JUNE 23, 2014

By Sunil Kejriwal,CA

This article attempts to analyze the excisability of fly ash.

Fly ash emerges on the burning of coal. It may be noted that until Feb'11, fly ash was specifically exempted from the levy of excise duty vide Notification No. 76/86-CE dated 10-02-1986. However, in the Budget 2011, the said notification was superseded by Notification No. 17/2011-CE dated 01-03-2011 whereby the specific exemption to fly ash was withdrawn. Simultaneously, Notification No. 1/2011-CE and Notification No. 2/2011-CE were also issued which provided the effective rate of excise duty on fly ash as 1%/5% (now 2%/6%). So it appears that as per the specific provisions of the law, at present, fly ash is exigible @2%/6%. Now, let us deal with the legal aspects relevant for determination of excisability of fly ash.

Under the Central Excise statute, the following basic conditions must be cumulatively satisfied before excise duty can be levied on any goods:

(i) The goods must be excisable;

(ii) Such goods should be manufactured; and

(iii) The manufactured goods should also be marketable.

So far as the excisability of goods is concerned, it may be noted that the term ‘excisable goods' has been defined in Section 2(d) of the Central Excise Act, 1944 to mean goods specified in the First Schedule and the Second Schedule to the Central Excise Tariff Act, 1985 (5 of1986) as being subject to a duty of excise and includes salt. Further, the explanation to the said sub-section provides that goods includes any article, material or substance which is capable of being bought and sold for a consideration and such goods shall be deemed to be marketable. As fly ash is covered under Chapter 26 of the Central Excise Tariff Act and further, carries a rate of duty, the same duly satisfies the condition of being an excisable goods. Further, as fly ash is used in various industries like brick, cement industry and thus capable of being sold at the price, the same also satisfies the condition of marketability.

Now let us proceed to examine whether fly ash can be said to be manufactured. Section 2(f) of the Central Excise Act, 1944 defines the term “manufacture” as follows:

“ ‘manufacture' includes any process, -

(i) incidental or ancillary to the completion of a manufactured product;

(ii) which is specified in relation to any goods in the Section or Chapter notes of the First Schedule to the Central Excise Tariff Act, 1985 (5 of 1986) as amounting to manufacture; or

(iii) which, in relation to the goods specified in the Third Schedule, involves packing or repacking of such goods in a unit container or labelling or re-labelling of containers including the declaration or alteration of retail sale price on it or adoption of any other treatment on the goods to render the product marketable to the consumer, and the word “manufacturer” shall be construed accordingly and shall include not only a person who employs hired labour in the production or manufacture of excisable goods, but also any person who engages in their production or manufacture on his own account.”

To understand the same in the context of fly ash, reference is made to the judgement of the Hon'ble Apex Court in the case of Union of India vs. Ahmedabad Electricity Co. Ltd. - 2003-TIOL-17-SC-CX wherein the Hon'ble Apex Court was analyzing the excisability of cinder/coal ash. The Hon'ble Apex Court held that excise duty is not leviable on cinder/coal ash inter alia on the following grounds:

- That coal is not used as a raw material for the end product. It is being used only for the ancillary purpose that is as fuel. Therefore, irrespective of the fact whether any manufacture is involved in production of cinder, it should be held to be out of the tax net for the reason that it is not a raw material for the end product. [Here, with due regard, it is not understood as to why a particular usage of any material (coal in the instant case) should determine the excisability of the resultant product (cinder in the instant case) if the process is otherwise amounting to manufacture, as no such distinction is carved out by the legislature.];

- That in producing ‘cinder', no manufacturing process is involved. Coal is simply burnt as fuel to produce steam. Coal is not tampered with, manipulated or transformed into the end product. For purposes of manufacture, the raw material should ultimately get a new identity by virtue of manufacturing process. Since coal is not a raw material for the end product in all the cases before us , the question of getting a new identity as an end product due to manufacturing process does not arise. Burning of coal for purposes of producing steam cannot be said to be a manufacturing process. From burning of coal when you get cinder or ash, it cannot be said that a new product had emerged. Accordingly, coal ash fails the test of being manufactured in India;

- That department has been consistently taking a stand that cinder is not excisable as it does not involve any manufacturing activity. The department issued Circular No. B. 352/75-TRU (Pt.) dated 06-06-1975 clarifying that coal ash left out in burning of coal would not attract duty for the reason that in the burning of coal as fuel resulting in coal ash as a waste product, no manufacturing process is involved. How can suddenly cinder become exigible to excise duty if the procedures which lead to emergence of cinder have remained the same. If it was not the result of manufacturing process in 1975, it is not so even now;

- That in Circular No. 386/19/98-CX dated 07-04-1998, the CBEC while declaring coal ash (cinder) as subject to excise duty, states that “the commodity also satisfied the tests of marketability and has a distinct commercial identity known to trade.” However, there is no reference to the essential test of being manufactured in India. It is for failing this test that the item was excluded from the levy of excise duty earlier;

- That waste/scrap obtained not by process of manufacture but in the course of manufacturing the end product is not exigible to excise duty.

Though the above judgement has been rendered in respect of cinder, the above grounds would equally apply to fly ash since fly ash also emerges from the same process.

Accordingly, it can be said that though fly ash is an excisable goods and satisfies the test of marketability also, excise duty still would not be leviable on the same for the reason that the same does not satisfy one of the crucial condition of being manufactured.

It may also be noted here that vide Notification No. 89/95-CE dated 18-05-1995, waste, parings and scrap arising in the course of manufacture of exempted goods are exempted from the levy of excise duty. However, the said exemption is available only in the event where the factory in exclusively engaged in the manufacture of exempted goods and no other excisable goods are manufactured. It appears that the intention of the legislature is to exempt waste, pairings and scrap which are generated in a factory where the main product is not subject to levy of excise duty.

Let us now examine the applicability of the said exemption notification in the case of power generating companies which are major consumer of coal and hence, major producer of fly ash. It may be observed that the said notification defines exempted goods as excisable goods which are chargeable to “Nil” rate of duty or are exempted from the whole of the duty of excise leviable thereon. It would be pertinent to note that though electrical energy is specified under tariff heading 2716 00 00, it does not carry any rate of duty and accordingly, it does not satisfy the condition for being the “excisable goods” and consequently the “exempted goods”. Accordingly, if a strict interpretation is adopted, the benefit of Notification No. 89/95 (supra) would not be available to power generating companies engaged exclusively in the generation of electricity, though the same may not be the intention of the legislature.

However, excise duty still may not be leviable on fly ash for the reason that the same is not an outcome of any manufacturing process as held by the Hon'ble Apex Court in the case of Ahmedabad Electricity Co. Ltd. (supra) and the issuance of Notification No. 1/2011 and Notification No. 2/2011 may not be of any help to the department for fetching additional revenue.

With the issuance of the above notifications, the CBEC is once again required to clarify the position of law with respect to exigibility of fly ash which was settled by the Hon'ble Apex Court after a long litigation. The same would also facilitate non-cumbersome removal of polluting fly ash which the Ministry of Environment and Forests has been continuously striving for.

Editor – Also see 2014-TIOL-1088-CESTAT-MUM