The Commissioner Of Central ... vs M/S Timex Watches Limited
2017 Latest Caselaw 7128 ALL

HIGH COURT OF JUDICATURE AT ALLAHABAD
 
 

A.F.R.
 
Reserved
 
Court No. - 4
 

 
Case :- CENTRAL EXCISE APPEAL No. - 309 of 2015
 

 
Appellant :- The Commissioner Of Central Excise
 
Respondent :- M/S Timex Watches Limited
 
Counsel for Appellant :- S.C.,Krishna Agrawal
 
Counsel for Respondent :- Nishant Mishra
 

 

 
Hon'ble Abhinava Upadhya, J.

Hon'ble Ashok Kumar,J.

(Delivered by : Ashok Kumar, J.)

The present appeal arises out of the order of the Central Excise Service Tax Appellate Tribunal (in short CESTAT) dated 27.5.2015 passed in Appeal No. E/1349/2006 by which the Tribunal has held that the respondent company is entitled to credit as per Rule 57-D of erstwhile Central Excise Rules, 1944.

The Commissioner of Central Excise, NOIDA has filed the instant appeal by which the following questions of law are referred for decision by this Court.

"(1) Whether on the facts and in the circumstances of the case, the Tribunal is justified in holding that the CENVAT/MODVAT Credit is admissible in respect of the inputs which were defective, unfit for use in the manufacturing of final goods & hence destroyed by the Respondent, without considering that the Respondent itself was unable to specify and identify the stage of such defect/wastage which clearly had to conclude that the inputs supplied to the Respondent were ad-initio defective inputs unfit for use in the manufacture of the final product ?

(2) Whether on the facts and in the circumstances of the case, the Tribunal is justified in holding that there was no shortage of inputs on the ground that in some cases, inputs were short accounted and in some cases inputs were found in excess, therefore the shortage of one inputs gets nullified with the excess of another inputs ?"

We have heard Sri Krishna Agrawal, learned counsel for the appellant/revenue and Sri Sriniwas Kotni, Advocate assisted by Sri Nishant Mishra, learned counsel for the assessee.

Brief facts of the case are that the respondent company M/s Timex Watches Limited was engaged in the manufacture of wrist watches and parts falling under Central Excise Tariff heading Nos. 91.01 and 91.02 of the Schedule to the Central Excise Tariff Act, 1985. It is alleged that the company have contravented the provisions of Rule 52-A, 57-A, 57-F(3), 173(F) and 173 (G).

A team of Central Excise Officers of NOIDA have visited the factory premises of the assessee company on 21.12.1998. The checking has been conduced at the unit of the assessee. During the course of the scrutiny of the records it is alleged that the company was prepared a statement regarding "RDW" (Report of Defective Work), which showed that the inputs valued at the rate of Rs.3,09,48,516/- had been destroyed as on 31.10.1998. At the time of checking the statement of one Paritosh Jain was recorded and according to the department he has stated that he is authorised for Central Excise Matters on behalf of the company. During the course of confrontation with regard to "RDW" Sri Paritosh Jain has stated that the said document stands generated and certain quantities of inputs have been sent back from assembly to stores giving therein cause for rejection. The said documents have been signed by Paritosh Jain and during the course of scrutiny it is revealed that certain quantity of "RDW" has been destroyed.

Based on the aforesaid statement and confrontation and as per "RDW", for 1997-98 the value of Rs.4.69 crores as defective upto 31.3.1998 is calculated, whereas the inputs worth Rs.3.09 crores have been destroyed upto 31.3.1998. Similar kind of features has been noticed as per "RDW", for 1998-99.

The department has issued the summons to General Manager (Finance) of the assessee company whose statement has been recorded under Section 14 and according to the department as explained that the "RDW" is a short form of return of defective work and the features reflected in "provided", "actual and value" column of the statement of "RDW" Schedule represent the total value of "RDW" inventory cumulative of 'RDW" material from the inception of the unit. It is further stated by the General Manager (Finance) that the actual column is also cumulative and represents the value of material destroyed till the date of statement i.e. 31.10.1998. Available balance is the difference of amount provided for destruction and actual "RDW" destroyed. The statement has been recorded of the General Manager (Finance) and the assessee was asked to elaborate and described in details the value column "RDW" codes.

