By TIOL News Service

MUMBAI, MAY 13, 2016: THE appellants are distilleries that source molasses, the primary input, from various sugar factories on payment of duty and on which CENVAT Credit is taken. The credit taken is reversed proportionately upon clearance of rectified spirit chargeable to state excise duty.

The manufacturing process involves addition of water and yeast to the molasses which ferment to transform the mixture into raw ethyl alcohol and carbon dioxide. Carbon dioxide is piped out for sale to manufacturers of carbonated water and to users in industrial activity. Raw ethyl alcohol is subject to distillation which produces rectified spirit and waste water. Waste water is fed into bio-digesters to produce bio-gas which comprises methane, carbon dioxide and hydrogen sulphide. Rectified spirit finds use in production of alcohol for human consumption. Other industrial demand is catered to by denaturing of the rectified spirit to segregate the two owing to the control and monitoring of potable alcohol being assigned to state governments and in accordance with laws enacted by the state legislatures. Denatured spirit is subject to duties of central excise while potable alcohol is outside the purview of central excise duty.

As mentioned, the appellants resorted to reversal of credit in accordance with Rule 6(3)(a) of CCR, 2004 till 31st March 2008 and thereafter opted for the formula prescribed in Rule 6(3A) of CCR, 2004.

Appellants were issued with SCNs for varying periods between April 2007 to March 2013 seeking to deny credit of duty paid on molasses during this period and to seek recovery of credit utilized for clearance of denatured rectified spirit. The claim of Revenue was that reversal of proportional CENVAT credit was not sufficient compliance of obligation under Rule 6 supra.

The original authority rendered a finding that with effect from 28th February 2005, 'rectified spirit' was non-excisable owing to alteration of the tariff entry in the Schedule to the CETA, 1985. He also disallowed the credit of duty paid on molasses on the ground that the final product is entirely non-excisable and, thus, exempt. Further holding that Rule 6(3)(i) was not required to be followed for non-excisable goods and conceding that the amount paid by the appellants in accordance with the said Rule, he permitted off-setting of the amount so paid towards the CENVAT credit disallowed.

The appellant submitted that ethyl alcohol continued in the tariff after February 2005 and hence was not an exempted product, that this is reinforced by exemption notification no. 3/2005-CE at serial no. 14 prescribing 'nil' rate for un-denatured spirits, that this exemption continued even under notification no. 12/12-CE dated 17th March 2012. Reliance was placed in support on the following case laws Ugar Sugar Works Ltd. - 2007-TIOL-2075-CESTAT-BANG, Godavary Sugar Mills Ltd. - 2007-TIOL-602-CESTAT-BANG. It was also contended that the changes in the Tariff with effect from 28th February 2005 was not intended to bring about any substantive changes in taxation and that the proceedings initiated were, therefore, incorrect. It was also submitted that ethyl alcohol is not the sole product that emerges from the manufacturing process as carbon dioxide is a by-product besides clearing of denatured spirit which is a dutiable item; that credit could not be denied or varied even if non-dutiable intermediate goods emerge.

The AR supported the order of the adjudicating authority by relying upon the following decisions - L'Oreal India Private Ltd. - 2012-TIOL-722-CESTAT-MUM, Orion Appliances Ltd. - 2010-TIOL-752-CESTAT-AHM and Madhukar Sahakari Sakhar Karkhana Ltd - 2014-TIOL-2265-CESTAT-MUM.

The CESTAT inter alia observed -

++ The existence of rectified spirit, even if not excisable, is not deniable. Merely owing to non-dutiability or coverage under the entry empowering taxation as a duty of excise by the Union, it does not transform as a figment of the imagination. That it finds a place in the tariff as it stood prior to 28th February 2005 and in its altered form thereafter clearly evidences so. That it finds a place in an exemption notification reinforces the position. Admittedly, an exempted good does emerge from the distillation. Most of these may have been cleared under the excise laws of the state; to the extent that they have been, it is akin to clearance of goods on which exemption notification has been claimed.

++ Denaturing of ethyl alcohol is an extension of the process of manufacturing a dutiable product commencing with molasses. Therefore, there can be no doubt that the appellants manufacture both exempted and dutiable goods using duty-paid molasses. It would appear that the appellants have been following the procedure laid down in Rule 6 of CENVAT Credit Rules, 2004 and reversing credit taken on inputs at the time of clearance of rectified spirit.

++ The Tribunal has consistently been taking the stand that in case of molasses used for manufacture of rectified spirit and de-natured alcohol by distilleries, compliance with Rule 6 of CENVAT Credit Rules, 2004 is sufficient. [Vishwanath Sugars Ltd. - 2010-TIOL-264-CESTAT-BANG relied upon]

++ In the matter before the Supreme Court [CA D. No. 28938 of 2015 filed by Revenue dismissed] [High Court ruling - 2015-TIOL-139-HC-MAD-CX], the Tribunal had ruled in favour of the assessee who manufactures rectified spirits and de-natured alcohol from molasses produced by the assessee as a by-product of manufacture of sugar. The molasses was eligible for exemption from duty upon being captively consumed for manufacture of de-natured spirits under notification no. 67/95-CE dated 16th March 1995.

++ From the above decision, it is clear that denatured alcohol is acknowledged as an excisable goods and 'output' in terms of CCR, 2004. There cannot be discriminatory treatment in the treatment accorded to two manufacturers of the same product merely on the ground that one used captively produced molasses and the other procures from external sources.

++ It is, thus, amply clear that rectified spirit is an exempt goods and as the appellants do manufacture dutiable goods also, CENVAT Credit Rules does permit them to take credit of duty paid on molasses subject to compliance with Rule 6 of CENVAT Credit Rules, 2004.

++ There is no finding that they have not reversed the CENVAT Credit taken on inputs that have gone into the exempt goods. This is sufficient compliance of Rule 6. They are, consequently, not required to be subject to recovery of duty on goods cleared by utilization of CENVAT Credit and not required to make the good the credit taken on inputs.

The orders were set aside and the appeals were allowed.

(See 2016-TIOL-1132-CESTAT-MUM)