CESTAT Chandigarh Quashes CENVAT Credit Reversal Demand on Zinc Ash: Key Lessons from Mahesh Chemicals Allied Industries

Background and Overview

A significant ruling has emerged from the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Chandigarh, in the matter of Mahesh Chemicals Allied Industries Vs Commissioner of Central Excise and Central Goods & Service Tax, which addresses a long-standing controversy surrounding the excisability of Zinc Ash and the consequential obligation to reverse CENVAT credit under Rule 6 of the CENVAT Credit Rules, 2004. The Tribunal's order, pronounced on 30.07.2024, provides welcome clarity for manufacturers dealing with industrial by-products and residues by setting aside demands that had their roots in a subsequently rescinded CBIC Circular.

This case holds particular relevance for manufacturers who generate by-products or waste residues during their production processes and who have faced CENVAT credit reversal demands premised on the classification of such residues as "exempted goods."

Material Facts of the Case

The assessee, a manufacturer engaged in the production of Zinc Ingots and Zinc Sulphate fertilizer classified under Chapter Headings 7901 and 2833 of the Central Excise Tariff Act, 1985, was subjected to an investigation by the Directorate General of GST Intelligence (DGGI).

During the course of the investigation, the DGGI recorded the following manufacturing process:

  • Zinc Skimming was pulverized, resulting in two distinct outputs: Zinc Metal and Zinc Ash
  • The Zinc Metal portion was melted in a furnace and converted into Zinc Ingots
  • Zinc Ash was either captively consumed for manufacturing Zinc Sulphate (by adding Sulphuric Acid) or sold in the domestic market on payment of Central Excise duty

The assessee had been consistently paying Central Excise duty on the clearance or captive consumption of Zinc Ash, treating it as an excisable product. Additionally, at the time of importing Zinc Ash, the assessee had paid Countervailing Duty (CVD) and Special Additional Duty (SAD), availing CENVAT credit of the same.

The Demand and Show Cause Notice

The DGGI, relying on the Supreme Court's ruling in Union of India Vs. DSCL Sugar Ltd – 2015 (322) ELT 769 (SC) and the consequent CBIC Circular No. 1027/15/2016-CX dated 25.04.2016, took the position that:

  • Zinc Ash was a non-excisable by-product, not arising from a manufacturing process
  • Since Explanation 1 to Rule 6(1) of the CENVAT Credit Rules, 2004, inserted with effect from 01.03.2015, treated non-excisable goods cleared for consideration as "exempted goods," Zinc Ash attracted the Rule 6 reversal obligation
  • The assessee had neither maintained separate accounts under Rule 6(2) nor reversed CENVAT credit at the applicable percentage under Rule 6(3)

A show cause notice dated 20.05.2019 was issued covering the period March 2015 to June 2017, proposing:

  1. Recovery of Rs. 71,68,232/- representing 6% of the value of Zinc Ash (amounting to Rs. 12,90,45,999/-) sold or captively consumed, under Rule 6(3) of the CENVAT Credit Rules, 2004 read with Section 11A of the Central Excise Act, 1944
  2. Levy of interest at the applicable rate
  3. Imposition of penalty under Rule 15(1) of the CENVAT Credit Rules, 2004 and Rule 25 of the Central Excise Rules, 2002 read with Section 11AC(1) of the Central Excise Act, 1944
  4. Appropriation of Rs. 1,61,30,759/- being the Central Excise duty charged and collected on Zinc Ash, under Section 11D(1A) of the Central Excise Act, 1944 read with Section 142(6)(a) and Section 174 of the CGST Act, 2017
  5. Imposition of a penalty of Rs. 5,00,000/- on the partner Shri Suresh Goyal under Rule 26 of the Central Excise Rules, 2002

The Commissioner of Central Excise and Central Goods & Service Tax, Rohtak confirmed all the above proposals vide the common impugned order dated 13.12.2019, following which the assessee filed appeals before CESTAT Chandigarh.

The Tribunal was called upon to adjudicate the following questions: