CENVAT Credit on Inputs Used for Processing Waste: Key Takeaways from Nitta Gelatin India Ltd. Vs Commissioner of Central Excise (CESTAT Bangalore)

The decision of the CESTAT Bangalore in Nitta Gelatin India Ltd. Vs Commissioner of Central Excise clarifies an important issue under the Cenvat Credit Rules, 2004: whether CENVAT credit on common inputs can be denied merely because waste generated during manufacture of a dutiable final product is further processed into another dutiable commodity.

The Tribunal allowed three connected appeals filed by M/s. Nitta Gelatin India Ltd., setting aside a common Order-in-Appeal dated 28.01.2016 passed by the Commissioner (Appeals-I), Cochin. The ruling reaffirms the principle that where waste/by-products inevitably arise in the production of a main final product, use of some of the same inputs to convert such waste into another product does not, by itself, justify denial of CENVAT credit or the benefit of conditional exemption/concessional notifications—absent specific proof of exclusive input usage.

Background of the Dispute

Manufacturing activity and CENVAT credit

  • The assessee, M/s. Nitta Gelatin India Ltd., is engaged in the manufacture of Gelatin at its unit in Kakkanad, Ernakulam.
  • For manufacturing Gelatin, the assessee availed CENVAT credit on:
    • Inputs such as hydrochloric acid, furnace oil, acetic acid, etc.
    • Eligible input services.
    • Capital goods.
  • The CENVAT credit so availed was utilized for payment of Central Excise duty on the assessee’s dutiable final product, namely Gelatin.

Generation of sludge and subsequent manufacture of Nutri Gold

  • In the course of extracting Gelatin from Ossein, a sludge emerged as an inevitable waste/hazardous by-product of the manufacturing process.
  • This sludge was initially treated as waste and disposed of within the factory and was not reflected in ER-1 returns, as it was not, at that stage, an excisable product.
  • At a later point, the assessee adopted an additional process to convert this sludge into a fertilizer:
    • The sludge was treated with acetic acid.
    • It was then washed with hot water to remove part of the acetic acid.
    • Caustic soda was added to adjust the pH level.
  • The resulting product, a fertilizer traded as Nutri Gold (also referred to in material as Nutri Gold/Seedaid), was classifiable under CTH 3105 5900 of the Central Excise Tariff.

Excise duty position and conditional notifications

  • Nutri Gold, as a fertilizer falling under Chapter 31, was initially exempt from excise duty under Notification No. 4/2006-CE dated 01.03.2006.
  • With effect from 01.03.2011, the exemption was withdrawn and the following duty regime applied:
    • Notification No. 1/2011-CE dated 01.03.2011: concessional rate of 1% ad valorem without availment of CENVAT credit on inputs or input services.
    • Notification No. 2/2011-CE dated 01.03.2011: concessional rate of 5% ad valorem with CENVAT credit facility.
  • Initially, Nutri Gold was cleared without payment of duty under Notification No. 4/2006-CE up to 01.03.2011.
  • Thereafter, the assessee started clearing Nutri Gold at 1% duty under Notification No. 1/2011-CE, opting for the route that required non-availment of CENVAT credit on inputs or input services used in relation to this product.

Revenue’s Stand and Show Cause Notices

Core allegation of the department

The Revenue contended that the assessee had availed CENVAT credit on inputs and input services used in the manufacture of Nutri Gold. On this basis, it alleged that:

  • The condition prescribed in Notification No. 1/2011-CE (and the subsequent Notification No. 12/2011-CE dated 17.03.2012, which continued the concessional regime) was violated.
  • As a consequence, Nutri Gold should have been cleared at 5% ad valorem under Notification No. 2/2011-CE, instead of 1% under Notification No. 1/2011-CE.
  • The assessee was allegedly liable to pay differential Central Excise duty together with equal penalty amounts.

Extract from representative show cause notice

One of the key show cause notices, dated 08.10.2012, recorded the following factual position:

  • Gelatin is manufactured from Ossein supplied from another division.
  • During extraction, sludge is generated and then treated with acetic acid and hot water, with caustic soda added to correct pH, to produce Nutri Gold / Seedaid.
  • This fertilizer, classifiable under heading 3105 5900, had been exempt under Notification No. 4/2006-CE.
  • After withdrawal of exemption, the goods were subject to:
    • 1% duty without CENVAT credit under **Notification No.