The Commissioner of Central Excise, Meerut has issued a detail show cause notice of which a detailed reply has been submitted by the assessee company and after considering the same the Commissioner, Central Excise has passed an order-in-original dated 25.10.2000 by which the Commissioner of Central Excise has disallowed the credit of Rs.28,24,339/- and has issued a demand of the said amount under Rule 57(i) along with interest as per the provisions of Rule57(i)(5).

This order passed by the Commissioner, Central Excise dated 25.10.2000 has been challenged by the assessee before the CESTAT in Appeal No. E/321/2001-NB (DB).

The said appeal filed by the assessee before the Division Bench of the CESTAT has been allowed by the CESTAT and the matter has been remanded to the Commissioner to decide the issue as raised by the assessee company afresh.

Before the Tribunal the issued has been raised by the assessee as to whether the inputs on which the assessee has taken MODVAT credit have been put to use for manufacturing of watches or not and as to whether there was shortage of inputs in the facts and circumstances of the case of the assessee. After consideration of the issue and after hearing the parties the Division Bench of the Tribunal has found that while deciding the case the main issue i.e. that the disputed watch parts in respect of which the MODVAT credit has been availed by the assessee company had become waste during the course of manufacturing process, or they were already defective before they were put to use in the manufacturing process of watches is not properly examined by the Commissioner and the Commissioner without verification has denied the MODVAT credit when the disputed watch parts had become short in or in relation to the manufacture of the watches. Before the Tribunal the appellant has submitted that the company was using duty paid parts and were availing of the benefit of MODVAT credit under Rule 57-A of the Rules. A number of parts after receipt in the factory of the assessee company and after the MODVAT credit in respect of such part of availed of, were found defective and were not used in the manufacture of watches had already been availed of, therefore, it was the contention of the assessee company that the parts as such were wasted during the process of manufacturing of watches the MODVAT credit was not required to be denied to the company in terms of the Rule 57-D of the Rules.

In the aforesaid background the matter has been remanded by the Division Bench of the Tribunal vide order dated 1.10.2001.

In pursuance of the remand order passed by the Tribunal the Commissioner Central Excise has reopened the matter and has passed a detailed order in Original No. 37/Commissioner/Noida/2005 dated 23.11.2005 by which the commissioner has disallowed the credit of Rs.42,53,080/- under Rule 57-I and has further imposed a penalty of the same amount under Rule 173Q.

This order of the Commissioner Central Excise has been challenged before the CESTAT in the impugned appeal being Appeal No.E/1349/2006 - EX(SM).

Learned counsel for the revenue has submitted that the order of the Tribunal is not correct so far as it allowing the MODVAT credit in respect of the inputs which were defective, unfit for use of the manufacturing of final goods and are destroyed. According to the learned counsel for the revenue the Tribunal has failed to appreciate that the adjudicating authority has not extended the benefit of MODVAT credit to the assessee company in the cases only where the assessee company has been unable to specify the emergence of specific waste by way of identification of the stage, and allowed the MODVAT credit in respect of course M-2, M-3, M-4 and M-5. He has submitted that the finding recorded by the CESTAT is not correct, so far as it has recorded that no shortage of inputs on the ground that in some case inputs were found short and in some cases inputs were found in excess.

On the other hand, the counsel for the assessee company has submitted that in fact the instant appeal filed by the appellant is without any basis as such is a result of non appreciation of the facts in its true sense and correct prospective therefore, the appeal is liable to be dismissed. He has submitted that even the questions of law which are framed are based on facts as such no legal issue is involved in the instant appeal. He has further submitted that the Tribunal has considered the factual submissions, the scientific coding (which is clear from the SCN and other proceedings itself) of different parts in the report for defective works, the C.A. Certificates and the process followed by the respondent for rejecting to come to a conclusion that all the rejections with respect to which the respondent has not debited the MODVAT credit were rejected during the manufacturing process only. He has further submitted that the conclusion arrived at by the Tribunal is purely a factual conclusion and there is no question of any point of law involved in the present appeal as required under Section 35-G of the Central Excise Act, 1944.

