2011 (10) TMI 2 - SC - Central Excise

Metal scrap from repair of cement-plant machinery is not manufacture and not excisable; Section Note only extends tariff coverage

M/s. Grasim Industries Ltd. Versus Union of India

SC held that metal scrap generated during repair of cement-plant machinery is not a result of manufacture of the final product and therefore not excisable ... Demand - Whether the metal scrap or waste generated whilst repairing of worn out machineries or parts of cement manufacturing plant amounts to manufacture, and thereby, is excisable to excise duty - meaning of the word 'process' - Definition and Applicability of Manufacture - HELD THAT:- It is not in dispute that these M.S. Scrap and Iron Scrap are excisable goods under Section 2(d) of the Act falling under the Chapter heading 72.04 in the Schedule to the Tariff Act read with Note 8 (a) to Section XV of the Tariff Act as 'metal scrap and waste'. We are of the opinion that Section Note has very limited purpose of extending coverage to the particular items to the relevant tariff entry in the Schedule for determining the applicable rate of duty and it cannot be readily construed to have any deeming effect in relation to the process of manufacture as contemplated by Section 2(f) of the Act, unless expressly mentioned in the said Section Note. It is clear that the process of repair and maintenance of the machinery of the cement manufacturing plant, in which M.S. scrap and Iron scrap arise, has no contribution or effect on the process of manufacturing of the cement, which is the excisable end product, as since welding electrodes, mild steel, cutting tools, M.S. Angles, M.S. Channels, M.S. Beams etc. which are used in the process of repair and maintenance are not raw material used in the process of manufacturing of the cement, which is the end product. The issue of getting a new identity as M.S. Scrap and Iron Scrap as an end product due to manufacturing process does not arise for our consideration. The repairing activity in any possible manner cannot be called as a part of manufacturing activity in relation to production of end product. Therefore, the M.S. scrap and Iron scrap cannot be said to be a by-product of the final product. At the best, it is the by-product of the repairing process which uses welding electrodes, mild steel, cutting tools, M.S. Angles, M.S. Channels, M.S. Beams etc. In the result, the appeal is allowed and the impugned Judgment and the Order of the High Court is set aside and the Order dated 09.08.2005 of the Tribunal is restored. Issues Involved:1. Whether metal scrap or waste generated during the repair of worn-out machinery in a cement manufacturing plant amounts to manufacture and thereby is subject to excise duty.Detailed Analysis:Issue 1: Definition and Applicability of Manufacture- The primary issue is whether the metal scrap or waste generated during the repair of machinery in a cement manufacturing plant constitutes 'manufacture' under the Central Excise Act, 1944, and is thus subject to excise duty.- The High Court had set aside the Tribunal's decision, which had dropped the duty demand and penalty, by holding that the generation of scrap is incidental or ancillary to the manufacture of spare parts, thus constituting manufacture.- The Tribunal had previously ruled that the metal scrap and waste did not arise from any manufacturing activity and were not excisable, referencing the decision in CCE v. Birla Corpn. Ltd., 2005 (181) ELT 263.Issue 2: Interpretation of Section 2(f) of the Central Excise Act- The assessee argued that the definition of 'waste and scrap' under Note 8(a) to Section XV of the Central Excise Tariff Act does not deem the generation of waste and scrap during repair as a manufacturing process.- The assessee's counsel contended that unless the product is manufactured in the sense of Section 2(f) of the Act, it does not attract excise duty under Section 3 of the Act.- The Revenue argued that metal scrap and waste are excisable goods under Section 2(d) of the Act and are generated during repair, which is incidental to the manufacture of cement.Issue 3: Judicial Precedents on Manufacture- The Supreme Court referenced several decisions to elucidate the meaning of 'manufacture,' including Union of India v. Delhi Cloth and General Mills Co. Ltd., AIR 1963 SC 791, and Shyam Oil Cake Ltd. v. CCE, (2005) 1 SCC 264.- The Court emphasized that excise duty is levied on the manufacture of goods, and merely listing an item in the tariff schedule does not make it excisable unless it is produced or manufactured in India.- The Court also highlighted that the process must lead to the creation of a new, distinct, and excisable product.Issue 4: Distinction Between Repair and Manufacture- The Court noted that the repair and maintenance of machinery, which generates M.S. scrap and Iron scrap, do not contribute to the manufacturing process of cement.- The materials used in repair (e.g., welding electrodes, mild steel) are not raw materials for cement production.- The Court concluded that the scrap generated from repair activities is not a by-product of the final product (cement) but of the repair process itself.Issue 5: Reliance on CST v. Bharat Petroleum Corpn. Ltd.- The Revenue's reliance on CST v. Bharat Petroleum Corpn. Ltd., where subsidiary products were considered manufactured goods, was deemed inapplicable.- The Court clarified that metal scrap and waste from repair activities do not arise regularly and continuously in the course of manufacturing cement and cannot be treated as subsidiary products.Conclusion:- The Supreme Court set aside the High Court's judgment, restoring the Tribunal's order that had dropped the duty demand and penalty.- The Court held that the metal scrap and waste generated during the repair of machinery do not amount to manufacture under Section 2(f) of the Act and are not subject to excise duty.