In a significant ruling on the integration of manufacturing operations, the Chennai Bench of the Customs, Excise & Service Tax Appellate Tribunal (CESTAT) has set aside the demand of over Rs. 10.77 lakhs, holding that an intermediate product arising unavoidably in the continuous manufacture of a dutiable final product cannot be treated as an exempted final product merely because it is exempt or cleared at nil rate of duty.
The CESTAT held that where ‘Processed Milk’ is manufactured by evaporating fresh milk and adding sugar and is either captively consumed in the manufacture of sugar-boiled confectionery or sent to job workers for such manufacture, it is an intermediate product forming an integral part of the continuous manufacture of the dutiable final product.
The manufacturing operation must be considered as an integrated whole, and an intermediate stage cannot be isolated to create an artificial ‘exempted final product’ for the purposes of Rule 6 of the CENVAT Credit Rules, 2004. Further, a product which emerges unavoidably or as a technological necessity in the course of manufacture of the principal final product is in the nature of a by-product, and Rule 6 is not attracted merely because such by-product is exempt or cleared at nil rate of duty, added the Tribunal.
A Single Technical Member M. Ajit Kumar observed that the preliminary issue for consideration was whether ‘Processed Milk’ could be regarded as an exempted final product for the purposes of Rule 6 of the CENVAT Credit Rules, 2004, noting that it was not in dispute that the product was neither cleared nor sold as such, but 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 such manufacture. The appellant explained that fresh milk received in tankers is evaporated until it attains 70–74° Brix, after which sugar is added to improve shelf life, with fresh milk and sugar being the principal ingredients on which no CENVAT credit is availed.
The Tribunal noted that Rules 3 and 6 of the CENVAT Credit Rules, 2004 must be read harmoniously, and that an intermediate activity which does not amount to manufacture cannot, merely by reason of that circumstance, result in the emergence of an ‘exempted final product’. An intermediate product captively consumed in, or sent to a job worker for, the manufacture of the dutiable final product cannot be equated with an exempted final product independently cleared from the factory.
Briefly, Lotte India Corporation Ltd., engaged in the manufacture of sugar confectionery falling under Chapters 17 and 18 of the Central Excise Tariff Act, 1985, also manufactures ‘processed milk’ classifiable under Chapter Heading 0402, which is either captively consumed in the manufacture of sugar confectionery or supplied to its sub-contractors for further use. Processed milk was exempt from duty under Notification No. 03/2006-CE dated March 01, 2006, and was treated as exempted goods for the purposes of Rule 6 of the CENVAT Credit Rules, 2004.
On verification of records, it appeared that the appellant had availed common input service credit for the manufacture of both dutiable and exempted goods without maintaining separate accounts, leading to the invocation of Rule 6 and the issuance of a Show Cause Notice dated April 04, 2014, proposing recovery of Rs. 4.17 lakhs for March 2013, along with penalty. For the period April 2013 to March 2014, although the appellant had reversed CENVAT credit under Rule 6(3A), the Department alleged the reversal to be deficient and issued further Show Cause Notices proposing recovery of Rs. 6.60 lakhs along with penalty. The demands and penalties were confirmed by the adjudicating authority and upheld by the Commissioner (Appeals).
