2012 (11) TMI 74 - AT - Central Excise

Cenvat credit manufacture of Telecommunication equipment alleged that use of inputs in R & D did not result in manufacture of dutiable final products and therefore they were not eligible for Cenvat Credit on such inputs used in R & D Held that - Noticee has informed that at present they do not have any R & D section as the same was stopped in 1997-98, as they are reported to have suffered heavy losses - noticee for the present is not doing any R & D work not they have maintained any record of R & D work done by them in the past. The noticee can correlate the inputs upto the issue stage but have no system to identify whether inputs in question have been used in the R & D work or manufacture of goods cleared on payment of duty - revenue is presuming that such inputs did not result in manufacture of final products. Inputs used in trial productions or destructive testing or trial production also are eligible for Cenvat credit. Revenue has not made out any case that the inputs were cleared without payment of duty or they were destroyed in the process of so called R & D; - appellants are eligible for Cenvat credit on the impugned inputs in favor of assessee

Issues Involved:
1. Eligibility for Cenvat Credit on inputs used in Research and Development (R&D).
2. Verification of whether inputs used in R&D resulted in the manufacture of dutiable final products.
3. Maintenance of records correlating inputs issued to R&D and their use in manufacturing final products.
4. Revenue's claim of non-eligibility for Cenvat Credit due to lack of evidence of inputs returning from R&D to production.

Detailed Analysis:

1. Eligibility for Cenvat Credit on inputs used in Research and Development (R&D):
The Appellants, a Punjab State Government undertaking, were engaged in manufacturing telecommunication equipment and availed Cenvat credit on inputs. Revenue contended that inputs used in R&D did not result in the manufacture of dutiable final products, thus disqualifying them from Cenvat Credit. A Show Cause Notice was issued, demanding reversal of Cenvat Credit and proposing penalties. The Tribunal initially remanded the case for verification of whether inputs shown as consumed in R&D were used in manufacturing finished products cleared on payment of duty.

2. Verification of whether inputs used in R&D resulted in the manufacture of dutiable final products:
The Tribunal directed the adjudicating authority to verify if the inputs used in R&D were indeed used in manufacturing final products cleared on payment of duty. The Appellants argued that their R&D was essentially initial production under the supervision of specially trained engineers, and the products were accounted for under R&D but cleared on payment of duty. They provided a list of unique inputs and claimed that the corresponding final products were cleared on payment of duty.

3. Maintenance of records correlating inputs issued to R&D and their use in manufacturing final products:
The adjudicating authority found that the Appellants did not maintain records showing the return of inputs from R&D to the production line. The Preventive staff's verification revealed no records proving that inputs issued to R&D were used in manufacturing final products. The Appellants maintained private computerized records of inputs issued to R&D but lacked records showing their return and subsequent use in production.

4. Revenue's claim of non-eligibility for Cenvat Credit due to lack of evidence of inputs returning from R&D to production:
Revenue's case was based on the absence of records showing the return of inputs from R&D to production. They argued that inputs were consumed in R&D and did not result in the manufacture of final products cleared on payment of duty. The Tribunal noted that the Revenue did not prove any clandestine removal of inputs or final products and failed to verify the Appellants' claim that inputs used in R&D were cleared as finished goods on payment of duty.

Conclusion:
The Tribunal concluded that the Revenue's case lacked merit as it was based on a misunderstanding of the Annual Financial Statements and an unwillingness to accept the Appellants' explanations. The Tribunal accepted the Appellants' claim that inputs used in R&D resulted in the manufacture of final products cleared on payment of duty. The appeal was allowed, setting aside the impugned order, and the cross-objection filed by Revenue was disposed of accordingly. The Tribunal emphasized that inputs used in trial production or testing are eligible for Cenvat Credit, referencing relevant decisions such as TELCO and Tetra Pak India Pvt. Ltd.

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