Case Law Details
M/s. Balrampur Chini Mills Ltd Vs Union of India (Allahabad High Court)
Allahabad High Court has held that Cenvat credit need not be reversed in respect of bagasse which is an agricultural waste and not a manufactured final produ The High Court quashed CBIC Circular No.1027/15/2016-CX, dated 25-4-2016 which treated bagasse as exempted product. It also observed that amendment in 2015 in the Cenvat Credit Rules may have the effect of treating bagasse as exempted good but cannot result in it being manufactured goods. Judgement in UoI v. DSCL Sugar Ltd. was relied on.
FULL TEXT OF THE HIGH COURT ORDER / JUDGEMENT
1. Heard Sri Rahul Agarwal, learned counsel for the petitioner as well as Sri Dipak Seth, learned counsel appearing for the respondents.
2. The petitioner has approached this Court challenging the show cause notice dated 24/03/2017 issued by The Asst Commissioner, Central Excise and Service Divisions, Faizabad as well as circular 1027/15/2016-CX dated 25/04/2016 issued by the Central Board of Excise and Customs thereby seeking to reverse the CENVAT credit relating to Bagasse in light of the notification dated 1.3.15 treating Bagasse as an non excisable good for the purposes of reversal of credit of input and input services, in terms of Rule 6 of the CENVAT Credit Rules, 2004.
3. The petitioner is manufacturer of sugar which falls under subheading no. 17011190 of the 1st schedule of Central Excise Tariff Act, 1985. The petitioner has set up its plant to manufacture sugar, which is an excisable product. During the process of Manufacture of sugar, waste in the form of Bagasse emerges, and the manufacturer cannot control the process and prevent the emergence of
4. The petitioner is availing credit of Central Excise Duty held on inputs, input services and capital goods as provided under CENVAT Credit Rules, 2004 for the payment of Central Excise Duty on the final product, namely sugar. That in the process of manufacture of sugar, sugar cane is crushed, its juice is extracted and “Bagasse” emerges as a residue/waste of the sugar cane which is neither a manufactured product not a final product of the sugar industry. It is further been submitted that there is a fixed proportion of raw material (sugar cane, lubricants, grease etc) that is required to manufacture a particular quantity of sugar; the petitioner cannot use lesser quantity of input/materials so as to avoid the emergence of waste in the form of Bagasse.
5. In the schedule to the Central Excise Tariff Act, 1985, in the six digit tariff, Bagasse is classified under heading 2301.00 with the description “Residue and waste from food industries, including Bagasse other ways of sugar manufacturers and oil cakes” in the eight digit tariff, it is classified under tariff heading 2303 20 000 with the description “Beet Pulp, Bagasse and other wastes of sugar manufacture”
6. Rule 6 of the CENVAT Credit Rules, 2004 provides that if CENVAT credit has been taken on inputs which are used for manufacture of dutiable and exempted final products, then this Bagasse is required to reverse proportionate credit or pay 6% amount of the value of the exempted final Rule 6 of the CENVAT Credit Rules, 2004, as it existed prior to 28/02/2015. In Union of India and others vs M/s DSCL Sugar Ltd and others, (2015 (322) ELT 769) and other connected appeals the Hon’ble Supreme Court held that Bagasse is not a manufactured product but an agricultural waste and residue, which itself is not the result of any process. The Hon’ble Supreme Court further held that “since it is not a manufacture, obviously Rule 6 of the CENVAT Rules shall have no application”.
7. That the Union of India, amended the CENVAT Credit Rules, 2004 w.e.f. 01/03/2015 by inserting Explanation 1 and 2 in Rule 6(1) and by means of Explanation 1 for the purposes of Clause (d) & (h) of Rule 2 by providing that exempted goods or final products shall include non-excisable goods cleared for consideration from the factory, and subsequently by means of the impugned circular dated 25/04/2016 interpreted the aforesaid amendment carried out in the CENVAT Credit Rules, 2004 and held that Bagasse is an exempted product for the purpose of reversal of CENVAT credit in terms of Explanation 1 to Rule 6, and have thereby issued the show cause notice to the petitioner which have been challenged in the instant writ petition.
