2001 (12) TMI 695 - AT - Central Excise

Summary

Issues involved:
Availability of Modvat credit for duty paid on inputs used for R&D purposes.

Analysis:
The appeal filed by M/s. Punjab Communications Ltd. raised the issue of whether Modvat credit of duty paid on inputs used for Research and Development (R&D) purposes is available. The appellants, a State Government Undertaking, manufacture high tech telecommunication systems supplied to the Department of Telecommunication (DOT). They argued that inputs used for R&D were ultimately used in the manufacture of final products cleared on payment of duty. The appellants emphasized the correlation between inputs, manufacturing process, and final product clearance. The Commissioner, however, did not accept this correlation based on an audit report. The appellants cited precedents where inputs used in or in relation to the manufacture of final products were eligible for Modvat credit.

The Respondent, Shri A.K. Jain, contended that the inputs used in the R&D section were not considered in the manufacturing expenses of final products. It was argued that the R&D work involved in developing new equipment cannot be considered part of the manufacturing process due to insufficient machinery in the R&D section.

Upon considering both arguments, the Tribunal observed that the crucial question was whether the inputs consumed in the R&D section were actually used in manufacturing finished products cleared on payment of duty. The Tribunal found merit in the appellants' submissions regarding the correlation between inputs and final product manufacture. It was noted that the adjudicating authority had not thoroughly examined this aspect, especially in light of the Tax Audit Report's limitations in calculating yield due to the complex nature of the products. The Tribunal directed a remand to the adjudicating authority to reevaluate the case, considering the appellants' submissions on the use of inputs in manufacturing final products. The authority was instructed to review all documents and determine the actual utilization of inputs in the manufacturing process. The appellants were given two months to provide detailed submissions correlating inputs to the manufacture and removal of final products. Additionally, the Tribunal instructed the authority to consider the appellants' argument regarding high-value inputs versus smaller items like screws. The appeal was allowed by remand for further examination and decision-making.