ORDER
K.K. Usha, J. (President)
1. This is an appeal at the instance of the assessee challenging the order passed by the Commissioner of Central Excise/ Indore, dated 29-8-2003. Under the above order the Commissioner has upheld the demand of duty against the appellant to the extent of Rs. 3,79,96,012/- under the proviso to Section 11A(1) of the Central Excise Act, 1944 and imposed an equal amount of penalty under Section 11AC of the Act and Rule 173Q of the Central Excise Rules, 1944.
2. Appellants are engaged in the manufacture of colour picture tubes (CPTs for short) at their factory at Malanpur, District Bhind (MP). The CPTs so manufactured by the appellants are supplied to various colour TV manufacturers on payment of appropriate central excise duty. Sometimes buyers noticed defects in CPTs at the time of assembly of the TV. On receipt of complaint, appellants’ engineers would go to the factory of the buyers and repair the same. Those CPTs which could not be repaired at the factory of the buyer were brought to the appellants factory following the procedure under 57F(4)/173H of the Central Excise Rules, 1944. In the show cause notice issued to the appellants on 26-4-2002 followed by a corrigendum dated 29-5-2002, it was alleged that in the guise of repairing defective CPTs they were replacing the same with new CPTs under the warranty clause without paying central excise duty. According to the Revenue during the period 1-4-97 to 21-12-99 the appellant had received 40567 numbers of 20″ and 22037 numbers of 21″ CPTs valued at Rs. 20,47,40,200/- under Rule 57F(4)/173H showing as repaired and cleared. The appellants have evaded central excise duty amounting to Rs. 3,41,66,172/- on this count. It was further alleged that the appellant had not accounted for the disposal of 1,12,360 numbers of ‘electron guns’ which are modvatable inputs. Therefore, Modvat credit of Rs. 38,29,840/- taken on the said input was also to be recovered from the appellant in terms of Sub-rule (1)(ii) of Rule 57-1. There were certain other allegations in the show cause notice which were not upheld by the adjudicating authority. The show cause notice proceeded on the basis of the correspondence between the appellant and buyers’ representatives etc. wherein the term “replacement” has been used in respect of CPTs received under Rule 173H/57F(4) for repairs.
3. Appellant submitted detailed reply to the show cause notice and also sought cross-examination of various persons whose statements and correspondence were relied on in the show cause notice. Opportunity was granted to cross-examine only two persons, out of whom one instead of appearing in person sent a sworn affidavit to the Commissioner.
4. It is the case of the appellant that the term ‘replacement’ is used in the trade in a loose manner under the warranty clause and in some cases the CPTs are repaired by minor processes and in some other cases certain parts namely, purity magnets, rubber wedge, deflection yoke etc. will have to be replaced. The process is only repair. The adjudicating authority also holds that the process of repair would not amount to manufacture. But, on the basis of the word used ‘replacement’ the Commissioner comes to the conclusion that appellants are replacing defective CPTs with newly manufactured one and cleared without payment of duty. It is the case of the appellant that apart from the correspondence there are no material whatsoever which would substantiate the allegation of clandestine removal of CPTs. Commissioner had placed reliance on the statement of Shri Gurpreet Singh of M/s. Bestavision in support of the finding that defective CPTs are being replaced by the appellant and not repaired. While cross-examined by the appellant he categorically stated that the defect found in CPTs are like conversion and static, focus out, black spot, switch of spot, patch, scratch and shadow mark. Most of these defects are rectified in their factory by the Hotline Engineers and others are sent back to Hotline under Rule 57F challans to rectify the defects. When a specific question was put to him as to what it meant by replacement of CPT in warranty period, he answered as follows : “Whatever is sent for repair the same is sent back to us after replacement of some parts in the CPT and repairing and same comes back to us. This is because that the same Sl. No. is given when it is going and when it comes back.” He also stated that 57F(4) registers are duly authenticated by the Central Excise officers for sending the CPTs. The appellant would contend that this part of the evidence of Shri Gurpreet Singh had not been appreciated correctly by the learned Commissioner.
5. Learned Counsel for the appellant further points out that while the Commissioner placed reliance on Clause 8(a) of the purchase order dated 7-10-1997 of M/s. Kalyani Sharp, he had failed to note condition No. 16. Clause 8(a) reads as follows :
“Allow the vendor to replace the rejected goods within a specific time, the vendor bearing the entire cost of freight, delivery expenses handling etc. as such replacement without being entitled to any extra payment.”
Clause 16 reads as follows :
“The vendor shall be liable and responsible for any defects in the designs, compositions or substance of materials and defect in the workmanship or process of manufacture. He shall make good by satisfactory replacement of supplies or repair any defects when under normal use appear therein or arise from defective composition or use of sub-standard materials, defective workmanship or process of manufacture of defective design, within a stipulated period from the date of receipt of such goods by Kalyani Sharp.”
