Quick answer: In M/s Gayatri Sugars Ltd. v. Commissioner of Central Tax, Medchal – GST, decided on 16 September 2026, the Hyderabad Division Bench of the Customs, Excise & Service Tax Appellate Tribunal (P.V. Subba Rao, Member Technical, and Angad Prasad, Member Judicial) set aside a demand of ₹80,28,148 raised under Rule 6(3) of the Cenvat Credit Rules, 2004 against a sugar manufacturer, for the period April 2008 to March 2013. The demand had proceeded on the footing that bagasse and press-mud — by-products emerging when sugarcane is crushed — were “exempted goods,” triggering an obligation under Rule 6 to reverse or pay an amount on common input services used without maintaining separate accounts. The Tribunal held, following the Supreme Court’s decision in Union of India v. DSCL Sugar Ltd., that bagasse is agricultural waste and not the result of any process amounting to “manufacture” under Section 2(f) of the Central Excise Act, 1944 — including after the 2008 amendment to Sections 2(d) and 2(f) — so that Rule 6 has no application to it at all. The Tribunal also accepted two further grounds: that the Department cannot itself select and enforce one option under Rule 6(3) against an assessee’s will, following the jurisdictional High Court’s decision in Tiara Advertising v. Union of India, and that the appellant’s proportionate reversal of credit on input services was, per the Supreme Court’s decision in Chandrapur Magnets Pvt Ltd v. CCE, as good as not having availed the credit at all.
Key Takeaways
- Bagasse remains outside the excise net even after the 2008 amendment to Sections 2(d) and 2(f) of the Central Excise Act, 1944. The amendment’s deeming fiction for “marketable” goods applies only where a process is specified as amounting to manufacture in the Section or Chapter notes of the Central Excise Tariff Act, 1985 — and no such process is specified for bagasse.
- If there is no manufacture, Rule 6 of the Cenvat Credit Rules, 2004 cannot apply at all. Rule 6 is triggered only by the parallel production of dutiable and exempted “final products” resulting from a manufacturing process; an unmanufactured agricultural residue is neither.
- The Department cannot pick and enforce a single option under Rule 6(3) against an unwilling assessee. Rule 6 gives the assessee a choice among the options it prescribes; the Telangana & Andhra Pradesh High Court’s decision in Tiara Advertising holds that Revenue cannot itself select the 6(3) route and raise a demand on that basis.
- A proportionate reversal of credit neutralises the demand. Once an assessee reverses the credit attributable to inputs or input services used in exempted output, it is treated as if it never availed that credit — eliminating the basis for a Rule 6(3) demand on the same facts.
- The same three-point defence has been available, and settled at Supreme Court level, since 2015 — yet sugar mills are still litigating it in 2026. The Tribunal’s order arises from a show cause notice issued in 2013 for a 2008–2013 period, adjudicated in 2014, and only now disposed of on appeal — twelve years after the underlying dispute began and eleven years after the Supreme Court resolved the core legal question.
1. Introduction
Every sugar mill in India produces two things nobody asks for: bagasse, the fibrous residue left after cane stalks are crushed for juice, and press-mud, the filter cake left over from clarifying that juice. Both are typically put to use rather than discarded — bagasse is burned to generate electricity, often enough to run the mill and sell the surplus to the state grid, and press-mud is handed to cane growers as manure. For over a decade, the Central Excise department treated this ordinary by-product economics as a trap: because the mill also produces dutiable sugar and molasses, and because it did not keep separate accounts for the inputs and input services consumed in producing the “exempted” bagasse and press-mud, Rule 6 of the Cenvat Credit Rules, 2004 was invoked to demand a percentage of the value of the by-products as if they were deliberately manufactured exempted goods.
M/s Gayatri Sugars Ltd. v. Commissioner of Central Tax, Medchal – GST, decided by the Hyderabad Division Bench of the Customs, Excise & Service Tax Appellate Tribunal on 16 September 2026, is the latest instalment of that fight — and it did not go the Department’s way. The Tribunal set aside a demand of ₹80,28,148, together with interest and penalty, holding that the entire premise was unsound: bagasse and press-mud are not the result of any manufacturing process at all, so Rule 6 — which presupposes a manufacturer producing both dutiable and exempted final products — never gets off the ground. This article traces the dispute, situates the Tribunal’s reasoning within the Supreme Court’s 2015 decision in DSCL Sugar Ltd. that it applies, and considers why a point settled at the highest level over a decade ago is still generating fresh litigation in CESTAT registries in 2026 — and what that persistence means for sugar mills and other by-product-generating industries structuring their Cenvat and GST input tax credit positions today.
