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Case Law Details

Case Name : Alkem Laboratories Ltd Vs C.C.E (CESTAT Ahmedabad)
Appeal Number : Excise Appeal No. 10053 of 2020
Date of Judgement/Order : 18/10/2022
Related Assessment Year :
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Alkem Laboratories Ltd Vs C.C.E (CESTAT Ahmedabad)

Whether the Appellant is entitled to Cenvat Credit in respect of inputs and packing materials used in the manufacture of medicament (exhibit batches) and the same is tested for trial and quality purpose and were destroyed / disposed off within the factory thereafter?

CESTAT find that there is no dispute in the facts that packaging /raw materials on which Appellant has claimed Cenvat credit has been used in process of manufacturing of medicaments for trial and testing purpose and quality purpose under the Drugs and Cosmetic Act, which was subsequently destroyed. On the basis of such testing /quality control process only the marketability of the product is ascertained. Accordingly, the raw materials/ packaging materials which is used in manufacturing and which goes for testing /quality process are indeed the inputs which are used in or in relation to manufacturing of final products. The nature of products manufactured by the Appellant is such that it is a must/ necessity that it needs testing and hence, the same forms an integral part of manufacture and without which it is not possible to manufacture the final products.

In view of the above Appellant is entitled for credit on input and packaging materials used for testing products (Exhibit batches).

FULL TEXT OF THE CESTAT AHMEDABAD ORDER

The present appeal has been filed against Order-in-Appeal No. CCESA-SRT(APPEAL)/PS-481/2018-19 dtd. 31.10.2019 passed by Commissioner (Appeals), Surat.

2. The brief facts of the case are that the Appellant are engaged in manufacture and supply of PP medicaments under Ch.30 and availing input tax credit on Input and Input service. As per the intelligence, the factory premises of the Appellant was searched by the officers of Hqrs. Preventive Section, Daman on 15.11.2018. During the course of said search and physical stock verification it was noticed that, Appellant had procured a total qty. of 2158.78Kgs,. of raw material namely “Lanthanum Carbonate Octahydrate” without payment of duty under Annexure -45 availing the benefit of Notification 43/2001- CE(NT) dtd. 26.06.2001 and out of said total 2158.78 Kgs., a qty. of 539.404 was left unused in the factory premises and the same could not be used for the intended purpose. Further, it was noticed that, Appellant wrongly availed Cenvat Credit of Rs. 1,40,89,259/- on input and packing materials used in manufacturing of ‘Exhibit Batches’ which were subsequently destroyed/disposed off within the factory premises. It was also noticed by the officers that appellant illicitly cleared medicaments under cover of non-returnable challans without payment of duty of Rs. 1,71,500/ and the same was accepted by Mr. Sanjeev Jha, Deputy General Manager (Account) of the Appellant in panchanama dtd. 15.11.2018 and his statement dtd. 30.11.2017 and 08.02.2019. Accordingly, a show cause notice was issued, which was adjudicated vide OIO dtd.31.07.2019. The Adjudicating authority confirmed the demand of Central Excise duty of (i) Rs. 18,60,102/- & (ii) Rs, 1,71,500/- and disallowed the wrongly availed and utilized Cenvat Credit of Rs. 1,40,89,259/- and ordered to recover alongwith interest. Since the Appellant had already paid the said duty amount, the same were appropriated against the demand; penalty was imposed under Section 11AC of the Central Excise Act, 1944; imposed redemption fine of Rs. 5,000/- under Rule 25 of Central Excise Rules,2002. Being aggrieved, Appellant filed appeal before the Commissioner (Appeals). He rejected the appeal filed by the Appellant vide impugned order-in-appeal dated 31-10-2019. Against this order of the Commissioner (Appeals), the present appeal has been filed.

