2025 (10) TMI 5 - AT - Central Excise

Lead acid batteries recovered from ships classifiable under Chapter 85.07; Note 9 to Section XV not applicable, duty waived

Madhav Industrial Corporation Versus Commissioner of C.E. & S.T. -Bhavnagar

CESTAT held that goods cleared by the appellant as lead acid batteries recovered from old ships are classifiable under Chapter 85.07, not as lead waste or ... Classification of goods - “Lead Acid Batteries” obtained from old and used ships, boats etc. - classifiable under Chapter heading 85.07 or Chapter heading 78.02 of the Central Excise Tariff Act, 1985 - HELD THAT:- It is clear that the appellant is clearing “Lead Acid Batteries” to their buyers which by any stretch of imagination, cannot be equated with “Lead waste and Scrap” classifiable under Chapter Heading 78.02. It is also clear from the say of the appellant that they are not registered with Gujarat Pollution Control Board for processing goods like Lead Acid Batteries and therefore, they are clearing these goods to their buyers who have license/ permission from Pollution Control Board for processing old/ used Lead Acid Batteries for extraction of lead scrap. It therefore transpires that what is coming out of old ship are “Lead Acid Batteries” which the appellant are selling to their buyers and so their classification is appropriate under Chapter 8507 and not under 78.02 as lead scrap. Had the appellant been processing such Lead Acid Batteries at their own premises and then clearing Lead waste and scrap to buyers, it would have been appropriately classified under Chapter 78.02. In that case, Note 9 to Section XV would have made the process as amounting to manufacture and duty would have been leviable. In the present facts, this being not the case, the arguments of the Appellant agreed upon and it is held that old and used Lead Acid Batteries cleared by the appellant are classifiable under Chapter heading 8507. Otherwise also, whether under Customs or even under Central Excise Law, goods are to be classified in the form in which they get cleared and not according to what will happen to them post clearance. Since the goods of Chapter Heading 8507 are not governed by Note 9 to Section XV of the Central Excise Tariff Act,1985, these goods do not amount to manufacture and hence, not liable to central excise duty. The impugned order is set aside - appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether lead-acid batteries recovered from old and used ships/boats constitute goods classifiable under Chapter heading 85.07 (batteries) or under Chapter heading 78.02 (lead waste and scrap) of the Central Excise Tariff Act, 1985. 2. Whether the process of obtaining lead-acid batteries by breaking up ships amounts to 'manufacture' under Note 9 to Section XV of the Central Excise Tariff Act, 1985, thereby rendering such goods leviable to central excise duty. 3. Whether removal of lead-acid batteries prior to ship breaking (for safety/operational reasons) affects classification and excisability. 4. Whether penalty under the Central Excise Act is imposable where the appellant sold recovered lead-acid batteries to authorised recyclers and did not itself extract lead scrap. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Classification: 85.07 vs. 78.02 Legal framework: Classification is governed by the Central Excise Tariff Act, 1985 headings. Chapter 85.07 specifically lists lead-acid batteries; Chapter 78 covers lead and articles thereof including lead waste and scrap. Goods are to be classified in the form in which they are cleared. Precedent treatment: The Tribunal considered earlier decisions addressing items removed from ships and classification of products recovered by ship breaking, including decisions that held some removed ship stores are not the result of manufacture and therefore non-excisable. The Department relied on prior decisions that treated materials intended for metal recovery as scrap. Interpretation and reasoning: The Tribunal examined the factual matrix showing that the appellant removed intact lead-acid batteries and sold them to buyers who hold the necessary environmental/processing licences; the appellant did not process or reduce the batteries to lead waste/scrap itself. The Tribunal emphasized the principle that classification must follow the form in which goods are cleared and not be dictated by subsequent processing by the buyer. The Tribunal distinguished a situation where the dismantler/processer itself converts batteries into lead scrap - only then would classification as lead waste/scrap (Chapter 78.02) be possible. Ratio vs. Obiter: Ratio - Goods recovered and cleared in the form of intact lead-acid batteries are classifiable under Chapter 85.07 and not under Chapter 78.02 where no conversion to lead scrap has occurred at the clearing party's premises. Obiter - Observations on typical uses and the regulatory control by pollution authorities were explanatory. Conclusions: Lead-acid batteries cleared by the respondent in intact form to licensed recyclers are classifiable under Chapter heading 85.07 and not as lead waste/scrap under Chapter 78.02; therefore such clearances are not leviable as scrap under Chapter 78.02. Issue 2 - Applicability of Note 9, Section XV: whether breaking up of ships amounts to 'manufacture' for the batteries Legal framework: Note 9 to Section XV provides that 'the process of obtaining goods and materials by breaking up of ships, boats and other floating structures shall amount to manufacture' in relation to the