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PJ/CASE LAW/2016-17/3150

Whether reversal of credit required on re-export of defective imported inputs after being put to use?
Case:-ERICSSON INDIA PVT. LTD. VERSUS COMMISSIONER OF C. EX. & S.T., JAIPUR-I

Citation:-2016 (334) E.L.T. 107 (Tri. - Del.)

Brief Facts:-The appellants are engaged in the manufacture of transmission equipments and procured various parts of the same from their parent company located in Sweden. The said parts are being imported by them and are being cleared on concessional rate of duty in terms of Notification No. 24/2005-Cus., which requires payment of countervailing duty only. The CVD paid by them is being availed as credit.
During the course of manufacture of transmission equipment some of the parts so imported by them are found to be defective. Inasmuch as the said parts were under warranty period, a claim is lodged by the appellant to the centre of the same. The appellants’ claim is accepted, the imported defective parts are re-exported and compensation comes either by the way of cash payment or replacement of the parts. The replaced parts, when imported, are again cleared on payment of CVD and the credit of the said duty so paid is again taken by the assessee.
The dispute in the present appeal relates to credit of the countervailing duty availed by the appellant in respect of the parts, which were originally imported, and subsequently found defective, consequently re-exported. As per Revenue, the same amounts to clearance of the inputs, as such, thus, invoking the provisions of Rule 3(5) of the Cenvat Credit Rules, 2004. Accordingly, the Revenue initiated proceedings against the appellant for reversal of the credit in terms of the said Rule, which stands culminated in the present impugned orders passed by the lower authorities.
 
Appellant Contentions:-  The appellants contention is that the inputs have not been cleared by them “as such” and thus there is no obligation on them to re-pay the credit so availed by them. By drawing our attention to the allegations made in the show cause notice, ld. Advocate submits that it is established that the inputs were issued from the store-room, were received at the production floor and were put to use for the purpose of assembling the various parts. It is only after the various parts are assembled, they are tested and the damage, if any, is detected at that stage. If that be so, the provisions of Rule 3(5) cannot be invoked inasmuch as the same relates to clearance of the inputs “as such”. By relying upon various decisions, the ld. Advocate submits that it is well settled law that an assessee cannot be asked to reverse the credit, once the inputs have been issued for use in the manufacture of the final product and are found to be defective or damaged at the assembly line.
 
Respondent Contentions:- The Respondent appearing for the Revenue draws attention to the findings of the Commissioner, which are to the effect that the inputs are found defective, even before the same are to be used by the assessee and, as such, the assessees are under a legal liability to reverse the credit.
 
 
Reasoning of Judgment: Having appreciated the submissions made by both sides and have been gone through the allegations made in the show cause notice, we find that the findings of the Adjudicating Authority that the inputs are found defective or damaged prior to their issuance from the store are factually incorrect. It stands described in the show cause notice dated 21-3-2012 that the appellant’s factory was visited by the officers and the process of manufacture of finished goods was examined. It stands mentioned in the show cause notice that the components were issued from the store-room to the production floor where assembly of the components/finished products takes place. Further, the notice referred to the statements of various senior personnels of the assessee-company clearly deposing that the testing is done either during the manufacturing process or after the assembling of the components. The conclusion in the show cause notice is also to the effect that the practice of the component being followed is known to the assessee only during the process of testing in the assembly line, as prior testing of the component before assembling is not being done by the assessee. As such, we are of the view that the findings of fact arrived at by the adjudicating authority in the impugned order are incorrect.
As regards the legal position, we find that it is settled that once the inputs are issued for manufacture of the final product and are further used and are found defective in the assembly line, the assessee cannot be asked to reverse the credit. Reference in this regard can be made to the Hon’ble Delhi High Court decision in the case of Asahi India Safety Glass Ltd. v. Union of India reported in 2005 (180) E.L.T. 5 (Del.). In fact, the following decisions deal with an identical situation, where the inputs originally imported were subsequently, re-exported on being detected as damaged or faulty.
1.         CCE, Jaipur-I v. RFH Metal Casting (P) Ltd. - 2005 (184) E.L.T. 194 (T)
2.         Indus Theco Pvt. Ltd. v. CCE, Raigad - 2007 (212)E.L.T.85 (T)
3.         Videocon International Ltd. v. CCE, Vadodara-II - 2009 (235)E.L.T.135 (T)
4.         Gujarat Heavy Chemicals Ltd. v. CCE, Madurai - 2010 (258)E.L.T.574 (T)
5.         Zydex Industries v. CCE, Vadodara - 2007 (219)E.L.T.602 (T)
6.         Gujarat Heavy Chemicals Ltd. v. CCE, Madurai - 2010 (258)E.L.T.574 (Tri. - Chennai)
7.         Capital Industries v. CCE, Delhi - 2010 (261)E.L.T.572 (T).
Further, the following decisions are to the effect that removal, “as such” means removal of the inputs before putting them to use : -
1.         Cummins India Ltd. v. Commissioner of C. Ex., Pune-III - 2007 (219)E.L.T.911 (Mum.)
2.         Shree Rajasthan Syntex Ltd. v. CCE, Jaipur - 2012 (280)E.L.T.470 (Del.)
3.         Shree Rajasthan Syntex Ltd. v. CCE, Jaipur - 2012 (282)E.L.T.550 (Del.).
It is only in those situations that assessee is liable to reverse the credit so taken by them.
In view of the forgoing, we find no merits in the Revenue’s stand. Accordingly, the impugned orders are set aside and both the appeals are allowed with consequential relief to the appellant.
 
 
Decision:-  Appeals allowed.

Comment:- The gist of the case is that cenvat credit is not required to be reversed on re-export of defective imported inputs after being issued from store-room to production floor and putting them to use in assembly. As held in case law of Asahi India Safety Glass Ltd. v. Union of India reported in 2005 (180) E.L.T. 5 (Del.) where the inputs originally imported were subsequently, re-exported on being detected as damaged or faulty are not considered as “as such” as defined in Rule 3(5) of Cenvat Credit Rules, 2004.
 
Prepared by: Mahesh Parmar
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