2016 (6) TMI 149 - AT - Central Excise

Leviability of duty on samples drawn - Manufacture of toilet soaps and detergents required to be tested at certain prescribed stages of the manufacturing process and samples, drawn from each batch, are to be retained for prescribed periods - samples for test purpose has been further segregated as those drawn for in-house laboratory testing and for preservation for investigation of complaints as well as samples which are drawn for sending outside the factory premises for testing. Held that - in the absence of a specific exemption for samples taken outside the factory premises, they are liable to duty in a manner similar to goods removed from the factory of production. However, samples which are retained in the factory of production for a prescribed period for conformity with standards as well as those which are tested within the factory are not, in effect, removed from the factory and it would appear that these should not be held liable to excise duty at that stage. It would appear that the adjudicating authority has been over-zealous in interpreting the provision relating to duty liability on removal to be applicable to all samples because of juxtaposition of sentences. We have no doubt in our mind that drawing of samples and removal of samples are two different events and it is only the latter that calls for discharge of duty liability. To the extent that samples are reintroduced into the production process, they would, undoubtedly, make their way into stock of finished goods and would, in due course, be removed on payment of duty. Even if the samples were to lose their identity and characteristics in testing, the cost of such samples would, in the normal course of business, be absorbed into the finished products which are subject to duty. There is, therefore, no logic in concluding that there is a loss of revenue on account of drawal of samples to the extent that those are retained or tested within the factory of production. Therefore, in view of instruction prescribing duty payment only upon removal from the factory, the ultimate inclusion of the samples or the costs in goods that are cleared from the factory of production and the decision of Tribunal in the case of Thermax Cullgian Water Technologies Ltd. v. Commissioner of Central Excise 2013 (12) TMI 977 - CESTAT MUMBAI and the decision of Hon ble High Court of Bombay in the case of Commissioner of Central Excise v. RPG Life Sciences Ltd. 2010 (12) TMI 52 - BOMBAY HIGH COURT , it is found that levy of duty on samples is without authority of law. - Decided in favour of appellant

Summary

Issues:
1. Appeal against orders-in-appeals by Commissioner of Central Excise (Appeals)
2. Duty demand on samples drawn for testing
3. Interpretation of duty liability on samples for testing
4. Adherence to quality standards in manufacturing process

Analysis:
1. The appeals were filed against orders-in-appeals by the Commissioner of Central Excise (Appeals). The appellant company, engaged in manufacturing toilet soaps and detergents, contested the demand of excise duty and penalties imposed. The issue revolved around the duty demand totaling significant amounts for different periods, which were confirmed by the original orders. The appeals were rejected by the Commissioner of Central Excise (Appeals), leading to the present proceedings consolidating all related issues for disposal.

2. The primary contention focused on the duty liability concerning samples drawn for testing. The Revenue argued that the Central Board of Excise and Customs' instructions mandate duty payment on samples, citing relevant circulars and judicial precedents. The Supreme Court's decision in ITC Ltd. v. Commissioner of Central Excise was referenced to support duty liability on samples taken for testing and the need for recording any destruction during the testing process.

3. The Tribunal analyzed the Supplementary Instructions of the Central Board of Excise and Customs, categorizing samples for various purposes, including testing. The instructions outlined procedures for sample drawal, emphasizing maintaining proper accounts and payment of duty before removal for testing. While acknowledging the absence of specific provisions on duty liability for samples, the Tribunal inferred that samples retained or tested within the factory premises should not attract excise duty until actual removal from the production facility.

4. Emphasizing the importance of quality standards in the manufacturing process, the Tribunal differentiated between drawing and removal of samples, highlighting that duty liability arises only upon the latter event. Referring to relevant case laws, including Thermax Cullgian Water Technologies Ltd. and RPG Life Sciences Ltd., the Tribunal concluded that duty imposition on samples without their removal from the factory lacked legal basis. Ultimately, the duty levy on samples was deemed unauthorized, leading to the setting aside of the impugned orders and allowing the appeals.

This comprehensive analysis of the legal judgment highlights the key issues addressed by the Tribunal, providing a detailed understanding of the decision-making process and legal reasoning involved in resolving the appeal.