2023 (6) TMI 459 - HC - Central Excise

High Court: Bagasse is agricultural waste, not a product. Cenvat Credit Rules inapplicable. Circular invalidated.

The High Court ruled that bagasse is an agricultural waste, not a manufactured product, making Rule 6 of the Cenvat Credit Rules, 2004 inapplicable to ... CENVAT Credit - inputs and input services used in manufacture of both taxable as well as exempted goods - reversal of proportionate Cenvat credit or pay an amount equal to 6% of the value of the exempted goods - bagasse - agricultural waste or not - HELD THAT:- The issue / question as to whether bagasse is an agricultural waste or a manufactured product so as to attract Rule 6 came up for consideration before the Apex Court in DSCL Sugar’s [2015 (10) TMI 566 - SUPREME COURT], wherein it was held that CENVAT credit in respect of electricity was denied only on the premise that Bagasse attracts excise duty and consequently Rule 6 of the CENVAT Credit Rule is applicable. Since this action of the appellant is found to be erroneous, all these appeals of the Revenue also stand dismissed. As can be seen from the aforesaid judgment, the Apex Court clearly held that bagasse was agricultural waste and was not a manufactured product and consequently, the provisions of Rule 6 were not applicable to bagasse; the Apex Court further held that Rule 6 was also not applicable to Electricity generated from bagasse. Under these circumstances, the Demands made by the respondents on the petitioner in relation to the periods up to February, 2015 were dropped on the basis of the said judgment of the Apex Court in DSCL Sugar’s case. By Notification bearing No.6 / 2015 – CE(NT), various provisions of the said Rules were amended including Rule 6 supra w.e.f. 01.03.2015 - As can be seen from the amendment, Explanation (1) was inserted, which provided that non-excisable goods cleared for consideration shall also be considered to be exempted goods or final products/finished goods for the purpose of explanation of the said Rule 6 referred to supra. In pursuance of the same, the Central Board of Excise and Customs issued Circular No.1027/15/2016-CX dated 25.04.2016 clarifying that consequent to the amendment the aforesaid Rule 6 w.e.f. 01.03.2015, bagasse would be considered as exempted goods. As can be seen from the aforesaid Circular, the respondents have referred to the judgment of the Apex Court in DSCL Sugar’s case, as well as the 2015 amendment to Rule 6 of the said Rules of 2004 for the purpose of directing the bagasse, which are non-excisable goods and are cleared for consideration from the factory need to be treated like exempted goods for the purpose of reversal of credit of input and input services in terms of Rule 6 of the said Rules of 2004; in other words, by virtue of the said Circular, the respondents sought to overcome the judgment of the Apex Court in DSCL Sugar’s case supra and invoke the 2015 amendment to Rule 6 for the purpose of making the said Rule 6 applicable to bagasse. The Allahabad High Court in Balarampur Chini Mill’s case [2019 (5) TMI 972 - ALLAHABAD HIGH COURT] quashed the said Circular as well as the impugned show-cause notice; while doing so, the Allahabad High Court came to the categorical conclusion that despite the 2015 amendment to Rule 6 of the said Rules of 2004, bagasse were not manufactured products, but continued to remain agricultural waste and residue and that the judgment of the Apex Court in DSCL Sugar’s case supra, continued to apply and operate and govern bagasse even after the 2015 amendment. The High Court also held that the 2015 amendment was not applicable to bagasse, since it was not a manufactured product/goods and consequently, the said Circular dated 25.04.2016 was illegal and arbitrary and contrary to law and the same was accordingly quashed. Subsequently, the said judgment in Balarampur Chini Mill’s case supra was followed by the Division Bench of the Punjab and Haryana High Court in the case of Indian Sucrose Limited Vs. Union of India and Others [2020 (3) TMI 1413 - PUNJAB AND HARYANA HIGH COURT], wherein the quashment of the aforesaid Circular dated 25.04.2016 was noticed and the show-cause notice issued by the respondents-Revenue was set aside. The material on record also discloses that the show cause notice dated 21.10.2016 for the period October-2015 to March-2016 issued by the respondents to the petitioner was dropped and the appeal by the respondents was dismissed by the Appellate Authority on 09.08.2021. Thus, bagasse is not a manufactured product and Rule 6 of the Cenvat Credit Rules, even after 2015 amendment is not applicable to bagasse nor to electricity generated from bagasse coupled with the fact that the Circular dated 25.04.2016 issued by the respondents pursuant to the 2015 amendment to Rule 6 having not only been quashed, but the same having been rescinded by the respondents by issuance of the Circular dated 07.07.2022 and consequently, the respondents did not have jurisdiction or authority of law to issue the impugned show cause notice and Statement of Demand, which deserve to be quashed. Petition allowed. Issues Involved:1. Whether bagasse is an agricultural waste or a manufactured product.2. Applicability of Rule 6 of the Cenvat Credit Rules, 2004 to bagasse.3. Validity of the Circular No. 1027/15/2016-CX dated 25.04.2016.4. Legality of the impugned show-cause notice and statement of demand.Summary:Issue 1: Whether bagasse is an agricultural waste or a manufactured product.The High Court reiterated the Apex Court's decision in DSCL Sugar Ltd. (2015) that bagasse is an agricultural waste and not a manufactured product. Consequently, Rule 6 of the Cenvat Credit Rules, 2004, was inapplicable to bagasse and electricity generated using bagasse.Issue 2: Applicability of Rule 6 of the Cenvat Credit Rules, 2004 to bagasse.The Court noted that Rule 6 was amended on 01.03.2015 to include non-excisable goods cleared for consideration as exempted goods. However, the Court held that despite the 2015 amendment, bagasse remained an agricultural waste and not a manufactured product. Therefore, Rule 6 was inapplicable to bagasse.Issue 3: Validity of the Circular No. 1027/15/2016-CX dated 25.04.2016.The Court observed that the Circular, which treated bagasse as exempted goods for the purpose of reversal of credit of input and input services, was quashed by the Allahabad High Court in Balarampur Chini Mills Ltd. and followed by the Punjab and Haryana High Court in Indian Sucrose Limited. The Apex Court confirmed this by dismissing the SLP against the Punjab and Haryana High Court's decision. The Circular was subsequently rescinded by the Central Board of Indirect Tax and Customs on 07.07.2022.Issue 4: Legality of the impugned show-cause notice and statement of demand.The Court held that the impugned show-cause notice and statement of demand, based on the quashed and rescinded Circular, were illegal and without jurisdiction. Additionally, the demand for the period October 2015 to March 2016 had already been dropped and attained finality, thus barring further demands for the same period under the principles of res judicata and issue estoppel.Order:(i) The petition is allowed.(ii) The impugned Show Cause Notice dated 30.03.2017 and the Statement of Demand dated 25.10.2017 are quashed.