Learned counsel for the assessee company has submitted that the Tribunal has discussed the issues at length with regard to as to whether the inputs on which the respondent company has taken the MODVAT credit have been put to use for manufacturing of watches or not and as to whether there were shortage of inputs in the facts and under the circumstances of the present case. The Tribunal has verified all the evidences and therefore, concluded that the assessee company has taken the MODVAT credit correctly and consequently they are not required to reversed the MODVAT credit taken by them while setting a side the order passed by the Commissioner of Central Excise.

For deciding the issue in hand it would be relevant to consider the certain provisions of law.

Rule 57-A of the Central Excise Rules 1944 provides as follows :

"Rule 57A. Applicability - (1) The provisions of this section shall apply to such finished excisable goods (hereafter, in this section, referred to as the final products) as the central Government may, by notification in the Official Gazette, specify in this behalf for the purpose of allowing credit of any duty of excise or the additional duty under Section 3 of the Customs Tariff Act, 1975 (51 of 1975), as may be specified in the said notification (hereafter, in this section, referred to as the specified duty) paid on the goods used in the manufacture of the said final products (hereafter, in this section, referred to as the inputs)."

Sub Rule 4 of Rule 57-A provides as under :

(4) The credit of specified duty under this section shall be allowed on inputs used in the manufacture of final products as well as on inputs used in or in relation to the manufacture of the final products whether directly or indirectly and whether contained in the final product or not.

On perusal of the above extracted Sub-rule (4) of Rule 57A of the erst while Central Excise Rules, 1944 it can be inferred that the MODVAT credit was available on inputs used in the manufacture of the final products. Further, MODVAT credit was also available on the inputs used in or in relation to the manufacture of final product whether directly or indirectly. Therefore, it is amply clear that it was not required that the said inputs should contain in the final products..

Rule 57-D of the Rules ibid specifies as under:

"Rule 57D. Credit of the duty not to be denied or varied in certain circumstances.-

(1) Credit of the specified duty shall not be denied or varied on the ground that part of the input is contained in any waste, refuse, or by-product arising during the manufacture of the final produce, or that the inputs have become waste during the course of manufacture of the final products, whether or not such waste or refuse or by-product is exempt from the whole of the duty of excise leviable thereon or chargeable to nil rate or duty or is not specified as a final product under rule 57A.

(2) Credit of specified duty shall also not be denied or varied in case any intermediate products have come into existence during the course of manufacture of final products or the inputs are used in the manufacture of capital goods as denied in rule 57Q and such intermediate products or capital goods are not chargeable to duty of excise."

Learned counsel for the assessee has therefore, submitted that the inputs are lost/ destroyed or have become waste after they are received on the production floor in the factory premises. Further, the tests during which inputs were destroyed/ become waste are integral to the manufacturing process i.e. without which the inputs cannot be used in manufacturing the watches. Therefore, the testing of inputs is in relation to the manufacture of final product (i.e. watches) and the assessee company cannot be denied to the MODVAT credit in terms of Rule 57A read with Rule 57D of the Central Excise Rules, 1944.

Learned counsel for the assessee company has relied upon judgment of the Delhi High Court in the case of Asahi India Safety Glass Ltd. vs. Union of India 2005 (180)ELT 5 (DEL). The Delhi High Court has held that the benefit of Rule 57D has to be extended to the float glass not found defective per se and after being put on the float table, and after being cut, broken and washed defects were noted on inspection. It was also held that the process of manufacturing began with putting the float glass on table and therefore, it was used in relation to manufacture of safety glass.

The counsel for the assessee has further relied upon the decision of CESTAT Mumbai in the matter of Sudarshan Chemicals Industries Limited vs. Commissioner of C.Ex. Reported in 2010 (262) ELT 974 (Tri. - Mumbai) and it was held that without testing in R&D section, final product could not be produced, hence, it was integral part of manufacturing process and Assessee was entitled to credit on inputs used therein. The relevant text of the said judgment is extracted as under :

