By TIOL News Service

MUMBAI, SEPT 21, 2017: APPELLANT is a manufacturer of self-adhesive stickers that are cleared to OE manufacturers of two wheelers/motor vehicles.

Stringent quality checks are prescribed at the receiver's end and those stickers that do not meet the required criteria are returned u/r 16 of the CER, 2002.

Upon return, the duty discharged at the time of clearance is availed as CENVAT credit.

While most of such returned goods are rectified and cleared again, some owing to defects that are non-rectifiable, are perforce subject to cutting for clearance as scrap on which appropriate duty liability is discharged.

The appellant was issued with show cause notice for recovery of Rs.12,33,931/- being the CENVAT credit availed on such returned goods.

The original authority confirmed the demand with interest and a penalty was imposed u/r 25 r/w s.11AC of CEA, 1944. A penalty of Rs.50,000/- was also imposed on the employee of the assessee u/r 26 of CER, 2002.

In appeal, the order was sustained except to the extent of penalty imposed on the employee.

The appellant is before the CESTAT and submits that goods were properly returned in accordance with rule 16 of the CER, 2002 and the goods which were cleared as scrap cannot be delinked from the process of manufacture which is an accepted reality in every manufacturing enterprise. Further, CENVAT credit on inputs cannot be denied merely because scrap was generated along with finished goods. Reliance is placed on the decisions in Mega Rubber Technologies Pvt. Ltd - 2016-TIOL-737-CESTAT-MUM, Sundaram Industries Ltd - 2006-TIOL-1378-CESTAT-MAD.

The AR emphasized that rule 16 of CER, 2002 is limited only to such goods as are brought back to the factory of manufacture for repairs, reconditioning and any other process which is tantamount to fresh manufacture. Reliance is placed on the decision in Meghdoot Refrigeration Industries Pvt. Ltd [Appeal no. E/785/2012 dated 31st August 2016] wherein benefit of CENVAT credit on goods which were brought back to the factory and scrapped has been denied.

The Single Member Bench distinguished the case law cited by the AR and observed -

"5. Consequently, in view of the decisions of the Tribunal and the contention of Learned Counsel that had the scrapping occurred before the goods were cleared in the first instance such denial of credit on inputs would not have arisen I find no ground to accept the contention of Revenue. The purpose of rule 16 of Central Excise Rules, 2002 is to enable reconditioning and further processing within the framework of legality without, in any way, compromising the rigor of maintenance of the CENVAT account. It, therefore, does not exclude the possibility of scrapping during the stage of re-manufacture and it is not in any way different from scrapping at the stage of original manufacture…."

Concluding that the findings in the impugned order do not have the foundation of law behind it, the impugned order was set aside and the appeal was allowed.

In passing: Some contrary decisions -

A. CCE, Nagpur vs. M/s Chanvim Engineering (I) Pvt. Ltd. [SMB] - 2008-TIOL-259-CESTAT-MUM :

3. I have considered the submissions.  I find that the respondents in their submission have not denied that the returned goods have not undergone specific manufacturing process and that since they could not be reconditioned they were cleared as such as scrap.  In view of this it is evidently clear that no manufacturing activity was carried out.  I, therefore, find merits in the Revenue's contention that when goods have been cleared as such as scrap, the respondents are required to reverse the credit taken by them on returned goods.  

B. Hindalco Industries Ltd. vs. CCE, Belapur[DB] - 2007-TIOL-862-CESTAT-MUM [followed in 2007-TIOL-1939-CESTAT-MUM ]

4…It is undisputed that when the appellant cleared their final products, at the first instance, they did so, after concluding that their products were matching the specification as given by their customers.   The provisions of Central Excise Law are very clear on this aspect i.e duty is payable on removal of dutiable goods.   It is settled law that Central Excise duty is payable on manufacture of the final products, but discharge of duty liability is deferred till the removal of goods from the factory premises of the assessee.   In this case before us, it is undisputed that when the goods were first removed by the appellant to their customers, they had undergone all the test within the factory of the appellant and on satisfaction of such quality control test the goods were removed.   The removal of the goods from the factory after discharging the duty liability indicates that the appellant themselves accepted that the goods are marketable. The argument of the Ld. Advocate that no duty is payable on the non-marketable goods could have come to his rescue provided the appellant had not cleared the goods from his factory premises and destroyed the same in factory premises.   Having chosen to remove the goods from the factory premises, the argument that the goods were non-marketable gets totally demolished.

5… In the case before us, it is seen that the appellant avails credit of the entire amount of the duty paid on rejected final products, seeks to pay the duty only on the waste and scrap, which at any stretch of imagination cannot be said to be arising out of a process of manufacture.   We are of the view that the appellant cannot claim that the waste and scrap which arises from rejected goods, are due to the process of manufacture as there is no manufacture involved in the process as is explained by the appellant before us as well as before the lower authorities. Accordingly, we find that the impugned order, to the extent it confirms the demand is correct and legal and does not require any interference.

(See 2017-TIOL-3432-CESTAT-MUM)