Case Law Details
Maruti Suzuki India Ltd Vs Commissioner of Central Excise (CESTAT Chandigarh)
CESTAT Chandigarh held that CENVAT Credit cannot be denied merely because final products are destroyed during testing. Notably, testing is integral to the activity of manufacture and CENVAT attributable to inputs that have gone into the manufacture of final products cannot be denied.
Facts- M/s Maruti Suzuki, the appellants, are engaged in the manufacture of motor vehicles, spares and components etc. and were availing CENVAT credit on inputs, capital goods and services; the appellant sends some of the vehicles to their associated companies situated outside India for testing, research and development purposes; such vehicles exported did not materialize in any export realization.
On conduct of Audit, Department concluded that the appellants are not entitled to CENVAT credit on such vehicles exported for testing etc., without realization of export proceeds. Accordingly, show-cause notices were issued to the appellants demanding CENVAT credit of Rs.1,90,20,198/- along with interest and penalty. Commissioner confirmed the recovery of credit along with equal penalty. Being aggrieved, the present appeal is filed.
Conclusion- It has been held in a number of cases that testing is integral to the act of manufacture and that CENVAT Credit cannot be denied on account of the fact that the samples are destroyed during the course of testing or as a result of testing.
Held that there is no provision under the Central Excise Rules or CENVAT Credit Rules to deny CENVAT credit just because the final products are destroyed during testing and for the reason that no export proceeds have been realized for such exports of prototypes. We find that the Hon‟ble Supreme Court and the Tribunal has been consistent in holding that testing is integral to the activity of manufacture and CENVAT credit attributable to the inputs that have gone into the manufacture of said final products cannot be denied to the appellants.
FULL TEXT OF THE CESTAT CHANDIGARH ORDER
M/s Maruti Suzuki, the appellants, are engaged in the manufacture of motor vehicles, spares and components etc. and were availing CENVAT credit on inputs, capital goods and services; the appellant sends some of the vehicles to their associated companies situated outside India for testing, research and development purposes; such vehicles exported did not materialize in any export realization; on conduct of Audit, Department concluded that the appellants are not entitled to CENVAT credit on such vehicles exported for testing etc., without realization of export proceeds. Show-cause notices dated 04.05.2011 and 30.04.2012 were issued to the appellants demanding CENVAT credit of Rs.1,90,20,198/- along with interest and penalty; both the show-cause notices were adjudicated vide the impugned order dated 03.08.2012 wherein learned Commissioner, CGST Delhi-III has confirmed the recovery of credit along with equal penalty. Hence, these two appeals E/3655/2012 and E/3656/2012.
2. Ms. Krati Singh, learned Counsel for the appellants, submits that the entire issue is settled in appellant’s favour for the subsequent periods; this Bench vide Final Order No.61019/2017 dated 23.05.2017 dismissed the appeal filed by the Department holding that export of sample vehicles/ prototype for testing and analysis is part of the manufacturing activity and hence, CENVAT credit is available to the appellant. Learned Counsel submits that Rule 3 of the CENVAT Credit Rules, 2004 provides that a manufacturer of final product shall be entitled to avail the credit of specified duties in respect of inputs or capital goods received in the factory of the manufacturer for use in or in relation to manufacture of final products; it is not disputed that the appellant was engaged in the manufacture and sale of motor vehicles; before producing the vehicles on a mass basis, various tests and checks for safety and quality are conducted on the goods and during that testing etc., the goods are destroyed and disposed of; learned Counsel produces copy of a Destruction Certificate issued by M/s ABN Amro Bank.
3. Learned Counsel further submits that export of sample vehicles is integral part of the manufacturing process and is intrinsically linked to the manufacture of final products; manufacture is not complete without such testing; hence, CENVAT credit cannot be denied as held in the following cases:
- Flex Engineering Ltd.- 2012 (276) ELT 153 (SC).
- ITI Ltd.- 2018 (9) TMI 1575-CESTAT BANGALORE.
- Alkem Laboratories – Final Order No. A/11228/2022 dated 18.10.2022 (Tri. Ahmedabad)
- General Cement Products (P) Ltd.- 1989 (39) ELT 689 (Tribunal), CEGAT, NEW DELHI.
