ORDER
V.P. Gulati, Member (T)
1. This appeal has been filed by the Revenue against the order of the Collector (Appeals), Bangalore. Under the impugned order, the respondents have been allowed the benefit of MODVAT Credit in respect of seat kushy returned by their customers as defective. The revenue is aggrieved of the findings of the learned lower appellate authority and have filed the appeal. In the grounds of appeal, they have urged the following grounds:
1. The Collector of Central Excise (Appeals) erred in not appreciating the fact that the rejected goods were received back by the manufacturers and that they had not complied with the provisions of Rule 173H or 173L by filing D. 3 intimation to the Department.
2. The Collector of Central Excise (Appeals ) failed to appreciate that the final product manufactured viz. “Seat Kushy” cannot be an input again as it violates the definition of manufacture under Section 2(f) of the Central Excises & Salt Act, 1944 read with Rules 57A & 57-I of the Central Excise Rules, 1944.
3. The Collector (Appeals) failed to appreciate the provisions of Rule 57A of the Central Excise Rules, 1944 as the duty paid under 57F(l)(ii) would not be available on finished excisable goods.
4. The Collector (Appeals) erred in not appreciating the time limit expressly provided under Rules 173H and 173L.
5. The ratio of judgment, relied upon by the Collector of Central Excise (Appeals) in 1992 (61) E.L.T. 517 is not in pari passu with the facts of the case.
6. The Collector (Appeals) erred in not appreciating that the final product after it emerges and put to use, cannot be termed as input following the ratio of judgment 1991 (52) E.L.T. 592 in the case of M/s. Mettur Chemical & Industrial Corporation.
2. The learned DR for the Department urged that in law when the defective goods are returned after clearance from the factory on payment of duty, the proper course available to the manufacturer would be to utilise the provisions of Rule 173H or 173L. He pleaded that the goods which emerged as finished product and were cleared from the assessees’s factory on return again could not become input for the same finished product and the learned lower appellate authority has misdirected himself in holding it so. He pleaded that the respondents in law could not have claimed the benefit of MODVAT Credit. The learned DR adopted the grounds of appeal.
3. The learned Consultant for the respondents pleaded that the respondents are eligible to the benefit of MODVAT Credit in respect of the defective ‘seat kushy’ received back from the customers which were earlier cleared from the factory on payment of duty. He drew my attention to the reasoning of the learned lower appellate authority reproduced below:
Even otherwise for taking credit this is not a relevant factor because ‘inputs’ even as per the definition in the Rule 57A can be the goods produced and captively consumed in the manufacture of the final product in the same factory of production. In other words an assesses if he has to pay duty on goods produced in his own factory for captive use can take the credit of such duty paid to be utilised towards payment of duty on the final product produced by himself again. The fact that he himself is the manufacturer of the inputs and the final product is not a bar in availing the credit. What has to be seen is whether such goods on which duty has been paid is used in or in relation to the manufacture of final product.
Under Rule 57F(i)(ii) the inputs in respect of which a credit of duty has been allowed under Rule 57A may be removed subject to the prior permission of the Collector of Central Excise, from the factory for home consumption on payment of appropriate duty of excise or for export under Bond as is such inputs have been manufactured in the said factory.
This shows that any goods removed under Rule 57(i)(ii) must be subjected to appropriate duty of excise and therefore such goods are to be cleared under a Gate Pass and the assessee who removes such goods is the manufacture of such goods for such purposes. Therefore, if any goods are removed under this Rule, duty is being paid, Gate Pass is being prepared and hence ingredients of Modvat Rules for taking credit are available to enable a recipient manufacturer to avail of credit.
He pleaded that the respondents were dismantling the seat kushy and remanufacturing the same with the parts retrieved and therefore they could not have availed of the provisions of Rule 173H or L. He pleaded that there is no bar for taking MODVAT Credit in respect of the defective goods and the appellants cannot be asked to avail of the facility available under Rule 173H or L or the MODVAT Rules.
4. I have considered the pleas made by both the sides. The admitted position is that seat kushy which were returned were found defective and have been dismantled. This dismantling obviously resulted in breaking up of the item into various components and thereafter utilisation of the same for manufacture of seat kushy in the respondents’ factory out of the parts which would have been found serviceable or usable. In this process, some of the parts would have been discarded. This position was confirmed by the learned Consultant for the respondents. The position that emerges in that defective ‘seat kushy’ which on return to the respondents factory in respect of which MODVAT Credit had been taken were dismantled and only some of the parts were used in the manufacture of the newly manufactured seat kushy. The input, therefore, which had gone into the newly manufactured kushy seats was only some of the retrieved parts. The activity of scraping cannot be treated as an activity relating to the manufacture of newly manufactured kushy seats and at best it can only be considered as an activity of retrieval of the parts which were contained in the returned kushy seats. A plea has been taken by the Revenue that this cannot be taken to be a manufacturing process. I agree with the Revenue that this activity of scraping of the kushy seat for retrieval of the parts cannot be taken to be an activity of manufacture of the parts retrieved. The Hon’ble Supreme Court in the context as to the scope of the term, ‘in the manufacture of in the case of JK Cotton Spg. & Wvg. Mills Ltd, v. STO reported in 1965 16 STC 563 has held as under:
The expression ‘in the manufacture of the goods’ should normally encompass the entire process carried on by the dealer of converting raw materials into finished goods. Where any particular process is so integrally connected with the ultimate production of goods that but for that process, manufacturing or processing of the goods would be commercially inexpedient, the goods required in that process would fall within the expression ‘in the manufacture of goods’.
The ratio of this ruling has been followed by the Hon’ble Supreme Court in the case of CCE v. Eastend Paper Industries Ltd. reported in 1990 (26) ECR 10 (SC). It is seen from the above that when use of an item is taken into reckoning in relation to the manufacture of finished product it has to be related to the process of manufacture. In the present case, it cannot be said that without use of the returned kushy seats, manufacturing process in the respondents ‘ factory cannot be carried on or scraping of the seats was integrally connected with the manufacture of the kushy seats in the respondents factory. Scraping in fact has resulted in emergence of parts which had gone into making of new kushy seats and it can only be taken to be with reference to retrieval of these parts which earlier went into the making of the goods. In view of the above position, I hold that retrieved parts used as inputs in the manufacture of new kushy seats cannot be considered as inputs used in relation to the manufacture in the respondents’ factory. I therefore, hold that the lower appellate authority’s order is not maintainable in law and the same is set aside and the appeal is allowed.
5. Before parting with this case, I would like to observe that in the Central Excise law necessary provision has been made to mitigate hardship caused to an assessee in case the goods cleared on payment of duty are returned to the assessees’ factory for repairs etc. under Rules 173H or L. Under the latter rule the manufacturer can claim refund of the duty paid on the goods which have been found defective. The proper course for the assessee as rightly held by the original authority was to have had resort to these rules.