2013 (9) TMI 240 - AT - Central Excise

Benefit of CENAVAT credit or returned goods - Defective Goods - Rule 16 - Revenue was of the view that there was no evidence to prove that the goods received under Rule 16 had been cleared subsequently under appropriate document and on payment of appropriate duty - Held that - The rejected goods after receipt in the unit have been accounted and stock accounts and credit had been availed by them under Rule 16(1) of CER, 2002 - the rejected/returned goods had been duly accounted for in the registers and credit had been correctly availed The goods and raw material account, had been subsequently issued for production in the normal course and the final products emerged had been accounted for in the daily production register. Forgings had been cleared on payment of duty by the assessee to their buyers, that the latter found the same to be defective and returned the same under proper duty-paying documents to the assessee and that the goods were subjected to some process - if correlation was established between the defective forgings and the defect-free forgings, the assessee was entitled to the credit in question - This correlation was established at the original level and the same was not cogently challenged by the Revenue before the Commissioner (Appeals) - In any case, it is not the case of the Revenue that Rule 16 was not applicable to a case where defective goods returned by the buyer were subjected to a process of remaking defect-free product - The original authority took an eminently correct view after verification of records including Annexure-10 discussing the facts of the case in the light of Rule 16 as correctly understood by that authority - Order set aside - Decided in favour of Assessee.

Summary

Issues:
1. Availing Cenvat credit on defective forgings returned by buyers.
2. Interpretation of Rule 16 of the Central Excise Rules, 2002.
3. Correlation between defective goods returned and reprocessed products.
4. Disallowance of Cenvat credit by the Commissioner (Appeals).

Issue 1: Availing Cenvat credit on defective forgings returned by buyers:
The appellant, engaged in forging manufacture, availed Cenvat credit on defective forgings returned by buyers. The Revenue contended that the appellant failed to prove that the reprocessed defect-free products were manufactured from the defective goods returned earlier. The department issued a show cause notice seeking recovery of the irregularly availed Cenvat credit, interest under Section 11AB of the Central Excise Act, and penalty under Section 11AC of the Act. The original authority dropped these proposals after verifying the records and finding that the defective goods were accounted for correctly.

Issue 2: Interpretation of Rule 16 of the Central Excise Rules, 2002:
The Commissioner (Appeals) disallowed Cenvat credit on the goods returned by buyers under Rule 16, stating that the goods were recycled, losing their identity, and not remade as required by the Rule. The appellant argued that they remade defect-free forgings from the defective goods, complying with Rule 16. The original authority found a correlation between the goods returned and the remade forgings, granting Cenvat credit. The Commissioner (Appeals) misinterpreted Rule 16, as remaking was one of the processes mentioned, and no evidence disproved the remaking by the appellant.

Issue 3: Correlation between defective goods returned and reprocessed products:
The original authority verified records and established a correlation between the defective goods returned by buyers and the defect-free forgings remade by the appellant. The Commissioner (Appeals) wrongly found that Rule 16 did not apply when defective goods were recycled. The appellant proved the correlation, which was not challenged effectively by the Revenue. The appellate authority failed to conduct fresh verification, and the original authority's decision was deemed correct.

Issue 4: Disallowance of Cenvat credit by the Commissioner (Appeals):
The Commissioner (Appeals) disallowed Cenvat credit, ordered recovery with interest, and imposed a penalty on the appellant. The appellant challenged this decision, arguing that they followed Rule 16 by remaking defect-free forgings. The appellate authority set aside the Commissioner (Appeals) decision, emphasizing the original authority's correct view based on record verification and Rule 16 compliance.

In conclusion, the appellate tribunal allowed the appeal, overturning the Commissioner (Appeals) decision to disallow Cenvat credit on defective goods returned by buyers. The tribunal upheld the original authority's findings, emphasizing the correlation between the returned goods and the remade defect-free products, as per Rule 16 requirements.