2025 (11) TMI 1812 - AT - Customs

Exemption for brass scrap waste upheld under Notifications 52/2003-Cus and 22/2003-CE, wiping out duty and penalties

CESTAT Ahmedabad allowed the appeals of a 100% EOU engaged in segregation and manufacture of goods from brass scrap, setting aside demands of customs ... 100% EOU - Proper availment of benefit of the input-output ratio, as statutorily prescribed under the Notification No. 52/2003-CUS dated 21st March, 2003 read with the Final Norms as fixed by the Norms Committee - segregation and manufacturing of the goods out of the brass scrap with impurities - HELD THAT:- The issue involved in all the four appeals is squarely covered by the decision of the Hon'ble Tribunal in the case of Deep Recycling Industries and others vs Commissioner of Central Excise and Service Tax, Rajkot [2024 (3) TMI 970 - CESTAT AHMEDABAD] in which it was held that 'While dealing with scope of Notification No. 52/2003-Cux. Dated 03.01.2003 31.03.2003 particularly clause (3) construed the non-obstante clause by interpreting that once the material procured are used for the purpose of manufacture of finished goods or services then even if, waste and scrap arises in course of production and manufacture over the norm then same is also exempt from the duty of custom leviable or the additional duty. Till the time the waste is cleared on payment of duty, and is not shown to have been removed without permission.' It is pertinent to mention here that Notification No. 22/2003-C.E. dated 31.03.2003 also containing “Non-Obstente Clause” (6), is similar to Clause (3) of the Notification No. 52/2003-Cust. dated 31.03.2003. The provisions of both the notifications are applicable in this case. Notification No. 22/2003-CE dated 31.03.2003 has been issued on the Central Excise side, inter alia, exempting goods from payment of Central Excise Duty and Additional Duty of Central Excise on such goods. As per proviso to Condition No. 4 (a) of the said Notification, generation of waste, scrap and remnants of the 2 % of the quantity is allowed where SION have not been notified - It is also pertinent to mention here that there is no dispute over the fact that appellant had paid duty on entire quantity of goods that were cleared by supposedly using excess imported / indigenous duty free brass scrap. The learned Commissioner and the Adjudicating Authority have erred in confirming the demand of Customs Duty, and Excise Duty and in imposing penalty upon the appellant. Therefore, the appeals are liable to be allowed and the impugned orders passed by the learned Commissioner are liable to be set aside. Appeal allowed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether alleged 'excess consumption' of duty-free brass scrap over the Final Wastage Norms / SION under Notification No. 52/2003-Cus and Notification No. 22/2003-CE renders the appellant liable to customs and excise duty, confiscation, redemption fine and penalties. 1.2 Whether slag, non-foundry scrap and other waste/scrap generated and cleared, allegedly in excess of norms, can be treated as clearance of duty-free raw material 'as such' and subjected to customs duty demand under the original tariff classification. 1.3 How clause (3) of Notification No. 52/2003-Cus and the corresponding non-obstante clause in Notification No. 22/2003-CE are to be interpreted regarding exemption when duty-free inputs are fully used in manufacture but waste/scrap and segregation losses exceed prescribed norms. 1.4 Whether the departmental and appellate reliance on final wastage norms and contrary Tribunal decisions is sustainable in light of binding precedent of the jurisdictional High Court and later coordinate Bench decisions, and whether such contrary decisions are per incuriam. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Liability to duty, confiscation and penalty on alleged excess consumption of duty-free brass scrap over norms Legal framework 2.1 The Tribunal examined Notification No. 52/2003-Cus dated 31.03.2003, in particular clause (3), reproduced and applied as interpreted by the jurisdictional High Court in Commissioner of Customs (Preventive) v. Monarch Overseas and by the Tribunal in Meridian Impex and Deep Recycling Industries and others. Notification No. 22/2003-CE dated 31.03.2003, containing a similar non-obstante clause (6), and proviso to condition 4(a) (2% waste where no SION) was also considered. Interpretation and reasoning 2.2 The Tribunal noted that the entire quantity of duty-free brass scrap (imported and indigenous) was admittedly issued to and used in the manufacture of final products. The dispute concerned quantities worked out as 'excess consumption' of raw material by applying: (i) Final Wastage Norms fixed by the Norms Committee for 'Mixed Brass Scrap with impurities'; and (ii) a 2% waste ceiling where no SION existed, leading to demands on alleged excess consumption of specified MTs and consequential confiscation and penalties. 