Cenvat credit on trial production inputs allowed where duty-paid final products were manufactured and cleared.

Cenvat credit was held admissible on inputs recorded under an R&D head where the assessee showed that the activity was only pilot production or trial manufacture leading to dutiable final products cleared on payment of duty. The record did not show clandestine removal or destruction of inputs, and the Revenue failed to rebut the explanation or establish that the inputs were not used in or in relation to manufacture. The insistence on item-wise correlation between each input and each finished product was treated as unrealistic for a factory using numerous small components. Credit was therefore allowed and the demand and penalties were found unsustainable.

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Issues: Whether Cenvat credit was admissible on inputs shown as consumed in the Research and Development division when the assessee contended that the activity was only pilot production or trial manufacture leading to dutiable final products cleared on payment of duty.

Analysis: The dispute turned on whether the entries in the financial statements reflected consumption of inputs in a non-manufacturing R&D process, or only a specialised stage of manufacture resulting in excisable goods. The record showed no case of clandestine removal or destruction of inputs. The assessee explained that the so-called R&D activity consisted of technology-based pilot production and trial runs under trained supervision, and that final products were cleared on payment of duty. The attempt to insist on item-wise correlation of every input with every finished product was found unrealistic for a factory using numerous small components. The Revenue did not satisfactorily rebut the explanation or establish that the inputs were not used in or in relation to manufacture of dutiable final products.

Conclusion: The assessee was held entitled to Cenvat credit on the impugned inputs, and the demand and penalties were unsustainable.

Final Conclusion: The appeal succeeded and the impugned adjudication was set aside because the input use was accepted as part of manufacture of duty-paid final products, not as ineligible R&D consumption.

Ratio Decidendi: Inputs used in trial production, pilot manufacture, or other manufacturing processes leading to duty-paid final products remain eligible for credit, and credit cannot be denied merely because the inputs were shown in accounts under an R&D or similar head if manufacture and duty-paid clearance are established.

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