2018 (1) TMI 1266 - HC - Central Excise

CENVAT credit - imported inputs/components which were found faulty during testing process - Whether the Tribunal is right in law in allowing Cenvat Credit of the duty paid in respect of imported inputs/components which were found faulty during testing process prior to the issuance of the same into the manufacturing process of final product and the same inputs were re-exported to the overseas supplier without reversing the Cenvat Credit availed earlier? - Rule 3(5) of the Cenvat Credit Rules, 2004. Held that - these components have to be treated as having been used for the intended purpose and hence the duty demand of ₹ 1,71,07,253/- would not be sustainable and has to be set aside. In the appellant s own case decided by the Tribunal M/s. Ericsson India Private Limited Versus CCE & St, Jaipur-I 2015 (5) TMI 93 - CESTAT NEW DELHI , this very question had come up for consideration. The point of dispute in that case was as to whether in respect of the components which had been issued for manufacture and were used for assembly but later on being found to be defective was re-exported, Cenvat credit of the additional customs duty earlier taken would be reversible and the Tribunal in para 8 of the judgment after considering the Delhi High Court judgment in the case of Asahi India Safety Glass Limited v. Union of India 2004 (9) TMI 118 - HIGH COURT OF DELHI held that such components have to be treated as having been used and hence the assessee cannot be asked to reverse the cenvat credit. Surplus inventory which was re-exported - components written-off - demand of duty - Held that - admittedly these components have not been used for the manufacture of the finished products and, therefore, in our view the Department is justified in invoking Rule 8 of the 1996 Rules for recovery of duty. Therefore, the duty demand of ₹ 23,15,901/- & ₹ 94,29,117/- have to be upheld. Duty Drawback - Held that - Since the components in respect of which the duty demand of ₹ 94,29,117/- has been confirmed have been re-exported, the customs authorities have to consider the appellants claim for duty drawback - penalty not sustainable. Appeal dismissed - decided in favor of respondent-assessee.

Issues Involved:
1. Whether the Tribunal is right in law in allowing Cenvat Credit for imported inputs/components found faulty during testing and re-exported without reversing the Cenvat Credit.
2. Whether the testing of inputs/components is considered part of the manufacturing process.
3. Whether the Tribunal erred in concluding that inputs cannot be said to be cleared ‘as such’ to attract Cenvat reversal.
4. Whether the Tribunal’s interpretation of the removal of inputs ‘as such’ is contradictory.
5. Whether the Tribunal’s decision aligns with the principles of the CENVAT Credit scheme.
6. Applicability of various case laws relied upon by the Tribunal.
7. The correctness of the Tribunal's reliance on the Asahi India Safety Glass Ltd. case.
8. Whether the Tribunal properly considered the customs duty demands and penalties.

Detailed Analysis:

1. Allowing Cenvat Credit for Faulty Inputs:
The core issue is whether the Tribunal was correct in allowing Cenvat Credit for imported inputs/components found faulty during testing and subsequently re-exported without reversing the Cenvat Credit. The Tribunal held that these components should be treated as having been used for the intended purpose, thus not requiring reversal of the Cenvat Credit. This decision was based on the interpretation that the process of testing is part of the manufacturing process.

2. Testing as Part of Manufacturing Process:
The appellant argued that the Tribunal erred by considering that inputs issued for testing purposes were part of the manufacturing process. The appellant contended that testing inputs/components before their use in manufacturing does not constitute a part of the manufacturing process. However, the Tribunal concluded that testing is an integral part of the manufacturing process, and thus the inputs/components used for testing should be considered as used in manufacturing.

3. Inputs Cleared ‘As Such’:
The Tribunal’s decision was challenged on the grounds that it erred in concluding that the inputs cannot be said to be cleared ‘as such’ to attract Cenvat reversal. The appellant argued that the defective inputs were not issued in the assembly line of manufacturing and should be considered as removed ‘as such.’ The Tribunal, however, held that since the components were used for testing, they cannot be considered as cleared ‘as such.’

4. Contradictory Interpretation of Removal ‘As Such’:
The appellant claimed that the Tribunal took a contradictory stand by treating the defective inputs not cleared ‘as such’ for Cenvat reversal purposes while considering them cleared ‘as such’ for extending export benefits. The Tribunal maintained that the removal of inputs ‘as such’ applies only when inputs are removed without being used, which was not the case here.

5. Principles of CENVAT Credit Scheme:
The appellant argued that the Tribunal’s order contradicts the principles of the CENVAT Credit scheme, which allows credit only for inputs used in or in relation to the manufacture of final products. The Tribunal, however, considered the defective inputs as part of the manufacturing process, thus allowing the credit.

6. Applicability of Case Laws:
The Tribunal relied on various case laws, including Asahi India Safety Glass Ltd. v. Union of India, to support its decision. The appellant contended that these case laws were not applicable to the present case. The Tribunal, however, found these precedents relevant and applicable.

7. Reliance on Asahi India Safety Glass Ltd. Case:
The Tribunal relied on the decision of the Delhi High Court in Asahi India Safety Glass Ltd. v. Union of India, which held that inputs used in the manufacturing process, even if found defective later, should be considered as used. The appellant argued that this reliance was misplaced, but the Tribunal upheld its decision based on this precedent.

8. Consideration of Customs Duty Demands and Penalties:
The Tribunal upheld the customs duty demands of ?23,15,901 and ?94,29,117 but quashed the demand of ?1,71,07,253 and the penalty of ?20,23,000. The appellant contended that the Tribunal did not properly consider the matter and erred in partially allowing the appeal. The Tribunal’s decision was based on its interpretation of the use of inputs in the manufacturing process.

Conclusion:
The Tribunal’s decision was based on the interpretation that testing is part of the manufacturing process and that the defective inputs used for testing should be considered as used in manufacturing. The Tribunal upheld certain customs duty demands but quashed others, along with the penalty. The appellant’s arguments against the Tribunal’s interpretation and reliance on case laws were not accepted, and the appeals were dismissed. The issue was ultimately answered in favor of the assessee.

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