CESTAT sets aside CENVAT duty demand on cleared imported edible lactose under Section 3

CESTAT New Delhi allowed the appeal and set aside the demand for CENVAT duty on edible lactose. The appellant had imported edible lactose, processed part of it into pharma grade through job work, and cleared the remainder after reversing CENVAT credit. The Tribunal held that excise duty under Section 3 applies only to manufactured or produced goods, not merely cleared imported goods. Since the appellant had no manufacturing facility for edible lactose and only cleared imported inputs, no duty liability arose. The Commissioner failed to establish through evidence that the appellant manufactured edible grade lactose, making the demand unsustainable.

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The core legal question presented for consideration is whether the appellant was liable to pay Central Excise duty (CENVAT) on edible lactose cleared from its factory, given that it had imported the lactose and did not manufacture it. This central issue involves interpretation of the charging section under the Central Excise Act, 1944, specifically whether the duty applies to goods merely cleared from the factory or only to goods manufactured or produced in India.

Additional relevant questions include:

• Whether the lactose cleared was indeed edible lactose as claimed by the Revenue.
• Whether the appellant had the manufacturing facilities or had engaged in manufacturing of edible lactose.
• The applicability of the proviso to section 11A(1) and penalty provisions under section 11AC for alleged clandestine clearance without payment of duty.
• The legitimacy of the CENVAT credit availed by the appellant on inputs and input services related to the imported lactose.
• The effect of processing part of the imported edible lactose into pharma grade lactose through a job worker on the liability to pay duty on the unprocessed edible lactose cleared.

Issue-wise detailed analysis:

1. Nature of the lactose cleared - whether edible lactose or not

The Tribunal had earlier remanded the matter to the Commissioner to examine the nature of the lactose imported by the appellant. The Commissioner, after review, confirmed that the appellant had imported edible lactose as per the Bills of Entry submitted. This was not disputed by the appellant. The Commissioner relied on documentary evidence (Bills of Entry) to establish that 1567.320 MT of edible lactose was imported during the relevant period.

This finding was crucial because the Revenue's demand was premised on the clearance of edible lactose without payment of duty, which is an excisable good under the Act.

2. Whether the appellant manufactured edible lactose or merely cleared imported edible lactose

The appellant contended that it did not manufacture edible lactose at all, having no manufacturing facilities for either edible or pharma grade lactose. Instead, it imported edible lactose, availed CENVAT credit on the customs duty paid, and sent part of the imported lactose to a job worker for conversion into pharma grade lactose. The processed pharma grade lactose was received back, while the unprocessed edible lactose was cleared after reversal of CENVAT credit.

The Commissioner did not find or produce any evidence to contradict the appellant's claim of non-manufacture. The impugned order acknowledged the appellant's lack of manufacturing facilities and accepted that part of the lactose was processed externally. However, the Commissioner confirmed the demand on the basis that edible lactose was cleared from the factory without payment of duty, equating clearance with manufacture for the purpose of duty liability.

3. Interpretation of the charging section of the Central Excise Act, 1944

Section 3(1) of the Act provides that Central Excise duty (CENVAT) shall be levied on all excisable goods "which are produced or manufactured in India." The proviso clarifies duty on goods produced or manufactured by hundred percent export oriented undertakings but does not alter the fundamental requirement of manufacture or production within India for duty liability.

The Court emphasized that the charge of duty is on manufacture or production, not merely on clearance (removal from factory premises). Therefore, if the appellant had only imported edible lactose and cleared it without manufacturing it, no excise duty would be leviable on such clearance.

4. Application of law to facts and evidence

The Commissioner's order confirmed import of edible lactose and accepted the appellant's claim of no manufacture. However, the Commissioner failed to establish any manufacturing activity on the part of the appellant. The demand was confirmed on the basis of clearance of edible lactose from the factory, treating it as manufacture, which the Court found to be a fundamental error.

The appellant's reversal of CENVAT credit on the cleared edible lactose further indicated recognition of the input nature of the goods cleared. The loss of lactose during processing by the job worker was also recorded but did not affect the core issue of manufacture versus clearance.

5. Treatment of competing arguments

The Revenue relied on the premise that clearance of edible lactose without payment of duty amounted to evasion under the proviso to section 11A(1) and justified penalty under section 11AC. The appellant argued that no manufacture had taken place and therefore no duty was payable on clearance of imported edible lactose.

The Court found the Revenue's argument untenable in the absence of any evidence of manufacture. The charging section's clear language was decisive in favor of the appellant. The penalty and interest demands were thus unsustainable.

6. Conclusions on issues

The Court concluded that the appellant was not liable to pay Central Excise duty on edible lactose cleared from its factory, as it had not manufactured the lactose but merely imported and cleared it after processing part through a job worker. The impugned order confirming demand and penalty was set aside.

Significant holdings include the following verbatim reasoning:

"...the charge of duty of excise (known as CENVAT) is on manufacture or production of excisable goods and not merely on clearing them (i.e., taking goods out of the factory which it had not manufactured). The Commissioner lost sight of the charging section of the Act and confirmed the demand without establishing through any evidence that the appellant had manufactured edible grade lactose."

Core principles established:

• Central Excise duty under the Act is chargeable only on goods manufactured or produced in India, not merely on clearance of goods from the factory.
• Import of excisable goods and clearance thereof without manufacture does not attract Central Excise duty, provided CENVAT credit on customs duty is reversed appropriately.
• Revenue must establish manufacture or production to sustain demand of excise duty and penalties under the Act.

Final determinations:

• The appellant imported edible lactose and did not manufacture it.
• The clearance of edible lactose from the factory without manufacture does not attract Central Excise duty.
• The demand of Rs. 60,95,448/- Central Excise duty along with interest and equal penalty imposed under sections 11A(1) and 11AC of the Act was unsustainable.
• The impugned order confirming demand and penalty was set aside, and consequential relief granted to the appellant.

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