The Chennai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has ruled that processed milk captively consumed or supplied to job workers for manufacturing sugar-boiled confectionery cannot be treated as an “exempted final product” for invoking Rule 6 of the CENVAT Credit Rules, 2004.
The bench of M. Ajit Kumar (Technical Member) observed that processed milk was merely an intermediate product forming an integral part of the continuous manufacture of dutiable confectionery. Its captive consumption or removal to job workers for further manufacture did not transform it into an independently manufactured exempted final product.
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The appellant/assessee is engaged in manufacturing sugar confectionery falling under Chapters 17 and 18 of the Central Excise Tariff Act, 1985.
During the manufacturing process, the company also produces processed milk, stated to fall under Chapter Heading 0402. This processed milk is either captively consumed in manufacturing sugar confectionery or supplied to subcontractors for further use in the manufacture of confectionery.
Since processed milk was exempt from central excise duty under Notification No. 3/2006-CE dated March 1, 2006, the department treated it as an exempted product for the purposes of Rule 6 of the CENVAT Credit Rules.
On scrutinising the company’s records, the department alleged that common input services had been used in manufacturing both dutiable confectionery and exempted processed milk without maintaining separate accounts.
A show-cause notice dated April 4, 2014, consequently proposed the recovery of ₹4,17,126 for March 2013, along with a penalty.
For the period from April 2013 to March 2014, the company had reversed CENVAT credit under Rule 6(3A). The department, however, alleged that the amount reversed was deficient. Further notices were issued proposing the recovery of ₹6,60,643, along with a penalty.
The adjudicating authority confirmed the demands and penalties. The Commissioner (Appeals) subsequently upheld the decision, prompting the company to approach the CESTAT.
The company argued that processed milk could not be treated as an exempted final product under Rule 6 because it was neither cleared nor sold independently.
It was either used within the factory for manufacturing sugar-boiled confectionery or sent to job workers for use in the same manufacturing process. Rule 6, according to the company, applies where a manufacturer manufactures both dutiable and exempted final products and not where an intermediate product is used in producing the dutiable final product.
The company explained that fresh milk received in tankers was evaporated until it attained a concentration of 70 to 74 degrees Brix. Sugar was then added to improve its shelf life. Fresh milk and sugar were the principal ingredients, and no CENVAT credit was availed on these materials.
Without prejudice to its principal submission, the company contended that it had already reversed the proportionate CENVAT credit under Rule 6(3A).
If the department believed that the reversal was insufficient or was not calculated strictly in accordance with the prescribed formula, it could, at most, recover the differential credit required to be reversed. There was no legal basis for demanding 6% of the value of the processed milk.
The company further submitted that the adjudicating authority had failed to consider the credit already reversed or determine the alleged short reversal with reference to the statutory formula.
It also challenged the invocation of the extended limitation period, contending that there was no suppression of facts or intention to evade duty. The dispute related only to the method of computing the reversal. It consequently argued that interest, penalties and the appropriation of ₹88,524 were also unsustainable.
The revenue department maintained that processed milk was a fully manufactured and exempted product. Its captive consumption in confectionery production or removal to job workers did not, according to the department, alter its character as a final product.
Since common input services were used for both dutiable confectionery and exempted processed milk, the department argued that Rule 6 was applicable.
The company had not maintained separate accounts as required by Rule 6(2). It was, therefore, required either to pay 6% of the value of the exempted goods or reverse the amount determined in accordance with Rule 6(3A).
The department alleged that the company had initially neither paid 6% nor properly exercised the option available under Rule 6(3A). Its claim that the reversal of common input-service credit was sufficient was also stated to be unsupported by evidence.
The Tribunal identified the preliminary question as whether processed milk could be regarded as an exempted final product for applying Rule 6 of the CENVAT Credit Rules.
It noted that the processed milk was neither independently cleared nor sold. It arose at an intermediate stage and was either captively consumed in the manufacture of sugar-boiled confectionery or sent to job workers for use in that manufacture.
The CESTAT held that Rules 3 and 6 of the CENVAT Credit Rules must be read harmoniously. Credit is admissible where inputs are used in or in relation to the manufacture of a final product, while Rule 6 applies when common inputs or input services are used for manufacturing dutiable and exempted final products.
The Tribunal held that an intermediate activity which does not amount to manufacture cannot, merely for that reason, result in the emergence of an exempted final product.
Similarly, an intermediate product captively consumed or sent to a job worker for manufacturing a dutiable final product cannot be equated with an exempted final product independently cleared from the factory.
The Tribunal also considered the CBEC circular dated September 26, 2007, which clarified that where a process does not amount to manufacture, no duty is payable and credit on inputs used exclusively in that activity would not be admissible.
It, however, held that the circular did not address the distinct situation in which an intermediate product arises during the integrated manufacture of a dutiable final product and is subsequently used in or in relation to that manufacture.
The circular’s application, therefore, had to be examined in the context of the complete manufacturing process instead of isolating one intermediate stage.
The CESTAT relied upon the Supreme Court’s ruling in Collector of Central Excise v. Eastend Paper Industries Ltd.
In that decision, the Supreme Court held that where a process is so integrally connected with the ultimate production of goods that, without it, manufacture would be commercially inexpedient, the articles required in that process would fall within the expression “in the manufacture of goods”.
The Tribunal observed that the ruling supported the proposition that the manufacturing operation must be considered as an integrated whole.
It also referred to the Bombay High Court’s decision in Rallis India Ltd. v. Union of India, which was affirmed by the Supreme Court in Union of India v. Hindustan Zinc Ltd.
Those rulings held that a product emerging unavoidably or as a technological necessity during the manufacture of the principal final product is in the nature of a by-product. The obligation to pay an amount under Rule 57CC of the erstwhile Central Excise Rules or Rule 6 of the CENVAT Credit Rules is not attracted merely because such a by-product is exempt or chargeable to nil duty.
The Tribunal concluded that processed milk was only an intermediate product forming an integral part of the continuous manufacture of sugar-boiled confectionery.
It was neither manufactured as an independent final product nor cleared as such. Its captive consumption or removal to job workers for further manufacture did not change its essential character as an intermediate product.
The CESTAT consequently held that processed milk could not be treated as an exempted final product for invoking Rule 6 of the CENVAT Credit Rules, 2004.
Since the entire demand was based on the contrary premise that processed milk was an exempted final product, the Tribunal found the demand unsustainable.
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