CESTAT Chennai Quashes CENVAT Reversal Demand: Captively Consumed Intermediate Goods Cannot Be Equated with Exempted Final Products
The classification and treatment of intermediate products emerging during a continuous manufacturing process have long been a subject of intense litigation under indirect tax laws. A recurring dispute between the revenue authorities and the manufacturing industry revolves around the applicability of CENVAT credit reversal mechanisms when an intermediate product, which is otherwise exempt from duty, is captively consumed to manufacture a dutiable final product.
In a highly significant judicial determination, the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) Chennai, in the matter of Lotte India Corporation Ltd. Vs Commissioner of GST & Central Excise (CESTAT Chennai), has provided profound clarity on this subject. The Tribunal categorically ruled that an intermediate product generated and consumed within the factory premises—or sent to a job worker for further processing into a dutiable final product—does not qualify as an "exempted final product" for the purpose of invoking Rule 6 of the CENVAT Credit Rules, 2004.
This comprehensive analysis delves into the factual matrix, the statutory framework, the arguments advanced by both sides, and the established judicial precedents that guided the Tribunal in delivering this pivotal order on 16.09.2026.
Factual Matrix of the Dispute
The assessee, Lotte India Corporation Ltd., is engaged in the commercial production of sugar-boiled confectionery, which is statutorily classifiable under Chapters 17 and 18 of the CETA, 1985. During the continuous manufacturing process of these dutiable confectioneries, an intermediate product identified as 'processed milk' emerges.
As per the operational facts recorded in the order, the assessee receives fresh milk in specialized tankers. This raw milk is subjected to an evaporation process until it reaches a concentration level of 70–74° Brix. Following this concentration, sugar is added to the evaporated milk to enhance its shelf life, resulting in the creation of 'processed milk'. The assessee maintains distinct and separate accounting records for the principal ingredients (fresh milk and sugar) and does not avail any CENVAT credit on these specific inputs.
This processed milk, falling under Chapter Heading 0402 of the tariff, is entirely utilized either through captive consumption within the assessee's own manufacturing facility or by being supplied to authorized sub-contractors/job workers exclusively for the further manufacture of the final dutiable sugar confectionery. It is an undisputed fact that processed milk enjoys an absolute exemption from excise duty by virtue of Notification No.03/2006-CE dated 01.03.2006.
The Genesis of the Department's Allegations
The dispute was triggered when the Central Excise Department conducted a verification of the assessee's statutory records. The revenue authorities observed that the assessee had availed CENVAT credit on various common input services utilized in the factory. The Department formed a view that since 'processed milk' was an exempted product under Notification No.03/2006-CE dated 01.03.2006, the assessee was effectively manufacturing both dutiable goods (sugar confectionery) and exempted goods (processed milk).
The Department alleged that the assessee had failed to maintain separate accounts for the receipt and consumption of common input services used in the manufacture of both categories of goods, thereby triggering the restrictive provisions of Rule 6 of the CENVAT Credit Rules, 2004.
Consequently, the Department initiated penal proceedings by issuing multiple Show Cause Notices:
- A Show Cause Notice dated 04.04.2014 was issued proposing a recovery of Rs. 4,17,126/- for the period of March 2013, along with applicable penalties.
- For the subsequent period spanning from April 2013 to March 2014, the assessee had proactively undertaken a reversal of CENVAT credit by opting for the formula-based mechanism under
Rule 6(3A). However, the Department alleged that this reversal was computationally deficient. - Based on the allegation of short-reversal, further Show Cause Notices dated 05.02.2014 and 02.05.2014 were issued, proposing an additional recovery of Rs. 6,60,643/-, alongside proposals for the imposition of penalties.