2023 (8) TMI 1043 - AT - Central Excise

Excisability - marketability - Process amounting to manufacture or not - top gas that emerged from the Reduction Shaft had been subjected to a refining process for removal impurities. Whether mere marketability of a product is enough for levy of central excise duty in view of what is contained in the Explanation to the definition of excisable goods in section 2(d) of the Excise Act w.e.f. 10.05.2008 or is it necessary that manufacture must necessarily also take place? HELD THAT - This issue was examined by the Bombay High Court in HINDALCO INDUSTRIES LIMITED VERSUS THE UNION OF INDIA, CUSTOMS, EXCISE AND SERVICE TAX APPELLATE TRIBUNAL, THE COMMISSIONER OF CENTRAL EXCISE 2014 (12) TMI 657 - BOMBAY HIGH COURT . The decision rendered by a Larger Bench of the Tribunal in HINDALCO INDUSTRIES LTD VERSUS COMMISSIONER OF CENTRAL EXCISE, BELAPUR, MUMBAI III NAGPUR 2014 (11) TMI 385 - CESTAT MUMBAI (LB) was assailed in a Writ Petition before the Bombay High Court. The issue that had arisen before the Larger Bench of the Tribunal was whether aluminium dross and skimmings or similar non-ferrous metal dross and skimmings, which arise in the process of manufacture of aluminium/non-ferrous metal products can be considered as manufactured goods and hence, excisable for the period post 10.05.2008 in view of the Explanation added to section 2(d) of the Excise Act. The Larger Bench of the Tribunal held when dross and skimmings are specifically mentioned in the tariff, it would not be unreasonable to assume that such products are manufactured goods even though they arise in the course of manufacture of other products. Inasmuch as the goods which are capable of being bought and sold are deemed to be marketable, in view of explanation to Section 2(d), the twin tests of manufacture and marketability are clearly satisfied in the case of dross and skimmings. As per the settled position in law manufacture takes place when a new commodity with a distinct name, character or use emerges from a process or series of processes. In the present case, this test of manufacture is satisfied in respect of dross and skimmings. Therefore, the will of the Legislature has to be given effect to by adopting a harmonious interpretation. In this view of the matter, it appears to us that w.e.f. 10-5-2008, aluminium dross and skimmings are liable to excise duty. The Bombay High Court, in view of the decisions of the Supreme Court in UNION OF INDIA VERSUS AHMEDABAD ELECTRICITY CO. LTD. 2003 (10) TMI 47 - SUPREME COURT , COLLECTOR OF CENTRAL EXCISE, PATNA VERSUS TATA IRON STEEL CO. LTD. 2004 (2) TMI 68 - SUPREME COURT and M/S. GRASIM INDUSTRIES LTD. VERSUS UNION OF INDIA 2011 (10) TMI 2 - SUPREME COURT held that when the Supreme Court had held that the conditions contemplated under section 2(d) and section 2(f) of the Excise Act have to be satisfied conjunctively in order to entail imposition of excise duty under section 3 of the Excise Act, the Tribunal committed an error in holding otherwise. The inevitable conclusion that follows from the aforesaid decisions is that even after the addition of Explanation in the definition of excisable goods w.e.f. 16.05.2008 in section 2(f) of the Excise Act, it has necessarily to be seen whether the goods satisfy the requirement of manufacture , for only then excise duty can be levied. In PHILLIPS CARBON BLACK LTD. VERSUS COMMISSIONER OF C. EX., BOLPUR 1998 (2) TMI 336 - CEGAT, CALCUTTA , the Tribunal observed that merely because off gas which emerged in the course of manufacture of carbon black was burnt because of environmental laws and in the process heat that was generated was used for the rotaters in the manufacturing operation, it cannot be said that manufacture had taken place. In the present case, to appreciate the issue, it would be useful to understand the process undertaken by the appellant for the manufacture of Hot Rolled Coils, Sheets, Plates and Direct Reduced Iron. It has been described earlier in detail, but briefly stated it transpires that the appellant had used Corex Technology for the two functional modules. These modules operated on the technology offered by VAI, Austria. It consists of two reactors, namely, Reduction Shaft and Melter Gasifier - contention of the appellant is that the top gas which emerges either from the Melter Gasifier or the Reduction Shaft is refuse, but it has necessarily to undergo the requirement of scrubbing of the particulate matter and other impurities before being released in the atmosphere because of the directions issued by the Ministry of Environment and Forests and this process of removal of impurities would not amount to manufacture. According to the appellant, it was only to meet this requirement that it had to work on the top gas. Whether the scrubbing of the particulate matter and removal of impurities in the top gas would amount to manufacture of export gas? - HELD THAT - The top gas that emerges is refuse and can be said to be similar to dross and skimmings, which are scum and are not manufactured goods. The appellant manufactures Direct Reduced Iron and the top gas emerges as a result of process of manufacture of Direct Reduced Iron. Top gas is not a new and different article with a distinctive character or use and merely because top gas may fetch a price after the removal of the impurities would not mean that it has been manufactured. It not possible to accept the distinction sought to be drawn by the learned special counsel for the department as the top gas is admittedly not manufactured and arises only as a technological accident. The top gas emerging out of the process of manufacture of Direct Reduced Iron is, in fact, in the nature of dross and skimmings which are scum that are produced in the course of manufacture of aluminium. It would, therefore, be reasonable to apply the same principles that have been enumerated in the decisions of the Supreme Court in UNION OF INDIA VERSUS HINDALCO INDUSTRIES LIMITED 2019 (3) TMI 1933 - SC ORDER , UNION OF INDIA VERSUS AHMEDABAD ELECTRICITY CO. LTD. 2003 (10) TMI 47 - SUPREME COURT , UNION OF INDIA VERSUS DELHI CLOTH AND GENERAL MILLS CO. LTD. 1962 (10) TMI 1 - SUPREME COURT and SOUTH BIHAR SUGAR MILLS LTD. VERSUS UNION OF INDIA 1968 (2) TMI 36 - SUPREME COURT to determine whether manufacture had taken place. We need to remind ourselves, at this stage, about the observations made by the Bombay High Court and the Supreme Court in Indian Aluminium Co. Indian Aluminium Co. The Bombay High Court noted that dross and skimmings are merely the scum thrown out in the process of manufacture of aluminium sheets and, therefore, it cannot be said that transformation has taken place resulting in a new and different article with a distinctive name, character or use. The Supreme Court also observed the dross and skimmings are merely refuse given out in the course of manufacture in the process of removing impurities from the raw material. A conclusion can, therefore, safely be drawn that top gas was not manufactured, and indeed the Commissioner has also not recorded a finding that top gas had been manufactured. Whether removal of impurities from the top gas would result in the manufacture of export gas? - HELD THAT - The Commissioner has emphasized that since the export gas becomes marketable it would indicate existence of manufacture. As noticed above, the Commissioner was first required to examine whether manufacture had actually taken place and a conclusion could not have been drawn that because it was marketable it would mean that manufacture had taken place. The Commissioner also heavily relied on the fact that the export gas was nothing but Carbon Monoxide , which conclusion is evidently incorrect since the export gas had only 47.02% of Carbon Monoxide. The Commissioner also proceeded to observe that manufacture had taken place since Carbon Monoxide falls under Tariff Item 2811 29 40 of the Excise Tariff and the Tribunal had earlier held in JSW STEELS LTD. VERSUS COMMISSIONER OF C. EX., BELGAUM 2010 (2) TMI 527 - CESTAT, BANGALORE that this would amount to marketability . This view, as discussed above, is incorrect. Even otherwise, it is a settled law that the burden is on the department to establish that a product is a manufactured product, before seeking to levy duty of excise on the same. The said burden has not been discharged, in the facts of the present case. Thus, the process undertaken on the top gas for removal of impurities to satisfy not only the conditions set out in the letter granting permission to the appellant for continuation and expansion of its manufacturing facilities but also to ensure compliance of the process design of the Technology supplier would not result in manufacture of the export gas. The Commissioner was, therefore, not justified in confirming the demand. Appeal allowed.

