The Mumbai Bench of the Customs, Excise & Service Tax Appellate Tribunal (CESTAT) has held that organic manure emerging from the physical mixing of press mud and spent wash, being a by-product/waste arising during the manufacture of sugar and molasses, cannot be treated as a manufactured final product for the purpose of Rule 6 of the CENVAT Credit Rules, 2004. 

The bench of Justice Ajay Sharma (Judicial Member) and M.M. Parthiban (Technical Member) set aside central excise demands aggregating to ₹1,96,30,245, along with the consequential penalties and interest, and allowed the appeals filed by the assessee. 

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The assessee was engaged, inter alia, in the manufacture of sugar, molasses, denatured ethyl alcohol and other products falling under Chapters 17 and 22 of the First Schedule to 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, for utilisation towards payment of central excise duty on its final products. 

During the manufacture of sugar and allied products, sugarcane was crushed, resulting in four products—sugar juice, molasses, bagasse and press mud. Sugarcane juice and molasses underwent further processing for production of sugar and distillery products. Bagasse emerged as waste, while press mud represented impurities removed during filtration and purification of sugarcane juice. 

The press mud was deposited in a compost pit, where spent wash was added to it. The mixture was left for several days and subsequently emerged as organic manure, which was sold in bags of 40 to 50 kilograms. The assessee cleared the organic manure without payment of central excise duty, treating it as waste product not chargeable to excise duty. 

The dispute arose because the assessee had not maintained separate accounts of common inputs and input services used in relation to dutiable final products and exempted/non-dutiable products such as organic waste.

The Department took the view that the assessee was required to reverse CENVAT credit attributable to the exempted goods under Rule 6(3)(i) of the CENVAT Credit Rules, 2004, at the rate of 6% of the value of the exempted goods. 

The original authority ultimately confirmed a total central excise demand of ₹1,96,30,245, invoking Rule 14 of the CENVAT Credit Rules, 2004 read with Section 11A(1) of the Central Excise Act, 1944. Interest was also ordered and an equivalent penalty was imposed under Section 11AC of the Central Excise Act. 

The Commissioner (Appeals), Nagpur, upheld the adjudication orders through orders dated February 13, 2019 and June 28, 2019. The assessee thereafter approached the CESTAT. 

Before the Tribunal, the assessee submitted that the issue had already been settled in its favour through several judicial decisions.

Among the authorities relied upon were the decisions in Perti Power Sugar Limited, Balrampur Chini Mills Limited, Union of India v. DSCL Sugar Ltd., Rallis India Limited v. Union of India, and Bhaurao Chavan SSK Ltd.

The Department, on the other hand, reiterated the findings contained in the orders under challenge. 

The Tribunal identified the central issue as whether the assessee was liable to pay CENVAT amounts in respect of clearances of organic manure without payment of central excise duty and whether the demands confirmed by the lower authorities were legally sustainable. 

The Bench noted that the issue had already been considered in a series of decisions and that the Tribunal had consistently held that bagasse, press mud, boiler ash and other organic waste emerging as waste or by-products fall outside the scope of Rule 6.

According to the Tribunal, even if an amendment to Rule 6 had the effect of treating a by-product as exempted goods, such amendment could not convert the by-product into a manufactured good. The essential character of bagasse, press mud, boiler ash or organic waste remained that of waste or residue rather than a final manufactured product. 

The Tribunal placed particular reliance on the Supreme Court’s decision in Union of India v. DSCL Sugar Ltd.

As noted by the CESTAT, the Supreme Court had examined the definitions of “excisable goods” and “manufacture” under the Central Excise Act and held that bagasse, being agricultural waste and residue and not being the result of a manufacturing process, could not be treated as falling within the definition of manufacture in the absence of a specific process deemed to constitute manufacture. Consequently, there could be no excise duty in the absence of manufacture. 

The CESTAT found this principle applicable to the dispute before it because the organic manure emerged through physical mixing of two by-products—press mud and spent wash. 

The Bench also relied upon its earlier decision concerning Purti Power Sugar Ltd., involving an identical factual situation.

In that case, the Tribunal had held that the emergence of a by-product during manufacture of the principal product should not be brought within Rule 6(3) of the CENVAT Credit Rules for requiring payment of the prescribed amount.

The earlier decision had relied upon the Bombay High Court judgment in Rallis India Ltd. v. Union of India, holding that Rule 6(3) would not apply to by-products emerging during manufacture of the main product. 

The CESTAT further referred to its decision in Bhaurao Chavan SSK Ltd., where the Tribunal had considered press mud, bagasse, boiler ash and sludge generated during sugar manufacture.

The Tribunal reiterated the principle that Rule 6(3) applies where a manufacturer manufactures both dutiable final products and exempted final products using common CENVAT inputs. However, where bagasse, press mud or boiler ash merely emerge as waste or residue during manufacture of sugar and molasses, the manufacturer cannot be said to be manufacturing those by-products. 

The Tribunal also took note of the subsequent position concerning the CBIC circular dated April 25, 2016. It recorded that the circular had been rescinded by CBIC Circular No. 1084/05/2022-CX dated July 7, 2022, following the Supreme Court’s order in Union of India v. Indian Sucrose Limited. 

The Tribunal noted that the Supreme Court, while dismissing the Revenue’s Special Leave Petition in Indian Sucrose Limited, had relied upon its earlier judgment in DSCL Sugar Ltd., holding bagasse to be non-excisable and observing that the CENVAT Credit Rules had no application to it.

The Tribunal therefore concluded that press mud, bagasse, boiler ash and sludge emerging as waste or by-products fall outside the purview of Rule 6. 

 CESTAT held that the dispute was no longer res integra. It found no merit in the Commissioner (Appeals)’ orders upholding the adjudged demands.

The Tribunal accordingly set aside the orders dated February 13, 2019 and June 28, 2019, and allowed all three appeals filed by the assessee. 

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