2019 (4) TMI 165 - AT - Central Excise

CENVAT Credit - inputs and capital goods used in R &D works - denial on the ground that R & D works is not related to manufacture - Held that - For any manufacturer R & D activity is indispensable part of the manufacturing activity. The manufacturer has to improve their finished products and also seek out new methods or process for manufacturing final product so as to make it commercially feasible and economically viable and to improve the quality and marketability of the finished products. Therefore the contention of the department that R & D activity is not connected to manufacturing activity in any manner is not tenable - Reliance also placed in the case of THE COMMISSIONER OF CENTRAL EXCISE VERSUS M/S TIMEX WATCHES LIMITED 2017 (11) TMI 1104 - ALLAHABAD HIGH COURT - credit allowed - appeal allowed - decided in favor of appellant.

Summary

Issues:
Eligibility of credit on inputs and capital goods used in R & D activity within the factory premises.

Analysis:
The case involved a dispute regarding the eligibility of credit on inputs and capital goods used in Research and Development (R & D) activity within the factory premises of the manufacturer. The appellants, engaged in brake assembly, had a R & D unit within their factory for developing new products and technologies. The department contended that the inputs and capital goods used in R & D were not eligible for credit as R & D was not related to manufacturing. A show-cause notice was issued, and after due process, the original authority confirmed the demand, interest, and penalties, which were upheld by the Commissioner (Appeals).

The appellant argued that R & D activities were integral to the manufacturing process, as they were necessary for testing, improving final products, updating technology, and making manufacturing commercially feasible. The appellant relied on various decisions to support their argument. On the other hand, the Authorized Representative for the Revenue argued that the inputs and capital goods were not used in the manufacture of final products and hence were not eligible for credit. He cited a decision of the Tribunal in a similar case to support his contention.

Upon hearing both sides, the Tribunal analyzed the definitions of "Capital Goods" and "inputs" and noted that goods used within the factory by the manufacturer were eligible for credit. The Tribunal highlighted that R & D activities were crucial for manufacturers to enhance product quality, explore new methods, and improve marketability. The Tribunal found the department's argument that R & D was not connected to manufacturing untenable. The Tribunal distinguished the decision cited by the Revenue's Representative as it pertained to a period before relevant amendments to the definitions of "inputs" and "Capital Goods." The Tribunal agreed with the appellant's argument that R & D activities were essential for manufacturing and that inputs and capital goods used in R & D were eligible for credit.

Consequently, the Tribunal held that the disallowance of credit was unjustified, setting aside the impugned order and allowing the appeals with any consequential reliefs. The judgment emphasized the importance of R & D activities in the manufacturing process and affirmed the eligibility of credit for inputs and capital goods used in R & D within the factory premises.