SAMPLES AFTER TESTING CLEARED AS SCRAP LIABLE TO DUTY

[Mr. M. GOVINDARAJAN]

Supplementary instructions in Chapter 11 issued by the Board under Rule 31 of Central Excise Rules contain the use of samples. The instructions discussed about the samples for test purposes and samples for other purposes. 

Samples for test purposes will generally include-

I. Samples drawn by in-house laboratory for testing quality and adherence to product specifications;

II. Samples drawn for preservation for investigation of complaints;

III. Samples drawn for test at other concerns and independent testing agencies;

IV. Samples required to be sent to Government Test centers including the Chemical Examiners for test.

In such cases the assessee is required to maintain a proper account of receipts and the utilization of samples in the test, in the laboratory. The removal shall be in the same manner as the goods are removed for home consumption. The manufacturer shall prepare invoice under Rule11 and make issue entries for the samples in the Daily Stock Account. Appropriate duty shall be paid by the assessee on these samples before their removal for the test purpose unless otherwise exempted by a duty exemption notification.

It is clarified that when a manufacturer preserves the samples of their product for some period for investigation of complaints, if any, no duty should be charged on these samples considering that the goods remain within the factory. Duty shall be charged, unless exempted by a notification, once the samples are cleared from the factory. If at any time the manufacturer desires to destroy these samples, procedure specified in Rule 21 of the said Rules shall be followed.

The issue to be discussed in this article is whether the samples after testing not brought back to the production but cleared as scrap is liable for duty with reference to the case law in 'Positive Packaging Industries Ltd., V. Commissioner of Central Excise, New Panvel' - 2010 (249) ELT 57 (Tri. Mumbai). In this case the appellants are the manufacturers of Flexible packaging material falling under Chapter 39 and clearing the samples drawn as waste and scrap on payment of duty. The appellants in their factory have drawn preservative samples from each and every roll of their finished products cleared for local as well as export clearances for quality control check. They did not manufacture standard consumer product that could be sold in the open market.  Theirs was a tailor made industrial produce useable by the Customers for packing their finished product.   They drew samples in small pieces ranging from half to one meter for quality test from each roll before and after the process of slitting. After quality approval, the lot was passed for further process. The samples drawn were preserved for future references in case of any quality complaint.

Consequent to EA 2000 audit, the duty is now demanded on the cost of production and in the last show cause notice on the sale price of the final product. The Department relied on the Board's supplementary instructions (Chapter 11) and the judgment of Supreme Court in the case of ITC Ltd.,  V. Collector - 2003 (151) ELT 246 SC in support of his claim that the duty is leviable on the samples when removed for quality test within the factory.  It was held that the sticks of cigarettes removed prior to packing for quality control test are liable to duty.

The appellants submitted the following before the Tribunal:

* The demand is time barred as the show cause notice is issue don 19.10.2005 covering the extended period April 2000 to June 2005;  the audit was conducted in July 2002 to September 2002 and the report of the compliance was submitted in Feb.2003. The appellants submitted the details disclosing all the facts of drawing of samples on 15.4.2003,  Even then the show cause notice was issued invoking larger period only on 19.10.2005 and therefore demand is time barred;

* The samples drawn are accounted as per the instructions in the CBEC Manual Chapter 11and the samples were cleared as waste and scrap on payment of duty on transaction value at the time of clearance. These facts are on record as the show cause notices are issued based on the clearance invoice details provided by them. The samples are notice required to be duty paid, when retained in the factory as held by Apex Court in the case of 'Bhansali Engineering Polymers Ltd., V. Commissioner of Central Excise' - 2002 (143) ELT A175 (SC);

* Effective from September 2001, the clearance of samples is governed by the Boards' supplementary instructions (Chapter 11), which states that no duty is required to be paid, when the preservative samples are retained in the factory and account of the same is maintained. These are liable to duty only when cleared from the factory. This view is also supported by the judgment of Larger Bench of the Tribunal in 'Commissioner V. Dabur India Ltd.,' - 2005 (182) ELT 185 (Tribunal - LB).  In this case it was held that the control samples retained in the factory are not liable to duty, if proper account is maintained.  If any time the manufacturer desires to clear such samples then these should be assessed to duty as applicable.

* In the case of appellants the sample is drawn from the bigger role and the same cannot be used for any purpose of packing.  Since the sample cannot be used for any purpose, it is a mere waste and accordingly cleared as waste on payment of duty;

* The Judgment of Supreme Court relied by the Department in 'ITC Ltd.,' (supra) is not applicable to their case. In that case the samples are used up on testing and ITC have not kept any account of the samples. Hence the Supreme Court ordered that the duty is to be paid on the entire quantity of the samples drawn.

The Tribunal observed that the samples in the present case have been drawn for twin purposes i.e.,

* Samples have been drawn by in-house laboratory for testing quality and adherence to produce specifications; and

* Samples are also preserved for investigation of complaints.

Since the samples are drawn for testing quality first and are thereafter preserved, the Board's supplementary instructions will be applicable and the appellants are required to pay appropriate duty on these samples before their removal for test purposes by preparing invoice under Rule 11 of the Central Excise Rules and make issue entries for the samples in the Daily Stock Account. The Tribunal observed that no testing was involved in this case. Since the samples are not only preserved but also are drawl for testing quality, the appellants are liable to pay appropriate duty on them before their removal for test purposes in terms of the supplementary instructions of the Board. The appellants relied upon the decision in 'Bhansali Engineering Polymers Ltd.,' (supra). The facts of the said case were totally different from the present case. In that case the samples of ABS polymers were drawn and sent for quality tests hence, it was contended that such samples would become liable to duty only after they were returned back to the production unit after quality control tests were carried out and not at the stage when samples were drawn for testing. The Tribunal upheld the appellant's contention and held that the duty on the samples drawn for testing was not liable and accordingly set aside the demand on ABS polymers removed for testing of samples. In fact, the samples were drawn after requisite tests, were brought back and duty accounted in the production. In the present case the appellants had drawn the samples after testing had not brought them back to the production but cleared them without payment of appropriate duty. 

In regard to extended period of limitation the appellants never informed the Department about the drawl and manner of disposal of samples on or before the issue was raised by the Department during EA 2000 Audit. Acquiring knowledge by the Department does not take away the period of five years provided by the Law Makers in the Act itself. The appellants have suppressed the fact with intent to evade payment of duty on such samples. The Tribunal dismissed the appeal filed by the appellants.