- Cadila Healthcare Ltd.- 2013 (30) STR 3 (Guj.)
4. Learned Counsel further submits that learned Commissioner finds that the goods manufactured by using inputs, on which CENVAT credit has been availed, should be a “Final Product”; however, Commissioner has raised this issue for the first time; the same was not spelt out in the show-cause notice; Commissioner cannot traverse beyond the show-cause notice which is in violation of principles of natural justice. Learned Counsel further submits that there is no requirement under CENVAT Credit Rules that the realization of export proceeds is a pre-condition for availing CENVAT credit; the fact that sample vehicles were exported under Rule 19 of Central Excise Rules, 2002, after furnishing a bond, is not disputed by the Department; Rule 6(6)(v) specifically permits the availment of credit on goods which are exported under Rule 19 following the procedure laid down in the Notification No.42/2001-CE(NT) dated 26.06.2001; it was held in Same Deutz Fahr (India ) Pvt. Ltd.- 2017 (6) GSTL 453 (Mad.) and Repro India Ltd.- 2009 (235) ELT 614 (Bom.) that CENVAT credit cannot be denied for the reason that the goods exported are cleared without payment of duty.
5. Learned Counsel further submits that the Department itself has been taking contrary view regarding the admissibility of credit in the appellant’s own case and therefore, extended period cannot be invoked as held in International Merchandising Company LLC – 2022 (67) GSTL 129 (SC). She also submits that as the demand itself is not sustainable, imposition of penalty cannot be justified.
6. Shri Narinder Singh, learned Authorized Representative for the Department submits that the contention of the appellants that the issue has been decided in favour of the appellants vide Final Order 6109/2017 dated 23.05.2017 is incorrect as there is no finding on the issue; the said order discusses the export of prototypes; it’s a moot point to see as to whether prototype can qualify to be excisable goods as per Section 2(d) of Central Excise Act, 1944; he submits that as per the definition, any goods should satisfy the twin conditions to be called as excisable goods; one the item should be specified under First or Second Schedule to the Central Excise Act, 1985 and the second is that the goods must be marketable i.e. they should be capable of being sold as such; as the prototypes exported by the appellants are not classifiable under First or Second Schedule to the Central Excise Act, 1985 and since the prototypes are not marketable, they do not qualify to be called goods; if any goods do not satisfy the definition under Section 2(d) of the Central Excise Act, 1944, the same do not qualify to be “final products” for the purpose of Rule 2(h) of the CENVAT Credit Rules, 2004.
7. Learned Authorized Representative further contends that the argument of the appellant, that the goods have been exported under Rule 19 of Central Excise Rules, 2002, will not support their case; in terms of Board’s Circular No.354/70/97-CX dated 13.11.1997, in case, the transference copy or bank realization certificate is not received within 180 days of clearance for exports, action for recovery of duty needs to be initiated; therefore, in the instant case as there is no realization of foreign remittance and since the goods are destroyed, the same cannot be treated as clearance of goods for export and re-import thereafter. He further submits that all the case laws relied upon by the appellants are distinguishable for the reason that in the instant case, the goods cleared do not qualify to be “final products”. He relies on the following:
- Circular No.354/70/97-CX dated 13.11.1997.
- International Tobacco Co. Ltd.- 2017 (356) ELT 254 (Tri. ).
- Reliance Industries Ltd.- 2004 (173) ELT 106 (Tri. Mumbai).
- Tambraparani Coatings- 2015 (316) ELT A125 (Mad.).
8. Heard both sides and perused the records of the case. Brief issues that require our consideration in the instant case are as to whether (i) credit availed on inputs and input services that have gone into the manufacture of prototype cars, manufactured and exported by the appellants for testing, for the reason that duty has not been paid on the final goods exported, (ii) whether the prototype motor vehicles manufactured and exported by the appellants can be considered as excisable goods, (iii) whether in the facts and circumstances of the case, extended period is invocable.
9. Coming to the question no.1, we find that it is beneficial to have a look at the provisions of CENVAT credit in order to answer the question no. 1 above. We find that in terms of Rule 3 of CCR, 2004, a manufacturer or producer of final products or a provider of taxable service shall be allowed to take credit (herein after referred to as the CENVAT credit) …. of duties/ taxes specified therein…. paid on (i) any input or capital goods received in the factory of manufacture of final product or premises of the provider of output service on or after the 10thday of September, 2004; and (ii) any input service received by the manufacturer of final product or by the provider of output services on or after the 10th day of September 2004.