8. The main thrust of the petitioner’s argument is that precondition for applicability of Rule 6 (1) is that there should be “manufacture of exempted goods” which can be clearly inferred from a bare perusal of Rule 6 (1). The obligation for reversal of credit can arise only in case of manufacture of dutiable final product and manufacture of exempted products, and in case the exempted goods are not manufactured there is no substantive liability on the Bagasse for reversal of credit.
9. It has been further submitted that by means of the aforesaid amendment in Rule 6 non-excisable goods cleared for a consideration from the factory may have the effect of treating Bagasse to be an exempted good, but cannot result in Bagasse being a manufactured good, as the nature of Bagasse namely, that it is an agricultural waste or residue and not a manufactured product and therefore despite the aforesaid amendment, and also in light of the ratio laid down by the Hon’ble Supreme Court in the case of Union of India vs M/s DSCL Sugar Ltd and others (supra) remains unaffected, and therefore the petitioner cannot be saddled with the liability of reversal of CENVAT credit.
10. Sri Deepak Seth, appearing on behalf of respondent no. 2 to 4 raised preliminary objection and submitted that the petitioner has challenged the show cause notice dated 24/03/2017, wherein he has full opportunity to place his claim/reply before the respondents who would consider the same and pass necessary orders, and the writ petition in this regard would not be maintainable. It is further submitted that the effect of amendment in Rule 6 of the CENVAT Credit Rules 2004 is only to the effect that for the purposes of Rule 6 the exempted goods or final product as defined in the Clauses (d) & (h) of Rule 2 shall include non-excisable goods cleared for a consideration from the factory. This amendment is made vide notification number 6/2015 dated 01/03/2015, and the said notification having not been challenged by the petitioner, he is not entitled to the relief claimed for.
11. The learned counsel for the respondent further submitted that the basic purpose of issuing the circular dated 25/04/2016 has been to (i) rescind the three earlier circulars referred therein as a consequence of the decision of the Hon’ble Supreme Court in the case of Union of India vs M/s DSCL Sugar Ltd and others (supra) as well as in the case of Union of India Vs. M/s Hindalco Industries, 2003 (153) E.L.T. 481 (SC) and (ii) to clarify the effect of amendment of Rule 6 by Notification No. 6/15 dated 01/03/2015 by which Rule 6 of the Rules 2004 has been amended. It is further submitted that circular dated 25/04/2016 issued by Central Board of Excise and Customs only states that the goods which are non-excisable goods and are cleared for consideration from the factory need to be treated like the exempted goods for the purpose of reversal of credit of input and input services, in terms of rule 6 of the CENVAT Credit Rules 2004, and lastly he submitted that it is not the intention of the respondents to treat Bagasse as a manufactured product, and this show cause notice has been issued to the petitioner on the basis of the amendments made in the rule 6 of the CENVAT Credit Rules 2004 and not on the basis of the circular dated 25/04/2016.
12. The issues arise for consideration of this Court are:-
(i) Whether the writ petition challenging the show cause notice dated 24/03/2017 is maintainable in exercise of the power under Article 226 of the Constitution of India;
(ii) Whether the Circular No.1027/15/2016-CX dated 25/04/2016 issued by The Central Board of Excise and Customs, New Delhi treating Bagasse to be an exempted good for the purpose of reversal of credit of input and input services in terms of Rule 6 of the CENVAT Credit Rules, 2004 is in consonance with the amendments made in the Central Excise Act and CENVAT Credit Rules.
13. In response to the preliminary objection raised by the counsel for the respondent, the counsel for the petitioner has submitted that the show cause notice is just a formality, and the respondents are bound by the Circular dated 25/04/2016 whereby subsequent to the amendment of the CENVAT Credit Rules, 2004, Bagasse being a non-excisable goods cleared for consideration from the factory and needs to be treated like exempted good for the purpose of reversal of credit input and input services, and therefore the respondents are bound to follow the circular of the Central Board of Excise and Customs and any argument to the contrary is bound to be rejected, and therefore the petitioner’s need not be relegated to the alternative remedy.
