M/S. V.S. Lignite Power Private Limited vs Commissioner Central Excise And Customs

Dilip Gupta, President

M/s. V.S. Lignite Power Private Limited [the appellant] has challenged the order dated 26.02.2019 passed by the Commissioner confirming the demand and ordering for its recovery from the appellant under rule 14 of the CENVAT Credit Rules 2004[the CENVAT Rules] read with section 11A(4) of the Central Excise Act 1944 [the Central Excise Act] with interest and penalty.

The issue involved in this appeal is whether the appellant is liable to pay any amount in terms of rule 6(3)(b) of the CENVAT Rules @ of 6% of the value of „clay‟ which is exempted from excise duty and arises during the course of excavation and production of the dutiable final product „lignite‟.

The appellant claims that it was authorized to mine only lignite for the purpose of captive consumption in generation of electricity and it is as a geographical necessity that in the process of excavation of lignite, the removal of overburden, top surface of the soil, and clay was unavoidable. The appellant claims that it does not own nor is authorized to sell such clay since the same belongs to the State Government of Rajasthan. According to the appellant, it had to remove overburden and clay to be able to reach lignite and the clay was merely stacked by the appellant with intimation to the State Government. The appellant also claims that the clay which was waste/refuse/by-product obtained during the excavation of lignite was lifted by M/s. Shanta Sales Corporation with the permission of the State Government.

A show cause notice dated 01.11.2017 was issued to the appellant alleging that the appellant appeared to have failed to reverse the CENVAT credit on the quantity of exempted goods i.e. clay cleared by the appellant during the period from 10.11.2012 to 28.02.2017. The show cause notice further alleges that the appellant had availed CENVAT credit of mining services on the strength of invoices raised by the sub-contractor and had utilised the entire credit for payment of central excise duty for clearance of the dutiable goods i.e. lignite but failed to reverse the CENVAT credit on the clearance of exempted goods i.e. clay which was also produced and cleared by the appellant which would be in contravention of rule 6(3) of the CENVAT Rules and, therefore, recoverable under rule 14 of the CENVAT Rules.

The appellant filed a reply to the show cause notice and denied the allegations. The Commissioner by order dated 26.02.2019 confirmed the demand holding that excavation of clay is equally important as the excavation of lignite, and excavation of clay by the appellant cannot be equated to the emergence of an unintended by-product. Thus, the appellant had to maintain separate records as per rule 6 of the CENVAT Rules.

Shri Saurabh Dixit, learned counsel for the appellant submitted that the Commissioner committed an error in assuming that the appellant pays separate charges and intentionally gets the clay excavated separately and since it availed CENVAT credit of the service tax paid on excavation charges, the appellant should have maintained separate accounts for dutiable lignite as also the exempted clay produced by the appellant. In support of the contention, learned counsel placed reliance upon the decision of the Ahmedabad Bench of the Tribunal in Gujarat Mineral Development Corporation Ltd. vs. C.C.E. & S.T. Vadodara-II [Excise Appeal No. 11106 of 2018 decided on 06.10.2021].

Shri Sanjay Kumar Singh, learned authorised representative appearing for the department, however, supported the impugned order and submitted that clay is a product obtained through the mining activity directly or as a by-product in the mining of lignite and it cannot be contented that no manufacturing activity took place.

The submissions advanced by the learned counsel for the appellant and the learned authorised representative appearing for the department have been considered.

It is seen that the appellant is only authorised to the excavate lignite, which is a necessary raw material used by the appellant as fuel in the generation of power by the appellant. In order to excavate lignite, the appellant had engaged the services of M/s. KSK Minerals[KSK] to mine lignite and the consideration was arrived at on the basis of per metric ton of lignite supplied at delivery point where the weighbridge had been installed. It is in the process of mining of lignite that KSK had to remove the overburden including clay. Service tax was paid by the appellant on the quantity of lignite excavated and billed and the appellant availed CENVAT credit on the service tax paid as the intention of the appellant was to produce lignite only.

The contention of the appellant is that in order to invoke the provisions of rule 6 of the CENVAT Rules, a company must be manufacturing clay as one of the final product which is not the case since the appellant is authorised to excavate only lignite and clay that arises with the top soil in the process of excavation of lignite is an unavoidable waste which belongs to the State Government over which and the appellant has no right or ownership.

