjudication order had been accepted by the Committee of Chief Commissioners and no appeal had been filed against it. Consequently, the issue had attained finality in that matter. 

The Supreme Court had held that bagasse is agricultural waste and residue and does not result from a manufacturing process. In the absence of manufacture, it cannot be treated as attracting Central Excise duty.

The Supreme Court further held that since bagasse was not manufactured, Rule 6 of the CENVAT Credit Rules, 2004 would have no application on that basis. 

CESTAT relied upon this settled position while examining the Department’s attempt to apply Rule 6(3) to electricity generated using bagasse.

The Mumbai Bench observed that the issue was no longer open for a contrary determination in view of the established judicial position.

The Tribunal held that there was no merit in the Commissioner’s order confirming the adjudged demand against the appellant. Accordingly, the impugned order dated 31 August 2017 was set aside. 

The Tribunal ultimately allowed the appeal in favour of the sugar manufacturer.

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