Summary

Issues Involved:
1. Whether the removal of impurities from top gas amounts to "manufacture" under the Central Excise Act.
2. Classification of the resultant export gas under the Excise Tariff Act.
3. Marketability and excisability of the export gas.

Summary:

1. Whether the removal of impurities from top gas amounts to "manufacture" under the Central Excise Act:
The Tribunal examined whether the process undertaken on the top gas for removing impurities would amount to "manufacture" under Section 2(f) of the Central Excise Act. The appellant argued that the top gas, which emerges as a technological accident in the manufacture of Direct Reduced Iron, is similar to refuse like dross and skimmings, and the process of scrubbing impurities is mandated by environmental regulations, not for creating a new product. The Tribunal referred to various Supreme Court judgments, including *Union of India vs. Indian Aluminium Co. Ltd.*, which held that dross and skimmings are not manufactured goods but refuse. The Tribunal concluded that the removal of impurities from the top gas does not result in the manufacture of a new product, and thus, the export gas is not a manufactured product.

2. Classification of the resultant export gas under the Excise Tariff Act:
The department classified the export gas under Tariff Item 2811 29 40 of the Excise Tariff Act as Carbon Monoxide. The appellant contended that the export gas is a mixture of gases and not predominantly Carbon Monoxide. The Tribunal noted that the export gas has only 47.02% Carbon Monoxide, and the rest is Hydrogen and Carbon Dioxide. Referring to the Supreme Court's decision in *South Bihar Sugar Mills Ltd. vs. Union of India*, the Tribunal held that a mixture of gases cannot be classified as Carbon Monoxide merely because it contains some percentage of it. Therefore, the classification under Tariff Item 2811 29 40 was not justified.

3. Marketability and excisability of the export gas:
The Tribunal examined whether the export gas is marketable and excisable. The Commissioner had held that the export gas is marketable because it is sold to Jindal and JSW, and thus, it is excisable. The Tribunal, however, emphasized that mere marketability does not make a product excisable unless it is manufactured. The Tribunal referred to the Bombay High Court's decision in *Hindalco Industries Limited vs. Union of India*, which held that both manufacture and marketability are required for a product to be excisable. Since the export gas was not manufactured, it cannot be subjected to excise duty.

Conclusion:
The Tribunal set aside the orders confirming the demand for central excise duty on the export gas, holding that the process of removing impurities from the top gas does not amount to manufacture, and the resultant export gas is not a manufactured product. The excise appeals filed by the appellant were allowed.