2.3 Relying on the detailed reasoning in Deep Recycling Industries and others, the Tribunal held that department's view-that any use of inputs beyond the norms attracts duty/penalty-is contrary to clause (3) of Notification No. 52/2003-Cus as construed by the jurisdictional High Court in Monarch Overseas and by the Tribunal in Meridian Impex. Those decisions hold that once imported/procured goods are used for manufacture of finished goods, the exemption covers such goods, and waste/scrap (even beyond norms) arising in the course of manufacture is also covered, provided that such waste/scrap, when cleared, suffers appropriate duty of excise and is not removed unauthorisedly. 2.4 The Tribunal endorsed the view that clause (3) is a non-obstante provision which extends the exemption to finished goods and services 'including by-products, rejects, waste and scrap arising in the course of production, manufacture, processing or packaging,' even if not exported, when sold in DTA as per FTP on payment of appropriate excise duty. Hence, invisible losses and higher wastage intrinsic to the particular industry fall within the ambit of the notification and cannot be treated as dutiable excess consumption of raw material so long as there is no diversion of duty-free inputs to DTA without permission. 2.5 The Tribunal recorded that there was no allegation or evidence of diversion of duty-free inputs as such into DTA; the dispute only related to the departmental calculation that certain quantities were 'excess consumed' based on norms. It held that such a dispute is directly governed by clause (3) and the High Court's interpretation, which immunizes such use from customs duty demands, once the imported material is actually used in manufacture and resultant clearances of waste/scrap are duly duty-paid. 2.6 The Tribunal further noted that the department's method of deriving excess consumption by mechanically applying the Final Wastage Norms, including for periods and material categories (e.g. 'Mixed Brass Scrap' vs 'Mixed Brass Scrap with impurities') where such norms did not strictly apply, is inconsistent with the scheme of the notification as interpreted by the High Court and by Meridian Impex. Clause (3) takes precedence and is not controlled by the wastage norms when the foundational condition of use in manufacture is satisfied. Conclusions 2.7 The Tribunal concluded that the demands of customs duty and central excise duty on alleged excess consumption of duty-free brass scrap, as also the related orders of confiscation, redemption fine and penalties, are contrary to Notification No. 52/2003-Cus, Notification No. 22/2003-CE and the binding interpretation in Monarch Overseas and Meridian Impex. The impugned duty demands, confiscation and penalties were therefore set aside. Issue 2: Characterization and duty treatment of slag and non-foundry scrap generated in segregation/manufacture Legal framework 2.8 The Tribunal considered the department's case that (i) slag cleared beyond Final Wastage Norms, and (ii) non-foundry scrap generated on segregation of mixed brass scrap, constituted clearance of duty-free raw material 'as such' and thus attracted customs duty under the original classification. This was tested against clause (3) of Notification No. 52/2003-Cus and the High Court's reasoning in Monarch Overseas concerning 'segregated waste' and 'foundry scrap.' Interpretation and reasoning 2.9 The Tribunal noted that, factually, the mixed brass scrap imported duty-free was subjected to segregation, yielding foundry scrap (non-ferrous metals) and non-foundry scrap (iron, rubber, plastic, etc.). The non-foundry scrap was cleared on payment of appropriate duties under respective tariff headings after obtaining 'Quantitative Clearance Permission' from the Development Commissioner. Slag and other waste generated in further manufacture were similarly cleared on payment of duty. 2.10 Following Monarch Overseas, the Tribunal held that segregated waste and scrap, including foundry scrap and slag arising in the course of production/manufacture of brass articles, fall squarely within the expression 'by-products, rejects, waste and scrap arising in the course of production, manufacture, processing or packaging of such goods' in clause (3). The High Court had specifically held that such segregated waste, when cleared on payment of duty and in accordance with EXIM/FTP permissions, satisfies clause (3) and remains covered by the exemption on customs duty on inputs. 