2018 (4) TMI 466 - AT - Central Excise

CENVAT credit - imports that were used exclusively in the research & development department of the operations of the appellant - according to Revenue, the output of the said department is not manufacture - Held that - apart from production of excisable outputs any activity that is incidental or ancillary also constitutes manufacture. That the output of such incidental or ancillary operations may not directly result in goods that are excisable would not take it out of the ambit of manufacture - prima facie, it would appear that the fruits of research and development facility ultimately finds its way, in form and in costs, to the excisable product. In the absence of any allegation that research and development is not concerned with manufacture of the appellant, the disallowance of CENVAT credit does not find favor - appeal allowed - decided in favor of appellant.

Summary

Issues:
Entitlement to CENVAT credit for inadmissible credit availed on imports used in research & development department.

Analysis:
The case involved M/s Force Motors Ltd challenging the disallowance of inadmissible CENVAT credit availed on imports used exclusively in their research & development department. The lower authorities upheld the disallowance, stating that CENVAT credit can only be availed in relation to the manufacture of goods, and the output of the research & development department does not constitute manufacture. Alongside the duty demand, a penalty was imposed under rule 15(1) of CENVAT Credit Rules, 2004. The appellant argued that the definition of manufacture under the Central Excise Act is not limited to the production of output, and justified the admissibility of credit by citing various decisions.

The dispute centered on the entitlement to CENVAT credit, focusing on the definition of 'input' crucial for determining eligibility. The inputs in question were not excluded by the definition, indicating that goods used in the research and development wing of the manufacturing facility could be eligible for credit. The key issue was whether ancillary functions supporting the manufacturing facility contribute to output for credit availment. The definition of manufacture in the Central Excise Act suggested that any activity incidental or ancillary to production constitutes manufacture, even if the output may not directly result in excisable goods.

Referring to precedents, the judgment highlighted that inputs used in any activity contributing to the final product are in compliance with the CENVAT Credit Rules. The Tribunal's decision in a similar case emphasized that denial of credit is contingent on proving that the research and development facility is not integral to the manufacturing process. Since there was no such allegation in the present case, and considering the wide latitude for credit availment, the disallowance of CENVAT credit was overturned, and the appeal was allowed.

In conclusion, the judgment favored M/s Force Motors Ltd, setting aside the disallowance of CENVAT credit on imports used in their research & development department. The decision was based on the interpretation of the definition of 'input' and the understanding that ancillary functions supporting manufacturing facilities contribute to output for credit eligibility.