CX - Board Circular dated 28.10.2009 on Bagasse is all GAS - Allahabad High Cour

CX - Board Circular dated 28.10.2009 on Bagasse is all GAS - Allahabad High Court quashes Circular

DURING the course of manufacture of sugar and molasses from sugarcane, bagasse is generated as a waste product. Bagasse is the fibrous matter that remains after sugarcane stalks are crushed to extract their juice. It is currently used as a biofuel and in the manufacture of pulp and paper products and building materials.

The 'bagasse' is classified under sub-heading 2303 20 00 of CETA, 1985 as 'Beet-Pulp', 'bagasse' and other waste of sugar manufacture' and cleared from the factory at NIL Tariff rate of duty.

The petitioner is using lubricant and grease to run the mills for crushing cane and extraction of juice in the process of which 'Bagasse' emerges as residue/waste after extracting juice from sugarcane. The petitioner transports about 65% cane from cane centres and service tax is being paid by the petitioner on the transportation of the cane and for which the CENVAT credit is taken. Service tax is also paid on repair and maintenance to contractors and also to the various other services for which the credit is taken by the petitioner. The petitioner is availing credit of Central Excise duty paid on inputs and capital goods as provided under CCR, 2004 for further payment of Central Excise Duty on final products, viz., Sugar and Molasses.

On the subject of excisability of "Bagasse", the Board in its Circular 904/24/2009-CX., dated October 28, 2009 clarified -

"2. The matter has been examined. Excisability of bagasse and similar waste products arising during the course of manufacture has been under dispute for a long period of time. There are number of Tribunal's judgments that being waste, these are not excisable products. Departmental appeal in respect of excisability of bagasse in one such case i.e Balrampur Chinni Mills Ltd. is reportedly still pending in the Supreme Court. Generally, the courts have been taking a view that the waste or refuse or residue arising during the course of manufacture can-not be treated as excisable goods even if such waste fetches some price in the market. However, all these matters pertain to the period prior to 2008.

3. In the budget of 2008, the definition of "excisable goods" in clause (d) of Section 2 of the Central Excise Act, 1944 was amended by adding an explanation that for the purposes of this clause, "goods" include any article, material or substance which is capable of being bought and sold for a consideration and such goods shall be deemed to be marketable.

4. It is clarified that with this amendment in Section 2 (d), the bagasse, aluminium/zinc dross and other such products termed as waste, residue or refuse which arise during the course of manufacture and are capable of being sold for consideration would be excisable goods and chargeable to payment of excise duty.

5. Field formations are advised to take suitable action for ensuring recovery of duty from the assessees in respect of these goods for the period after the budget of 2008. It is further clarified that in case the rate of duty in respect of such products is Nil in the tariff or they are exempt from duty in terms of any exemption notification, and if Cenvat Credit has been taken on the inputs which are used for manufacture of dutiable and exempted goods, then in terms of rule 6 of Cenvat Credit Rules, 2004, the assessee is required to reverse the proportionate credit or pay 5% amount."

A Circular dated 3.10.2009 was also issued by the Chief Commissioner, Central Excise, U.P., Lucknow and based on the same demand notice dated 24/27.9.2010 was issued by the Joint Commissioner, Customs Central Excise and Service Tax.

Suffice to say that sugar manufacturers were the recipient of bitter show cause notices demanding the `amounts' citing rule 6 of the CCR, 2004 and many manufacturers paid these amounts along with interest but under Protest and took the matter to the High Court.

The petitioner submitted that since Bagasse is not a manufactured product, the provisions of Rule 6(1) of the CCR, 2004 would not come into play.

The Counsel for the Revenue submitted that the Supreme Court in Balrampur Chini Mills in Civil Appeal No. 2791 of 2005, decided on 21.7.2010 held that bagasse is not a manufactured product. However, consequent upon the amendment brought by the Government in the newly enacted and enlarged Section 2 (d) of the Central Excise Act, 1944, vide the Finance Bill, 2008, 'bagasse' got covered under the definition of excisable goods w.e.f 10.5.2008 and consequently bagasse w.e.f. 10.5.2008 is an 'exempted excisable goods' and hence the provisions of Rule 6 of the Rules would apply.

