2023 (2) TMI 775 - AT - Central Excise

Process amounting to manufacture or not - waste and scrap is a result of manufacture as defined in section 2 (f) of the Central Excise Act or not - 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? - HELD THAT - When some waste is generated in the process of manufacture of the goods it comes out of the inputs directly or the inputs transform into some form. Input is that substance or material which, after transformation, becomes the output. By contrast, capital goods are those goods which are used in the manufacture or production of the goods without they themselves getting transformed. A block of iron, for instance, is an input to manufacture a machine part. In the process of manufacture the turnings and other forms of steel scrap arise. However, the lathe machine, the forging equipment, etc. which participate in converting the block of iron into the final part are capital goods. 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. 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. The impugned orders cannot be sustained and need to be set aside - Appeal allowed.

Issues Involved:
1. Whether the waste and scrap generated by the appellant in the form of pipes and barrels during the production of oil are subject to excise duty.
2. Whether the waste and scrap are a result of the manufacturing process as defined under section 2(f) of the Central Excise Act or arise from other processes such as maintenance and repair of capital goods.

Issue-wise Detailed Analysis:

1. Excise Duty on Waste and Scrap:
The appellant, M/s Cairn India Limited, generates waste and scrap in the form of plastic barrels and pipes during the production of oil. The Revenue's position is that this scrap, generated in the process of manufacturing excisable goods (oil), is chargeable to excise duty. Consequently, excise duty amounting to Rs. 76,23,366/- was demanded and penalties totaling Rs. 47,74,082/- were imposed. The appellant contends that the waste and scrap are not manufactured goods and thus not subject to excise duty, relying on case laws, particularly Grasim Industries Ltd. vs. Union of India, which asserts that waste and scrap not generated from manufacturing are not exigible to excise duty.

2. Definition of Manufacture and Applicability:
The core question is whether the waste and scrap result from the manufacturing process as defined under section 2(f) of the Central Excise Act. The judgment in Grasim Industries provides a comprehensive answer, emphasizing that excise duty is levied on goods produced or manufactured in India. The goods must satisfy the conditions under Section 2(d) and Section 2(f) conjunctively to be excisable. The definition of "manufacture" includes any process incidental or ancillary to the completion of the manufactured product. The process must bring about a change or transformation in the raw material, leading to a new and distinct product.

3. Integral Connection to Manufacturing:
The test to be applied is whether the waste and scrap are produced as a result of the manufacturing process or from other processes like maintenance and repair of capital goods. For a process to be "incidental or ancillary to manufacture," it must be integrally connected to the production of the end product, making its manufacture impossible or commercially inexpedient without it. In this case, the pipes are essential for oil production but do not transform into the final product. They are capital goods, not inputs, and their scrap arises from maintenance, not manufacturing.

4. Distinction Between Inputs and Capital Goods:
Inputs are materials that transform into the final product, whereas capital goods are used in the production process without transforming. The pipes in question do not get consumed or transform into oil; they are used in its production. The waste generated from their replacement is from maintenance, not manufacturing. Similarly, empty barrels are packing materials and not generated during the manufacturing process.

Conclusion:
The Tribunal concluded that the waste and scrap from pipes and barrels are not subject to excise duty as they are not generated from the manufacturing process but from the maintenance of capital goods. The impugned orders were set aside, and the appeals were allowed, providing consequential relief to the appellant.

(Order pronounced in open court on 17/02/2023.)

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