2. Case summary and background
The transaction and the demand
Gayatri Sugars Ltd, a manufacturer of sugar and molasses at Nizamsagar Mandal in Nizamabad district, Telangana, paid Central Excise duty on those principal products. In the course of crushing sugarcane, two by-products emerged: bagasse, which the appellant used to generate electricity — consuming part of it captively within the factory and selling the remainder to the Andhra Pradesh State Power Distribution Company (APTRANSCO) — and press-mud, which it distributed free of cost to cane growers as manure.
The appellant did not maintain separate accounts for the receipt, consumption and inventory of inputs and input services used respectively in the manufacture of the dutiable goods (sugar and molasses) and the non-dutiable by-products (bagasse and press-mud). On that footing, a show cause notice dated 22 May 2013 was issued, covering the period April 2008 to March 2013, proposing recovery under Rule 6(3) of the Cenvat Credit Rules, 2004 of an amount equal to 10%, 5% or 6% of the value of the exempted goods — the applicable percentage having changed over the period in question. The proposed recovery comprised ₹80,07,233 calculated on the value of electricity sold to APTRANSCO, and a further ₹20,915 calculated on the press-mud, notwithstanding that the press-mud was not sold at all but given away free of cost. The two figures together made up the total demand of ₹80,28,148.
Procedural history
The Commissioner of Customs, Central Excise & Service Tax, Hyderabad-I passed Order-in-Original No. 3/2014 (CE) on 3 January 2014, confirming the demand along with interest and a penalty under Rule 15(2) of the Cenvat Credit Rules read with Section 11AC of the Central Excise Act, 1944. Gayatri Sugars carried the matter in appeal, and the appeal — Excise Appeal No. 21297 of 2014 — was heard and decided on the same day, 16 September 2026, by a Division Bench comprising P.V. Subba Rao, Member (Technical), and Angad Prasad, Member (Judicial), which delivered Final Order No. A/30515/2026.
The issues framed and the holding
Before the Tribunal, the appellant advanced three independent grounds, each capable of disposing of the appeal on its own: first, that the Department could not itself dictate which option under Rule 6 the appellant must follow, since the choice belonged to the assessee, relying on the Telangana & Andhra Pradesh High Court’s decision in Tiara Advertising v. Union of India; second, that bagasse — and, by the same logic, press-mud — is not the product of any manufacturing process and therefore falls outside Rule 6 altogether, relying on the Supreme Court’s decision in Union of India v. DSCL Sugar Ltd.; and third, that the appellant had in any event reversed a proportionate amount of credit (₹5,53,773) attributable to the input services in question, which under the Supreme Court’s decision in Chandrapur Magnets Pvt Ltd v. CCE is treated as equivalent to never having availed the credit. The Tribunal accepted all three grounds, held that the facts were “identical” to those considered in DSCL Sugar Ltd., allowed the appeal, and set aside the Order-in-Original in its entirety with consequential relief.
3. Legal analysis
3.1 Why Rule 6 needs a manufacturer of exempted goods in the first place
Rule 6 of the Cenvat Credit Rules, 2004 addresses a specific problem: a manufacturer who uses common inputs or input services to produce both dutiable final products and exempted final products, and who has not maintained separate accounts to isolate the credit attributable to each stream, must either reverse the proportionate credit or pay an amount calculated on the value of the exempted goods. The rule’s entire architecture assumes that the exempted output is itself the result of a manufacturing process — otherwise there is no “final product,” dutiable or exempted, for the rule to compare against the dutiable one. If an item is not “manufactured” within the meaning of the Central Excise Act at all, it cannot be an “exempted final product” for Rule 6 purposes, because the premise that would make it a final product — a process satisfying the statutory definition of manufacture — is missing.
3.2 Section 2(f), the 2008 amendment, and why bagasse still fails the test
This is where the Supreme Court’s reasoning in DSCL Sugar Ltd., reproduced by the Tribunal at length, does the real work. Section 2(f) of the Central Excise Act, 1944 defines “manufacture” to include any process incidental or ancillary to the completion of a manufactured product, any process specified in the Section or Chapter notes of the Central Excise Tariff Act, 1985 as amounting to manufacture, and certain packing, labelling or similar treatments in relation to goods in the Third Schedule. Before 2008, it was well established that bagasse — an agricultural residue thrown up incidentally when cane is crushed for juice, involving no process directed at producing bagasse itself — did not satisfy this definition.
