The Customs, Excise & Service Tax Appellate Tribunal (CESTAT) New Delhi has held that waste and scrap generated incidentally in the course of manufacture of a final product cannot be said to have been “manufactured” within the meaning of Rule 6(1) of the CENVAT Credit Rules, 2004. Rule 6(1), even after the insertion of the Explanation extending its scope to non-excisable goods, applies only where exempted or non-excisable goods are actually manufactured using the same inputs as dutiable goods.

Since waste and scrap merely arise as an incidental consequence of the manufacturing process and are not manufactured goods, the obligation to reverse proportionate CENVAT credit under Rule 6(1) does not arise. Accordingly, the CESTAT set aside the impugned order of recovery Rs. 22.59 lakhs with consequential relief to the appellant.

A Technical Member P.V. Subba Rao observed that waste and scrap are never manufactured by any manufacturer and do not even constitute a byproduct. They arise incidentally in the course of manufacture of the final product, as distinct from byproducts such as molasses, which are manufactured alongside the main product of sugar.

The Tribunal drew an analogy to illustrate this distinction, i.e., metal scrap arises when a piece of metal is ground or a sheet is cut to make a particular part; spent solvent results from the use of solvents in the manufacturing process; and used lubricating oil, aluminium dross, and bio-compost are all wastes that arise in the course of manufacture of the final product, none of which can be said to have been manufactured.

The Tribunal further observed that Rule 6(1) of the CCR is confined in its operation to cases where the same inputs are used for the manufacture of both dutiable and exempted goods, and does not extend to cover cases where inputs have incidentally gone into the waste and scrap generated during the manufacturing process.

Briefly, the appellant, a manufacturer of scooters, motorcycles, and their parts, was subject to a show cause notice covering the period April 2016 to March 2017. In the course of its manufacturing operations, the appellant generated waste and scrap in the form of metal scrap, bio-compost, spent solvent, aluminium dross, and used lubricating oil, all of which were sold by the appellant for a consideration.

The Assistant Commissioner ordered recovery of Rs. 22.59 lakhs as ineligible CENVAT credit under Rule 6(1) of the CENVAT Credit Rules, 2004 read with Section 11A of the Central Excise Act, 1994, along with interest under Section 11AA and penalty of an equal amount under Section 11AC of the Act read with Rule 15(1) of the CCR.

Appearances:

Deepali and Shivam Bansal, Advocates, for the Appellant

V.J. Saharan, Authorised Representative, for the Respondent