9.1. Rule 4 of CCR, 2004 prescribes conditions for allowing CENVAT credit it prescribes that:
Rule 4: conditions for allowing CENVAT credit. – (1) the CENVAT credit in respect of inputs may be taken immediately on receipt of the inputs in the factory of the manufacturer or in the premises of provider of output service.
2(a) The CENVAT credit in respect of capital goods received in a factory or in the premises of the provider of output service 4[or outside the factory of the manufacturer of the final products for generation of electricity for captive use within the factory] at any point of time in a given financial year shall be taken only for an amount not exceeding fifty per cent of the duty paid on such capital goods in the same financial year.
9.2. Rule 6 of CCR, 2004 lays down the obligations of a manufacturer for availing CENVAT credit.
Rule 6. 1[Obligation of a manufacturer or producer of final products and a provider of taxable service.] – (1) The CENVAT credit shall not be allowed on such quantity of 2[input used in or in relation to the manufacture of exempted goods or for provision of exempted services, or input service used in or in relation to the manufacturer of exempted goods and their clearance up to the place of removal or for provision of exempted service] except in the circumstances mentioned in sub-rule (2).
9.3. One of the exceptions given for Rule 6 is under sub-Rule 6 where it is laid down that the provisions of sub-rules (1) (2) (3) & (4) shall not be applicable in case the excisable goods removed without payment of duty are either….
….
(v) cleared for export under bond in terms of the provisions of the Central Excise Rules, 2002.
10. On going through the provisions for CENVAT credit, we see that the CENVAT credit is admissible to a manufacturer or producer of final products and the provider of taxable service when such inputs are received in the factory; CENVAT credit is not admissible on such quantity of inputs used in or in relation to the manufacture of exempted goods subject to some exceptions. One such exception is that there is no bar on availment of CENVAT credit when the goods are exported under bond. In the instant case, the Department attempts to argue that the motor vehicles sent abroad by the appellants for testing are not suffering any duty; no export proceeds are realized and hence, CENVAT credit is not applicable. We find that the contention of the Department has no legal basis. As per the provisions of CENVAT credit under CCR, 2004, there is no such bar on availment of CENVAT credit when the goods are exported. We find that this issue has come up for decision in the case of Repro India Ltd. (supra) and Same Duetz Fahr India Pvt. Ltd. (supra). Hon‟ble High Court of Mumbai in the case of Repro India Ltd. (supra) has held that:
7. We may also consider the provisions of Rule 6 of the Cenvat Credit Rules, 2004. The relevant portion of Rule 6(6)(v) reads as under:-
“(6) The provisions of sub-rules (1), (2), (3) and (4) shall not be applicable in case the excisable goods removed without payment of duty are either –
(i)……
(ii) ……..
(iii) …….
(iv) …….
(v) cleared for export under bond in terms of provisions of the Central Excise Rules, 2002.”
The petitioners had manufactured both dutiable and exempted final product (packaged software and printed books respectively). The petitioner has taken credit on input used in the manufacture of dutiable as well as exempted final products. If the exempted products are exported outside India the provisions of Rule 6(6)(v) of the Cenvat Credit Rules are applicable. Therefore, the bar provided under Rule 6(1) and the liability created under Rule 6(3)(b) of the Cenvat Credit Rules, 2004 are not attracted. By denying to the petitioner from exporting the printed books under bond what the respondents want to do is in fact to levy 10% on the sale price of the printed books in terms of Rule 6(3)(b) of the Cenvat Credit Rules, 2004. In our opinion this is wholly impermissible.
The provisions as now contained in Rule 6 of the Credit Rules, 2004 were contained in Rules 57C and 57CC of the Central Excise Rules, 1944 as they stood prior to 1st April, 2000. From 1st April, 2000 till 30th June, 2001 similar provisions were contained in Rule 57AD of the Central Excise Rules, 1944. In the context of these Rules circular dated 8th November, 2001 of the Ministry of Finance was issued. It dealt with the question whether 8% has to be paid on the sale price of exempted goods. Under Rule 6(3)(v) of Cenvat Credit Rules, 2004, to 8% has been increased to 10%. The relevant portion of the Circular dated 8th November, 2001 reads as under :-
“Further, it is now clearly and specifically mentioned in Rule 57AD(4) that the provisions relating to non-availability of Modvat credit and reversal @ 8% is not applicable in case the exempted goods are cleared for export under bond in terms of the provisions of Rule 13 .
