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CESTAT Chennai Rules Lotte India's Processed Milk in Confectionery Not
In a significant ruling for the confectionery and dairy processing industry, the of the has held that processed milk emerging during the manufacture of sugar-boiled confectionery cannot be treated as an “” for the purposes of . The decision, delivered by Technical Member M. Ajit Kumar on , set aside the revenue department's demand for and associated penalties amounting to over ₹10 lakh against
The tribunal ruled that the processed milk was merely an captively consumed in the of dutiable confectionery or sent to job workers for further processing, and did not undergo independent clearance as a finished commodity. The judgment provides clarity on the distinction between intermediate products and exempted final products, reinforcing the principle that the manufacturing process must be viewed as a continuous whole rather than by isolating individual stages.
Background of the Dispute
, a manufacturer of sugar confectionery falling under Chapters 17 and 18 of the , uses fresh milk as a raw material. The milk is subjected to thermal and mechanical treatment — including evaporation to a concentration of 70–74 degrees Brix and addition of sugar — to produce processed milk. This processed milk is either used captively within the factory to manufacture sugar-boiled confectionery or sent to job workers for the same purpose. No excise duty is payable on the processed milk by virtue of .
Revenue authorities alleged that the processed milk was a fully manufactured , distinct from the dutiable confectionery. They invoked Rule 6 of the CENVAT Credit Rules, which deals with common inputs or input services used for manufacturing both dutiable and exempted final products. According to the department, Lotte India had used for both products without maintaining separate accounts, and therefore was required to either pay 6% of the value of the exempted goods or reverse credit as per . A show-cause notice dated , proposed recovery of ₹4,17,126 for March 2013, and subsequent notices demanded ₹6,60,643 for the period from April 2013 to March 2014, along with penalties.
The adjudicating authority confirmed the demands, and the Commissioner (Appeals) upheld that decision, prompting Lotte India to approach CESTAT.
Arguments Before the Tribunal
Lotte India contended that processed milk was never cleared or sold as an independent product. It arose at an intermediate stage and was either used within the factory or sent to job workers solely for the manufacture of the dutiable final product — sugar confectionery. The company argued that Rule 6 applies only when a manufacturer produces and clears both dutiable and exempted final products from the factory, not when an is consumed in the same manufacturing chain. It further submitted that it had already reversed proportionate CENVAT credit under and that any alleged deficiency could at best result in recovery of differential credit, not the penal 6% levy.
The revenue department, on the other hand, maintained that the processed milk was a fully manufactured exempted product in its own right, and its or removal to job workers did not change its character. Since were used, the department argued, Rule 6 was squarely applicable. It alleged that Lotte India had not maintained separate accounts and had not properly exercised the option under .
CESTAT's Reasoning: Integrated Manufacturing is Key
The tribunal framed the preliminary question as whether processed milk could be regarded as an for invoking Rule 6. It answered in the negative, emphasising that the manufacturing process must be examined as an integrated whole.
The bench observed: “An captively consumed in, or sent to a job worker for, the manufacture of the dutiable final product cannot be equated with an independently cleared from the factory.”
CESTAT noted that the processed milk was neither independently cleared nor sold. It arose at an intermediate stage and was essential for the production of sugar-boiled confectionery. The fact that no excise duty was payable at that stage did not, by itself, transform the into an for the purposes of Rule 6.
The tribunal relied on a catena of decisions. In , the Apex Court held that where a process is integrally connected with the ultimate production of goods such that without it manufacture would be commercially inexpedient, the articles required in that process fall within the expression “in the manufacture of goods”. This supported the view that the manufacturing operation must be considered as an integrated whole.
Further, the tribunal referred to the ’s decision in , affirmed by the in . Those rulings established that a product emerging unavoidably or as a technological necessity during the manufacture of the principal final product is in the nature of a , and the obligation to pay an amount under Rule 6 is not attracted merely because such a is exempt or chargeable to nil duty.
CESTAT also considered the circular dated , which clarified that where a process does not amount to manufacture, no duty is payable and credit on inputs used exclusively in that activity would not be admissible. However, the tribunal distinguished that scenario from the present case, where an arises during the of a dutiable final product and is subsequently used in or in relation to that manufacture.
Conclusion: Demand Set Aside
Applying these principles, CESTAT concluded: “Processed Milk was only an forming an integral part of the of sugar-boiled confectionery. It is neither manufactured as an independent final product nor cleared as such. Its or removal to job workers for further manufacture does not alter its character as an . Consequently, it cannot be treated as an for invoking . The demand founded on the contrary premise is therefore unsustainable and merits to be set aside.”
The tribunal annulled the entire demand for CENVAT credit reversal, interest, and penalties, and granted consequential relief to Lotte India. The order also covered similar issues for other periods where the company had reversed credit under , holding that the department could not treat the processed milk as an merely because there was an alleged short reversal.
Implications for Industry
The ruling offers clear guidance to manufacturers in the confectionery, dairy, and allied sectors where intermediate products arise during an integrated production process. It reinforces that the tax authorities cannot isolate an intermediate stage and treat it as an if the product is not independently cleared or sold. The decision also reaffirms the importance of examining the entire manufacturing chain, as endorsed by the , and curtails the revenue’s tendency to invoke Rule 6 in situations where or job worker processing is involved.
Legal practitioners note that the judgment aligns with the well-settled principle that the CENVAT credit mechanism is intended to avoid and should not be applied rigidly to intermediate operations that are part of the manufacture of dutiable goods. The case also serves as a caution for companies to maintain clear documentation of their manufacturing processes and credit reversal calculations to avoid disputes.
The tribunal’s reliance on the Hindustan Zinc and Eastend Paper rulings provides strong precedent for future litigation involving similar issues. For Lotte India, the decision brings finality to a long-standing dispute and saves substantial revenue demands.
As the confectionery and dairy processing industries continue to face scrutiny under indirect tax laws, this CESTAT ruling is a welcome clarification on the scope of Rule 6 and the treatment of intermediate products in an integrated manufacturing setup.
