M/s CGST Commissionerate v M/s International Tobacco Company Ltd- Allahabad High Court 2019-TIOL-2944-HC-ALL-CX

PJ/Case Law/2020-2021/3621

M/s CGST Commissionerate v M/s International Tobacco Company Ltd- Allahabad High Court 2019-TIOL-2944-HC-ALL-CX

Brief Facts: - The Applicant is engaged in manufacture of various brands of cigarettes on job work basis. The assessee clears goods from factory on payment of Excise Duty. However, certain duty paid goods were returned to the factory for various reasons. The assessee claimed CENVAT credit on the bought back goods under rule 16(1) of CER on the ground that the said goods were to be used for refining purpose. Rule 16(1) of CER provides that if duty paid goods are bought back to the factory for being re-made, refined, reconditioned or for any other reason, then the assessee can avail CENVAT credit of such goods. In the instant case, the CESTAT observed that since rule 16(1) of CER includes the phrase or for any other reason, its scope is wide enough to include the goods brought back by assessee. Accordingly, CESTAT allowed the CENVAT credit availed by the assessee. Further, CESTAT dropped the penalty imposed under rule 26 of CER.

Issue: - Whether the CESTAT mis interpreted rule 16(1) of Central Excise Rules, 2002 by including goods sold as scrap within its scope and allowing assessee to avail CENVAT Credit? Whether CESTAT was justified to revoke penalty imposed under rule 26 of CER?

Reasoning of the Judgement: - The revenue filed an appeal before the Hon’ble High Court against the said order. The observations of the Hon’ble High Court are as under:

Goods were brought back for the purpose of scrapping and not refining. The cartons that were returned were found in packed condition. Hence, the alleged defects in goods, as claimed by assessee could not be ascertained. The receipts were not found to be reliable. There are no records of reasons given by purchasers for rejecting the consignments. The assessee tried to pass scrapped goods as refined goods.

Scrapping is not included within the scope of rule 16(1) of CER-Goods may be brought back to factory and may be subjected to processing and thereafter removed after having become saleable commodities. The phrase or for any other reason has to be necessarily read on the construction canon of ejusdem generis. Any other rule of interpretation would make the rule unworkable and defeat the intention of legislature. The legislative intent was not to read the phrase or for any other reason? in rule 16(1) of CER in isolation or to give it a wide scope. Otherwise there would be no necessity to precede the said phrase with processes of re-made, refined and re-conditioned. The phrase for any other reason? has to be interpreted in light of the preceding expressions of remade, refined, re-conditioned. The essential characteristics of the goods are retained even after subjected to processes of re-made etc. However, in case of scrapping, the original identity of goods completely perishes. Scrapping does not fall within the scope of rule 16(1) of CER. Based on the aforementioned observations, the imposition of penalty under rule 26 of CER was also upheld.

Held: - The Hon’ble High Court has held CESTAT misinterpreted rule 16(1) of CER by unlawfully including scrapping within its scope. CESTAT was unjustified in setting aside penalty imposed under rule 26 of CER.

Comment: - The Hon’ble High Court has interpreted rule 16(1) of CER by following the principle of ejusdem generis and has held that the phrase for any other reason has to be interpreted in light of the preceding expressions remade, refined, re-conditioned. Scrapping of goods is neither a species nor in the likeness of remade, refined, re-conditioned and hence, should not fall within the ambit of rule 16(1) of CER.
Prepared By- CA Kartik Singhvi

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PJ/Case Law/2020-2021/3621

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