In the new rule 57AD, it has been explicitly provided what was implicity in erstwhile rules 57C and 57CC. Further, the present rule 57AD(4) clearly goes on to show that the exempted goods are eligible to be exported under bond. To interpret otherwise will render the new rule 57AD(4) redundant.
In view of the foregoing in this case the provisions of sub-rule 57C(1) are satisfied as stipulated under Rule 57C(2) as well as Rule 57CC(6)1 and there was no need to comply with the provisions of rule 57CC1). Therefore, it is clear that an amount of 8% of the price of the goods exported is not required to be paid irrespective of whether the exported goods are exempted or otherwise.”
It would thus appear that the direction of the respondent No. 2 to the petitioners to pay 10% even though printed books were exported is not legally sustainable. It is only in the event the petitioners does not export the printed goods and do not maintain the account as contemplated by rule 6(2) the petitioner would be required to pay 10% on the sale price of the printed books not so exported.
Even though Rule 6(1) of the Cenvat Credit Rules, 2004 provides that no Cenvat credit will be available in respect of the inputs used in the manufacture of exempted products, Rule 6(6)(v) of the Cenvat Credit Rules creates an exemption inter alia in respect of the excisable goods removed without payment of duty for export under bond in terms of Central Excise Rules, 2002. Considering the language of Rule 6(6)(v) of the Cenvat Credit Rules, 2004 the petitioners are entitled to avail Cenvat credit in respect of the inputs used in the manufacture of the final products being exported irrespective of the fact that the final products are otherwise exempt.
11. It is not the case of the Department that the motor vehicles exported by the appellants are exempted excisable goods; when it is held, in above cases, that CENVAT credit is admissible to the goods exported even when they are exempt, there should be no bar for allowing CENVAT credit for goods which are not exempt as in the case of the appellants. Learned Counsel for the appellants submits that the impugned order tries to distinguish “excisable goods” from “finished goods”; she further submits that this proposition is not raised in the show-cause notice and to that extent, learned Commissioner has travelled beyond the show-cause notice which is not permissible. We find that even if it is accepted, for the sake of argument, that the motor vehicles exported by the appellants are not final products, the argument will not help the case of the Department for the following reasons:
(i) In terms of Rule 2(h) of CCR, 2004 “final products” means excisable goods manufactured or produced from input or using input service. In terms of Rule 2(k) “Input” means all goods used in the factory by the manufacturer of the final products. In view of the definition of the “Input”, the nature of input is not altered even if it is accepted, for the sake of argument, that the motor vehicles exported by the appellant were not “final products”, since the very definition includes all goods used in the factory by the manufacturer of the final products. The definition does not prescribe that the inputs should necessarily be contained in the final product. The only incontrovertible conclusion that flows is that as long as the status of the appellant is that of a manufacture of the final products, credit cannot be denied just because some motor vehicles, conveniently called prototypes by the Department, are exported without payment of duty under bond and are further destroyed in the process and sale proceeds also are not realized.
(ii) It is the argument of the Department that the impugned goods are destroyed after testing abroad and no foreign exchange is realized and the same is in violation of the Circular No.354/7097- CX dated 13.11.1997 issued by the CBEC. It is the case of the Department that the impugned goods are exported under bond in terms of Rule 19 of Central Excise Rules, 2002. Rule 19 provides that:
RULE 19. Export without payment of duty. — (1) Any excisable goods may be exported without payment of duty from a factory of the producer or the manufacturer or the warehouse or any other premises, as may be approved by the [Principal Commissioner or Commissioner, as the case may be].
(2) Any material may be removed without payment of duty from a factory of the producer or the manufacturer or the warehouse or any other premises, for use in the manufacture or processing of goods which are exported, as may be approved by the [Principal Commissioner or Commissioner, as the case may be].
(3) The export under sub-rule (1) or sub-rule (2) shall be subject to such conditions, safeguards and procedure as may be specified by notification by the Board.