In 2008, Parliament amended Section 2(d), the definition of “excisable goods,” to add an Explanation deeming any article, material or substance capable of being bought and sold for a consideration to be “marketable,” and hence potentially excisable, even without independent proof of marketability. The Revenue’s argument, recorded in the Supreme Court’s judgment and reproduced by the Tribunal, was that this amendment brought bagasse within the excise net because it undeniably has value and is bought and sold. The Supreme Court rejected this for a sequencing reason central to the statutory scheme: the deeming fiction in Section 2(d) only operates once a process first qualifies as “manufacture” under Section 2(f); marketability is a condition to be assessed after manufacture is established, not a substitute for it. The Revenue tried to bring bagasse within sub-clause (ii) of Section 2(f) — the branch covering “any process which is specified in relation to any goods in the Section or Chapter notes” of the Tariff Act as amounting to manufacture — but, as the Supreme Court recorded and the Tribunal repeated, no such process is in fact specified for bagasse in the Tariff Act’s Section or Chapter notes. In the absence of that specification, the deeming provision is never triggered, and bagasse — being “only an agricultural waste and residue, which itself is not the result of any process” — remains outside Section 2(f) even after the 2008 amendment. Once there is no manufacture, there is no excise duty, and — critically for this appeal — no application of Rule 6 of the Cenvat Credit Rules, since that rule presupposes a manufactured final product to classify as exempted in the first place.
The Tribunal found the facts of the appeal “identical” to DSCL Sugar Ltd. and applied its reasoning without qualification to both bagasse and, implicitly, to press-mud, which the record describes in materially the same terms — an incidental residue of the cane-crushing process, not separately manufactured. The Tribunal’s own order does not separately unpack the press-mud component of the demand, which forms a small fraction (₹20,915) of the total; having found the demand on the larger bagasse-derived electricity component unsustainable on the manufacture point, and having set aside the Order-in-Original in its entirety, the Tribunal did not need to, and did not, draw out a distinct line of reasoning for press-mud, which in any event was never sold for a consideration at all — a further, independent difficulty for treating it as a valued exempted supply under Rule 6(3).
3.3 The election-of-remedy point: Tiara Advertising
The appellant’s first submission — that the Department could not itself select and enforce the Rule 6(3) percentage-of-value option — drew on the Telangana & Andhra Pradesh High Court’s decision in Tiara Advertising v. Union of India. Rule 6 offers an assessee facing common inputs or input services more than one route to compliance, including the percentage-of-value payment under Rule 6(3) and proportionate reversal under Rule 6(3A). The point recognised in Tiara Advertising, and accepted by the Tribunal here, is that this is the assessee’s election, not the Department’s; an adjudicating authority cannot bypass an assessee’s actual or available proportionate reversal and instead impose the (frequently higher) percentage-of-value demand under Rule 6(3) as though that were the only mechanism Rule 6 provides. The Tribunal recorded that it found “force” in this submission, treating it as an independent basis on which the demand could not stand, separate from the manufacture question.
3.4 Proportionate reversal as a cure: Chandrapur Magnets
The appellant’s third point was factual rather than purely legal: during the proceedings, it had reversed ₹5,53,773 of Cenvat credit attributable to the input services in question. The Tribunal treated this reversal as decisive in its own right, applying the long-standing principle from the Supreme Court’s decision in Chandrapur Magnets Pvt Ltd v. CCE that a proportionate reversal of credit is “as good as not availing the Cenvat credit at all.” On this footing, even if Rule 6 had applied to the by-products in question — which the Tribunal held it did not — the reversal already made would have neutralised the demand for want of any credit having, in substance, been availed on inputs or input services used for the exempted output.
3.5 What the Tribunal did not have to decide
Because the manufacture point was dispositive, the Tribunal did not need to, and did not, engage with the appellant’s submission on interest and penalty beyond noting that these could not survive once the underlying demand fell away. Nor did the order need to address the electricity-generation process itself, or whether the sale of surplus electricity to APTRANSCO carried its own, separate excise or (in a post-2017 world) GST characterisation questions; those questions simply did not arise once bagasse was held to fall outside Section 2(f) altogether.
4. Practical significance
For sugar mills and other agro-processing units that generate incidental, unavoidable residues alongside a dutiable principal product — rice bran and husk in rice milling, oil cake in edible oil extraction, molasses itself in an earlier stage of the same sugar process — this order is a reminder that the DSCL Sugar Ltd. defence remains fully available wherever a demand is still framed under the legacy Cenvat Credit Rules, whether in a transitional appeal from the pre-GST period or in ongoing litigation over closing-stock credit carried into the GST regime. The three grounds accepted here are cumulative and can be pleaded together: first, dispute the characterisation of the residue as a “manufactured” exempted product at all; second, if the Department has picked a specific Rule 6 option, contest its authority to make that election for the assessee; and third, as a fallback that neutralises the dispute regardless of the first two points, reverse the proportionate credit attributable to the disputed output, under protest if necessary, to remove the practical sting of the demand while the larger question is litigated.
