Recently in a ruling, the Customs, Excise, and Service Tax Appellate Tribunal ( CESTAT ) ordered a reassessment of a ₹7 crore excise duty demand on pharmaceutical equipment prototypes, questioning the denial of an excise duty exemption claimed under a long-standing government notification.
The Tribunal set aside two orders passed by the Commissioner of Central Excise, Mumbai-IV, which had imposed the excise duty demand on goods cleared between November 2008 and March 2016.
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The appellant, Scitech Centre, a research institute engaged in the development of pharmaceutical equipment prototypes, invoked Notification No. 167/71-CE, dated September 11, 1971, which exempts goods produced for research, technical training, or experimentation by educational or research institutions from excise duty. The prototypes in question were produced as part of the appellant’s research activities and were cleared under this exemption for several years.
However, the excise authorities challenged the appellant’s eligibility for the exemption, arguing that the prototypes were primarily supplied to its associated companies, effectively turning the appellant into an in-house research and development unit.
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The Commissioner of Central Excise, in its orders, held that the majority of the prototypes were supplied to group companies for commercial purposes, which disqualified the goods from the exemption. As a result, demands of ₹4.61 crore for the period between 2008 and 2015, and ₹2.30 crore for 2015-16, were raised, along with applicable interest and penalties.
The appellant, in defense, argued that its registration as a research institute was not in dispute and that the excise authorities were wrong to interpret the exemption notification in a restrictive manner. The appellant’s counsel contended that the prototypes were part of ongoing research, and the fact that they were supplied to associated companies did not change their nature or the purpose for which they were developed. Relying on multiple Supreme Court judgments, the appellant asserted that the exemption should be applied strictly according to the wording of the notification, without introducing additional conditions that were not explicitly mentioned.
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CESTAT’s bench, comprising Mr C.J. Mathew and Mr Ajay Sharma, took note of the appellant’s arguments and expressed concerns about the approach taken by the excise authorities. The Tribunal highlighted that Notification No. 167/71-CE, under which the exemption was claimed, was enacted in a different regulatory context, when excise officers had more direct oversight of the manufacturing process and clearances. Over time, procedural changes such as self-assessment and the introduction of modern clearance practices have shifted how such exemptions are monitored.
The Tribunal criticized the Commissioner’s orders for failing to provide a thorough examination of whether the prototypes were genuinely produced as part of research activities. CESTAT noted that while the notification required the satisfaction of excise officers that the goods were produced during research or experimentation, the excise authorities had not followed these procedures. There was no evidence of certification, inspection, or proper record-keeping for the goods, which undermined the basis for denying the exemption.
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Additionally, the Tribunal pointed out that the Commissioner’s assumption—that the associated companies used the prototypes for commercial duplication—was speculative and unsupported by detailed findings. The order, according to the Tribunal, lacked the necessary analysis of each clearance and the specific nature of the goods, making it insufficient to uphold such a significant excise demand.
As a result, CESTAT set aside the Commissioner’s orders and remanded the case back for a fresh decision. The Tribunal instructed the excise authorities to reassess the matter, ensuring that the conditions stipulated in the exemption notification were carefully considered.
In result, the case was remanded back to the Commissioner of Central Excise for a new assessment, in line with CESTAT’s instructions.
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