2017 (11) TMI 1104 - HC - Central Excise

CENVAT/MODVAT credit - defective units - Rule 57-D of erstwhile Central Excise Rules, 1944 - Whether on the facts and in the circumstances of the case, the Tribunal is justified in holding that the CENVAT/MODVAT Credit is admissible in respect of the inputs which were defective, unfit for use in the manufacturing of final goods & hence destroyed by the Respondent, without considering that the Respondent itself was unable to specify and identify the stage of such defect/wastage which clearly had to conclude that the inputs supplied to the Respondent were ad-initio defective inputs unfit for use in the manufacture of the final product? Held that - On perusal of the above extracted Sub-rule (4) of Rule 57A of the erst while Central Excise Rules, 1944 it can be inferred that the MODVAT credit was available on inputs used in the manufacture of the final products. Further, MODVAT credit was also available on the inputs used in or in relation to the manufacture of final product whether directly or indirectly. Therefore, it is amply clear that it was not required that the said inputs should contain in the final products. The testing is an integral part of manufacturing process and MODVAT is available as per Rule 57A. The order passed by the Tribunal is fully justified as the Tribunal has categorically recorded the finding of fact, after perusal of the report of defect work that the MODVAT credit has been availed by the assessee company on the inputs/ parts, of the watches at the time of the receipt of the same, before putting to use and that the assessee company has conducted certain test to find out as to whether the inputs to be usable or not. In respect of the inputs which were not found fit to be used, the assessee company has reversed credit thereon and rest of the inputs were issued by the respondent for process or assembling of watches, and during the course of manufacture of watches, certain inputs were found defective during further test and certain inputs were lost while manufacturing the goods. The MODVAT credit cannot be denied applying the provisions of Rules 57-D when duty has indeed been paid - In the instant case of the appellant during the period in dispute scrap valued at ₹ 78,53,771/- was cleared from the factory on this scrap a duty of ₹ 12,20,722/- was paid, therefore, without prejudice and in any case the benefit of MODVAT credit has to be given to the assessee company on the basis of relevant fact that the duty has been paid on scrap. Appeal dismissed - decided against appellant.

Summary

Issues Involved:
1. Admissibility of CENVAT/MODVAT Credit for defective inputs.
2. Determination of input shortage and excess.

Issue-wise Analysis:

1. Admissibility of CENVAT/MODVAT Credit for Defective Inputs:
The primary issue was whether the respondent company was justified in claiming CENVAT/MODVAT credit for inputs that were defective and unfit for use in the manufacturing of final goods. The Tribunal held that under Rule 57-D of the Central Excise Rules, 1944, credit should not be denied even if the inputs become waste during the manufacturing process. The Tribunal found that the inputs were initially used in the manufacturing process and only later identified as defective, thus justifying the credit. The Tribunal relied on various precedents, including the Delhi High Court's decision in *Asahi India Safety Glass Ltd. vs. Union of India*, which held that inputs used in the manufacturing process, even if later found defective, are eligible for credit. The Tribunal also considered the decision in *Flex Engineering vs. CCE*, where it was held that testing is an integral part of the manufacturing process and inputs used therein are eligible for credit.

2. Determination of Input Shortage and Excess:
The second issue was whether the Tribunal was justified in holding that there was no shortage of inputs on the grounds that excess inputs in some cases nullified the shortage in others. The Tribunal found that the company's stock accounting was done on a weighment basis due to the large number of minute inputs, leading to discrepancies. The Tribunal accepted the company's explanation that the shortages and excesses were due to this accounting method and were supported by a Chartered Accountant's certification. The Tribunal concluded that there was no actual shortage of inputs and that the company had correctly taken the MODVAT credit.

Judgment Summary:
The High Court dismissed the appeal filed by the Commissioner of Central Excise, affirming the Tribunal's decision. The Court found that the Tribunal had correctly interpreted the provisions of Rule 57-A and Rule 57-D of the Central Excise Rules, 1944. The Tribunal's findings that the inputs were used in the manufacturing process and that any shortages were nullified by excesses in other inputs were upheld. The Court concluded that no question of law arose in the appeal, and the Tribunal's decision to allow the MODVAT credit was justified. The appeal was dismissed for lack of merit.