"9. After careful examination of the facts of the case, I find that the manufacturing activity of the appellant is as such that the input procured by the appellant is first to be tested and then they have to be taken into the manufacturing process. Moreover, if some variations found with regard to the quality of input, it is to be retested as per required composition. In that situation, the manufacturing activity explained by the learned Advocate in the facts and circumstances in this case, the testing in the R&D Section is being done for manufacturing of final product. If these tests have not been taken over by the appellant at the various stages the final product will not be produced. In that situation, I find that in this case the testing done in R&D section as stated by the appellant is an integral part of the manufacture of final product. The case cited by the learned Advocate and the arguments of the learned DR both are of the view that if any put which is being used in or in relation to the manufacture of final product are entitled for CENVAT credit. In this case these tests are required to manufacture the final product. Accordingly, the appellants are entitled for CENVAT credit availed on such inputs which went for testing and analysis to manufacture the final product. The CENVAT credit on capital goods used in R&D section is also entitled as the same has been used in or in relation to the manufacture of the final product."

Learned counsel for the assessee has further relied upon the decision in the case of Flex Engineering vs. CCE 2012 (276) ELT 153 (SC), in which the Hon'ble Apex Court held that testing was inextricably connected with manufacturing process, and until it was carried out, manufacturing process was incomplete, and machines were not fit for sale and hence not marketable. In that view, goods used for testing machines were inputs used in relation to manufacture of final product, eligible for Cenvat/Modvat Credit. On facts it was held that flexible laminated plastic film and poly paper, used for testing, tuning and adjusting various parts of fill and seal machines, tailor made according to requirements of individual customers, were inputs eligible for Cenvat/Modvat credit under Rule 57 A of erstwhile Central Excise Rules, 1944.

Though the ratio of this judgment is not similar to the present case, however, it can be referred in order to prove that the testing is an integral part of manufacturing process and MODVAT is available as per Rule 57A.

Learned counsel for the assessee has also relied upon the decision of Bombay High Court in the case of Tata Engg. & Locomotive Co. Ltd. vs. CCE 2010 (256) ELT 56 (Bom.). In this case the Court has held as under :

"33. Having seen the judicial pronouncements expanding the scope of Rule 57A and accepted by the Board vide its Circular dated 4th May, 1994 referred to hereinabove, one has to put a question, can it be said that input or material on which Modvat credit is taken, if subjected to testing in a laboratory to determine tensile strength and other quality but not physically used in the manufacture of the final product would not fall within the sweep of the words in relation to the manufacture of finished goods appearing in Rule 57A of the Rules.

35. Laboratory test or quality check is always in relation to the manufacture of finished goods. It is immaterial whether or not the input is physically present in the final finished product as such, in out considered view, the laboratory test in relation to the manufacture of final product is a part of manufacture."

At the end he has submitted that on consideration of the aforesaid judgments it can be construed that the assessee company has rightly taken the MODVAT credit and the Tribunal was right to decide that the assessee company is eligible for MODVAT credit and is not required to reverse the same. Without prejudice, it is respectfully submitted that the appeal filed by the department is baseless and liable to be dismissed.

After hearing the parties at length and after perusal of the order of the Commissioner of the Central Excise and the order of CESTAT, we find that the order passed by the Tribunal is fully justified as the Tribunal has categorically recorded the finding of fact, after perusal of the report of defect work that the MODVAT credit has been availed by the assessee company on the inputs/ parts, of the watches at the time of the receipt of the same, before putting to use and that the assessee company has conducted certain test to find out as to whether the inputs to be usable or not. In respect of the inputs which were not found fit to be used, the assessee company has reversed credit thereon and rest of the inputs were issued by the respondent for process or assembling of watches, and during the course of manufacture of watches, certain inputs were found defective during further test and certain inputs were lost while manufacturing the goods.

The CESTAT has further notices that for the aforesaid process the assessee company has made certain head namely :

"Q.1 QC samples - Destructive - samples taken by Quality Control personnel inspectors and which get damaged/become unusable during the process of checking.

Q.2 Samples taken by the manufacturing Engineer for Pilot Engineer testing and which get damaged/become unusable during the process of checking.

M-2 Defect due to the handling of material identifiable by a visual check.

M-3 Defect due to the handling of material identifiable by a functional check.

M-4 Defect due to the design and dimensional problem by a functional check.

M-5 Defect due to components fabricated in house plastic/dial shop.

M-6 Defects returned to the supplying vendors for salvage/purchase returns. These are returned after debiting/reversing the modvat credit availed or under Rule 57D F1 (ii).