14. In the present case by means of circular dated 25th April, 2016 The Central Board of Excise and Customs have interpreted the amendment dated 01/03/2015 of the CENVAT Credit Rules 2004 so as to treat Bagasse as an exempted good for the purpose of reversal of credit of input in terms of Rule 6 of the CENVAT Credit Rules 2004. The show cause notice has been issued by Asst Commissioner, Central Excise, Faizabad Division, Faizabad relying on the amendment dated 01/03/2015, to the effect as to whether the petitioner was reversing CENVAT Credit Rules, 2004, related with the Bagasse and pressmud after introduction of Notification dated 01/03/2015. The Circular dated 25/04/2015 is a policy decision of the Department and the same is binding on all the authorities of the Central Board of Excise and Customs, and they were bound to follow the directives issued in the said circular.
15. We have also considered the judgement cited by the counsel for the respondent namely Union of India vs Guwahati Carbon Ltd 2012 (278)ELT 26 (SC), Rahat Industries vs Commissioner of Central Excise, 2010 (254) ELT 385 (All), Hiran Tobacco Factory vs Union of India 2014 (302) ELT 58 (All.) and Union of India Vs Zalcon Electronics 2010 (255) ELT 490 (SC). All the said judgements are distinguishable on the facts inasmuch as they had approached the High Court under the writ jurisdiction after passing of the order by the competent authority without approaching the appellate authority, and in the circumstances the Hon’ble Supreme Court in the case of Union of India vs Guwahati Carbon Ltd (supra) has held that the assessee has a remedy in the form of a right to appeal under the statute, that remedy must be exhausted first, and the High Court ought not to have interfered under Article 226 of the Constitution of India. In the Case of the Rahat Industries (supra), the Division Bench of this Court relegated the petitioner to the competent authority and directed the petitioner to submit reply to the show cause notice, and refused to interfere in the matter and exercise of writ jurisdiction under Article 226 of the Constitution of India. This case is also distinguishable as the petitioner could not indicate any reason for not approaching the competent authority, rather than approaching the High Court in the writ jurisdiction.
16. That on the other hand the Supreme Court in the case of Dhampur Sugar Mills Ltd. v. State of P., (2007) 8 SCC 338 the Court has considered a similar controversy and has held as under :-
“16. As to alternative remedy available to the writ petitioner, a finding has been recorded by the High Court in favour of the writ petitioner and the same has not been challenged by the State before us. Even otherwise, from the record, it is clear that the decision has been taken by the Government. Obviously in such cases, remedy of appeal cannot be termed as “alternative”, or “equally efficacious”. Once a policy decision has been taken by the Government, filing of appeal is virtually from “Caesar to Caesar’s wife”, an “empty formality” or “futile attempt”. The High Court was, therefore, right in overruling the preliminary objection raised by the respondents.”
17. In the instant case the petitioner has challenge the show cause notice which seeks to saddle it with the liability to reverse the CENVAT Credit claimed by it, in the light of the amendment in CENVAT Credit Rules dated 01/03/2015, and further elaborated by means of Circular dated 25/04/2016 which treats Bagasse as an exempted good for the purpose of reversal of credit of input in terms of rule 6 of the CENVAT Credit Rules 2004. We are inclined to agree with the argument of the petitioner, that relegating them to the competent authority to decide the issue after receiving the reply from the petitioner would be just an empty formality in as much as the argument of the petitioner that despite the amendment dated 01/03/2015 the CENVAT credit claimed by them cannot be reversed in as much as the bagasse not being a manufactured product is out of the purview of Rule 6 of the CENVAT Credit Rules 2004. We are also in full agreement with the argument that the competent authority deciding the claim of the petitioner consequent to the Show Cause Notice, would be bound by the departmental Circular dated 25/04/2016 and he would not have the liberty of disagreeing with the circular issued by Central Board of Excise and Customs. In this view of the matter it would not be efficacious to relegate the petitioner before the competent authority and in light of the above we have no hesitation in holding that the writ petition in the present facts and circumstances of the case would be maintainable.
