Scrap from repair of capital goods not excisable when Revenue cannot prove it arose from modvatable machinery.

Waste and scrap generated during repair or wear and tear of capital goods was not chargeable to central excise duty under Rule 57S(2)(c) where the Revenue failed to prove that the scrap arose from modvatable capital goods. The demand rested on an unproved assumption that the scrap represented capital goods cleared as waste and scrap, but the notice did not establish the necessary factual basis. Scrap arising from repair activity or ordinary wear and tear was treated as non-manufactured material and not excisable merely because it was removed from the factory. The demand was therefore unsustainable.

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Issues: Whether waste and scrap generated during repair or wear and tear of capital goods was chargeable to central excise duty under Rule 57S(2)(c) of the Central Excise Rules, 1944, and whether the Revenue had proved that the scrap arose from capital goods on which credit had been taken.

Analysis: The demand was founded on the assumption that the scrap represented capital goods sold as waste and scrap, but the show cause notice did not allege or establish that the scrap arose from modvatable capital goods. The burden to prove duty liability lay on the Revenue. On the admitted case that the scrap was generated during repair of machinery, it could not be treated as capital goods cleared as waste and scrap. Scrap arising from wear and tear or repair activity is not the product of manufacturing and is not excisable merely because it was removed from the factory. The reasoning of the lower appellate authority, based on probabilities and absence of proof from the assessee, was therefore unsustainable.

Conclusion: The scrap was not liable to duty under Rule 57S(2)(c) and the demand could not be sustained. The appeal succeeded in favour of the assessee.

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