6% CENVAT reversal on clearing used packing drums: Rule 6(3) held inapplicable; demand and penalty set aside

Rule 6(3) of the CENVAT Credit Rules, 2004 was invoked to demand reversal at 6% on clearance of used packing materials/drums. The Tribunal held that, even after Notification No. 6/2015-CE (NT), Rule 6 applies only where an assessee manufactures exempted goods along with non-exempted goods using common inputs/input services; mere clearance of non-manufactured, non-excisable packing materials/drums does not trigger Rule 6, making the 2015 Explanation inapplicable. Consequently, the demand raised under s. 11A(10) of the Central Excise Act, 1944 and the equal penalty were set aside, and the appeal was allowed.

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1. ISSUES PRESENTED AND CONSIDERED

(i) Whether clearance of used/empty packing materials (used drums), which were not manufactured by the assessee, attracts payment/reversal of an amount at 6% under amended Rule 6(3) of the Cenvat Credit Rules, 2004 read with Notification No. 6/2015-CE (NT) (w.e.f. 01.03.2015), on the footing that such items are "non-excisable goods cleared for a consideration".

(ii) Whether, on the facts found, the demand confirmed under Section 11A(10) with interest and the equal penalty under Section 11AC(1)(c) read with Rule 15(2) (premised on Rule 6(3) liability) could be sustained when the foundational applicability of Rule 6 was not met.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i): Applicability of Rule 6(3) (6% amount) to used/empty packing material cleared for consideration

Legal framework (as discussed by the Court): The Court examined Rule 6(3) of the Cenvat Credit Rules, 2004, which applies where a manufacturer "manufactures two classes of goods", namely non-exempted goods and exempted goods, and requires compliance through specified options including payment of an amount equal to six per cent of the value of exempted goods. The Court also considered the amendment w.e.f. 01.03.2015 inserting Explanation 1 to Rule 6(1) (treating "exempted goods or final products" as including "non-excisable goods cleared for a consideration") and Explanation 2 (valuation for such non-excisable goods).

Interpretation and reasoning: The Court held that despite the insertion of the explanations, the scope and triggering condition of Rule 6 remains anchored to the situation contemplated by Rule 6(3): the manufacturer must manufacture (and remove) exempted goods along with non-exempted goods, with the issue relating to inputs/input services used in or in relation to such manufacture. On facts, the Court found it undisputed that the assessee was manufacturing only one kind of goods and that the used drums/packing materials cleared were not goods manufactured by the assessee. Therefore, the essential precondition for Rule 6(3) was absent, and there was "no question of applicability of the explanation" inserted in 2015 to the present clearances.

Conclusions: Clearance of used/empty packing material (used drums) not arising from the assessee's manufacture does not attract the 6% payment/reversal mechanism under Rule 6(3), even if cleared for consideration after the 2015 amendment. The demand computed at 6% of value on this basis was held not sustainable.

Issue (ii): Sustainability of demand, interest, and equal penalty when Rule 6(3) itself is inapplicable

Legal framework (as discussed by the Court): The demand had been confirmed under Section 11A(10) of the Central Excise Act, 1944 with interest, and penalty imposed under Section 11AC(1)(c) read with Rule 15(2) of the Cenvat Credit Rules, 2004 (also referring to the CGST Act saving provisions). The Court's determination focused on whether the underlying liability under Rule 6(3) existed.

Interpretation and reasoning: Having concluded that Rule 6(3) was wrongly invoked because the cleared used drums/packing materials were not manufactured goods and the assessee did not manufacture exempted goods along with non-exempted goods, the Court held that the entire basis of the demand failed. Consequently, the confirmed amount, interest, and the equal penalty-being consequential to the alleged Rule 6(3) contravention-could not survive.

Conclusions: Since the foundational Rule 6(3) obligation was held inapplicable, the demand of the quantified amount and the equal penalty were set aside as not sustainable; the appeal was allowed and the impugned order was set aside.

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