3. Shri Mahesh Rainchandani and Shri Anshul Jain, learned counsel appearing on behalf of the Appellant submits that Rule 6 of the central Excise (Removal of Goods at Concessional Rate of Duty for Manufacture of Excisable Goods) Rules, 2002 employs the word ‘duty’ and the said Rule provides that for recovery of such ‘duty’ section 11A of the Central Excise Act, 1944 would be applicable mutatis mutandis. In such scenario, once Section 11A is made applicable for recovery of such duty, the Appellant removes such goods from his factory without using the same for the intended purpose would be deemed to be a manufacturer. Once this is the case, the Appellant is free to pay such duty either in cash or through utilization of Cenvat Credit.

4. He also submits that there is no provisions which provide that duty should be paid in cash alone. Neither Section 11A read with Rule 8 of the Central Excise Rules, 2002 provide for payment of duty in cash only nor Rule 6 of the Central Excise (Removal of Goods at Concessional Rate of Duty for manufacture of Excisable Goods) Rules, 2001 provide that duty ought to be paid in cash. Further Rule 3(4) (b) of Cenvat Credit Rules, 2004 provide that Cenvat Credit may be utilized for payment of an amount equal to Cenvat Credit taken on inputs if such inputs are removed as such or after being partially processed. Since the payment of duty on the input has to be discharge by the Appellant , in the absence of any specific bar, the Appellant have utilized the Cenvat Credit available in the records for this purpose and there is no infirmity in such payment. He placed reliance on following judgements.

(i) Cinger Clothing Pvt. Ltd. Vs. CCE – 2014(299) ELT 469

(ii)  Shree Rajasthan Texchem Ltd. Vs. CCE in final order No. 54982­54981/2014 dtd. 18.12.2014.

(iii) Shree Rajasthan Syntex Ltd. Vs. CCE- 2018(360) ELT 106

(iv)Final Order No. A/11777/2019 dtd. 13.02.2019

(v)  Eicher Motors Ltd. Vs. Union of India 1999 (106) ELT 3

(vi) Jayaswal Neco Ltd. Vs. CCE -2015 (322) ELT 587 (SC)

5. As regard the second issue he submit that, in the instant case, the raw materials and packaging materials are used by the Appellant- manufacturer in the factory in manufacture of ‘sample’ /exhibit batches’. The process of manufacture of ‘exhibit batches’ is one of the processes which ultimately lead to the manufacture of the final products which is cleared on payment duty. In other words, without undertaking testing/sampling/ manufacturing ‘ exhibit batches’ the appellants cannot proceed with the manufacture of final products. The Appellant are a pharmaceutical company producing pharmaceuticals /drugs. The nature of products manufactured by the appellant is such that it is a must/ necessity that it needs testing and hence, the same forms an integral part of manufacture and without which it is not possible to manufacture the final products. Without testing, the medicines (‘approved final products’) cannot be put out in the market. Hence the raw materials/ packing materials ought to be treated as used in relation to the manufacture of the final products of the Appellants, be it directly or indirectly. In some industries, quality check is undertaken after manufacture of final product. In some cases quality check is undertaken at both stages i.e. before the and after manufacture of finished products such as pharmaceutical products wherein input undergoes quality test before it is used in manufacture of final product and thereafter again after final product is tested vis-à-vis its quality and potency. He placed reliance on the following judgments.

(i) Final order passed in their own case vide order No. A/10404/2020 dtd. 24.02.2022.

(ii) Tata Engineering and Locomotives Co. Ltd. Vs. CCE, Pune – 2010(256) ELT 56 (Bom)

(iii) Tetra Pak India Pvt. Ltd. Vs. CCE- 2018(363)ELT 1104

(iv) Sudharshan Chemicals Inds Ltd. Vs. CCE – 2010 (262) ELT 974

6. As regard the demand on samples sent for testing/quality check etc. under non-returnable challans he submits that medicaments cleared under the cover of non-returnable challans dispatched outside the factory premises for testing and sampling purpose were not manufacturing items. For an item to be termed as ‘manufactured’ there has to be conversion of raw materials into a product which is completely different from the starting materials. There is no such activity being undertaken in the instant case. There is no evidence to such effect in the instant case. Even if it is assumed that the appellant manufactured an item, the same is not marketable in as much as the same has not attained any level of marketability as is clear from the facts that the same was sent outside factory for testing and sampling purpose. He placed reliance on the judgment of Bhansali Engg Polymers Ltd. Vs. Commissioner of Central Excise- 2002 (143) ELT A175 (SC).

