2023 (8) TMI 654 - AT - Central Excise

Manufacturers of edible oil win appeal on excise duty evasion charges, by-products deemed exempted goods

M/s. HABIB AGRO INDUSTRIES Versus C.C.,C.E. & S. T-MYSORE And M.K. AGROTECH (P) LTD. Versus C.C.,C.E. & S. T-MYSORE

The Tribunal allowed the appeals of the appellants, engaged in the manufacture of edible refined oil, setting aside the demand, interest, and penalties ... Clandestine Removal - edible refined oil - acid oil - fatty acids - gums - waxes - exempt under Notification No.89/95-CE dated 18.05.1995 as waste or not - demand alongwith interest and penalty - HELD THAT:- The findings of Larger Bench wherein the Larger Bench in the matter of M/S RICELA HEALTH FOODS LTD., M/S J.V.L. AGRO INDUSTRIAL LTD., M/S KISSAN FATS LIMITED VERSUS CCE, CHANDIGARH, ALLAHABAD [2018 (2) TMI 1395 - CESTAT NEW DELHI] through detailed chart explained the process of manufacturing of refined rice bran oil and generation of waste at each stage of manufacture. There is nothing on record to show that the manufacturing of acid oil is excluded from the said process of manufacturing of edible oil. The issue whether “acid oil” can be treated as a waste during the course of manufacture was considered in the case of M/S VINAYAK AGROTECH LTD. VERSUS CCE & ST, JAIPUR–I [2017 (11) TMI 598 - CESTAT NEW DELHI], and it is categorically held that acid oil is a waste and not a by-product. Hence eligible for the benefit of Notification No.89/95-CE dated 18.05.1995. The issue involved in the appeals has been settled by Larger Bench in the matter of Ricela Health Foods Ltd and the other benches of the Tribunal in similar cases. The impugned orders confirming demand with interest and imposition of penalty in all the above appeals are not sustainable - Appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether acid oil, fatty acids, gums and waxes recovered during refining of crude rice-bran oil are excisable manufactured goods or constitute waste/refuse not chargeable to central excise. 2. Whether exemptive Notification No.89/95-CE applies to such goods for periods prior to and after the statutory amendment to the definition of 'excisable goods' effected by Section 78, Finance Act, 2008 (w.e.f. 10.05.2008), and the legal effect of that amendment on entitlement to exemption. 3. Whether demands, interest and penalties imposed for clandestine clearance of the said goods are sustainable in view of the factual and legal characterisation of the goods as waste. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Excisability: legal framework Legal framework: Central excise levy applies to 'manufactured' goods; the Court examines whether the products in question are 'manufactured' within the meaning of excise law. The test requires transformation into a new and different article having a distinct name, character or use. Precedent treatment: The Tribunal relied on the ratio of the Apex Court decisions holding that incidental residues/dross, arising inevitably in the course of manufacture and not constituting a transformation into a new article, are not exigible (authority establishing that mere saleability or value does not convert waste into manufactured excisable goods). Interpretation and reasoning: The Tribunal analysed the refining process of crude rice-bran oil - degumming, de-waxing, deacidification/deodorisation and distillation - and found that gums, waxes and fatty acid distillates emerge as materials removed to obtain the intended final product (refined oil). The processes are directed to producing refined oil; the incidental residues are generated by removal operations and are not produced as the object of manufacture. Applying the Apex Court's transformation test, these residues do not attain the requisite change in identity, description or use to qualify as manufactured goods. Ratio vs. Obiter: The holding that the residues (gums, waxes, fatty acid distillate/acid oil) are waste and not manufactured goods is ratio, grounded on the Apex Court's tests and applied to the factual manufacturing sequence. Conclusion: Acid oil, fatty acids, gums and waxes arising during refining of crude rice-bran oil are incidental waste/refuse and are not excisable manufactured goods. Issue 2 - Applicability of Notification No.89/95-CE and effect of statutory amendment Legal framework: Notification No.89/95-CE exempts goods classifiable as waste arising during manufacture of refined edible oil. Separately, w.e.f. 10.05.2008, Section 78, Finance Act, 2008 amended the statutory definition of 'excisable goods' by adding an explanation deeming any article/material capable of being bought and sold for consideration to be 'goods' and 'marketable', thereby broadening the scope of excisability. Precedent treatment: The Tribunal considered a Larger Bench decision which applied the Apex Court's tests to hold that the same residues are waste and therefore covered by Notification No.89/95-CE; that Larger Bench view was affirmed by the Apex Court subsequently. Interpretation and reasoning: The Tribunal reconciled the pre-amendment legal position (where the residues were held non-excisable waste and covered by the exemption) with the post-amendment statutory position. It observed that the Larger Bench's detailed factual and legal analysis concluded the residues are waste and within the exemption. The Tribunal further noted that there is no record showing acid oil to be outside the manufacturing sequence of edible oil processing. Where the amendment to the definition has been interpreted by other fora to bring marketable residues within chargeability, the Tribunal relied on the Larger Bench and subsequent Apex Court affirmation which maintained the non-excisability/waste character for the facts at hand. Ratio vs. Obiter: The conclusion that Notification No.89/95-CE covers the residues for the periods in dispute, even in the face of the statutory amendment, is ratio with respect to the facts and the binding Larger Bench/Apex Court treatment; any general remarks on the amendment's scope beyond the applied precedents are obiter. Conclusion: For the factual manufacturing process under consideration, Notification No.89/95-CE applies and the residues are exempt as waste; the Tribunal followed the Larger Bench and subsequent affirmation, concluding the amendment does not render these particular residues exigible for the periods adjudicated. Issue 3 - Sustainability of demand, interest and penalty for clandestine clearance Legal framework: Demand, interest and penalty arise only if goods are exigible and clandestine clearance is established; if goods are not excisable, no duty or penalty can be lawfully sustained. Precedent treatment: Decisions cited by the appellants and the Larger Bench support the proposition that unintended by-products/waste are non-excisable even if saleable, and thus cannot sustain demands/penalties premised on excise liability. Interpretation and reasoning: Applying the determination that the goods are waste and exempt under Notification No.89/95-CE, the Tribunal found the impugned orders confirming demand, interest and penalties unsustainable. The Tribunal noted the Commissioner (Appeals) had already set aside demands for periods prior to the relevant amendment; for the post-amendment period the Tribunal relied on binding precedent treating the same materials as waste and on the lack of evidence that acid oil was produced outside the ordinary refining sequence. Ratio vs. Obiter: The finding that demands, interest and penalties are not sustainable in the appeals before the Tribunal is ratio, premised on the non-excisability holding. Any discussion of alternative reliefs (e.g., eligibility under a separate turnover threshold exemption) was expressly not decided and remains obiter or reserved. Conclusion: The demands, interest and penalties confirmed by adjudication for the challenged periods are set aside; the appeals are allowed with consequential relief. The Tribunal did not adjudicate the separate claim regarding entitlement under turnover-based exemption Notification No.8/2002 (left unconsidered). Cross-references and final disposition All issues are interlinked: the excisability determination is determinative of entitlement to Notification No.89/95-CE and thereby controls the validity of demands and penalties. The Tribunal followed the Larger Bench's factual application of the Apex Court's transformation test; that line of authority was treated as determinative and led to setting aside of the impugned demands and penalties for the appeals before the Tribunal. The question of eligibility under the separate turnover exemption was expressly not decided and remains open for adjudication.