18. The main argument of the petitioner with regard to the challenge of the Circular dated 25/04/2016 is that despite the insertion of Explanation 1 with effect from 01/03/2015, the Legislature has not removed the basis on which the judgment of the Hon’ble Supreme Court dated 24/07/2015 was pronounced, and therefore despite the amendment treating certain non-excisable goods as exempted goods or final products, Bagasse would not be treated to be an exempted good for the purpose of reversal of credit of input in terms of Rule 6 of the CENVAT Credit Rules 2004 and still the condition of “manufacture” of the exempted good would be required.
19. Rule 6 of the CENVAT Credit Rules 2004, as it existed prior to 28.02.2015, is as follows:-
“RULE 6. [Obligation of a manufacturer or producer of final products and a [provider of output service]]. —
[(1) The CENVAT credit shall not be allowed on such quantity of input or input service which is used in the manufacture of exempted goods or for exempted services, except in the circumstances mentioned in subclause (2) (2) Where a manufacturer or provider of output service avails of CENVAT credit in respect of any inputs or input services, and manufactures such final products or provides such output service which are chargeable to duty or tax as well as exempted goods or services, thyen, the manufacturer or provider of output service shall maintain separate accounts for receipt, consumption and invertory of input and input service meant for use in the manufacture of dutiable final products or in providing output service and the quantity of input meant for use in the manufacture of exempted goods or services and take CENVAT credit only on that quantity of input or input service which is intended for use in the manufacture of dutiable goods or in providing output service on which service tax is payable.
(3) Notwithstanding anything contained in sub-rules (1) and (2), the manufacturer of goods or the provider of output service, opting not to maintain separate accounts, shall follow either of the following options as applicable to him, namely :-
i. the manufacturer of the goods shall pay an amount equivalent to five percent of the value of the exempted goods and the provider of output service shall pay an amount equal to six percent of the value of the exempted services; or ii. “
20. The union of India amended CENVAT Credit Rules, 2004 with effect from 01/03/2015 by inserting Expression 1 and 2 in Rule 6 (1), which reads as under:-
“Explanation 1. – For the purposes of this rule, exempted goods or final products as defined in clauses (d) and (h) of rule 2 shall include non-excisable goods cleared for a consideration from the factory.
Explanation 2. – Value of non-excisable goods for the purposes of this rule, shall be the invoice value and where such invoice value is not available, such value shall be determined by using reasonable means consistent with the principles of valuation contained in the Excise Act and the rules made thereunder.”
21. A perusal of Rule 6 (1) clearly shows that the manufacturer has to manufacture dutiable goods as well as exempted goods. Since Bagasse is not manufactured good but the waste product which emerges/comes into existence in the process of manufacture of sugar, and therefore the production of Bagasse cannot be held to be manufacture of exempted good.
22. Rule 6(2) provides that where a manufacturer avails of CENVAT credit in respect of any inputs and manufacturers such final products which are chargeable to duty as well as exempted goods, the manufacturer shall maintain separate accounts for the same, and in an inventory of input meant for use in the manufacture of dutiable final product and the quantity of input meant for the use in the manufacture of exempted goods.
23. As per Rule 6 (3) the manufacturer of dutiable final product and the manufacturer of exempted goods who does not maintain separate accounts shall be liable to pay an amount of 5% of the value of the manufactured goods.
24. The Hon’ble Supreme Court in the case of Union of India and others vs M/s DSCL Sugar Ltd and others (supra), held that Bagasse is not a manufactured product but an agricultural waste and residue, which itself is not the result of any process. It is relevant to point out that in the said judgement the Hon’ble Court also considered the amendment in Section 2 (d) wherein in the definition of “excisable goods” were duly amended to include any article or material substance capable of being bought or sold for consideration and as such could/shall be deemed to be marketable, and therefore the fiction was introduced wherein certain kinds of goods were treated to be marketable and thus excisable.
25. Considering the aforesaid amendment Hon’ble Supreme Court in Union of India and others vs M/s DSCL Sugar Ltd and others (supra) held:-
“However, before the aforesaid fiction is to be applied, it is necessary that the process should fall within the definition of “manufacture” as contained in section 2 (f) of the Act.”