11.1. On perusal of the Rule 19 as above, it is clear that excisable goods can be exported under bond without payment of duty subject to such conditions that may be imposed by the Commissioner of Central Excise. Learned Authorized Representative argues that in terms of the Circular above, in case, the transference copy or bank realization certificate is not received within 180 days of clearance for exports, action for recovery of duty needs to be initiated. Be it so, the Commissioner or the officer authorized by him may initiate any action for the violation of conditions of the bond submitted at the time of export. Department has accepted the bonds submitted by the appellants for export of vehicles for testing. In terms of Rule 19, excisable goods may be exported without payment of duty. By allowing exports under bond, Revenue has accepted that the goods exported by the appellant are excisable goods. A conjoint reading of Rule 19 of CER and definition of „final products‟ would make it clear that the argument that the export goods are not final products is not acceptable. Further, there is nothing in Rule 19 to say that in case of breach of conditions of the bond, CENVAT credit attributable to the export goods shall be disallowed. The Department was within its right to take whatever action on the appellants for not adhering to the conditions of the bond. It is not on record whether any such action has been initiated by the Department. We are of the considered opinion that for the reason that export proceeds are not realized, CENVAT credit, which is otherwise admissible as per the discussion above, cannot be denied.
12. The appellants have claimed that testing of motor vehicles to ensure that they have all the safety mechanisms properly working in all road conditions are integral to the manufacturing of motor vehicles. Therefore, it was incumbent upon the appellants to get the vehicles tested. We find that there is force in the argument of the appellants. It has been held in a number of cases that testing is integral to the act of manufacture and that CENVAT Credit cannot be denied on account of the fact that the samples are destroyed during the course of testing or as a result of testing. We find that Hon‟ble Supreme Court in the case of Flex Engineering Ltd. (supra) held that:
17. It is trite to state that “manufacture” takes place when the raw materials undergo a series of changes and transformation that result in the formation of a commercially distinct commodity having a different name, character and use. It is equally well settled that physical presence of an input in the final finished excisable goods is not a pre-requisite for claiming Modvat credit under Rule 57A of the Rules. It may very well be indirectly related to manufacture and still be necessary for the completion of the manufacture of the final product. It needs little emphasis that the process of manufacture is complete only when the product is rendered marketable. Thus, manufacture is intrinsically integrated with marketability. In this regard it would be profitable to refer to the following observations of this Court in Union of India &Ors. v. Sonic Electrochem (P) Ltd. &Anr., (2002) 7 SCC 435 = 2002 (145) E.L.T. 274 (S.C.).
“8. We do not consider it necessary to discuss the cases on the question of marketability, as this Court has dealt with all relevant cases in A.P. SEB case,(1 994) 2 SCC 428 = 1997 (70) E.L. T. 3 (S.C.). In that case, the question was whether electric poles manufactured with cement and steel for the appellant Board were marketable. After considering various cases on the question of marketability of goods, Jeevan Reddy, J., speaking for the Court, summed up the position thus : (SCC p. 434, para 10)
“10. It would be evident from the facts and ratio of the above decisions that the goods in each case were found to be not marketable. Whether it is refined oil (non-deodorised) concerned in Union of India v. Delhi Cloth and General Mills Co. Ltd., AIR 1963 SC 791 = 1997 (1) E.L.T. (J199) (S.C.) or kiln gas in South Bihar Sugar Mills Ltd. v. Union of India, AIR 1968 SC 922 = 1978 (2) E. L. T. (J366) (S. C.) or aluminium cans with rough uneven surface in Union Carbide India Ltd. v. Union of India, (1986) 2 SCC 547 = 1986 (24) E.L.T. 169 (S. C.) or PVC films in Bhor Industries Ltd. v. C. C. E. (1989) 1 SCC 602 = 1989 (40) E.L.T. 280 (S.C.) or hydrolysate in C.C.E. v. Ambalal Sarabhai Enterprises (P) Ltd., (1989) 4 SCC 112 = 1989 (43) E.L.T. 201 (S.C.) the finding in each case on the basis of the material before the Court was that the articles in question were not marketable and were not known to the market as such. The “marketability“ is thus essentially a question of fact to be decided on the facts of each case. There can be no generalisation. The fact that the goods are not in fact marketed is of no relevance.”