6. Learned Counsel points out that while 8{a) is a general clause, Clause 16 which specifically referred to repair of any defect has been totally ignored by the Commissioner. Appellant would further contend that reliance placed by the Commissioner on the statement of Shri V.N. Ramachandran of M/s. Videocon International is totally misdirected. Even though Shri Ramachandran has stated that warranty means replacement against rejection related to manufacturing defect in respect of CPTs, he went on to explain that they were following the procedure under Rule 57F(4) for sending defective CPT to original manufacturer to carry out the process and reconditioning of CPT to suit for production of CTV as there is no cost involvement in such transaction even though it is called as replacement. Shri Ramachandran was not made available for cross-examination but in a sworn affidavit sent by him to the Commissioner dated 12-3-2003 he has stated that the well known practice in the industry is that the defective CPTs are being sent back to the manufacturers to carry out the necessary repairs on the CPTs and the same are supplied back which is termed as replacement. He also stated that defective CPTs were being sent under provisions of Rule 57F(4) for repairs, reconditioning etc. Learned Counsel for the appellant would submit that the Commissioner has misinterpreted the statement of Shri Ramachandran and totally ignored his affidavit.
7. Yet another document relied on by the Commissioner is a letter dated 28-7-1998 of M/s. Texla Electronics Ltd. addressed to the appellants that they had received replacement of broken CPTs. Insurance claim of 71 CPTs according to the Commissioner is an indication that the appellants had been replacing broken CPTs with fresh CPTs in the garb of repairs. It is pointed out by the Learned Counsel for the appellant that in respect of 71 CPT while it was being transported to the appellants factory for repairs an accident occurred en route and the CPTs were totally broken. Since CPTs could not be repaired appellants replaced 71 CPTs, In respect of the above mentioned 71 CPTs appellant had paid central excise duty and interest under intimation to the Superintendent, Central Excise Range before issue of show cause notice. This is the only goods where insurance claim had been made.
8. It is also contended by the appellant that the fact that they had reversed Modvat credit to the extent of Rs. 3,40,398/- on components like Magnet, Compation Plate, Sonibond, Rubber Wedge, etc. used in repairs of such defective CPTs would clearly show that they carried out repair work and not replacement. Learned Counsel for the appellant would further submit that there were no evidence of any excess production produced by the Department. It was also submitted that denial of Modvat on electron gun is totally unsustainable. If the loss of electron gun during the process is taken into account correctly it will be seen that there is no diversion of electron gun. According to the appellant reliance placed on MIS reports by the Commissioner is unjustified. Month-wise MIS report would show the figures of mount yield varying from 80% to 85%. In the affidavit filed by Shri D.C. Tripathi, Vice President (Works) he explained the different circumstances under which loss of electron gun comes about in the manufacturing process. Reliance is also placed by the Learned Counsel for the appellant on the Hand Book of Procedure of Standard Input-Output Norms fixed by DGFT (Ministry of Commerce) under the EXIM Policy, Sr. No. B23 under the category of ‘Electronic Products’ is for 100 CPTs 115 electron guns are permitted as import. This would also show that there will be loss of electron gun in the process of vaccumisation of CPTs after mounting and sealing of electron guns. The appellant has also contended that the entire demand is barred by limitation.
9. We heard learned Departmental Representative who addressed arguments in support of the adjudication order.
10. As mentioned earlier Revenue is not taking the contention that repair of picture tube would amount to process of manufacture. This position is settled by the decision of this Tribunal in CCE, Meerut v. Samtel Color Ltd. – 2001 (135) E.L.T. 288. Then the only issue to be considered is whether the Revenue has proved in this case clandestine removal of CPTs by the appellant on the pretext of returning of repaired or re-conditioned CPTs. Nothing has been brought out to show that the appellant had not followed the procedure under Rule 57F(4)/173H. On the other hand, reliance is placed on the term ‘replacement’ used in the correspondence between the parties. In the cross-examination as well as in the affidavit such persons have explained what is meant by the term ‘replacement’ in this trade. They have categorically stated that defective goods are taken to the factory of the appellant. After repair, sometimes even replacing some parts, CPTs are returned to the customers. This procedure is termed as ‘replacement’. When procedure under Rule 57F(4)/173H had been correctly followed and there is no other evidence of excess production and clandestine removal, we find that the order passed by the Commissioner on this issue cannot be sustained.
11. On the denial of Modvat on electron gun also we find that the assessee has produced sufficient material to show that the difference in numbers cannot be in excess of loss sustained in the manufacturing process. Since the demand of duty is not sustainable, naturally, the imposition of penalty also cannot be upheld.
12. In the result, we set aside the order impugned and allow the appeal.