Z-1 Defective components taken out from the market returned watches being repaired under Rule 173H. Duty on these reversed on periodical basis."

In para 9 the following findings have been recorded by the Tribunal:

"9. The defective goods were found only after inputs were issued for processing or assembling of watches. This fact has not been disputed and on the basis of record it is ascertained that these inputs were issued for manufacturing watches. Therefore, it cannot be said that the inputs were not put to use. Therefore, in terms of Rule 57D of erstwhile Central Excise Rules, 1944, the inputs have become waste during the course of manufacture or used in or in relation not the manufacture of the final product are eligible for modvat credit. In the impugned order, the Commissioner himself observed that "the ripping open of manufactured watches also does not appear to be an essential requirement for manufacture .... this effectively means that the emergence of this waste is either prior or after the manufacturing process. The waste was in the nature of being emanating as a result of Research and Development process which is quite different from manufacturing activity." The said observations of the Commissioner itself is conclusive that the inputs were issued for manufacturing of watches and the same were found defective during the process of manufacture or during the course of Research and Development process which is integral part of the manufacturing process. Further, I find that the similar issue came up before Hon'ble High Court of Delhi in the case of Asahi India Safety Glass Ltd. (Supra) wherein the High Court has granted the benefit of Rule 57D to the float glass not found defective per se and after being put on the float table, and after being cut, broken and washed defects were noted on inspection. Therefore, the Hon'ble High Court concluded that when float glass has been put to use and it was found defective, modvat credit cannot be denied."

Apart from the aforesaid it is clear that the MODVAT credit cannot be denied applying the provisions of Rules 57-D when duty has indeed been paid. In the instant case of the appellant during the period in dispute scrap valued at Rs.78,53,771/- was cleared from the factory on this scrap a duty of Rs.12,20,722/- was paid, therefore, without prejudice and in any case the benefit of MODVAT credit has to be given to the assessee company on the basis of relevant fact that the duty has been paid on scrap. It is further noticed that during the course of period in dispute the departmental officers were informed about the scraping of process rejections on various occasions.

Apart from the aforesaid even the Commissioner, Central Excise has himself observed that the ripping open of manufactured watches also does not appear to be an essential requirement for manufacture as in the first place this exercise is not carried out in the manufacturing floor of the factory, as in none of the samples copy of "RDW" report the code of cause viz. Q1 & Q2 is mentioned. This effectively means that emergence of this waste is either prior or after the manufacturing process. The Q2 rejects/waste were in the nature of being emanating as result of Research & Development (R&D) process which is quite distinct fromo the manufacturing activity as contemplated in Rule 57A ibid.

The Tribunal has further recorded categorical finding of fact in para 11 of its judgment, which is quoted hereinbelow :

"I find that for shortage of inputs, the appellants have explained general ledger of stock adjustment account reflected the shortages of inputs on physical verification. However, in the same general ledgers excesses have also been found over the recorded balances of various inputs. It shows that the inputs have been short accounted in some cases and in some other cases the inputs are in excess, therefore, there is no actual shortage of inputs. The shortages and excesses are due to the fact that stock accounting used to be done on weighment basis since the minute inputs ran into millions and physical counting is not possible. The Commissioner has not given any credence to the defence taken by the appellant for shortages of the inputs have not verified the said fact with cogent evidence. Therefore, the defence taken by the appellant is acceptable. Accordingly, I hold that there is no shortage of inputs as explained by the appellant. Further all the shortages/rejections have been supported by the charted accountant certifying the same which has not been controverted by the revenue with cogent evidence. In view of the above, I hold that the appellant has taken modvat credit correctly and consequently they are not required to reverse the modvat credit taken by them. In the circumstances, the penalty is not imposable on the appellant. Therefore, I do not find any merit in the impugned order and the same is set aside. The appeal is allowed with consequential relief."

In view of the aforesaid categorical findings of fact recorded by the Tribunal, we find no ground to interfere and in fact no question of law arises in this appeal filed by the Commissioner of Central Excise.

The appeal lacks merit and is accordingly, dismissed.

Order Date :- 20.11.2017

S.S.

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(Ashok Kumar, J.)         (Abhinava Upadhya, J.)