2019 (2) TMI 253 - AT - Central Excise

CENVAT Credit - input services - Product Liability Insurance - not post manufacturing activity - period April 2016 to March 2017 - Held that - The appellants have taken such insurance policies to cover their losses in case finished products are defective and the customers claim for compensation - It is brought out that the insurance does not cover cost of removal, replacing or repair of defective products or losses of use but is only for malfunctioning or manufacturing defects, which is detected in the hands of the customers. These cannot be considered as post-manufacturing activities as they are integrally connected to the manufacture of finished products - credit cannot be denied - appeal allowed - decided in favor of appellant.

Summary

Issues:
Eligibility of credit on Product Liability Insurance.

Analysis:
The case involved the appellants, engaged in manufacturing brake linings, availing Cenvat Credit on inputs, capital goods, and input services. The issue arose when the department disallowed the credit on Product Liability Insurance for the period Apr. '16 to Mar. '17, deeming it ineligible. A show-cause notice was issued, leading to confirmation of demand, interest, and penalties by the original authority and subsequent affirmation by the Commissioner (Appeals).

In the appeal, the appellants argued that the insurance was to cover risks in case of defects in finished products, such as brake linings, clutch facings, and railway brake blocks. They emphasized that such insurance policies were directly related to the manufacturing process and cited precedents supporting their stance. The learned Authorised Representative supported the findings of the impugned order.

The crucial question was the eligibility of credit on Product Liability Insurance. The insurance was taken to mitigate losses in case of defective finished products leading to customer compensation claims. It was clarified that the insurance did not cover costs like removal, replacement, or repair of defective products, focusing solely on malfunctioning or manufacturing defects detected by customers. The Tribunal's previous decisions, including one in the appellant's own case, favored the admissibility of such credits. Considering the integral connection of the insurance to the manufacturing process, the judge ruled in favor of the assessee, setting aside the impugned order and allowing the appeal with any consequential reliefs.

This judgment highlights the importance of establishing a direct link between insurance policies and the manufacturing process to determine the admissibility of credits. The decision underscores the need for a comprehensive understanding of the nature and purpose of such insurance in the context of manufacturing activities to support credit claims successfully.