2.11 The Tribunal rejected the departmental characterisation of non-foundry scrap and slag as clearance of duty-free raw material as such, noting that the waste had arisen during and because of the process of segregation and manufacture and was not shown to be removal of unutilised raw material. The generation and clearance of such waste/scrap, duly duty-paid and authorised by the Development Commissioner, therefore could not be treated as misuse of the exemption or non-use for the intended purpose. 2.12 The Tribunal also observed that Notification No. 22/2003-CE contains a similar non-obstante clause and specific allowance for waste/scrap where SION are not notified, further reinforcing that waste/scrap generated in the manufacturing process is an accepted and exempted consequence of using duty-free inputs, subject only to payment of excise duty at the stage of clearance and compliance with FTP permissions. Conclusions 2.13 The Tribunal held that slag and non-foundry scrap generated in the course of segregation and manufacture, and cleared on payment of applicable duty with due permission, cannot legally be treated as clearance of duty-free raw material as such. Corresponding customs duty demands based on such a theory, as well as related confiscation and penalties, are unsustainable and were set aside. Issue 3: Effect of clause (3) of Notification No. 52/2003-Cus and parallel clause in Notification No. 22/2003-CE; treatment of contrary precedents Legal framework 2.14 The Tribunal expressly relied on the binding ratio of the jurisdictional High Court in Monarch Overseas, which construed clause (3) of Notification No. 52/2003-Cus, and on the Tribunal's own decisions in Meridian Impex and Deep Recycling Industries and others. It also considered departmental reliance on earlier decisions including one in Amardeep Exports. Interpretation and reasoning 2.15 Referring to Deep Recycling Industries and others, the Tribunal reiterated that earlier decisions relied upon by the department which had imposed duty/penalty for excess wastage without examining the scope of the non-obstante clause in Notification No. 52/2003-Cus were held to be per incuriam. Those decisions had failed to appreciate that clause (3) specifically extends the exemption to waste and scrap arising in the course of manufacture, even where such waste/scrap is not exported but sold in DTA against duty of excise. 2.16 The Tribunal emphasized that Monarch Overseas directly addressed the question whether clearance of scrap beyond the norms fixed by the Norms Committee, upon payment of excise duty, violated Notification No. 52/2003-Cus. The High Court held that such waste and scrap are also exempt from customs duty, provided clause (3) conditions are met. The Tribunal found that the factual matrix in the present matters-segregation and manufacture of brass goods, generation of waste/scrap, clearances on payment of excise duty with Development Commissioner's permission-was on all fours with Monarch Overseas and Meridian Impex. 2.17 The Tribunal noted that Notification No. 22/2003-CE, with its similar non-obstante clause and explicit recognition of permissible waste in absence of SION, must be read harmoniously with Notification No. 52/2003-Cus, reinforcing the same legal position: once inputs are used in manufacture and resultant waste/scrap is cleared on payment of excise duty per FTP and Development Commissioner's approvals, customs duty on the inputs cannot be demanded merely because wastage exceeded norms. 2.18 In light of this settled legal position, the Tribunal held that the conclusions of the adjudicating authority and the Commissioner (Appeals), which were based primarily on the Final Wastage Norms and ignored the overriding effect of clause (3) and the binding High Court judgment, are contrary to law. Conclusions 2.19 The Tribunal concluded that: (i) clause (3) of Notification No. 52/2003-Cus and the analogous clause in Notification No. 22/2003-CE have overriding effect and fully cover the present fact situation; (ii) decisions not considering this non-obstante scheme are per incuriam and not to be followed; and (iii) applying the law as laid down in Monarch Overseas, Meridian Impex and Deep Recycling Industries and others, the customs and excise duty demands, confiscation orders, redemption fine and penalties in the impugned orders are unsustainable. The appeals were allowed and the impugned orders set aside.