2000 (6) TMI 237 - AT - Central Excise

Summary

Issues:
1. Availability of modvat credit on finished goods returned to the manufacturer due to defects.
2. Interpretation of Rule 57A of the Central Excise Rules, 1944 regarding modvat credit eligibility.
3. Ambiguity in legal position regarding processing defective goods for modvat credit.
4. Referral of a question of law to the Hon'ble High Court under Section 35G of the Central Excise Act, 1944.

Issue 1: Availability of modvat credit on finished goods returned due to defects
The Tribunal upheld the Order-in-Appeal, allowing modvat credit on finished goods returned to the manufacturer by customers due to defects. The Department contended that as finished products, these goods were not eligible for modvat credit under Rule 57A read with Rule 57G. Despite the Department's initial disallowance, the Commissioner (Appeals) and the Tribunal confirmed the credit, amounting to Rs. 6,88,548/-, leading to the present Reference Application by the Department.

Issue 2: Interpretation of Rule 57A for modvat credit eligibility
The Department argued that modvat credit is only available on duty paid goods used in or related to the manufacture of final products as per Rule 57A. Citing precedents like I.C.I. v. CCE and other tribunal decisions, the Department contended that processing defective goods for removal of defects does not constitute manufacturing, thus not qualifying for modvat credit. This interpretation led to the question of law regarding the eligibility of defective goods for modvat credit under Rule 57A.

Issue 3: Ambiguity in legal position on processing defective goods
The Tribunal noted ambiguity in the legal position concerning the processing of defective goods for modvat credit. While relying on case laws like Alcobex Metals Ltd. and Udasee Stamping (P) Ltd., the Tribunal considered whether re-processing defective goods, not for remelting but for defect removal, aligns with modvat credit provisions. Provisions like Rule 173H and 173L were highlighted to argue against modvat credit eligibility for goods received for re-making, re-conditioning, or repairing.

Issue 4: Referral of a question of law to the Hon'ble High Court
After considering submissions and acknowledging ambiguity, the Tribunal decided to refer a question of law to the Hon'ble High Court under Section 35G of the Central Excise Act, 1944. The question pertained to whether processing defective goods, as per Rules 173H and 173L, can be treated as inputs for modvat credit under Rule 57A. The Tribunal directed the Registry to proceed with the referral, accepting and disposing of the Reference Application accordingly.