Control samples, trial inputs and mandated excess filling are not separately dutiable when properly accounted for or required by process.

Control samples retained in the factory are not separately dutiable when they are properly accounted for and not removed in the ordinary course of trade, so related interest and penalty do not survive. Inputs consumed in machine trial or testing to verify conformity with customer specifications are treated as used in relation to manufacture, supporting MODVAT credit and excluding a separate duty demand, with consequential interest and penalty also waived. Excess quantity filled in injections under the Drugs & Cosmetics Rules, 1945 is not treated as a separate dutiable clearance when required by the regulatory process, so duty, interest and penalty are not payable.

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Issues: Whether control samples retained in the factory were liable to duty when proper accounts were maintained; whether inputs used for machine trial/testing were liable to duty; and whether excess quantity filled in injections under the Drugs & Cosmetics Rules, 1945 was liable to duty, along with consequential interest and penalty.

Issue (i): Whether control samples retained in the factory were liable to duty when proper accounts were maintained.

Analysis: Control samples retained in the factory are not exigible to duty where the assessee maintains proper account of such samples. The rule applied was that retained samples used for testing, without removal in the ordinary course and with proper accounting, do not attract duty liability.

Conclusion: The control samples were not liable to duty, and the related interest and penalty were also not sustainable.

Issue (ii): Whether inputs used for machine trial/testing were liable to duty.

Analysis: Inputs consumed in trial runs for testing the final product to ensure conformity with customer specifications are inputs used in relation to manufacture. Such use supports eligibility to MODVAT credit and negates a separate duty demand on the inputs so used.

Conclusion: The inputs used in machine trial were not liable to duty, and the consequential interest and penalty were waived.

Issue (iii): Whether excess quantity filled in injections under the Drugs & Cosmetics Rules, 1945 was liable to duty, along with consequential interest and penalty.

Analysis: Where the assessee is required by the regulatory regime to fill excess quantity in the injections, such excess quantity is not to be treated as a separately dutiable clearance. On that footing, no duty demand can survive on the excess quantity, and interest and penalty cannot be sustained once duty itself is not payable.

Conclusion: The excess quantity filled in the injections was not liable to duty, and the related interest and penalty were not payable.

Final Conclusion: The disputed duty demands and the consequential interest and penalty did not survive, and the appeals were disposed of by granting relief to the assessee on the contested issues.

Ratio Decidendi: Goods or quantity necessarily retained or added under the applicable regulatory or manufacturing process, where properly accounted for or used in testing manufacture, are not separately chargeable to duty, and consequential interest and penalty cannot stand when the underlying duty demand fails.

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