Mineral Oil Sludge and CENVAT Credit: Residue in storage tanks is not excisable, and no proportionate reversal was required.

Mineral oil sludge settling in storage tanks was treated as residue or waste, not a manufactured product, so it fell outside the Central Excise Tariff and was not excisable. On the CENVAT issue, Rule 3(3) of the CENVAT Credit Rules, 2002 was held inapplicable because the material cleared was sludge at the bottom of the tank, not an input removed as such; accordingly, no proportionate reversal of credit was required. The demand, penalty, and interest were therefore unsustainable, and the assessee obtained consequential relief.

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Issues: (i) Whether mineral oil sludge accumulated in storage tanks was excisable. (ii) Whether the assessee was required to reverse proportionate Cenvat credit in relation to the sludge cleared from the tank.

Issue (i): Whether mineral oil sludge accumulated in storage tanks was excisable.

Analysis: The sludge was treated as a residue settling at the bottom of tanks during storage of petroleum products and not as a manufactured product. The Board circular expressly clarified that mineral oil sludge falls outside the scope of the Central Excise Tariff because it is not manufactured. The Tribunal also noted that prior decisions had taken the same view.

Conclusion: Mineral oil sludge was not excisable and did not fall within the Central Excise Tariff.

Issue (ii): Whether the assessee was required to reverse proportionate Cenvat credit in relation to the sludge cleared from the tank.

Analysis: Rule 3(3) of the CENVAT Credit Rules, 2002 was held inapplicable because the removal was not of an input as such. What was removed was only sludge settled at the bottom of the tank, treated as waste, and the issue had already been decided in favour of the assessee in its own earlier cases.

Conclusion: No reversal of proportionate Cenvat credit was required.

Final Conclusion: The demand, penalty, and interest were unsustainable, and the assessee succeeded in the appeal with consequential relief.

Ratio Decidendi: Sludge that merely accumulates during storage of petroleum products is not a manufactured excisable product, and its clearance does not attract proportionate reversal of Cenvat credit under Rule 3(3) when the removed material is only waste or residue and not the input as such.

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