Central Excise Duty Payable on Metal Containers Returned to Factory & Cleared as Scrap Without Further Manufacturing Process, No Penalty Leviable in Absence of Wilful Evasion: CESTAT [Read Order]

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Chennai bench has held that Central Excise Duty is payable on the metal containers that were brought back to the factory and subsequently cleared as scrap without undergoing any further manufacturing process. It was also held that Penalty is not applicable as there is no wilful evasion on the part of the appellant assessee.

The Excise Appeal was filed by M/s. Balmer Lawrie & Co. against an Order in Appeal passed by the Commissioner of Central Excise (Appeals), Chennai. The dispute revolved around metal containers, specifically drums and barrels, falling under Chapter 73 of the Schedule to the Central Excise Tariff Act (CETA), 1985.

The appellant company was engaged in the manufacture of these metal containers. They had availed credit on rejected and returned metal containers, which were considered as final products, under Rule 16 of the Central Excise Rules, 2002. However, they had not followed the procedure outlined in sub-rule (2) of Rule 16, which required them to pay duty equivalent to the CENVAT credit taken at the time of subsequent clearance.

The appellant eventually debited the excess credit availed amounting to Rs.2,20,756 but did not pay the associated interest. Subsequently, a Show Cause Notice was issued, demanding the differential duty of Rs.2,20,756 along with interest and penalties under Rule 11AC and Rule 25 of the Central Excise Rules, 2002.

The case was brought before the Commissioner (Appeals), who upheld the original authority’s decision. Dissatisfied with the outcome, the appellant filed an appeal before the CESTAT.

The issue before CESTAT was the interpretation of Rule 16(2) of the Central Excise Rules, 2002. This rule differentiates between two situations -The first one is when the goods returned have undergone a process that does not amount to manufacture and the second one is in any other case. The distinction is vital because the treatment of goods and the applicable duty rates depend on which part of Rule 16(2) is applicable.

The appellant, represented by Shri K.A. Parthasarathy argued that their case fell under the second part of Rule 16(2) – “in any other case”. The appellant contended that this part encompassed situations where goods were returned without undergoing any manufacturing process, as was the case with their rejected metal containers.

The respondent, represented by Shri Rudra Pratap Singh argued for duty payment as per the first part of Rule 16(2) due to lack of manufacturing process and mandatory reversal of CENVAT credit as per CENVAT Credit Rules, 2004.

The bench agreed with the appellant’s interpretation of Rule 16(2). The bench emphasised that the second part of the rule applied to cases where no manufacturing process had occurred before the goods were cleared for the second time. Therefore, the duty payable should be based on the value determined under the relevant sections of the Central Excise Act, 1944 rather than simply reversing the CENVAT credit.

The bench also noted that there was no evidence of wilful evasion or suppression on the appellant’s part. Consequently, the bench found no grounds for invoking the extended time limit for imposing penalties under Section 11AC of the Central Excise Act, 1944 and Rule 25 of the Central Excise Rules, 2002.

The two-member bench comprising Shri P. Dinesha (Judicial Member) and Shri M. Ajit Kumar (Technical Member) provided clarity on the application of Rule 16(2) in cases involving the return and clearance of goods without further manufacturing processes. The bench highlighted that the phrase “in any other case” encompasses situations where no manufacturing process has taken place, and duty should be assessed accordingly.

To Read the full text of the Order CLICK HERE

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