The High Court observed –

+ A perusal of Rule 6 (1) clearly shows that the manufacturer has to manufacture both dutiable goods as well as exempted goods. Since bagasse is not manufactured goods but is a waste product which emerges/comes into existence in the process of manufacture of sugar, it is not manufacture of exempted goods.

+ In the instant case 'sugar' is the final product and molasses is an intermediary product or by-product, therefore, for applicability of Rule 6, the manufacture of dutiable goods and manufacture of exempted goods are conditions precedent. Since waste is never manufactured and it only emerges in the process of manufacture of final product, Rule is not applicable to bagasse which is admittedly a waste, which emerges from the crushing of sugarcane for the manufacture of final product, namely, sugar.

+ The Tribunal in the case of CCE v. Shakumbhari Sugar and Allied Industries Limited, - (2003-TIOL-275-CESTAT-DEL) held that the 'Bagasse' obtained during the course of manufacture of sugar out of sugarcane may find an entry in Schedule to the Central Excise Tariff, but it does not become a final product merely on such entry. Such 'bagasse' is nothing but a waste obtained during manufacture of sugar waste cannot be regarded as a final product exempt from duty for invoking provisions of Rule 57 CC of Central Excise Rules, 1944. And the Revenue appeal against this decision has been dismissed by the apex Court.

+ The said finding has also been followed in the cases of Central Excise Commissioner v. Mahalakshmi Sugar Mills and Commissioner Central Excise, Meerut versus U. P. State Sugar Corporation - (2006-TIOL-1699-CESTAT-DEL) and held that the Bagasse and press mud are not final products of the manufacturer. Accordingly, recovery of 8% amount of the waste Bagasse and press mud cleared by the said sugar company was held to be not justified.

+ The Apex Court while dismissing the Civil Appeal No.2791 of 2005 preferred by the department vide judgment and order dated 21.7.2010, upheld the findings recorded by the Tribunal that reversal of 8% under 57 CC is not applicable as 'Bagasse' is not a final product, but it is a waste.

+ As held by the Apex Court, bagasse is not manufactured goods and it is never manufactured, but it only emerges in the process of final product, namely, sugar; bagasse being not a manufactured goods and being a waste, hence Rules 6 (2) and Rule 6 (3) are not applicable.

+ So far as the Explanation added to Section 2 (d), it only refers to the goods which is capable of being bought and sold shall be deemed to be marketable. Earlier also, bagasse was being bought and sold for a consideration and even after the amendment in 2008 it is being bought and sold for a consideration. Hence, it was marketable earlier also and no difference has been made about the marketability of bagasse on account of addition of explanation to Section 2 (d) of CEA, 1944 inasmuch as it does not cease to be waste and it does not become a manufactured final product for the purposes of Rule 6 of CENVAT Credit Rules.

Adverting to the decision of the Bombay High Court in the case of Rallies India Ltd. v. Union of India (2009-TIOL-16-HC-MUM-CX) holding that waste cannot be called a final product and hence, neither Rule 57 CC nor Rule 6 (2) is applicable and the apex Court decision in Gas Authority of India Ltd. (2007-TIOL-250-SC-CX), holding that rules denying benefit of Modvat Credit can only be in respect of final products and since the commodity mentioned in the show cause notice was not final product, hence the benefit of the Modvat Credit cannot be denied, the High Court concluded that although it is not in dispute that the bagasse is an agricultural waste of sugarcane, though marketable product, but the duty cannot be imposed as it does not involve any manufacturing activity simply by adding an explanation under Section 2(d) of the Central Excise Act, 1944.

The court also observed that the Chief Commissioner vide Circular dated 3.10.2009 had attempted to nullify the judgment and order dated 21.7.2010 rendered in Civil Appeal No.2791 of 2005. In fact, in compliance with the order of the High Court dated 07.05.2012, he was present in the Court and he submitted that the Circular dated 3.10.2009 was issued by his predecessor and he had retired on attaining the age of superannuation.

In fine, the Circulars issued by the Board and the Chief Commissioner of CE, Lucknow were quashed and it was held that the petitioners are not liable to duty either by payment or by reversal of CENVAT credit in respect of bagasse sold.

The Writ Petitions were allowed and the amounts paid by the petitioners were directed to be returned.