2007 (1) TMI 50 - AT - Central Excise

Demand for returning credit on defective gears upheld by Tribunal, rectification not manufacturing

S & H GEARS PVT. LTD. Versus COMMISSIONER OF C. EX., INDORE

S & H GEARS PVT. LTD. Versus COMMISSIONER OF C. EX., INDORE - 2007 (213) E.L.T. 680 (Tri. - Del.) Issues:1. Whether Cenvat credit taken in respect of defective gears is required to be returnedRs.2. Whether the defective gears brought back for rectification can be considered as manufactured goodsRs.3. Whether the demand for returning credit on defective gears is sustainableRs.Analysis:Issue 1: The appellant brought back 6,566 duty paid gears to the factory, and Cenvat credit equivalent to the duty paid was taken. A show cause notice was issued for returning credit on 1902 defective gears. The appellant argued that these gears were beyond repair and declared as rejects, disposed of as scrap. The Tribunal held that the demand for returning credit on defective gears is sustainable as there was no manufacture involved when defective gears were declared as rejects.Issue 2: The appellant contended that the defective gears brought back for rectification should be considered as manufactured goods since repair processes were carried out. However, the Tribunal rejected this contention, stating that rectification of defects does not amount to manufacturing as the goods remained the same before and after the process. The requirement of Rule 16 was not satisfied as the defective gears were sold as scrap, not used in manufacturing new goods.Issue 3: The Tribunal confirmed the duty demand but set aside the penalty. It was held that while the demand for returning credit on defective gears was justified, penalty imposition was not warranted as there was no failure to account for inputs or removal of inputs without payment of duty. The appeal was allowed by confirming the duty demand and setting aside the penalty.