CESTAT: Excise Duty Cannot be Charged on Empty Barrels Used Only for Packing Material

CESTAT: Excise Duty Cannot be Charged on Empty Barrels Used Only for Packing Material

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Delhi by its two-member bench of Justice Dilip Gupta (President) and P.V. Subba Rao (Technical Member) observed that no excise duty is payable on empty barrels used only for packing material.

M/s Cairn India Limited, (now merged with Vedanta Limited)- appellant/assessee claimed to produce oil by drilling. In the process of manufacturing or producing oil, plastic barrels in which the input chemicals are procured arise as scrap. Due to wear and tear, the pipes used in the production of oil have to be replaced at times. At times, the residuary portion of tubes or pipes after cutting and fitting, etc., also arise as waste or scrap. The appellant sells this waste and scrap to third parties.

According to the appellant waste and scrap in the form of pipes and barrels only arise in the process of producing oil, and this waste and scrap is not manufactured by the appellant. Unless the goods are manufactured, no central excise duty can be levied. The waste and scrap that are not generated as a result of manufacture are not subject to excise duty.

The case of the Revenue was that the appellant was generating this scrap in the process of manufacture of excisable goods namely oil and, therefore, it was chargeable to excise duty. Excise duty totaling Rs. 76,23,366 was, therefore, demanded in three show cause notices and was confirmed by the original authority and upheld on appeal, by the impugned orders. Penalties amounting to Rs. 47,74,082 have been imposed upon the appellant.

The issue that came for consideration before the Tribunal was whether waste and scrap is a result of manufacture as defined in section 2 (f) of the Central Excise Act or through some other process. For this the CESTAT relied on decision passed in the case of Grasim Industries Ltd. versus Union of India to assert that waste and scrap which is not generated as a result of manufacture is not eligible of excise duty.

The CESTAT was of the view, "as laid down in Grasim Industries, the test to be applied, therefore, with respect to waste and scrap is whether the waste and scrap has come out of the process of manufacture including any process incidental or ancillary to manufacture or it has arisen out of some other processes, such as, maintenance and repair of capital goods. To qualify as 'incidental or ancillary to manufacture,' the process has to be a process which is so integrally connected to the manufacturing of the end product, that without it, the manufacture of the end product would be impossible or commercially inexpedient."

Next issue was, whether the used/broken pipes which are generated as waste in this case arise out of the process of manufacture or out of the process of maintenance of the capital goods.

The bench noted that in this case, the pipes do not get consumed and do not get transformed into oil. They are used to manufacture/production of oil. Regardless of the fact that the use of pipes is essential for production of oil, the pipes by themselves are capital goods and are not inputs.

The CESTAT observed, "when such pipes need repair or replacing and waste is generated in the process, it is a waste generated during the repair or maintenance of capital goods and not during the process of production of oil or any process incidental or ancillary to it. For this reason, no excise duty can be charged on the scrap of pipes produced in this manner. Similarly, the empty barrels are only packing material in which the inputs are received and these barrels are not generated during the process of manufacture. Therefore, no excise duty can be charged even on that scrap."

In view of the above reasons the bench found the impugned orders cannot be sustained and set aside while allowing the appeal.