7. Without prejudice, he also submits that demand is barred by limitation in as much as there was no suppression on the part of the appellant in not paying alleged duty on such sample.

8. On the other hand Shri Vinod Lukose, learned Superintendent (Authorized Representative) appearing for the revenue supports the findings of the adjudicating authority. He relies upon the following judgments

(i) Manali Petrochemicals Ltd. [2004(167)ELT 434 (Tri. Chennai)

(ii) Dabur India Ltd. [2005 (182) ELT 185 (Tri. LB)

(iii) Wipro Ltd. [2006 (196) ELT 226 (Tri. Mum)

(iv) Medley Pharmaceuticals Ltd. [2011(263)ELT 641 (SC)

9. Heard both side and perused the records. We find that the first issue to be decided is that in respect of goods procured under Notification No. 43/2001-CE (NT) for the clearance of the same without putting to use for manufacture of exported goods, demand of duty can be paid by utilizing cenvat credit. We find that the identical issue has been considered by the tribunal in the matter of Shree Rajasthan Syntex Ltd. (Supra) , Shree Rajasthan Texchem Ltd (Supra) and Ginger Clothing Pvt. Ltd. (Supra) and the payment of duty on the goods procured under Notification 43/2001-CE (NT) by utilization form cenvat credit for payment has been allowed. Therefore, following the said decisions we hold that the demand of duty can be paid by utilizing cenvat credit being no bar in law in this regard.

10. Second issue involved in the present case is that whether the Appellant is entitled to Cenvat Credit in respect of inputs and packing materials used in the manufacture of medicament (exhibit batches) and the same is tested for trial and quality purpose and were destroyed / disposed off within the factory thereafter. We find that there is no dispute in the facts that packaging /raw materials on which Appellant has claimed Cenvat credit has been used in process of manufacturing of medicaments for trial and testing purpose and quality purpose under the Drugs and Cosmetic Act, which was subsequently destroyed. On the basis of such testing /quality control process only the marketability of the product is ascertained. Accordingly, the raw materials/ packaging materials which is used in manufacturing and which goes for testing /quality process are indeed the inputs which are used in or in relation to manufacturing of final products. The nature of products manufactured by the Appellant is such that it is a must/ necessity that it needs testing and hence, the same forms an integral part of manufacture and without which it is not possible to manufacture the final products.

11. We also find that in Thermax Culligan Water Technologies Ltd. v. Commissioner of Central Excise [2014 (312) E.L.T. 148] the Tribunal has held:

“5.3 As regards the demand on control samples of purified water, it is an admitted position that the samples had been drawn as per the norms fixed by the Food and Drugs Authorities. These were retained to test the shelf-life of the product of each batch and to analyse the customer complaints. Therefore, it cannot be said that the appellant had cleared the control samples for purposes other than those stipulated. There is also no evidence led by the Revenue to show that the appellant did not put to use the control samples by clearing them to customers. The only charge against the appellant is that they did not keep an account of the control samples drawn and tested. This Tribunal in the case of Dr. Reddy’s Laboratories Ltd. (cited supra) held that samples mandatorily drawn for testing and getting used up/destroyed during testing cannot be considered as excisable goods liable to duty. Similarly, in the case of J.K. Industries Ltd. (cited supra) it was held that samples of tyres drawn for in-house testing and destroyed during testing is not liable to any excise duty. The ratio of these decisions applies to the facts of the present case.

