Dismantling imported machinery is not manufacture; duty liability is limited to the differential amount under Rule 16.

Dismantling and reassembling imported machinery in the factory did not amount to manufacture. Under Rule 16 of the Central Excise Rules, 2002, the assessee was required to reverse duty equivalent to the Cenvat credit taken on receipt of the goods. Because duty had been paid only on transaction value instead of the prescribed credit-reversal amount, liability survived only for the differential between the duty paid and the amount required under the rule. The penalty had to follow the reduced duty demand and was correspondingly curtailed, with consequential relief including the option to pay the reduced penalty.

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Issues: Whether dismantling and reassembling imported machinery amounted to manufacture so as to justify payment of duty only on transaction value and full Cenvat credit, and whether the demand and penalty were sustainable only to the extent of the differential amount.

Analysis: The imported machinery was brought into the factory, dismantled, reassembled and then cleared on payment of duty on transaction value. On the facts, the activity was held not to amount to manufacture. Under Rule 16 of the Central Excise Rules, 2002, where goods are brought into the factory and the activity does not amount to manufacture, the assessee is required to reverse duty equivalent to the Cenvat credit availed at the time of receipt. Since duty had been paid on transaction value instead of the credit-reversal amount, the liability survived only for the difference between the duty already paid and the amount required under the rule. The same approach applied to the penalty, which had to correspond to the reduced duty demand.

Conclusion: The demand was held unsustainable to the extent it covered the entire Cenvat credit and was confined only to the differential amount. The penalty was also reduced accordingly, with consequential relief including the option to pay the reduced penalty.

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