The issue involved in this appeal stands decided in favour of the appellant by the Tribunal in Gujarat Mineral Development Corporation. The issue was whether Gujarat Mineral Development Corporation was required to pay an amount under rule 6 of the CENVAT Rules in respect of exempted product namely Silica Sand and Ball Clay when the input service was used for mining of lignite. The relevant portions of the decision of the Tribunal are reproduced below:

“The issue involved is that whether the appellant is required to pay an amount as per Rule 6 of Cenvat Credit Rules, 2004 in respect of exempted product, namely, Silica Sand and Ball Clay when the input service is used for mining of Lignite as well as Silica Sand and Ball Clay.

Shri. Rahul Gajera, Learned Counsel appearing on behalf of the appellant submits that Silica Sand and Ball Clay are by-product which are generated during excavation of Lignite. This Silica Sand and Ball Clay are excavated from the upper layer during the mining which is unavoidably generated as the main product is Lignite, therefore, both the products are being by-product, no amount is required to be paid in terms of Rule 6. He further submits that as per the contract with the contractor for excavation, it is only in respect of Lignite and the payment terms is also with respect to the Lignite only and no payment is made for excavation of by-product namely Silica Sand and Ball Clay, for the reason that Silica Sand and Ball Clay is unavoidably generated while mining of Lignite. He further submits that in case of by-product no demand under Rule 6 is sustainable as held in various judgments which are relied upon as under:-

xxxxxxxxxxx

Shri Vinod Lukose, Learned Counsel appearing on behalf of the revenue reiterates the finding of the impugned order. He further submits that there is no difference between Lignite, Silica Sand and Ball Clay which are excavated in the same mining process, therefore, there are three different minerals, it cannot be considered that two product out of these three are by-product, therefore, the product namely Silica Sand and Ball Clay are also the final product as well as being exempted product, Rule 6 shall apply and appellant is required to pay an amount under Rule 6 of Cenvat Credit Rules, 2004. He placed reliance on the following judgments:

xxxxxxxxxxxx

4.1 From the above it is clear that the main contract is for mining of Lignite while doing the excavation to achieve Lignite, the over burden has to be removed and this over burden constitute Silica Sand and Ball Clay etc., thereafter the Lignite is excavated. With this it is clear that to excavate the Lignite unavoidably upper layer has to be removed and, in that process the said by-products are also removed. Therefore, from the nature of mining of Lignite as discussed above, it is clear that the Silica Sand and Ball Clay are generated unavoidably which is inevitable.

Learned Counsel has also submitted a chart giving ratio of main product i.e. Lignite, Silica Sand and Ball Clay according to which almost 98% to 99% is the Lignite and remaining very small percentage of these by products. This also show that the Silica Sand and Ball Clay are by-product. As per para 3.7 of Chapter 5 of CBEC‟s manual which is reproduced below:-

“3.7 CENVAT Credit is also admissible in respect of the amount of inputs contained in any of the waste, refuse or by-product. Similarly, Cenvat is not to be denied if the inputs are used in any intermediate of the final product even if such intermediate is exempt from payment of duty. The basic idea is that Cenvat credit is admissible so long as the inputs are used in or in relation to the manufacture of final products, and whether directly or indirectly.”

From the above para, it is clear that any input/input services contained in any by-product/waste/refuse, Cenvat Credit cannot be varied or denied. With this logic demand under Rule 6 in respect of by-product is not applicable. This issue has been considered in various judgments as cited by Learned Counsel. Once it is established that the product in question are byproduct then it is settled in respect of by-product demand under Rule 6 will not sustain. Accordingly, in the present case also, Silica Sand and Ball Clay being a by-product, no demand under Rule 6 shall sustain.”

(emphasis supplied)

In the present case also, the appellant has only been authorised to excavate lignite which is a raw material used by the appellant in the generation of power. The appellant had engaged KSK to mine lignite and the consideration that was to be paid by the appellant to KSK was on the basis of per metric ton of lignite supplied at delivery point. For mining of lignite, it was imperative for KSK to remove the overburden, including clay. Clay which arises as a technical necessity in the course of excavation of lignite is, therefore, not a manufactured commodity. It is a by-product arising in the course of manufacture and is waste so far as the appellant is concerned.

In view of the aforesaid decision of the Tribunal in Gujarat Mineral Development Corporation, it cannot be said that the appellant had manufactured two products namely lignite and clay out of which one is exempted or chargeable to nil rate of duty and the other is dutiable as a result of which the appellant had to maintain separate records for utilisation of input service in the manufacture of these products, thereby attracting rule 6(3) of the CENVAT Rules.

The order dated 26.02.2019 passed by the Commissioner, therefore, cannot be sustained and is set aside. The appeal is, accordingly, allowed.