Railway Coach Factory Wins ₹5.45 Crore Scrap-Duty Refund as CESTAT Counts 1%-Duty Coaches as Exempted Goods for Scrap Exemption

Integral Coach Factory, a Ministry of Railways production unit, manufactured railway coaches under headings 8601–8606, cleared at 1% duty under Notification No. 1/2011-CE, and parts under heading 8607. It cleared resulting iron and steel waste and scrap without duty, claiming exemption under Notification No. 27/2011-CE.

Following an audit objection, the appellant paid amounts towards duty on the scrap and sought a refund. The Assistant Commissioner rejected the refund claim for scrap arising from coaches; the Commissioner (Appeals) upheld that rejection.

Separately, the Principal Commissioner confirmed a demand of Rs. 5,19,00,124 on the same scrap, with interest and an equal penalty, invoking the extended limitation period.

The appeals challenged the refund rejection and the demand order.

Section 5A of the Central Excise Act authorises exemption from the whole or any part of the duty; accordingly, goods cleared at a concessional rate may still be “exempted goods” where the notification’s language does not require full exemption.

Sl. No. 17 of Notification No. 62/95-CE exempts waste and scrap arising in the course of manufacture of exempted goods in a factory belonging to Indian Railways; the entry contains no requirement that the principal goods be wholly exempt or chargeable to nil duty.

Under Section 2(d), goods remain excisable if specified in the tariff, notwithstanding an exemption; thus the proviso to Notification No. 27/2011-CE applied where heading 8607 goods were also manufactured.

Section 11A(4) requires fraud, collusion, wilful misstatement, suppression, or contravention with intent to evade duty; mere non-declaration or omission does not establish wilful suppression, and the Revenue bears the burden of proving it (Lipi Boilers Ltd., Pahwa Chemicals and Continental Foundation).

Interest under Section 11AA is consequential to the duty liability, while Section 11AC penalty requires the statutory culpable conduct.

Coaches cleared under Notification No. 1/2011-CE were exempt from the portion of duty above 1%; Section 5A expressly recognises partial exemption, and Sl. No. 17 does not restrict “exempted goods” to goods wholly exempt or chargeable to nil duty. The scrap therefore qualified for exemption under Notification No. 62/95-CE, notwithstanding that Notification No. 27/2011-CE was unavailable because the factory also manufactured excisable goods of heading 8607.

The extended period was also unavailable: the Department had audited, quantified and collected the duty, and had adjudicated the refund claim years before issuing the notice. The notice identified no deliberate act of suppression, and the dispute concerned a tenable claim to exemption. Government ownership alone did not confer immunity, but the facts did not support an intent to evade duty.

As the demand failed on merits and limitation, the consequential interest and penalty could not stand.

It set aside the rejection of the refund claim and held the appellant entitled to refund of Rs. 5,45,11,106, less any amount already refunded, with interest as admissible in law and subject to verification under Section 11B.

It also set aside the confirmed demand of Rs. 5,19,00,124, the appropriation, interest and penalty, directing that the appropriated amount be refunded only once as part of the overall refund.

The competent authority was directed to process the refund within 90 days of receiving the order.