India: Excise Duty Is An Incidence Of Manufacture- Yet Again Held By The Hon'ble High Court

Last Updated: 14 October 2015
Article by Shipra Makkar Devgun

Most Read Contributor in India, September 2016

To be subjected to levy of excise duty "excisable goods" must be produced or manufactured in India. For being produced and manufactured in India, the raw material should have gone through the process of transformation into a new product by skillful manipulation. Excise duty is an incidence of manufacture and, therefore, it is essential that the product sought to be subjected to excise duty should have gone through the process of manufacture.

The said rule which was already laid by the Hon'ble Apex Court of India in UOI v Ahmadabad Electricity Company Limited reported in (2001) 11 SC 129 has once again been relied upon by the Hon'ble High Court of Madras, in whose considered view the ratio in the case above was squarely applicable in the case of "Fly ash" since it cannot be said to have gone through any manufacturing process.

In the case of M/s Mettur Thermal Power Station v CBEC and Anr. reported in 2015-TIOL-1948-HC-MAD-CX which relates to a writ petition filed by the petitioner, one of the various thermal stations of TANGEDCO, a Public Sector Undertaking owned by the Government of Tamil Nadu, engaged in generation and distribution of electricity and manufacture of 'Fly Ash' and 'Fly Ash Bricks' falling under Chapter 26219000 and 68159910 respectively, of the central excise Tariff Act.

As both the said products were cleared by the petitioner without payment of excise duty, a show cause notice was issued by the Respondents proposing to impose CENVAT duty along with interest and penalty under the Rules. Challenging the said show cause notice (hereinafter referred to as SCN), the present petition was filed wherein the main issue before the Hon'ble High Court was "whether the 'fly ash' and fly ash bricks' included as items in the entries to the first schedule to the Central Excise Tariff Act, per se make the same eligible to excise duty?"

The department took a view that during the process of production of electricity, 'Fly Ash' emerges as a by-product and generated during the burning of pulverized coal for power generation, which is marketable and has also an intrinsic value in the commercial market.

The department was also of the view that electricity is not an exempted product and it finds a place in the first schedule to the Act and thereby it is classified as tariff item. Being non-excisable goods, electricity cannot be regarded as exempted goods and as the 'Fly Ash' arising during the production of electricity is not covered by the Notification No.89/95-CE dated 18.05.1995, duty is to be paid on the 'Fly Ash'. The petitioner has not paid duty on the 'Fly Ash' in lieu of the levy of duty on the clearance of 'Fly Ash' with effect from 01.03.2011 with an intent to evade payment of duty which was detected during the investigation carried out by the department. The extended period of limitation is applicable.

Apart from the above various other issues were discussed regarding applicability of notification No. 89/95-CE dated 18.05.1995 with regards exemption to be provided/ not to be provided on 'fly ash' as a waste arising out of manufacture of 'electricity' which is exempted good or not along with difference between by-product and waste.

However, the court concentrating on the judgment of Ahmadabad Electricity, was of the view that 'fly ash' is produced during combustion of coal. The difference between 'cinder' (which was the subject matter in Ahmadabad Electricity case) and 'fly ash' was only that, when coal is not burnt fully and leaves pieces behind, is called 'cinder' whereas, when it is fully burnt and reduced to ash, is called 'fly ash'. Therefore ratio decided in the above said decision would squarely apply in the case of 'fly ash'. Also since the product 'fly ash' also cannot be said to have gone through any manufacturing process. The Hon'ble Court did not find it necessary to deal with other related issues and very categorically held that "Fly Ash' cannot be subjected to levy of excise duty because it is not an item of good which has been subjected to process of manufacture.

On the contrary, with regards "fly ash bricks", the Hon'ble High Court was of the view that since fly ash does not itself get shaped as bricks unless some manufacturing activity is involved. Since the raw material fly ash undergoes a change since an operation performed on it, resulting into fly ash brick, such operation would certainly amount to processing of the commodity and such commodity is recognized as a new and distinct article, i.e. 'fly ash brick' and therefore, it can be said that the good fly ash brick does involve manufacturing activity, which is admittedly, has marketability also being sold on a considerable price. Therefore, the good 'fly ash brick', having satisfied the test of being manufactured in India and also marketability, would be leviable to excise duty.

At this juncture, it shall be pertinent to mention that with effect from 01.03.2011, central excise duty at the rate of 1% was imposed on many goods which are hitherto exempted. 'Fly Ash' is found at Sl. No, 27 of the Notification.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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