Whether credit reversal demand sustainable on defective goods on the contention that process does not amounts to manufacture?

PJ/CASE LAW/2015-16/2734

Case:-COMMISSIONER OF C. EX., JAIPUR VERSUS AMCO INDIA LTD.

Citation:- 2015 (316) E.L.T. 525 (Tri. - Del.)

Brief Facts:-As per facts on record the respondents are engaged in the manufacture of Aluminium 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 customer or under the cover of the invoices issued by the respondent themselves. In terms of the provisions of Rule 16 of the Central Excise Rules, the respondent was entering goods in their input receipt register and was availing the Cenvat credit in Credit Account Register. There is no dispute about the availment of credit by the Respondents. The Revenue was of the view that is inasmuch as after entering the goods in their Cenvat Account, the assessee has simplicitor shown the issuance of the said inputs for further manufacture, without maintaining any records about the same. Statements of the various persons recorded during investigation were to the effect that only 20% of the material is found to be reusable in respect of the quantity so cleared by them as scrap. As such, after initiating proceeding 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 in terms of Rule 16(2) of the Central Excise Rules, 2002, if the goods are not subjected to any process of manufacture, an assessee shall pay an amount equal to the Cenvat credit taken.

Appellants Contentions:-The Revenue’s contention is that in terms of the statement of Shri Krishan Kumar and the other employee of the assessee company, it stands deposed that only 20% of the returned goods were found usable and the balance 80% were sold as scrap. Therefore, the process undertaken on the defective goods does not amounts to manufacture and the cenvat credit taken is required to be reversed.

Respondents Contentions:-On the other hand, the assessee had taken a categorical stands before Commissioner (Appeals) that there is no requirement of maintenance of separate records of inputs received as return after sale and the same has to be treated as inputs; that they are also getting the waste and scrap, during manufacture of their final product, which is being cleared by them to M/s. Hindalco Industries Ltd. for conversion into stock, on payment of duty. Even if the Revenue’s stand is accepted, the duty paid by them on the scrap is available as Cenvat credit to their buyer and there is no mala fide intent to evade payment of duty, as the entire exercise would be revenue neutral.

Reasoning Of Judgement:-On appeal against the above order, Commissioner (Appeals) allowed the appeal by observing as under Para 6 :-

“In view of the above tribunal find that certain processes were undertaken on the returned aluminium foils viz., re-annealing, slitting, edge trimming, Panacking, 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. The adjudicating authority has alleged 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 should not pay duty less than the credit availed by them on such goods in terms Rule (2) of Rule 16 ibid. Tribunal 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 is 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.”
The said order is impugned before the Tribunal.
On going through the submission so made as also by the learned DR and after going through the impugned order of Commissioner (Appeals), The tribunal find no reasons to disagree with the finding of the appellant 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 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, Tribunal find no justification for setting aside the impugned order of Commissioner (Appeals). Revenue’s appeal is accordingly rejected.

Decision:- Appeal dismissed.

Comment:-The analogy in the case is that as far as the returned goods are cleared on payment of duty by treating them as amounting to manufacture, the demand of credit reversal cannot be raised on the contention that 80% of the rejected material was sold as scrap. When defective goods are received under Rule 16, they are deemed to be treated as inputs. Rule 16 do not stipulate requirement of maintenance of any separate records of inputs whether returned after sales or fresh receipts & returned goods have to be treated as inputs and shown as the issuance of inputs from RG-I of the assessee which were deemed to have been used in manufacture. Mere statement of employee that 80% of the defective material is sold as scrap cannot be relied upon unless the same is corroborated with sufficient and appropriate evidences.

Prepared By:- Neelam Jain

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PJ/CASE LAW/2015-16/2734

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