For advisory work, the more interesting question the order raises is why this dispute needed to be litigated all the way to CESTAT in 2026 at all. The show cause notice was issued in 2013, the demand was confirmed in 2014, and the Supreme Court had already settled the governing principle — for an entire batch of connected sugar mill appeals spanning several states — the year before, in 2015. Practitioners advising sugar mills or their trade associations facing similar demands for cogeneration by-products should treat DSCL Sugar Ltd. as conclusively settled law at the threshold stage, and should consider whether a demand raised or confirmed after 2015 on this exact point exposes the adjudicating authority’s order to challenge not merely on merits but as inconsistent with binding precedent that ought to have foreclosed the show cause notice, or at least the confirming order, from the outset.
On regime continuity, this is squarely a legacy Central Excise and Cenvat Credit Rules matter — the dispute concerns a period, April 2008 to March 2013, that predates the Goods and Services Tax entirely, and the appeal survives only because CESTAT continues to hear pre-GST Central Excise appeals to finality. The reasoning does not automatically carry over to input tax credit reversal under the GST regime, which is governed by a distinct statutory mechanism — Section 17(2) of the Central Goods and Services Tax Act, 2017, read with Rules 42 and 43 of the Central Goods and Services Tax Rules, 2017 — built on a different formula and a different definition of “exempt supply” than Rule 6 of the Cenvat Credit Rules. What does carry over conceptually, even if the statutory text differs, is the underlying question this order answers: whether an incidental residue that a taxpayer never set out to produce, and that involves no process directed at its own creation, should be treated on the same footing as a deliberately manufactured or supplied exempted product for input tax credit reversal purposes. Any GST-era analogy should be tested against the GST statute’s own text and definitions, not assumed from the Cenvat-era result.
5. Conclusion
Gayatri Sugars does not break new legal ground — the Tribunal said as much itself, finding the facts “identical” to a Supreme Court decision already a decade old. Its value lies elsewhere: it shows how long a settled point can keep generating fresh demands, fresh adjudication orders, and fresh appeals when show cause notices are issued mechanically against a class of taxpayers without regard to binding precedent already on the books, and it consolidates, in one short order, three separate and independently sufficient defences — no manufacture, no departmental election of remedy, and a curative proportionate reversal — that any similarly placed by-product generator can plead together. For sugar mills still carrying legacy Central Excise appeals through the system, and for anyone advising an agro-processing unit on a fresh demand invoking Rule 6 over an incidental residue, the practical lesson is to lead with DSCL Sugar Ltd. at the earliest possible stage, rather than allowing a decade-old, Supreme Court-settled question to be relitigated to the same result at greater cost and delay.
Authorities and provisions
Applied by the Tribunal:
- Union of India v. DSCL Sugar Ltd., 2015 (322) E.L.T. 769 (S.C.) — bagasse is agricultural waste, not the result of a manufacturing process, and falls outside Section 2(f) of the Central Excise Act, 1944 even after the 2008 amendment to Sections 2(d) and 2(f); Rule 6 of the Cenvat Credit Rules, 2004 accordingly has no application to it. Decided together with a batch of connected matters, including Civil Appeal No. 9332 of 2013 (CCE v. M/s. Saryoo Sahakari Chini Mills Ltd.) and SLPs/appeals styled Union of India v. Haidergarh Chini Mills, Akbar Pur Chini Mills, Gularia Chini Mills, Manakpur Chini Mills and Upper Ganges Sugar & Industries Ltd.
- Tiara Advertising v. Union of India, 2019 (10) TMI 27 (Telangana & Andhra Pradesh High Court) — the Department cannot itself select and enforce a specific option under Rule 6 of the Cenvat Credit Rules, 2004 against an assessee.
- Chandrapur Magnets Pvt Ltd v. CCE, 1996 (81) E.L.T. 3 (S.C.) — a proportionate reversal of Cenvat credit is equivalent to never having availed that credit.
Legislation and rules:
- Section 2(d), Central Excise Act, 1944 (definition of “excisable goods,” as amended in 2008) — https://www.indiacode.nic.in/
- Section 2(f), Central Excise Act, 1944 (definition of “manufacture,” as amended in 2008) — https://www.indiacode.nic.in/
- Section 11AC, Central Excise Act, 1944 (penalty for short-levy or non-levy) — https://www.indiacode.nic.in/
- Rule 6, Cenvat Credit Rules, 2004 (obligation of a manufacturer or provider of output service using common inputs or input services for dutiable and exempted goods or services)
- Rule 15(2), Cenvat Credit Rules, 2004 (penalty)
This article is not legal advice and does not create an attorney–client relationship. Readers should verify the certified copy of the judgment and any subsequent clarificatory orders before relying on it, and consult a qualified advocate on the facts of their matter.