26. The Hon’ble Supreme Court also considered the definition of “manufacture” as provided in Section 2 (f) of the Act wherein there is a deeming provision amounting to manufacture in respect of certain goods, and specifically with regard to Bagasse and held as under:-
“in the present case it could not be pointed out as to whether any process in respect of Bagasse has been specified either in the section or in the chapter notice. In the absence thereof this deeming provision cannot be attracted. Otherwise, it is not in dispute that Bagasse is only an agricultural waste and residue, which itself is not the result of any process. Therefore, it cannot be treated as falling within the definition of section 2 (f) of the act and the absence of manufacture, there cannot be any Excise duty.
Since it is not a manufacture, Rule 6 of the CENVAT Credit Rules 2004, shall have an application rightly held by the High Court.”
27. After the aforesaid judgement which has clearly held Bagasse not to be a manufactured product, and therefore Rule 6 of the CENVAT Credit Rules, 2004 shall have no application, Section 6 (1) has been amended by inserting the 2 Explanations, which the respondent contends is sufficient to include Bagasse within the fold of Section 6, and further to justify the stand for a reversal of CENVAT Credit Rules, 2004.
28. A perusal of the Explanation 1 to Rule 6 would indicate that it provides that the exempted good and final product as defined in Clause (d) & (h) of Rule 2 shall include non-excisable goods cleared for a consideration from the factory.
29. Explanation 1, talks about the inclusion of non-excisable goods cleared for consideration from the factory within the category of exempted goods or final products while the Circular dated 25/04/2016 proceeds on the basis that Bagasse is a non-excisable good and is now to be treated like exempted good for the purpose of a reversal of input and Input service.
30. As noted by the Hon’ble Supreme Court in the case of Union of India and others vs M/s DSCL Sugar Ltd and others (supra) specifically in the contest of Bagasse, Rule 6 applies only when there is a manufacture of final products or of exempted products, and if there is no manufacture, Rule 6 of the CENVAT Credit Rules, 2004, has no application.
31. This amendment may have the effect of treating Bagasse to be an exempted good, but cannot result in Bagasse being manufactured good, as the nature of Bagasse remains that of an agricultural waste and residue and is not in effect a product. This aspect and character of Bagasse remains unaltered by insertion of Explanation 1.
32. In absence of Bagasse being a manufactured final product, the obligation of a reversal of CENVAT period under Rule 6 (1) of the CENVAT Credit Rules, 2004 is not attracted. It has also been noticed that Bagasse has always been an “exempted goods” under Rule 2 (d) of the CENVAT Credit Rules, 2004. It has been mentioned in Central Excise tariff heading 2303 20 000 and was subjected to NIL rate of duty. It therefore, fell within the definition of “exempted goods” as defined under Rule 2 (d) and is not a non-excisable good, as mentioned in the impugned Circular.
33. That the Circular dated 25/04/2016 interpreting Explanation 1 to Rule 6 has provided that “consequently, Bagasse, dross and skimmings of nonferrous metal or any such byproduct of waste, which are non-excisable goods and are cleared for consideration from the factory need to be treated like exempted goods for purpose of reversal of credit of input and input services, in terms of rule 6 of the CENVAT Credit Rules, 2004. The circular therefore treating Bagasse to be a non-excisable good, is clearly erroneous, and for this reason also the Circular dated 25/04/2016 is liable to be quashed with regard to Bagasse.
34. In light of the above we are of the considered opinion that in absence of Bagasse being a manufactured final product, the obligation of reversal of CENVAT Credit under Rule (1) of the CENVAT Credit Rules, 2004 is not attracted, and the ratio laid down in the judgement of the Hon’ble Supreme Court in the case of Union of India and others vs M/s DSCL Sugar Ltd and others (supra) still holds the field. Rule 6 of the CENVAT Credit Rules would have no application for reversal of CENVAT Credit in relation to Bagasse. The Circular No.1027/15/2016-CX, dated 25/04/2016, contained in Annexure – 1 to the writ petition to the extent that it includes Bagasse under the purview of the reversal of credit of input services in terms of Rule 6 of the CENVAT Credit Rules, 2004, as well as the impugned show cause notice dated 24/03/2017 contained in Annexure – 2, are hereby quashed.
35. The writ petition is accordingly
is govt filed review against this order