By TIOL News Service

NEW DELHI, JAN 16, 2015: THIS is a Revenue appeal.

The respondents are engaged in the manufacture of Aluminum Foils. The said final product cleared by them on payment of duty to their customers is sometimes received by them either under the cover of the invoices issued by their customers or under the cover of the invoices issued by the respondent themselves. In terms of the provisions of Rule 16 of the CER, 2002 the respondent was entering goods in their input receipt register and was availing the CENVAT Credit. There is no dispute about the availment of credit by the Respondents.

However, it is the Revenue observation that after entering the goods in their CENVAT Account, the assessee has simpliciter shown the issuance of the said inputs for further manufacture, without maintaining any records about the same. Statements recorded during investigation were to the effect that only 20% of the material is found to be reusable and the balance quantity was cleared by them as scrap.

As such, after initiating proceedings against the assessee the original adjudicating authority confirmed the demand of duty of Rs.19,60,153/- along with imposition of penalty on the ground that the reprocesses like rewinding, cutting, slitting, re-packing undertaken by the appellant on the returned goods do not amount to "manufacture" as defined under Section 2(f) of the Central Excise Act, 1944 and the appellant cannot pay duty less than the credit availed by them on such goods in terms rule (2) of Rule 16 ibid .

The Commissioner (A) allowed the appeal by inter alia recording the following findings -

"… I find that certain processes were undertaken on the returned aluminum foils viz, re-annealing, slitting, edge trimming, …, lamination, built up-breaking etc. These processes would be the process of manufacture if not incidental/ancillary to manufacture to render the goods marketable. The adjudicating authority has not disputed the facts that the goods were returned due to certain defects or for not meeting purchase specifications. Furthermore, the goods were accounted for in all the relevant documents. The Rule do not stipulate requirement of maintenance of any separate records of inputs whether returned after sales or fresh receipts. Inputs have to be treated as inputs and accounted for as prescribed….I find that the goods were returned because of not meeting their purchase specifications and process incidental/ancillary to rendering of the goods as marketable would qualify the application of manufacture and consequent levy thereafter, as defined under law. As regards differential demand on 80% of sales returns cleared as scrap is not sustainable because same is based on presumptions and assumptions as the adjudicating authority himself has concluded that the appellant was not maintaining any separate accounts for the returned goods. It is admitted fact that goods were returned to factory and CENVAT credit on these returned goods was taken/availed as per provisions of Rule 16 of Central Excise Rules 2002. Prescribed records were also maintained for this and there no evidence that these goods were removed clandestinely without payment of duty. Therefore, duty demand of Rs. 19,60,153/- for CENVAT credit on returned goods is not sustainable under law and deserves to be set aside."

Against this order the CCE, Jaipur is before the Tribunal.

The CESTAT observed -

"…, I find no reasons to disagree with the finding of the appellate authority. As rightly observed by him, Revenue on one hand, is contending that no records were being maintained by the assessee after receipt of the returned goods, so as to show the further process taken by them and on the other hand, they are contending that 80% of the receipt material was cleared as Scrap. The said submission of the Revenue is based upon the statement of the employee, without verifying as to whether the waste and scrap so cleared by the appellant emerged during the course of remanufacture or the not. The provision of Rule 16 does not require maintenance of any records. The returned goods have to be treated as inputs and the assessee having shown the issuance of the said inputs from their RG-I; had deemed to have manufactured their final product. In the absence of any documentary evidence in support of revenue's stand, I find no justification for setting aside the impugned order of Commissioner (Appeals)…."

The Revenue appeal was rejected.

In passing - the Rule 16 loop -

++ Once duty has been paid on excisable goods and are later returned by consignee as per rule 16(1), it cannot be said that goods were non-marketable in first place and are 'waste and scrap'; Removal of the goods from the factory after discharging the duty liability indicated that the appellant themselves accepted that the goods are marketable. - Hindalco Industries vs. CCE, Belapur 2007-TIOL-862-CESTAT-MUM , followed in 2007-TIOL-1939-CESTAT-MUM.

++ Rule 16 of CER, 2002 - Returned goods subjected to a process resulting in emergence of waste & scrap & lesser duty paid on clearance - since no specific manufacturing process was carried out, the assessee is required to reverse the credit taken on returned goods - Chanvim Engineering (I) P. Ltd. [2008-TIOL-259-CESTAT-MUM]

++ Rule 16(2) of CER'2002 - Piston rings manufactured & initially cleared on payment of duty brought back & credit availed - cutting & scrapping the same is not a manufacturing activity - assessee required to pay an amount equal to cenvat credit availed - payment of duty on scrap value will not suffice. Menon Piston Rings Pvt. Ltd. [2007-TIOL-309-CESTAT-MUM].

(See 2015-TIOL-128-CESTAT-DEL)