Pradeep Jain - Chartered Accountant

PJ/CASE STUDY/2009-10/009

08 September 2009

CASE STUDY

Introduction:-

Cenvat Credit is available on inputs, capital goods and on input services which are used in or in relation to manufacture of finished goods. The finished goods have a distinct character, different use and different name from the inputs used therein. However, in case the finished goods are rejected and are received back in the factory, can the said rejected goods be treated as inputs and modvat credit can be availed on them? This issue was raised in the case we have taken hereunder for studying.

M/s Kansara Bearings Ltd. v/s CCE, Jaipur

Brief Facts of the Matter:-

- The Appellant (assessee herein) were engaged in the manufacture of steel rollers for bearing falling under heading 84.82 of the Schedule to the Central Excise Tariff Act, 1985.

- The appellants took Cenvat credit of duty paid on rejected steel rollers under Rule 57A during March, 1996 to August, 1996. The rejected rollers were returned by the party because they were not according to the requirements of the customers.

- The appellants had filed declarations under Rule 57G before the Department for availing credit on rejected steel rollers received back by them by declaring them as inputs. The Department had duly approved the said declaration. Thereafter, the appellants had taken Cenvat credit.

- The Department issued a show cause notice proposing to disallow the Cenvat credit taken by them on rejected steel rollers on the ground that in terms of Explanation to Rule 57A of the Central Excise Rules, 1944, rejected rollers were not inputs. It was alleged that the appellants had contravened the provisions of Rule 57A and 57G of the Central Excise Rules, 1944 and were liable for penal action under Rule 173Q.

- The Appellant in its reply relied upon the case of M/s Alcobex Metal Pvt Ltd v/s CCE [1993 (68) ELT 46] in which it was held that rejected goods ceased to be final products and must be treated as input only and in such cases, the procedure in Rule 173H or 173L is not required to be followed. It was further contended that the word manufacture means whereby any process or manipulation which results in producing a new product distinct in name, character and use amounts to manufacture. It was contended that the appellants were converting rejected rollers into fresh rollers which are distinct in name, character and use, because the rejected rollers are nothing but scraps. Appellants also relied upon the decision in case of Indian Lenolium Limited v/s CCE [1993 (67) ELT 678] and contended that they have taken modvat credit on the said goods and cleared them after payment of duty hence there is no loss of revenue. They also relied upon the decision in case of CCE v/s Hirsht Watch Straps Private Limited [1997 (91) ELT 174].

- The Adjudicating Authority held that the nature, character and name of the rejected goods received back in the factory did not change even after the series of processes were carried on the said goods. The steel rollers remained as steel rollers and even the use remained the same even after the processes of grinding and hardening were undertaken on them. The Authority relied upon the decisions given in cases of Swastik Metals v/s CCE [1996 (88) ELT 196 (T)]. Accordingly, Cenvat credit taken on rejected steel rollers was denied to the appellant and penalty was imposed under Rule 173Q (1) (bb) for contravention of Rule 57G/57A.

- The Commissioner (Appeals) held that the finished goods were received back as rejected goods and even when they were subjected to processes of grinding and hardening to remove defects, they never lost their identity. Therefore, the matter is covered under Rule 173 H and modvat cannot be extended to them. The cases laws relied upon by the appellants were held to be not applicable to the facts of the appellant’s case. However, penalty was set aside on the ground that it was not a fit case for invoking penal provisions.

- Aggrieved by the order passed by the Commissioner (A), the appellant filed further appeal before the Tribunal.

Question for Consideration: -

The Question for consideration before the Tribunal was:

Whether the rejected goods, which are subjected to further process and on such rejected goods, whether the modvat credit will be available?

Contention of the Appellant: -

The appellant has submitted that the definition of term “manufacture” is given under note 6 of Section XVI of Chapter 84 which reads as follows-

“In respect of goods covered under this section, the conversion of an article which is incomplete or unfinished but having the essential character of complete or finished article(including the “blank” that is an article, not ready for direct use, having the approximate shape or outline of the finished article or part, and which can only be used, other than in exceptional cases, for completion into the finished article or part) into finished or complete article shall amount to manufacture”

As such, the rejected goods were having the essential character of the finished goods but can not be used for any purpose. Hence, the conversion of the same into finished goods will amount to manufacture as per aforesaid definition.

Judgment of Tribunal: -

v The Tribunal held that the issue involved was also considered by the Tribunal in the judgment passed in the case of Honda Siel Power Products Limited v/s CCE, Meerut-II [2000 (38) RLT 1125]. In the cited case, it was held that Modvat credit is available on such rejected goods and Rule 173H and 173L of the Central Excise Rules, 1944 are not applicable to the goods not manufactured by the assessee.

v Tribunal held that as the issue has already been decided by the Tribunal in the above-cited case, the contention of the appellant is accepted. Appeal was accepted accordingly.

Conclusion:-

The Tribunal rightly held that rejected finished goods received back in the assessee’s factory were eligible for Modvat credit if the same is used in manufacture of finished goods. The term “manufacture” was most important. By virtue of chapter note, it has been held that the process employed by the appellant amounts to manufacture and as such the credit is admissible on the same.

Before Parting…

This case pertains to erstwhile Central Excise Rules, 1944. Now, these Rules have been amended and Rule 16 of Central Excise Rules, 2002 deals with the goods returned back. It clearly says that the credit will be allowed on such returned goods. If the processing done on such goods amounts to reprocess then the Cenvat credit is to be reversed and if the processing amounts to manufacture then the duty is to be paid on sale value. Hence the issue of availment of Cenvat credit on rejected goods has been settled by the Board. The only requirement is that the duty paying documents should accompany the goods.

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PJ/CASE STUDY/2009-10/009
08 September 2009

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