In EXCISE APPEAL No.53258 of 2018-CESTAT- Empty barrels are only packing material in which inputs are received and no excise duty can be charged on such scrap: CESTAT 
President-Dilip Gupta & Technical Member- P.V. Subba Rao [17-02-2023]

Read Order: CAIRN INDIA LIMITED V. ASSISTANT COMMISSIONER

Mansimran Kaur

New Delhi, February 18, 2023: The Delhi Bench of the Customs, Excise & Service Tax Appellate Tribunal has opined that the empty barrels are only packing material in which the inputs are received and these barrels are not generated during the process of manufacture. Therefore, no excise duty can be charged even on that scrap.

President-Dilip Gupta and Technical Member- P.V. Subba Rao allowed the present appeal by observing that in the present case the pipes do not get consumed and do not get transformed into oil. They are used to manufacture/production of oil. When such pipes need repair or replacing and waste is generated in the process, it is a waste generated during the repair or maintenance of capital goods and not during the process of production of oil or any process incidental or ancillary to it. For this reason, the bench stated that no excise duty could be charged on the scrap of pipes produced in this manner. 

The appellant in the present case claimed to produce oil by drilling. In the process of manufacture/production of oil, plastic barrels in which the input chemicals were procured arise as scrap. Further, due to wear and tear, the pipes used in the production of oil had to be replaced at times. At times, residuary portion of tubes or pipes upon cutting and fitting of operation etc., also arises as waste/scrap. It is undisputed that the appellant sells these waste and scrap to third parties.

The case of the Revenue was that the appellant was generating this scrap in the process of manufacture of excisable goods namely oil and, therefore, it was chargeable to excise duty. Excise duty totaling Rs. 76, 23,366 was, therefore, demanded in three show cause notices and was confirmed by the original authority and upheld on appeal, by the impugned orders. Penalties amounting to Rs. 47, 74,082 had been imposed upon the appellant.

Counsel for the appellant submitted that waste and scrap in the form of pipes and barrels only arises in the process of production of oil and this waste and scrap is not manufactured by the appellant.

After considering the submissions from both the sides, the Court noted that it is true that in case of production of oil, the use of pipes is absolutely essential and without using such pipes the final product, namely oil cannot be produced at all. It is for this reason that the pipes suffer considerable wear and tear and require replacing. What needs to be decided in this case is whether the used/broken pipes which are generated as waste in this case arise out of the process of manufacture or out of the process of maintenance of the capital goods, the Court stated. 

In view of the same, the Court noted that when some waste is generated in the process of manufacture of the goods it comes out of the inputs directly or the inputs transform into some form. Input is that substance or material which, after transformation, becomes the output. By contrast, capital goods are those goods which are used in the manufacture or production of the goods without themselves getting transformed. 

It was further noted, in this case, the pipes do not get consumed and do not get transformed into oil. They are used to manufacture/production of oil. Regardless of the fact that the use of pipes is essential for production of oil, the pipes by themselves are capital goods and are not inputs. 

“When such pipes need repair or replacing and waste is generated in the process, it is a waste generated during the repair or maintenance of capital goods and not during the process of production of oil or any process incidental or ancillary to it”, the Bench held.

For this reason, the Bench opined that no excise duty could be charged on the scrap of pipes produced in this manner. “Similarly, the empty barrels are only packing material in which the inputs are received and these barrels are not generated during the process of manufacture. Therefore, no excise duty can be charged even on that scrap”,  the Court further observed. 

In view of  such observations, the impugned order was set aside and the appeal was allowed.