Rule 16 Does Not Require Return Of Remade Goods To Original Buyer To Avail CENVAT Credit: CESTAT Mumbai

The Mumbai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) on 3 June held that CENVAT credit on duty-paid goods returned to a factory cannot be denied merely because the re-manufactured machine was supplied to a different customer and not to the buyer who had originally returned the goods.

A Single Member Bench comprising Judicial Member Dr. Suvendu Kumar Pati allowed the appeal filed by Grafica Flextronica and set aside a demand of Rs. 23.40 lakh along with interest and penalty. He held:

“It has not been stated that such removal was for the purpose of return of the goods to the sender of the goods from whom it was received earlier. Further, in the said provision, the words used like 're-made, refined, re-conditioned or for any other purpose' do not specifically say that the resultant outcome should be the same manufactured product as it was at the time of return.”

Grafica Flextronica had initially cleared a screen-printing machine on payment of central excise duty. The buyer later returned the machine due to technical defects. Upon receiving the machine, the company availed CENVAT credit under Rule 16 of the Central Excise Rules, 2002.

The company subsequently used components of the returned machine to manufacture a smaller machine, which it cleared to another customer on payment of applicable excise duty. It also cleared the remaining unused components as scrap after paying duty.

The Department denied the credit on the ground that the returned machine had neither been repaired nor re-manufactured and supplied back to the same customer who had returned it. The adjudicating authority confirmed the demand, and the Commissioner (Appeals) upheld that order.

Allowing the appeal, the Tribunal held that Rule 16 does not require re-made or re-conditioned goods to be returned to the same buyer. It observed that the provision only mandates payment of duty when the goods are subsequently cleared after a process amounting to manufacture.

The Bench further held that Rule 16(2) makes the subsequent removal of goods the relevant consideration and does not prescribe that the goods must be supplied to the customer who had originally returned them.

Rejecting the Department's reliance on the CBEC Circular dated 21 June 2001, the Tribunal held that neither the Circular nor Rule 16 requires the remade machine to be identical in shape and size to the original machine or to be supplied back to the same buyer.

The Tribunal also found that the Commissioner (Appeals) had travelled beyond the allegations in the show cause notice by examining whether all components of the returned machine had been used in the manufacture of the new machine. It held that such findings fell outside the scope of the notice and were therefore legally unsustainable.

Accordingly, the CESTAT set aside the impugned order and directed refund of the confirmed demand along with applicable interest.

Appearance for the Appellant: Shri C.A. Prakash Jhalari, Advocate

Appearance for the Respondent: Shri Rajiv Ranjan, Authorized Representative for the Respondent