Excise Duty on Scrap under Indian Central Excise Law: Doctrinal Evolution and Contemporary Framework

Excise Duty on Scrap under Indian Central Excise Law: Doctrinal Evolution and Contemporary Framework

1. Introduction

The levy of Central Excise Duty on “scrap” has generated sustained litigation in India. Whether a by-product, residue, or waste arising during manufacture constitutes an excisable good depends upon the twin criteria of “manufacture” and “marketability”, the presence of an appropriate tariff entry, and the allocation of the burden of proof. This article critically analyses the statutory provisions and jurisprudential developments that shape the excisability of scrap, drawing extensively on leading Supreme Court and tribunal decisions.

2. Statutory Framework

2.1 Charging Provision and Definition of Manufacture

Section 3(1) of the Central Excise Act, 1944 (“CEA 1944”) imposes a duty on all excisable goods … which are produced or manufactured in India at the rates set out in the Central Excise Tariff Act, 1985 (“CETA 1985”). “Manufacture”, defined in s.2(f), includes any process incidental or ancillary to the completion of a manufactured product. The definition is deliberately wide, yet the courts have consistently required that the process result in a new article having a distinct name, character and use[1].

2.2 Tariff Treatment of Scrap

CETA 1985 provides specific headings for “waste and scrap” (e.g., Heading 7204 for ferrous waste and scrap; Heading 7602 for aluminium waste; sub-heading 2620.00 for ash and residues). Earlier, Item 26A(1b) under the First Schedule to the erstwhile Tariff (prior to 1986) covered “waste and scrap of copper” and analogous metals. Amendments have periodically expanded coverage, yet the presence of a tariff heading does not ipso facto render an article excisable; the tests of manufacture and marketability remain paramount[2].

3. Doctrinal Tests: Manufacture, Marketability and Burden of Proof

3.1 The “Manufacture” Requirement

In South Bihar Sugar Mills (1968) the Supreme Court held that kiln gas containing 30–35 % CO2 was not excisable as “compressed carbon dioxide” because no manufacturing process yielded a commercially recognised product[3]. This rationale underpins later scrap-related cases: unless a transformation occurs that accords the residue a distinct commercial identity, excise cannot be levied.

3.2 Marketability

Marketability refers to the capability of being sold—not actual sales. In Hindustan Zinc (2004) the Court reiterated that electrodes were excisable despite absence of market sales, as evidence showed they were capable of being bought and sold[4]. The same principle is applied to scrap: if empirically marketable, the requirement is met.

3.3 Burden of Proof

Steel Strips (2003) clarified that the revenue must establish, with evidence, that a new excisable commodity emerges; mere tariff headings are insufficient[5]. This allocation of burden is decisive in disputes on scrap where the assessee contends absence of manufacture.

4. Judicial Evolution on Scrap

4.1 Constitutional Validity and Early Recognition

In Khandelwal Metal & Engineering Works (1985) the Supreme Court upheld the constitutional validity of excise duty on “waste and scrap”, rejecting arguments that scrap cannot be produced or manufactured. The Court reasoned that although a prudent manufacturer does not intend to generate scrap, its emergence is a necessary incident of the manufacturing process[6].

4.2 By-Products versus Non-Manufactured Waste

A contrasting line of authority has exempted certain residues where no manufacture occurs. In Markfed Vanaspati (2003) “spent earth” used for oil filtration was held non-excisable for want of manufacture and marketability[7]. Similarly, Indian Aluminium (2006) reaffirmed that aluminium dross and skimmings, though saleable, are process residues not resulting from manufacture and hence non-excisable[8].

4.3 Generation of Scrap During Manufacturing and the Impact of MODVAT/CENVAT

Where the assessee avails credit on inputs, the waste or scrap arising from those inputs is generally liable to duty. In Maruti Udyog (2002) the Supreme Court upheld duty on aluminium and steel scrap generated in the manufacture of motor vehicles, emphasising that the price realised should be treated as “cum-duty” for valuation under s.4 of CEA 1944[9].

4.4 Scrap Not Linked to Manufacture or Non-Cenvatable Inputs

Recent tribunal jurisprudence distinguishes scrap unconnected with manufacturing processes: Shreno Ltd. (2022) excluded duty on sale of obsolete machinery, iron grills, etc., holding that such scrap neither emanated from manufacture nor from cenvatable inputs[10]. An identical view was adopted in Finolex Cables (2024) for certain periods prior to insertion of the expansive definition of “goods” in s.2(d) Explanation[11].

