Chennai tribunal quashes CENVAT credit reversal demand against Lotte India, ruling intermediate dairy inputs form an integrated manufacturing chain.
In a notable indirect tax ruling for food and dairy ingredient processors, the Chennai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that “processed milk” captively consumed or sent to job workers during the manufacture of confectionery cannot be treated as an “exempted final product” under Rule 6 of the CENVAT Credit Rules, 2004. Delivering the ruling in an appeal filed by confectionery manufacturer Lotte India Corporation Ltd., Technical Member M. Ajit Kumar established that intermediate dairy processing stages cannot be isolated to enforce statutory credit reversals intended exclusively for independent, duty-exempt finished goods.
The controversy arose during the manufacture of sugar-boiled confectionery, where liquid milk undergoes thermal and mechanical processing within the facility before being incorporated into the final sweet confection or transferred to outside job workers for specialized processing. Because liquid and processed milk enjoyed an excise duty exemption under Notification No. 03/2006-CE, revenue authorities alleged that the company had utilized common input services across both dutiable confectionery and “exempted” processed milk. Invoking Rule 6(3), the tax department sought substantial CENVAT credit reversals alongside interest and penalties, arguing that processed milk constituted a distinct, finished commodity cleared without duty.
Challenging the tax assessment, Lotte India demonstrated that processed milk was never cleared, marketed, or sold as an independent commercial product to third-party buyers. Instead, the dairy transformation occurred solely as an integrated, intermediate stage dictated by technological necessity in the continuous manufacturing recipe for sugar-boiled sweets. The appellant argued that Rule 6 was engineered to address multi-product factories clearing independent lines of dutiable and exempted finished goods, not continuous industrial processes where intermediate dairy derivatives flow directly into final dutiable merchandise.
Agreeing with the manufacturer, the Tribunal observed that an intermediate activity cannot be transformed into an “exempted final product” merely because no excise duty is leviable at that specific production step. Citing settled Supreme Court jurisprudence, including Union of India v. Hindustan Zinc Ltd. and Rallis India Ltd. v. Union of India, CESTAT underscored that manufacturing sequences must be evaluated as an integrated commercial whole. Where intermediate processes are indispensable to the ultimate production of finished goods, intermediate goods captively consumed or dispatched to job workers preserve their essential character as inputs rather than independent final commodities.
The tribunal consequently quashed the department’s demand and set aside all associated penalties, providing clear tax certainty for large-scale confectionery, dairy beverage, and baked goods manufacturers. In industrial food manufacturing, dairy streams such as condensed milk, pasteurized blends, and milk solids regularly pass through intermediate phases before entering chocolate, candy, or biscuit production. By preventing tax authorities from imposing punitive credit reversals on intermediate dairy processing, the CESTAT ruling protects food processors from compounding tax burdens across vertically integrated production lines.
Source: JurisHour
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