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Issues: (i) Whether duty was payable on warranty replacement parts cleared as such; and (ii) whether duty could be demanded on amounts recovered by debit notes towards repair charges for damaged inputs transported in transit.
Issue (i): Whether duty was payable on warranty replacement parts cleared as such.
Analysis: Notification No. 3/2011-CE (NT) dated 01.03.2011 recognises goods used for providing free warranty for final products. The clearance practice showed that duty was not paid where the removed goods were inputs and duty was paid where the removed goods were manufactured goods. That distinction, in the facts of the case, could not be treated as a divergent practice warranting demand, particularly when warranty charges were already taken into account while discharging duty earlier.
Conclusion: Duty was not payable on the warranty replacement parts cleared under free warranty.
Issue (ii): Whether duty could be demanded on amounts recovered by debit notes towards repair charges for damaged inputs transported in transit.
Analysis: The debit notes were raised for damage to inputs during transportation, and there was no finding on record that the damaged inputs were not used in production. The authorities did not properly address the appellant's submissions in repeated adjudications. On these facts, the recovery represented repair charges and not a basis for excise duty demand.
Conclusion: Duty could not be demanded on the debit-note recoveries towards repair charges.
Final Conclusion: The demand and consequential order were unsustainable, and the assessee succeeded on both substantive issues.
Ratio Decidendi: Where free warranty replacements are already accounted for in the duty on the final product and debit-note recoveries merely reflect repair charges for damaged inputs without proof of non-use in production, no excise duty demand is sustainable.
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