Rule 6 of the CENVAT Credit Rules does not apply to bagasse, an agricultural waste.

M/s Gayatri Sugars Ltd. manufactured sugar and molasses, on which central excise duty was paid.

Bagasse arose as an agricultural by-product during crushing of sugarcane; the appellant used part of it to generate electricity for captive consumption and sold the remaining electricity to APTRANSCO.

Press-mud, another by-product, was distributed free of cost to cane growers as manure.

The appellant did not maintain separate accounts for inputs and input services used in the manufacture of dutiable sugar and molasses and the non-dutiable by-products.

The Department issued a show-cause notice dated 22 May 2013 for the period April 2008 to March 2013, proposing recovery under Rule 6(3) of the Cenvat Credit Rules, 2004 (“CCR”) of Rs. 80,07,233 on electricity sold to APTRANSCO and Rs. 20,915 on press-mud.

The Commissioner confirmed the demands, along with interest and penalty, by Order-in-Original dated 3 January 2014.

The appellant challenged that order before the CESTAT.

1. Whether Rule 6(3) of the CCR could be invoked to demand an amount on electricity generated from bagasse, when bagasse is an agricultural waste or residue and is not the result of a manufacturing process.

2. Whether the Department could directly select and enforce the payment option under Rule 6(3), instead of allowing the assessee to exercise the applicable options under Rule 6.

3. Whether reversal of proportionate Cenvat credit by the appellant amounted to non-availment of credit, thereby negating the demand, interest and penalty.

The Tribunal applied Rule 6 of the Cenvat Credit Rules, 2004, which regulates credit attributable to exempt or non-dutiable goods and prescribes alternative methods for compliance.

It relied on Union of India v. DSCL Sugar Ltd., 2015 (322) E.L.T. 769 (S.C.), holding that bagasse is agricultural waste or residue, is not the result of manufacture under Section 2(f) of the Central Excise Act, 1944, and consequently does not attract Rule 6 of the CCR.

It further relied on Tiara Advertising v. Union of India, 2019 (10) TMI 27 (Telangana and Andhra Pradesh High Court), for the proposition that the Department cannot compel recovery under one particular option of Rule 6(3) when the rule provides alternative mechanisms available to the assessee.

The Tribunal also applied Chandrapur Magnets Pvt. Ltd. v. CCE, 1996 (81) E.L.T. 3 (S.C.), which recognises that reversal of credit is equivalent to non-availment of credit.

Interest and penalty cannot survive where the underlying demand is unsustainable.

The Tribunal found the case materially covered by DSCL Sugar Ltd.

Bagasse was treated as agricultural waste or residue arising during the manufacture of sugar, rather than as a manufactured or excisable product.

Since bagasse was not the result of manufacture under Section 2(f), the foundational condition for applying Rule 6 of the CCR was absent; consequently, Rule 6 could not be invoked merely because electricity generated from bagasse was sold to APTRANSCO.

The Tribunal additionally accepted that the Department could not unilaterally impose the Rule 6(3) payment mechanism in view of Tiara Advertising.

It also accepted the appellant’s contention that the proportionate reversal of Rs. 5,53,773 in Cenvat credit was legally equivalent to not availing that credit, applying Chandrapur Magnets.

These findings rendered the demand, and consequently the related interest and penalty, unsustainable.

It also accepted the appellant’s alternative contentions concerning the impermissible selection of the Rule 6(3) option and reversal of proportionate credit.

The appeal was allowed, the Order-in-Original dated 3 January 2014 was set aside, and consequential relief was granted to the appellant.