2016 (7) TMI 78 - AT - Central Excise

Duty liability on samples drawn for testing within the factory premises - Revenue contented that the Supplementary Instructions of the Central Board of Excise and Customs has laid down procedure for drawal and accounting of samples for testing which apparently insists upon payment of excise duty - FAA set aside the duty demand - Held that - Samples that are retained in the factory of production for prescribed periods as well as those that are subject to test within the factory are not, in effect, removed from the factory and it would appear that these should not be liable to excise duty at that stage. It would appear that the adjudicating authority has been over-zealous in interpreting the treatment to be accorded to removals to be applicable to all samples whether retained in the factory or taken outside. We have no doubt in our minds that drawing of samples and removal of samples are two different events and it is only the latter that requires discharge of duty liability. Samples that are drawn and retained are, by and large, reintroduced subsequently in the production process and thus metamorphosised as finished goods that are removed on payment of duty. Even if the samples were to lose their identity and characteristics during the testing, the cost of such samples would, in the normal course, be absorbed in the cost of production of finished goods that would ultimately be charged to duty. There is, therefore, no logic in concluding that there is loss of revenue on account of drawal of samples to the extent that such samples are retained or tested within the factory of production. - Decided against revenue

Summary

Issues:
1. Appeal against order-in-appeal confirming duty liability on samples drawn for testing within factory premises.
2. Interpretation of Circulars issued by Central Board of Excise and Customs regarding samples drawn for testing.
3. Adherence to quality standards in manufacturing process and duty liability on samples drawn for testing.
4. Comparison of treatment of samples retained in factory for testing and those taken outside for testing.
5. Application of previous judgments on duty liability for samples drawn and tested within factory premises.

Analysis:
1. The appeal was filed by the revenue against an order-in-appeal confirming duty liability on samples drawn for testing within the factory premises. The first appellate authority set aside the demands based on the contention that the tests were necessary as a prerequisite for the manufacturing process completion. The authority relied on a Tribunal decision and acknowledged that samples drawn for testing within the factory were not liable for duty.

2. The Circulars issued by the Central Board of Excise and Customs were crucial in determining the duty liability on samples drawn for testing. The Circulars detailed the procedure for drawal and accounting of samples for various purposes, including testing. The Circulars differentiated between samples drawn for in-house testing and those sent outside the factory premises for testing.

3. The manufacturing process's adherence to quality standards necessitated drawing samples for testing, both within and outside the factory premises. The Tribunal highlighted that samples retained in the factory for testing purposes should not be subject to excise duty as they are not removed from the factory. The cost of such samples is absorbed in the production cost of finished goods ultimately charged with duty.

4. The judgment emphasized the distinction between samples retained in the factory for testing and those taken outside for testing. Samples retained and tested within the factory premises should not attract excise duty as they are reintroduced in the production process. The judgment cited previous cases where samples drawn for testing and consumed during testing were not considered excisable goods liable for duty.

5. Previous judgments, including decisions by the Tribunal and High Court, were cited to support the view that duty liability on samples drawn and tested within the factory premises should not apply. The instructions prescribing duty payment only upon removal from the factory and the treatment of samples in finished stock were crucial in rejecting the appeal and upholding the orders setting aside the duty demands.

This detailed analysis of the judgment provides insights into the legal interpretation of duty liability on samples drawn for testing within factory premises, emphasizing the importance of quality standards in the manufacturing process and the application of previous legal precedents in determining excise duty obligations.