9. It may be noticed that in the cases referred to in the passage, quoted above, the reasons for holding the articles “not marketable” are different, however, they are not exhaustive. It is difficult to lay down a precise test to determine marketability of articles. Marketability of goods has certain attributes. The essence of marketability is neither in the form nor in the shape or condition in which the manufactured articles are to be found, it is the commercial identity of the articles known to the market for being bought and sold. The fact that the product in question is generally not being bought and sold or has no demand in the market would be irrelevant. The plastic body of EMR does not satisfy the aforementioned criteria. There are some competing manufacturers of EMR. Each is having a different plastic body to suit its design and requirement. If one goes to the market to purchase the plastic body of EMR of the respondents either for replacement or otherwise one cannot get it in the market because at present it is not a commercially known product. For these reasons, the plastic body, which is a part of EMR of the respondents, is not “goods” so as to be liable to duty as parts of EMR under para 5(f) of the said exemption notification.”
(Emphasis supplied by us)
18. In Collector of Central Excise, Calcutta-II v. M/s. Eastend Paper Industries Ltd., (1989) 4 SCC 244 = 1989 (43) E.L.T. 201 (S.C.), the assessee was manufacturing different kinds of paper. A question arose whether the wrapping paper manufactured and used for wrapping the finished product is a part of manufacture. It was held that wrapping of finished product by wrapping paper is process incidental and ancillary to completion of the manufactured product under Section 2(f) of Act. Thus, the Court held that, anything required to make goods marketable, must form a part of manufacture and any raw material or any material used for same would be a component part of the final product.
19. In Dharampal Satyapal v. Commissioner of Central Excise, Delhi-I, New Delhi, (2005) 4 SCC 337 = 2005 (183) E.L.T. 241 (S.C.), the term marketable has been held to mean saleable, as under :
“18. Marketability is an attribute of manufacture. It is an essential criteria for charging duty. Identity of the product and marketability are the twin aspects to decide chargeability. Dutiability of the product depends on whether the product is known to the market. The test of marketability is that the product which is made liable to duty must be marketable in the condition in which it emerges. Marketable means saleable. The test of classification is, how are the goods known in the market. These tests have been laid down by this Court in a number of judgments including Moti Laminates (P). Ltd. v. C. C. E. – (1995) 3 SCC 23 = 1995 (76) E. L. T. 241 (S.C.); Union of India v. Delhi Cloth & General Mills Co. Ltd., (1997) 5 SCC 767 = 1997 (92) E.L.T. 315 (S.C.) and Cadila Laboratories (P) Ltd. v. C. C. E. – (2003) 4 SCC 12 = 2003 (152) E.L.T. 262 (S.C.).”
20. Thus, if a product is not saleable, it will not be marketable and consequently the process of manufacture would not be held to be complete and duty of excise would not be leviable on it. The corollary to the above is that till the time the step of manufacture continues, all the goods used in relation to it will be considered as inputs and thus, entitled to Modvat credit under Rule 57A of the Rules. In the present case, as aforesaid, each machine is tailor made according to the requirements of individual customers. If the results are not in conformity with the order, then the machine loses its marketability and is of no use to any other customer. Thus, the process of manufacture will not be said to be complete till the time the machines meet the contractual specifications and that will not be possible unless the machines are subjected to individual testing. Even though the revenue has alleged that the process of manufacture is complete as soon as the machine is assembled, yet it has not discharged the onus of proving the marketability of the machines thus assembled, prior to the stage of testing. Moreover, as has been held in the case of Hindustan Zinc Ltd. v. Commissioner of Central Excise, Jaipur, (2005) 2 SCC 662 = 2005 (181) E.L. T. 170 (S.C.), the burden of proving whether a particular product is marketable or not is on the department and in the absence of such proof it cannot be presumed to be marketable. In the absence of the revenue having adduced any such evidence or contorted the assessee’s claim that the machines cannot be sold unless testing is done with some alternative evidence as to their marketability, the stand of the revenue cannot be accepted.