4.5 Job-Work Scenarios

The fate of scrap generated at job-worker premises has vexed industry. In Rocket Engineering (2005) CESTAT demanded duty from the principal manufacturer on recoverable scrap retained and sold by job-workers, invoking Rule 57AC(5)(a) of the Central Excise Rules, 1944[12]. The decision underscores that responsibility under the credit scheme travels with the principal manufacturer unless the scrap is returned.

5. Valuation Issues

5.1 Wholesale Price and Cum-Duty Concept

Bombay Tyre International (1983) remains foundational, holding that excise is a duty on manufacture but may be measured by the wholesale price, inclusive of post-manufacturing expenses[13]. When scrap is cleared, the transaction value often represents a cum-duty price; Maruti Udyog applied s.4(4)(d)(ii) to deduct the embedded duty from assessable value.

5.2 Applicability of Notifications and Exemptions

Notification regimes may carve out specific concessions. For instance, Notification No. 156/77 exempted “copper waste and scrap” from customs duty beyond 20 %, an aspect recognised in Khandelwal Metal & Engineering Works. Similarly, power-based exemptions were denied in Rajasthan State Chemical Works (1991) because preliminary processes used power[14]; where such notifications specify “goods produced without use of power”, scrap generated with power involvement remains liable.

6. Synthesis of Principles

  • Presence of Manufacture: Scrap becomes excisable when it emerges from a process amounting to manufacture (or is deemed so by statute).
  • Marketability: Capability of being bought and sold suffices; actual sales data, though persuasive, is not mandatory.
  • Tariff Heading Necessary but Not Sufficient: A specific entry (e.g., Heading 7204) is a pre-condition; however, without proof of manufacture, duty fails (Steel Strips).
  • Burden of Proof on Revenue: The department must establish both manufacture and marketability; assessee bears evidentiary burden only after prima facie case is made.
  • CENVAT/Job-Work: Where credit is taken on inputs, scrap arising therefrom is ordinarily dutiable, including scrap at job-worker premises unless returned.
  • Exclusions: Scrap that is obsolete capital goods, municipal waste, or unconnected with manufacturing remains outside the levy (Shreno Ltd.).

7. Conclusion

Indian excise jurisprudence on scrap illustrates a delicate balance between revenue interests and doctrinal coherence. The Supreme Court has consistently upheld duty where scrap is a by-product of manufacture and marketable, while shielding residues that do not satisfy the definitional thresholds. The analytical anchors—manufacture, marketability, tariff classification, and evidentiary burden—continue to govern disputes despite statutory amendments. Practitioners must therefore meticulously document manufacturing processes, establish or rebut marketability evidence, and navigate credit provisions to determine liability. With the transition to the Goods and Services Tax regime (where excise persists only on specified goods), these precedents retain relevance for legacy assessments and for sectors like petroleum and tobacco still under central excise.

Footnotes

  1. Union of India v. Delhi Cloth & General Mills Ltd., 1963 Supp (1) SCR 586.
  2. Commissioner of C. E. v. Steel Strips Ltd., (2003) 5 SCC 216.
  3. South Bihar Sugar Mills Ltd. v. Union of India, 1968 AIR SC 922.
  4. Commissioner of C. E., Jaipur v. Hindustan Zinc Ltd., (2004) 4 SCC 455.
  5. Commissioner of C. E. v. Steel Strips Ltd., (2003) 5 SCC 216.
  6. Khandelwal Metal & Engineering Works v. Union of India, (1985) 20 ELT 222 (SC).
  7. Commissioner of C. E. v. Markfed Vanaspati & Allied Industries, (2003) 4 SCC 184.
  8. Commissioner of C. E. v. Indian Aluminium Co. Ltd., (2006) 8 SCC 314.
  9. Commissioner of C. E. v. Maruti Udyog Ltd., (2002) 3 SCC 547.
  10. Shreno Ltd. v. CCE Vadodara-I, 2022 (…) ELT (Tri.).
  11. Finolex Cables Ltd. v. CCE Pune-I, CESTAT Final Orders 2024 (Feb. 2024).
  12. Rocket Engineering Corporation Ltd. v. CCE Pune-II, 2005 SCC OnLine CESTAT 687.
  13. Union of India v. Bombay Tyre International Ltd., (1984) 1 SCC 467.
  14. Collector of C. E. v. Rajasthan State Chemical Works, (1991) 4 SCC 473.