Processed Milk Is Intermediate Product, Not Exempted Final Product | Sets Aside CENVAT Credit Demand Under Rule 6 : CESTAT Chennai

The Customs, Excise & Service Tax Appellate Tribunal (CESTAT), Chennai, set aside demands for CENVAT credit reversal on processed milk, ruling it is an intermediate product integral to sugar confectionery manufacture and not an exempted final product attracting Rule 6 of the CENVAT Credit Rules, 2004. The judgment clarifies that captive consumption or job-work processing does not alter the character of intermediate products in integrated manufacturing processes.

Background & Facts

The Dispute

Lotte India Corporation Ltd. (appellant) manufactured sugar confectionery and 'processed milk' as an intermediate product. Processed milk, exempt under Notification No.03/2006-CE dated 01.03.2006, was used captively in confectionery production or supplied to sub-contractors. The Revenue demanded CENVAT credit reversal under Rule 6 of the CENVAT Credit Rules, 2004, alleging non-maintenance of separate accounts for common input services used in both dutiable (confectionery) and exempted (processed milk) goods.

Key Facts

• Appellant manufactures sugar confectionery (Chapters 17-18, CETA 1985) and processed milk (Chapter Heading 0402)
• Processed milk is either captively consumed in sugar confectionery manufacture or sent to job workers for further use
• Exempt from duty under Notification No.03/2006-CE dated 01.03.2006
• Treated as exempted goods for Rule 6 of CENVAT Credit Rules, 2004
• Common input service credit availed for both dutiable and exempted goods without separate accounts
• Show Cause Notice dated 04.04.2014 proposed recovery of Rs.4,17,126/- for March 2013 with penalty
• For April 2013-March 2014, appellant reversed CENVAT credit under Rule 6(3A); Department alleged deficient reversal and issued Show Cause Notices dated 02.05.2014 and 05.02.2014 proposing recovery of Rs.6,60,643/- with penalty
• Demands and penalties confirmed by adjudicating authority and upheld by Commissioner (Appeals)

Procedural History

• 04.04.2014: Show Cause Notice issued for March 2013 (Rs.4,17,126/-)
• 05.02.2014 & 02.05.2014: Show Cause Notices issued for April 2013-March 2014 (Rs.6,60,643/-)
• 24.06.2016: Commissioner of Central Excise (Appeals-II), Chennai passed Orders in Appeal No. 225 & 226/2016 (CXA-II) confirming demands
• 2016: Excise Appeal Nos. 41695 and 41696 filed before CESTAT Chennai challenging the appellate orders
• 31.07.2026: Date of hearing
• 16.09.2026: Date of decision

Relief Sought

Appellant sought:

• Setting aside of impugned orders dated 24.06.2016
• Recovery of Rs.4,17,126/- and Rs.6,60,643/- with penalties and interest deemed unsustainable
• Consequential relief as per law

The Legal Issue

The central question was whether 'processed milk' captively consumed in sugar confectionery manufacture or sent to job workers constitutes an 'exempted final product' under Rule 6 of the CENVAT Credit Rules, 2004, thereby triggering liability for CENVAT credit reversal on common input services.

Arguments Presented

For the Appellant

1. Processed milk is not cleared or sold as a final product but is either captively consumed in confectionery manufacture or sent to job workers; thus, it cannot be treated as an exempted final product for Rule 6 applicability.
2. Even if considered exempted, appellant had reversed CENVAT credit under Rule 6(3A); any shortfall allowed recovery of only the differential amount, not 6% of exempted goods' value.
3. Non-maintenance of separate accounts cannot justify 6% demand when appellant substantially complied with reversal mechanism under Rule 6(3A).
4. No suppression of facts or intent to evade duty; hence, interest and penalties demand is unsustainable.
5. Appropriation of Rs.88,524/- is liable to be set aside.

For the Respondent

1. Processed milk is an exempted final product (classifiable under Heading 0406, exempt under Notification No.03/2006-CE); captive consumption or job-work clearance does not alter its final product character.
2. Common input services used for both dutiable and exempted goods trigger Rule 6; failure to maintain separate accounts under Rule 6(2) necessitates payment of 6% of exempted goods' value or amount under Rule 6(3A).
3. Appellant neither paid 6% nor exercised Rule 6(3A) option; reversal claim lacks evidentiary support.
4. Amount under Rule 6(3) with interest is therefore payable.

The Court's Analysis

The Tribunal examined whether processed milk qualifies as an 'exempted final product' under Rule 6. It held that Rule 6 applies only when a manufacturer produces both dutiable and exempted final products. Citing Collector of Central Excise Vs Eastend Paper Industries Ltd. [1989 (43) E.L.T. 201 (S.C.)], the Tribunal emphasized that processes integrally connected with ultimate production make inputs part of 'manufacture of goods'. Applying Rallis India Ltd. Vs Union of India [2009 (233) E.L.T. 301 (Bom.)], affirmed in Union of India Vs Hindustan Zinc Ltd. [2014 (303) E.L.T. 321 (S.C.)], it ruled that products emerging unavoidably as technological necessities in principal product manufacture are by-products; exemption at nil duty does not attract Rule 6 obligation.

The Tribunal found processed milk is an intermediate product forming an integral part of sugar-boiled confectionery manufacture. It is neither manufactured as an independent final product nor cleared as such. Captive consumption or job-work processing does not alter its intermediate character. Consequently, it cannot be treated as an exempted final product for invoking Rule 6. The demand founded on the contrary premise is unsustainable and merits being set aside.

"Rules 3 and 6 of the CENVAT Credit Rules, 2004 must be read harmoniously. Credit of duty paid on inputs is admissible when such inputs are used in or in relation to the manufacture of the final product. Rule 6 is attracted where common inputs or input services are used in the manufacture of dutiable and exempted final products. An intermediate activity which does not amount to manufacture cannot, merely by reason of that circumstance, result in the emergence of an 'exempted final product'."

The Verdict

The appellant succeeded fully. CESTAT Chennai set aside the impugned orders dated 24.06.2016 passed by the Commissioner of Central Excise (Appeals-II), Chennai. The demands of Rs.4,17,126/- for March 2013 and Rs.6,60,643/- for April 2013-March 2014, along with penalties and interest, were held unsustainable. The appeals were disposed of accordingly with consequential relief as per law. No specific monetary relief or interest rates were quantified in the judgment beyond the original demand amounts.

What This Means For Similar Cases

Intermediate Products in Integrated Manufacturing

• Products arising as technological necessities in principal product manufacture are intermediate, not exempted final products
• Captive consumption or job-work processing does not convert intermediates into final products for tax exemption purposes
• Rule 6 CENVAT Credit applies only to genuine final products, not intermediate stages

Burden of Proof on Revenue

• Revenue must demonstrate separate manufacture and clearance of exempted final products
• Mere exemption at nil duty does not trigger CENVAT credit reversal liability
• Taxpayers availing reversal under Rule 6(3A) need only prove substantial compliance, not perfect account maintenance

Practical Implications for Manufacturers

• Review classification of by-products/intermediates in manufacturing processes
• Ensure documentation shows integral connection to principal product manufacture
• Challenge demands based on incorrect final product characterization