Incidental Waste From Sponge Iron Units Not Excisable Without Manufacture: CESTAT Hyderabad

The Hyderabad Bench of the CESTAT in Pr. Commissioner of Central Tax Vs Maruti Ispat And Energy Pvt Ltd. (CESTAT Hyderabad) has clarified that incidental residues such as dolochar, fly ash, iron ore fines and other waste arising during the manufacture of sponge iron cannot be subjected to Central Excise duty merely on the basis of marketability or tariff coverage. The Tribunal reaffirmed that “manufacture or production” under Section 3 of the Central Excise Act, 1944 is the essential taxable event, and saleability alone cannot render incidental waste excisable.

The Department’s appeal against the order of the Commissioner (Appeals) was dismissed, thereby confirming the setting aside of Central Excise duty of Rs. 1,91,54,979/-, along with interest and penalties, originally confirmed by the Adjudicating Authority for the period April 2010 to January 2015.

Background of the Dispute

Assessee’s Business and Products Involved

The respondent, Maruti Ispat And Energy Pvt Ltd., is engaged in the manufacture of sponge iron falling under tariff item 72031000 of the Central Excise Tariff. During the course of the sponge iron manufacturing process, the following by-products / residues / waste emerged:

  • Dolochar
  • Fly ash
  • Waste material
  • Iron ore fines

These materials were cleared without payment of Central Excise duty.

Department’s Stand and Show Cause Notice

The Department took the view that these materials:

  • Have distinct names and identifiable characteristics,
  • Are capable of being sold for a consideration,
  • Are commercially usable and in fact sold, and
  • Are specifically covered by tariff entries.

Placing reliance on the explanation to Section 2(d) of the Central Excise Act, which broadens the concept of “goods” to include any article, material or substance capable of being bought and sold for consideration, the Department proceeded on the footing that the above materials were marketable excisable goods.

Accordingly, a Show Cause Notice dated 04.02.2016 was issued for the period April 2010 to January 2015, proposing to demand:

  • Central Excise duty of Rs. 1,91,54,979/-,
  • Interest, and
  • Penalties, including personal penalties on company officers.

The Show Cause Notice relied, inter alia, on Board Circular No. 904/24/2009-CX dated 28.10.2009, which was later rescinded by Circular No. 1027/15/2016-CX dated 25.04.2016.

Order-in-Original and Penalties

The Adjudicating Authority, by Order-in-Original dated 26.12.2016:

  • Held that dolochar, fly ash, waste material and iron ore fines were excisable,
  • Confirmed the demand of Rs. 1,91,54,979/- with interest,
  • Imposed penalty under Section 11AC of the Central Excise Act, 1944, and
  • Imposed personal penalties on the Managing Director and the authorised signatory under Rule 26 of the Central Excise Rules, 2002.

Commissioner (Appeals) Decision

The assessee challenged the Order-in-Original before the Commissioner (Appeals). The Commissioner (Appeals) held that:

  • The disputed materials were not the result of any independent process of manufacture, and
  • They arose incidentally and inevitably during the manufacture of sponge iron.

Consequently, the entire demand of duty, interest and penalties was set aside by Order-in-Appeal dated 31.01.2018.

The Department then filed the present appeal before the CESTAT Hyderabad.

Arguments Before the Tribunal

Department’s Submissions

The Department’s Authorised Representative contended that:

  • The disputed goods have distinct names and commercial utility.
  • They are regularly bought and sold for consideration in the market.
  • They are covered by specific tariff entries.
  • In light of the explanation to Section 2(d), any article that can be bought and sold should be regarded as “goods” for excise purposes.
  • The respondent had, at a later stage, started paying duty on fly ash and ESP dust, which, according to the Department, supported the conclusion that these items were excisable.

On this basis, it was argued that the Commissioner (Appeals) incorrectly set aside the adjudication order.

Respondent’s Submissions

Counsel for the assessee supported the Order-in-Appeal and submitted that:

  • Under Section 3 of the Central Excise Act, 1944, excise duty is attracted only on goods that are manufactured or produced in India.
  • Manufacture is an indispensable condition; marketability or classification in the tariff cannot substitute the requirement of manufacture.
  • The disputed items—dolochar, fly ash, iron ore fines and other waste—arise inevitably as residues in the process of producing sponge iron and are not manufactured products of the assessee.
  • With respect to dolochar, even if it were treated as excisable, it would be covered by unconditional exemptions under:
    • Notification No. 4/2006-CE dated 01.03.2006, and
    • **Notification No.