2025 (11) TMI 1334 - AT - Central Excise

Waste wood in paper manufacturing not exempted final product; Rule 6(3) CENVAT reversal demand quashed, appeals allowed

The West Coast Paper Mills Ltd. Versus Commissioner of Central Excise, Dakshina Kannada

CESTAT held that chipper dust/wood waste arising during manufacture of dutiable paper and paper boards is merely waste, not an exempted final product, and ... CENVAT Credit - availing and utilizing cenvat credit on taxable as well as exempt goods - non-maintenance of separate account in respect of credit availed on the input services used in the manufacture of exempted goods and dutiable goods - clearing saw dust / wood waste falling under Chapter sub-heading 44013000 being exempted goods - whether the chipper dust / waste which arose during the course of chipping of woods for manufacture of final products viz. paper and paper boards fall under Chapter 48 of the CETA, 1985 be considered as exempted final product and Rule 6(3) of CCR, 2004 is applicable for non-maintenance of separate records for dutiable and exempted goods? HELD THAT:- The issue is no more res integra and settled by the judgment of the Hon’ble Supreme Court in a series of cases viz. UOI Vs. DSCL Sugar Ltd. [2015 (10) TMI 566 - SUPREME COURT] and recently in the case of UOI Vs. Indian Sucrose Limited [2022 (7) TMI 353 - SC ORDER] wherein it is held that Rule 6(3) of the Cenvat Credit Rules, 2004 is not applicable to waste generated during the manufacture of dutiable final product. This Tribunal also, in the case of Shri Hiranyakeshi SSK Niyamit Vs. CCT, Belgaum [2024 (3) TMI 1499 - CESTAT BANGALORE] held that Rule 6(3) is not applicable to waste by-products emerging during the manufacture of dutiable final product. The impugned orders are set aside and appeals are allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether chipper dust/waste arising during chipping of wood in the manufacture of paper and paper boards constitutes an exempted or non-excisable final product such that Rule 6(3) of the Cenvat Credit Rules, 2004 is attracted. 2. Whether non-maintenance of separate accounts for credit attributable to input services used in manufacture of alleged exempted goods (chipper dust/waste) permits demand of credit reversal under Rule 6(3) read with Rule 6 provisions and imposition of interest and penalty. 3. Whether prior departmental practice, audits, or limitation bars the present demand. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Excisability of chipper dust/waste and applicability of Rule 6(3) CCR, 2004 Legal framework: Rule 6 of the Cenvat Credit Rules, 2004 governs reversal of Cenvat credit where inputs/input services are used in manufacture of exempted goods; Rule 6(3) (as applied in adjudication) deals with liability where manufacturer makes both dutiable and exempted supplies. Explanations were added to Rule 6(1) by amendment referenced in the judgment. Precedent treatment: The Tribunal relied upon binding decisions of the apex court (as described in the judgment) holding that waste/residue arising during the manufacture of an excisable final product is not excisable and Rule 6(3) is not attracted to such waste. Administrative guidance previously issued to treat certain wastes as exempted goods was rescinded in light of the apex court's holdings; High Court and Tribunal decisions have followed the same view. Interpretation and reasoning: The Court examined factual finding that the mill used chippers (not saws) producing 'chipper dust' as a waste arising during manufacture of paper/paperboard (which are dutiable final products). The Tribunal reasoned that waste produced incidentally in the process of producing a dutiable final product does not become a separate excisable final product merely because it is cleared for consideration. The apex court's conclusions that similar residues/by-products (e.g., bagasse, dross) are non-excisable and outside the operation of Cenvat provisions were applied by analogy. Ratio vs. Obiter: The application of the apex court principle that process-generated waste accompanying a dutiable final product is non-excisable and outside Rule 6(3) is treated as ratio for the present factual matrix. Any discussion of tariff nomenclature or dictionary meanings served as factual clarification and is obiter to the extent not necessary to adopt the apex court rule. Conclusion: Chipper dust/waste arising during manufacture of paper/paper board is not an excisable final product for purposes of Rule 6(3); Rule 6(3) does not apply to such waste. Issue 2 - Entitlement to Cenvat credit and validity of demand, interest and penalty for non-maintenance of separate records Legal framework: Cenvat credit is admissible on inputs, capital goods and input services used in manufacture of dutiable products; Rule 6 prescribes reversal where inputs/input services are used for exempted goods. Maintenance of records and segregation is required where Rule 6 applies. Precedent treatment: The Tribunal applied the apex court pronouncements and subsequent departmental circular withdrawing an earlier circular that sought to treat certain wastes as exempted goods. Tribunal and High Court authorities cited recognize that credit cannot be denied where final product is dutiable and the waste is incidental. Interpretation and reasoning: Because the waste in question is not an exempted final product, the statutory trigger for reversal under Rule 6(3) is absent. Consequently, non-maintenance of separate accounts concerning the alleged exempted goods cannot form the basis for demanding reversal of Cenvat credit, interest and penalty under Rule 6(3). The Tribunal also noted the factual record that the final products are dutiable and that chipper dust is a by-product/waste from that process. Ratio vs. Obiter: The holding that non-maintenance of separate accounts cannot sustain a demand under Rule 6(3) where the alleged exempted goods are not excisable is ratio. Conclusion: Demand of reversal of credit, interest and penalty under Rule 6(3) for non-maintenance of records in respect of chipper dust/waste is unsustainable. Issue 3 - Limitation and prior audits Legal framework: Limitation and laches may bar departmental demands depending on statutory limitation and facts of previous audit/reopenings. Precedent treatment: The Tribunal acknowledged submissions about prior audits and delay but primarily disposed on substantive law per apex court rulings and departmental circular. Interpretation and reasoning: While the appellant raised limitation and previous audit silence, the Tribunal's disposal rested on legal inapplicability of Rule 6(3) to process-generated waste; remedial consequences follow irrespective of limitation arguments. The circular rescinding earlier administrative position and judicial pronouncements rendered the prior ground for demand untenable. Ratio vs. Obiter: Observations on limitation and prior audits are ancillary and thus obiter; the dispositive ratio is non-excisability of the waste and consequent inapplicability of Rule 6(3). Conclusion: Even if audits did not earlier object, the principal ground for demand fails; limitation point not necessary to decide given the primary legal conclusion. Overall Disposition The impugned orders imposing demands under Rule 6(3) in respect of chipper dust/waste are set aside; appeals allowed with consequential relief as per law, applying the apex court precedent and the rescinding departmental circular that process-generated waste incidental to manufacture of dutiable final products is non-excisable and outside Rule 6(3).