Sending Testing Samples to In-House Laboratory Not Exciseable Activity: CESTAT quashes Excise ₹2.57 Crore Demand against Navin Fluorine [Read Order]

The New Delhi bench of Customs, Excise and Service Tax Appellate Tribunal ( CESTAT ) has quashed a demand of ₹2.57 crore against the famous Navin Fluorine International Limited, holding that sending product samples to the company’s in-house laboratory for testing does not constitute a clearance of excisable goods.

A show cause notice issued on 7 September 2020 under Section 11A of the Central Excise Act, 1944, alleging that the company had removed finished goods without payment of duty by disguising them as samples sent for testing. The appellant, Navin Fluorine International Limited approached the tribunal.

The department depended on the similarity of product names in various annexures to conclude that the goods sent to the Surat laboratory were complete finished products and not trial samples.

It further alleged that since no permission was obtained under Rule 16C of the Central Excise Rules, 2002, the removals were in violation of law and amounted to clandestine clearances.

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The Bench comprising Justice Dilip Gupta (President) and P. Anjani Kumar (Technical Member) noted that the appellant, being an Export Oriented Unit (EOU), was engaged in Contract Research and Manufacturing Services (CRAMS), which required multiple rounds of laboratory testing of intermediate products and materials. Since the Dewas facility lacked certain equipment, the samples were sent to its own laboratory at Surat for analysis.

The tribunal, considering the documents and testing records, held that the department’s conclusion was speculative and not based on evidence.

The Bench observed that “The reason given by the appellant in response to the show cause notice has not even been considered in the impugned order and only an inference has been drawn that since there is similarity in the names mentioned in Annexures F and I to the show cause notice, the products which the appellant claims were sent for testing were final products. There is no other evidence on record which may lead to the aforesaid conclusion.”

The Tribunal further banked on the covering letters accompanying the dispatches, laboratory test reports, and certificates confirming consumption of the samples during testing. It found that these materials clearly established the bona fide nature of the transfers.

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The bench added that “It is, therefore, clear from the covering letters, testing reports and consumption certificates that only testing samples were sent by the appellant to its in-house facility at Surat and not the finished products.”

Further, the appellate tribunal also noted that the department failed to substantiate its claim that higher weights shown in courier invoices indicated movement of finished products. It accepted the appellant’s argument that courier agencies billed based on weight slabs rather than actual weights, and noted that the statements of courier employees had been misinterpreted by the authorities.

Accordingly, the Tribunal ruled that the samples were not finished products but small quantities used purely for testing and development as part of contract research services. Hence, the allegation of clandestine removal of goods was unsustainable in law. The issue was ruled in favour of the appellant.

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