5.4 The reliance placed by the Revenue in the case of Commissioner of Central Excise, Chandigarh v. Dabur India Ltd. – 2005 (182) E.L.T. 185 (Tri.-Del.), does not support the case of the Revenue. In the said case, it was held that, as long as the control samples are kept in the factory and not cleared from there, the same will not be chargeable to duty if proper account is maintained. When these samples are cleared for test or for destruction at that time assessment should be made for duty, if any, leviable as per law. In the present case, the Revenue has not adduced any evidence that the control samples have been removed from the factory and has not been consumed or lost or destroyed during the course of testing. In the absence of any corroborative evidence of removal of these samples from the factory, the demand of duty on such control samples cannot be sustained.”

The Hon’ble High Court of Bombay in the case of Commissioner of Central Excise v. RPG Life Sciences Ltd. [2011 (264) E.L.T. 346 (Bom.)] has also held that :

“4. In the present case, the specific case of the assessee is that samples drawn for testing were not cleared out of the factory but were cleared within the factory for testing and that the said samples were consumed in the process of testing. These facts have not been controverted by the revenue. It is not the case of the revenue that the assessee has failed to maintain the books/accounts as required under the Rules relating to the samples drawn for testing. Where the goods are not cleared out of the factory premises but were drawn for testing within the factory and in fact were consumed within the factory during the process of testing, the question of demanding any duty on those samples does not arise. We draw support for this view from the decision of the Apex Court in the case of ITC Ltd. v. Collector of Central Excise, Patna reported in 2003 (151) E.L.T. 246 (S.C.), particularly para 11 thereof.

5. Decision of the Tribunal in the case of Positive Packaging Industries Ltd. (supra) relied upon by the counsel for the revenue is distinguishable on facts. In that case the samples were cleared out of the factory and sold as scrap, whereas, in the present case, the samples are consumed/destroyed within the factory during the process of testing. Therefore, the decision of the Tribunal in the case of Positive Packaging Industries Ltd. (supra) has no relevance to the facts of the present case.

6. In these circumstances, in our opinion, the decision of the Tribunal, in the facts of the present case cannot be faulted. In the result, the appeal is dismissed by answering the question in favour of the assessee and against the revenue. There shall be no order as to costs.”

12. In view of above judgments, we are of the view that Appellant is entitled for credit on input and packaging materials used for testing products (Exhibit batches).

13. Third issue involved in the present case is that whether the Appellant is liable to pay duty on goods cleared from factory on non-returnable challans for testing and sampling purpose. We find that pharmaceutical goods before being marketed should be sent for tests and sampling purpose in terms of the provisions of Drugs and Cosmetics Act, 1945. The medicaments cleared under the cover of non-returnable challans for testing and sampling purpose cannot be considered as manufactured goods as the same is not marketable in as much as the same has not attained any level of marketability as is clear from the facts that the same was sent outside the factory premises for testing and sampling purpose. Marketability is decisive test for dutiability. Further we observed that samples cannot be subjected to duty in terms of the decision of the Tribunal in the case of Collector of Central Excise, Guntur v. Sahwala Cylinders (P) Ltd. reported in 1998 (98) E.L.T. 645 (Tribunal) and the Tribunal’s decision reported in 1989 (39) E.L.T. 689 (Tribunal) in the case of Collector of Central Excise v. General Cement Products (P) Ltd. and that reported in 1999 (114) E.L.T. 947 (Tribunal) in the case of Bhansali Engg. Polymers Ltd. v. Commissioner of Central Excise, Indore. All these decisions maintained a consistent position that samples drawn for quality control test to ascertain the marketability of products are not liable to excise duty. On considering the above, we hold that, the samples cleared for testing and quality control test are not liable to any excise duty.

14. As per our above discussion and finding, no demand is sustainable, accordingly, the impugned order is set aside and the appeal is allowed with consequential relief, if any.

(Pronounced in the open court on 18.10.2022)

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