Processed Milk Used In Sugar Confectionery Not 'Exempted Final Product' For CENVAT Credit: CESTAT Chennai

The Customs, Excise & Service Tax Appellate Tribunal (CESTAT), Chennai, has ruled that 'Processed Milk' emerging during the manufacture of sugar confectionery cannot be treated as an exempted final product merely because the milk itself is exempt from excise duty.

The court observed, “An intermediate product captively consumed in, or sent to a job worker for, the manufacture of the dutiable final product cannot be equated with an exempted final product independently cleared from the factory.”

Technical Member M. Ajit Kumar allowed Lotte India Corporation Ltd.'s appeals against demands raised after the department treated Processed Milk as an exempted final product. The court held that the product remained an intermediate stage in the manufacture of the dutiable sugar confectionery.

Lotte India manufactures sugar confectionery. During the process, 'Processed Milk' emerges and is either used in making the confectionery or sent to job workers for further manufacture.

The milk was exempt from excise duty under Notification No. 03/2006-CE dated March 1, 2006.

The department treated Processed Milk as an exempted product for Rule 6 of the CENVAT Credit Rules, 2004. It alleged that Lotte India had used common input services for dutiable and exempted goods without maintaining separate accounts.

Rule 6 deals with common inputs or input services used for making both dutiable and exempted final products. Where it applies, the manufacturer has to follow the prescribed mechanism for dealing with the common credit.

Lotte India argued that Processed Milk was never cleared or sold as such. It emerged at an intermediate stage and was used in making sugar-boiled confectionery or sent to job workers for the same purpose.

The court agreed that the nature of the product had to be examined in the context of the entire manufacturing process. It noted that Processed Milk arose at an intermediate stage and was further used in making the dutiable sugar confectionery.

The court held that an intermediate activity that does not amount to manufacture cannot, merely for that reason, result in the emergence of an exempted final product.

An intermediate product used in making the dutiable final product also cannot be equated with an exempted final product independently cleared from the factory.

It further observed that the manufacturing process could not be viewed by isolating the intermediate stage. The fact that no duty was payable on that stage did not, by itself, turn the intermediate product into an exempted final product for Rule 6.

The court also relied on earlier rulings concerning products that emerge unavoidably or as a technological necessity during manufacture of the principal final product.

It noted that the Rule 6 obligation is not attracted merely because such a product is exempt or cleared at a nil rate of duty.

Applying these principles, the court held that Processed Milk was “only an intermediate product forming an integral part of the continuous manufacture of sugar-boiled confectionery. It is neither manufactured as an independent final product nor cleared as such. Its captive consumption or removal to job workers for further manufacture does not alter its character as an intermediate product. Consequently, it cannot be treated as an exempted final product for invoking Rule 6 of the CENVAT Credit Rules, 2004. The demand founded on the contrary premise is therefore unsustainable and merits to be set aside"

The order under challenge was set aside with consequential relief

For Appellant: Advocate S. Satishchandrasekaran, 

For Respondent: M. Selvakumar, Authorized Representative