2008 (1) TMI 111 - AT - Central Excise

Assessee took credit on goods on rejected goods got returned back since the goods could not be reconditioned and were cleared as such as scrap without any manufacturing process the assessee was required to reverse the entire credit taken by them as per Rule 16(2) CCR there is merits in the Revenue s contention that when goods have been cleared as such as scrap, assessee are required to reverse the credit taken by them on retuned goods Bona fide mistake penalty set aside

Summary

Issues:
1. Whether the respondents were required to reverse the Cenvat Credit taken by them on returned goods cleared as scrap without any manufacturing process.
2. Whether the activity of converting returned goods into scrap constitutes a manufacturing process for the purpose of duty payment.

Analysis:
1. The case involved the respondents clearing finished goods as scrap without any manufacturing process after the goods were rejected and returned to them. The Revenue contended that since no manufacturing activity was undertaken on the returned goods, the Cenvat Credit initially taken by the respondents should be reversed as per Rule 16(2) of Cenvat Credit Rules, 2002. The Asst. Commissioner confirmed the duty and imposed a penalty, which was set aside by the Commissioner (Appeals) who held that duty should be paid only on the scrap value. The Tribunal found that no manufacturing activity was carried out on the returned goods, agreeing with the Revenue's contention that the credit should be reversed. However, considering the bona fide mistake in interpretation of Rule 16, the penalty was set aside, and the duty demand was upheld.

2. The dispute revolved around whether the conversion of returned goods into scrap constituted a manufacturing activity for the purpose of duty payment. The respondents argued that since the goods were converted into scrap after return, it involved manufacturing activity, justifying the duty payment at the scrap value. However, the Tribunal noted that the returned goods did not undergo any specific manufacturing process and were cleared as scrap directly. Therefore, the Tribunal agreed with the Revenue's position that no manufacturing activity was undertaken on the returned goods, leading to the decision that the Cenvat Credit taken on the returned goods should be reversed. Despite upholding the duty demand, the Tribunal modified the Commissioner (Appeals)'s order by setting aside the penalty due to the bona fide mistake in interpreting Rule 16.

This judgment clarifies the requirement to reverse Cenvat Credit on goods cleared as scrap without any manufacturing process and emphasizes the distinction between manufacturing activities and direct clearance as scrap. It highlights the importance of adhering to the provisions of Cenvat Credit Rules while determining duty liability in such cases, even when goods are converted into a different form like scrap.