products of Section XV (Chapters 72-83). Precedent treatment: Prior authorities treated the insertion of Note 9 as clarifying that reduction of a ship to scrap for products within Section XV is manufacturing; however, decisions also recognized that certain items removed for safety/stores prior to breaking (bunker oil, stores, etc.) are not the result of manufacture and hence non-excisable. Interpretation and reasoning: The Tribunal analyzed the scope of Section XV and Note 9, noting Section XV covers Chapters 72-83 (base metals and articles). It concluded Note 9 applies to products that fall within those chapters (e.g., lead scrap under Chapter 78). Since lead-acid batteries are specifically classifiable under Chapter 85 (outside Section XV), Note 9 does not make their recovery an act of manufacture for excise purposes. Additionally, the Tribunal observed factual circumstances where batteries may be removed before ship breaking for safety; such pre-removal further supports non-application of Note 9 to intact batteries cleared as batteries. Ratio vs. Obiter: Ratio - Note 9 to Section XV makes the breaking up of ships an act of manufacture only insofar as it produces goods that fall within Section XV headings; it does not convert items falling outside Section XV (such as goods classifiable under Chapter 85) into manufactured excisable goods by virtue of recovery alone. Obiter - Illustrative remarks on when removal occurs (pre-breaking for safety) and on the policy rationale behind classifying by form of clearance. Conclusions: Note 9 does not operate to treat intact lead-acid batteries (Chapter 85) recovered from ships as manufactured excisable goods under Section XV; therefore those batteries are not rendered liable to central excise duty by virtue of Note 9 alone. Issue 3 - Effect of pre-breaking removal for safety/operational reasons on excisability and classification Legal framework: The distinction between items removed prior to breaking (stores, bunkers, batteries) and items obtained as a result of breaking is relevant to whether the act constitutes manufacture and whether goods fall within Note 9's scope. Precedent treatment: Prior decisions held that stores and items removed for safety prior to ship breaking are not results of manufacture and hence not liable to excise under Note 9; the Tribunal relied on such reasoning. Interpretation and reasoning: The Tribunal noted that lead-acid batteries may be required to be removed before actual ship breaking begins for safety reasons and that removal prior to the onset of the manufacturing process supports classification of those batteries in their original form. This factual distinction reinforces the conclusion that such batteries are not the product of manufacture arising from ship breaking. Ratio vs. Obiter: Ratio - Pre-breaking removal of intact components that are subsequently cleared as such supports classification based on cleared form and militates against treatment as excisable manufacture under Note 9. Obiter - Comments on safety/operational practice at ship breaking yards. Conclusions: Removal of lead-acid batteries prior to commencement of ship breaking supports their classification as intact batteries (Chapter 85.07) and negates the application of Note 9 to treat them as manufactured excisable goods. Issue 4 - Penalty and intention to evade duty where appellant sold intact batteries to authorised recyclers and did not process them Legal framework: Penalty provisions under the Central Excise Act are dependent on findings of duty liability and, in some cases, mens rea (intent to evade) or culpability in suppression/false statements. Precedent treatment: The Tribunal referred to background case law distinguishing goods not resulting from manufacture and treating clearances in original form as non-excisable; penalty implications follow from the core liability finding. Interpretation and reasoning: Because the Tribunal held that the lead-acid batteries as cleared were classifiable under Chapter 85.07 and not liable to central excise duty under Note 9, the foundational demand for duty and associated penalties could not be sustained. The Tribunal further noted factual indicators that the appellant did not process batteries and sold only to licensed recyclers; consequently, there was no suppression of facts or intent to evade duty to ground penalty imposition. Ratio vs. Obiter: Ratio - Where no duty is leviable because goods are correctly classified and cleared in their original form to authorised processors, penalty based on alleged duty evasion is not sustainable. Obiter - Remarks on awareness of ship breaking activity by authorities and historical industry practice. Conclusions: Penalty under the Central Excise Act tied to the disallowed classification/duty demand is not imposable given the finding that the cleared goods were non-excisable in the asserted manner; the demand, interest and penalty were set aside accordingly. Overall Disposition The Tribunal allowed the appeal, concluding that lead-acid batteries recovered from ships and cleared in intact form are classifiable under Chapter heading 85.07, Note 9 to Section XV does not render such items manufactured/excisable, and consequent duty, interest and penalty sustained by the lower authorities were not justified. Cross-references: Issue 1 and Issue 2 are interdependent (classification governs applicability of Note 9); Issue 3 supports both issues by supplying the factual basis for classification; Issue 4 follows from the adverse conclusion on liability.