It is a normal practice in the industry that waste and scrap generate some revenue on sale to re-cycling industry. But the same has also been a bone of contention between the revenue authorities and the industry as the former insisting that such a waste generated out of dismantling of obsolete machinery is an excisable product. There are hundreds of such cases pending at various stages of adjudication in our judicial system.

So, it finally came up for hearing before the Bangalore Bench of CESTAT (Central Excise and Service Tax Appellate Tribunal) which has ruled that scrap generated out of dismantling of worn out machinery cannot be termed as a process of manufacture in terms of Section 2(f) of Central Excise Act and the same is not an excisable product.

While dismissing the appeal of Revenue, the Tribunal has held that for the purpose of holding an item to be goods it has to arise out of the process of manufacture. It has to be goods which are known in the market and it should be in a marketable position. Therefore worn out machinery cannot be considered as having arising out of process of manufacture in the light of the judgment rendered by the Tribunal in the case of Hindalco industries Ltd. The Tribunal in the case of Hindustan Petroleum Corpn. Ltd had, under an identical circumstances, held that damaged parts of plant cannot be considered as goods.

The Commissioner came to the conclusion that waste and scrap generated by dismantling of worn out machinery previously installed in the appellants' factory does not come within the definition of the term "manufacture" appearing under Sec. 2(f) of the Act as well as the provisions of the Sec. Note 8(a) of Section XV of the Schedule of the CETA. The finding of the Commissioner was :

"6. The basic issue involved in the instant appeal, is the duty liability on waste and scrap generated by dismantling of worn out machinery previously installed in the appellant's factory. The adjudicating authority, after examining the issue, has taken a view that dismantling of worn out machinery amounts to manufacture and the resultant scrap is accordingly liable to duty under the provisions of Central Excise Act, 1944. The adjudicating authority, while deciding matter, has relied upon the definition of "manufacture" appearing under Sec.2(f) of the Central Excise Act, 1944, as well as the provisions of Section Note 8(a) of Sec. XV of the Schedule to the Central Excise Tariff Act, 1985. In the light of these provisions, he has held that the waste and scrap generated by the appellants fall in the category of metal goods definitely not usable as such because of breakage, cutting up, wear or other reasons and has accordingly concluded that the impugned goods come under the purview of Note 8(a) of Section XV of the Central Excise Tariff Act, 1985 read with the definition of "manufacture" appearing under Section 2(f) of the Central Excise Act, 1944 and are liable to duty as scrap. The adjudicating authority has made the following further observations in support of his stand:

"The expression "any process" as used in Section 2(f) of the Act is wide enough to cover the processes which are not carried out intentionally and which occur by chance. Similarly, the said expression "any" process covered not only constructive processes but also destructive processes. If a destructive process results in the emergence of a new product, that destructive process also amounts to manufacture under the Central Excise Act, 1944 and the resultant product is excisable. This reasoning is in line with the definition of metal waste and scrap as given in Note 8(a) of Section XV of the C.Ex. Tariff as amounting to manufacture for the purpose of Sec. 2(f) of the Central Excise Act, 1944."

As per the definition of the manufacture under Sec. 2(f) of the Central Excise Act, 1944, manufacture includes any process:

"(i) incidental and ancillary to the completion of a manufactured product; and

(ii) which is specified in relation to any goods in the Section or Chapter notes of the First Schedule to the Central Excise Tariff Act, 1985 as amounting to manufacture"

When the activity of generation of scrap by dismantling the appellants' worn out machinery is tested by applying the above definition, it is observed that the process of dismantling of worn out machinery is neither incidental nor ancillary to the completion of the manufactured product in the subject case. Regarding the coverage of the impugned goods under Note 8(a) of Section XV of the Central Excise Act, 1944, I observe that the said note covers "metal waste and scrap from the manufacture or mechanical working of metals and metal goods definitely not usable as such because of breakage, cutting up, wear or other reasons."

In fact, when the above definition is read with Section Note 9 of Section XV, its connotation becomes more clear. The aforesaid Section Note 9 provides that "in relation to the products of this Section, the process of obtaining goods and materials by breaking up of ships, boats and other floating structures shall amount to manufacture."

Had it been the intention to treat dismantling of old and used machinery as manufacture under Sec. XV of the aforesaid Schedule, the same would have been obviously specified under Section Note 9 thereof, which is restricted to breaking of ships, boats and floating structures only and not dismantling of old and worn out machinery. It is further observed that Section Note 1(f), under Section XV, excludes articles of Sec. XV (machinery, mechanical appliances and electrical goods) from the purview of Section XV.

The North Regional Bench of the CEGAT, in the case of Hindalco Industries Ltd took a similar stand when it held that "the waste and scrap, which is liable to duty, are the waste and scrap arising from the manufacture or mechanical working of iron or steel. It is not the metal scrap arising from dismantling of buildings, repair of machinery etc. This position remains settled by the various decisions of the Tribunal as relied upon by the appellants."

See full text of Judgement in 2004-TIOL-296-CESTAT-BANG in Legal Corner.

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