2003 (6) TMI 158 - AT - Central Excise

Summary

Issues Involved:
1. Demand of duty on samples of final products.
2. Reversal of Modvat credit on inputs used for quality control.
3. Imposition of penalties under Sections 11AC and Rules 173Q and 209A of the Central Excise Rules.

Detailed Analysis:

1. Demand of Duty on Samples of Final Products:
The main issue was whether the samples of the final product, which were drawn for quality control purposes, were liable to excise duty. The appellant argued that the samples were not marketable and hence not subject to duty. The Tribunal referred to the stringent provisions of the Drugs and Cosmetics Act, 1940, and the Rules framed thereunder, which mandate testing of raw materials and finished products before they can be marketed. The Tribunal noted that the samples drawn for testing could not be sold in the market and thus were not marketable. The Tribunal also cited the case of Bayer Diagnostics India Ltd. v. Commissioner of C. Ex. & Customs, Vadodara, where it was held that samples of drugs drawn for testing were not saleable and hence not subject to duty. The Tribunal concluded that the demand for duty on the samples was incorrect and set aside the order.

2. Reversal of Modvat Credit on Inputs Used for Quality Control:
The second issue was whether the Modvat credit availed on inputs used for quality control purposes should be reversed. The appellant contended that the inputs used for testing were part of the manufacturing process and hence eligible for Modvat credit. The Tribunal examined the provisions of the Drugs and Cosmetics Act and Rules, which require testing of each batch of raw materials and finished products. The Tribunal referred to Rule 57D of the Central Excise Rules, which allows Modvat credit on inputs even if they are used in processes resulting in waste or by-products. The Tribunal concluded that the inputs used for quality control were part of the manufacturing process and hence eligible for Modvat credit. The order demanding reversal of Modvat credit was set aside.

3. Imposition of Penalties:
The third issue was the imposition of penalties under Section 11AC of the Central Excise Act and Rules 173Q and 209A of the Central Excise Rules. The Tribunal noted that the penalties were imposed based on the demand for duty and reversal of Modvat credit, both of which were found to be incorrect. Since the demand for duty and reversal of Modvat credit were set aside, the penalties imposed under Section 11AC and Rules 173Q and 209A were also set aside.

Conclusion:
The Tribunal allowed the appeals, setting aside the impugned order that confirmed the demand for duty on samples, reversed Modvat credit on inputs used for quality control, and imposed penalties. The Tribunal emphasized the importance of compliance with the Drugs and Cosmetics Act and Rules, and held that the samples drawn for testing were not marketable and hence not subject to duty. The inputs used for quality control were part of the manufacturing process and eligible for Modvat credit. Consequently, the penalties imposed were also set aside.