Advocate R.P. Singh
When we discuss the sources of law, the precedent is one of the most important sources of law apart from the codified law and the law arrives though customs. When the law is not cleared enough through the statute then the role of the precedent came into picture. The precedent is interpretation of codified law and customs as per judicial wisdom. The cardinal principle governing the judicial discipline is once and issue settled judicially then normally it should not be disturbed. The precedents also help in the situation when the things are not clear on the subject. However, even if the issue is ambiguous in the codified law it can be settled through precedent. The precedent once settled is binding in the lower forum of judiciary unless the same is unsettled. This is a humble attempted to clarify and issue of central excise duty on scrap generated during remade, refined and re-conditioning.
During the course of the business every assesse use to send their products to the buyer and sometime few of the consignment returned to the factory due to some defect or rejection by the buyer on some ground. The central excise law has given specific provision in the above said case in Rule 16 of the Central Excise Rules, 2002. Rule 16 of the Central Excise Rules, 2002 reads as follows:
Rule 16. Credit of duty on goods brought to the factory.-(1) Where any goods on which duty had been paid at the time of removal thereof are brought to any factory for being re-made, refined, re-conditioned or for any other reason, the assessee shall state the particulars of such receipt in his records and shall be entitled to take CENVAT credit of the duty paid as if such goods are received as inputs under the CENVAT Credit Rules, 2002 and utilise this credit according to the said rules.
(2) If the process to which the goods are subjected before being removed does not amount to manufacture, the manufacturer shall pay an amount equal to the CENVAT credit taken under sub-rule (1) and in any other case the manufacturer shall pay duty on goods received under sub-rule (1) at the rate applicable on the date of removal and on the value determined under sub-section (2) of section 3 or section 4 or section 4A of the Act, as the case may be.
Explanation. – The amount paid under this sub-rule shall be allowed as CENVAT credit as if it was a duty paid by the manufacturer who removes the goods.
(3) If there is any difficulty in following the provisions of sub-rule (1) and sub-rule (2), the assessee may receive the goods for being re-made, refined, re-conditioned or for any other reason and may remove the goods subsequently subject to such conditions as may be specified by the Commissioner.
From the perusal of the above said rule it is clear that the return goods will came under Rule 16 of the Central Excise Rules, 2002 and the asseessee accordingly will take credit of the duty paid on those goods under Rule 16 (1) of the Central Excise Rules, 2004. Then as per Rule 16 (2) of the Central Excise Rules, 2002 the assessee is required to reprocess the goods and make them consumable by the buyer and then goods return to the buyer according after paying the applicable duty. Otherwise the asseessee shall pay an amount equal to the CENVAT credit taken under sub-rule (1). In the above said transaction, two questions have been arisen which are as follows:
1. What will be the treatment of the scrape generated during the reprocessing of the goods.
2. Up to which ration, the duty is not required to be reversed. Because reprocessing of the goods will fetch lower quantity and price. So, the assessable value of the reprocessed goods is bound to be lower than the original clearance, and the payment of central excise duty will be lower than the credit taken at the time of the receiving of the goods.
In the first case it is too easy to give answer that the scrape garneted during the time of re-made, refined, and re-conditioned can be removed with payment of central excise duty. But in the second case regarding removal of goods after re-made, refined, and re-conditioned at the lower assessable value is difficult, because it may be possible that the assessee at the time of receiving of the goods taken CENVAT credit more than the duty payment at the time of removal of the re-made, refined, and re-conditioned goods. In the entire statute it is not clear that up to what ratio assessee will not be required to reverse the credit taken at the time of removal of the goods after re-made, refined, and re-conditioned of the goods.
But the precedent has clarified this confusion and held that generation of scrape during the process of reprocessing is a normal feature and it is found in almost all industry subject to variation which depends on the nature and quality of the goods returned. In some cases scrape may be as less as two precent but in another case it may be as high as 50%-60%.
In the matter of Sterlite Industries V. CCE 2006 (193) ELT 35 (CESTAT) the Hon’ble tribunal appreciated the facts and held that the scrap during the reprocess of reprocessing can be generated as high 40%. The relevant portion is as follows;-
“As regards returned goods, on which credit was availed, after the declarations have been filed, there subsequent removal have to be governed by the Modvat rules. The rules do not stipulator require maintenance of any separate records of inputs whether returned after sales or fresh receipts inputs have to be treated as ‘inputs’ & accounted for as prescribed. The fixing of small percentage as scrap on lamination process is an assumption followed by the adjudicator. As to when the input shall become waste & scrap and has to be treated as such should be and at the option of the assessee, who availed the Modvat Credit and this position has been upheld by the Larger Bench in the case of Wyeth Laboratories [2000 (120) E.L.T 218 (Tri.-LB)]. Therefore the finding, on presumption that 40% scrap is excess, that it should not exceed 10%, cannot be upheld. It cannot be a cause for duty demand differentials, as made act.
Infact judicial pronouncement in this regard is quite certain. If the return goods are reproessed and during the process of reprocessing scrape is generated or goods is totally scraped then too the assessee is not liable for the credit reversal. The Hon’ble tribunal in the matter of
Sundaram Industries Ltd. Vs. CCE., Madurai 2006 (202) E.L.T 538 (Tri-Chennai) held as follows:-
“I, however, find that, in the cited case, the department was invoking Rule 57F (3) and not any of the rules presently cited by ld. SDR. The fact highlighted by Ld.SDR is that the defective goods returned by the appellants’ customers did not undergo any process amounting to “manufacture” inasmuch as only “scrap” resulted from that process. This submission has to be examined in the light of a crucial finding of fact recorded by the Tribunal in TATA SSL’s case, which reads thus
‘……..What is ultimately cleared from the factory is scrap resulting out of further processing of rejected wire’.
I am inclined to follow this finding. Accordingly, in the instant case, it has to be held that the” process” undergone by the defective/returned final product amounted to “manufacture” though it resulted in scrap. On this fact, Rule 16 ibid gets attracted and it was open to the appellants to remove the scrap on payment of duty, after availing Cenvat credit on the defective/returned final product, by the processing of which the scrap was produced. In the result, the impugned order gets set aside and this appeal is allowed.
So, it is clear that if the goods has been manufactured as per rule 16 (2) the payment of central excise duty ranging from 10% to 40% is properly justified considering the precedent set in this regard.