21. Thus, in our opinion the process of testing the customised F&S machines is inextricably connected with the manufacturing process, in as much as, until this process is carried out in terms of the afore-extracted covenant in the purchase order, the manufacturing process is not complete; the machines are not fit for sale and hence not marketable at the factory gate. We are, therefore, of the opinion that the manufacturing process in the present case gets completed on testing of the said machines and hence, the afore-stated goods viz. the flexible plastic films used for testing the F&S machines are inputs used in relation to the manufacture of the final product and would be eligible for Modvat credit under Rule 57A of the Rules.
13. The Ahmedabad Bench of the Tribunal vides Final Order A/11228/20222 dated 18.10.2022 held that:
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 andquality 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.
14. The Tribunal in the case of General Cement Products Pvt. Ltd. (supra) held that:
3. We do not agree with the Department’s contention. The Cement Concrete Poles in question were meant for supply to UP State Electricity Board against specific contracts. These Poles are used for distribution of electric energy and for tele-communication purposes. There is a specific requirement in the contracts that before the goods could be considered as fit for delivery, they had to pass the prescribed quality control test. For this purpose, about one per cent of the poles were selected at random and they were subjected to various specified tests till they broke in the testing process. The goods were despatched to the Electricity Board only after the samples had passed the prescribed tests. In the circumstances, it has to be held that the goods became marketable and fit for delivery only after they had passed the prescribed quality control tests, and not before. Unless the goods reach a stage where they are fit for delivery, they cannot be considered as fully manufactured goods. The quality control test was a mandatory requirement before the goods produced could be considered as fully manufactured. We agree with the learned Collector (Appeals) that no Central Excise duty was payable on the Cement Concrete Poles which got destroyed in the course of mandatory quality control tests which were a part of the production process of the poles.
15. We also find that this Bench vides Final Order No.61019/2017 dated 23.05.2017 had decided the issue in the case of the appellants themselves in their favour for the period 2014-15. Tribunal observed that:
6. I find that the facts of the case are not in dispute that the vehicles which are prototype have been exported for trial purpose. As vehicles have been used for trial purpose, which is a part of manufacturing activity, therefore, the respondent has correctly taken the CENVAT credit on the inputs used in manufacturing of prototype vehicles used for trial purpose. In that circumstance, the learned Commissioner (Appeals) has rightly allowed the CENVAT credit of the respondent. Therefore, I do not find any infirmity in the impugned order and the same is upheld. The appeal filed by the Revenue is dismissed.
16. In view of the above, it is clear that there is no provision under the Central Excise Rules or CENVAT Credit Rules to deny CENVAT credit just because the final products are destroyed during testing and for the reason that no export proceeds have been realized for such exports of prototypes. We find that the Hon‟ble Supreme Court and the Tribunal has been consistent in holding that testing is integral to the activity of manufacture and CENVAT credit attributable to the inputs that have gone into the manufacture of said final products cannot be denied to the appellants. Learned Authorized Representative for the Department relies on some case laws as cited above. On going through the facts of the cases, we find that the facts of the cases are not identical and the issue before the respective forum is different. We find that in the case of International Tobacco (supra), the issue discussed was about dummy packets of cigarettes which are neither excisable nor marketable; similarly, in the case of Reliance Industries Ltd. (supra) the issue before the Tribunal was items used in trial runs and in the case of Tambraparani Coatings (supra), the issue before the Hon‟ble Court was the inputs destroyed in fire accident. Thus, we find that the case laws submitted by the Department are not applicable to the facts of the present case. In view of the above; we find that the appellants have made a strong case in their favour. To this extent, the impugned order cannot be sustained.
17. The appellants have also argued their case on limitation. They submit that there was no positive act of suppression etc. on their behalf to invite the extended period and moreover, they are regularly filing the Returns and were exporting the prototypes or motor vehicles under bond and for these reasons, suppression etc. with intent to evade payment of duty cannot be alleged. We find that there is considerable force in the arguments of the appellants. Moreover, we find that the Department themselves have decided the issue in favour of the appellants for the year 2014-15. Notwithstanding the fact that the said order has been appealed against, it goes to prove that the issue was not free of doubt and the appellants had reasons to entertain the view they had on the issue. As the issue involves interpretation of legal provisions, suppression etc. cannot be alleged and extended period cannot be invoked.
18. In view of the above, both the appeals are allowed.
(Pronounced on 1 6/1 0/2023)
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