Goods rejected from our customer

[Guest]

Dear Experts,

Please resolve my query!!

We have supplied our Final product to our customer and our final product will be a part of a machinery for our customer . Our customer used our product and in manufacturing process They came to know some fault in our product and their one raw material , say X got attached with our product, say Y,. Now customer raised one invoice i.e. rejection invoice for our product because of some fault and raised one debit note of their another raw material which wasted because of our product and returned both material physically in our factory.

Now my question is our customer while raising debit note reversed cenvat credit or we can say charged some excise duty then what should we do whether we will take benefit of cenvat credit which our customer charged from us because this material we have never sent to our customer that why we can not say that this is our sale return ??

Please suggest, Thanks in advance.

[KASTURI SETHI]

Sh.Prem Bajaj Ji, Can you use the returned goods (both) in the manufacture of any dutiable final product ?

[Guest]

No sir both products are waste/ scrap for us.

[Ganeshan Kalyani]

Sir , if you cannot use the returned goods in the manufacture of duitable goods then credit cannot be availed. Thanks.

[KASTURI SETHI]

Dear Sir,

I fagree with Sh.Ganeshan Kalyani, Sir. You will have to bear the loss. Both are duty paid goods. Duty cannot be charged twice. So clear the said wast and scrap on excisable invoice at NIL duty giving the reference of both invoice.

[Guest]

Dear Sir,

It means My rejected material is eligible to take credit but another material is not eligbile for credit we will suffer the loss on account of this.

If i conclude i will take credit under rule 16 of CER 2002 and clear the goods as scrap and charge excise duty on this.

And if i consider another material which my customer reject i will not take credit of this but on account of sale of this scrap i will not charge excise duty as well because this is not my manufactured item.

Please correct me if i am wrong.

Thanks alot for giving your valuable time.

[KASTURI SETHI]

Sh.Bajaj Ji,

Rejected finished goods are eligible for cenvat credit only if the same are to be recycled/used in the manufacture of dutiable final product. It is basic requirement that cenvatable inputs should be used in the manufacture of dutiable final product. No doubt scrap/waste is final product also. There is a great deal of difference between the transaction value of finished goods and scrap/waste (which is bye-product). You want to take credit of duty paid on final product and clear scrap/waste as final product. How will you justify valuation ? You cannot justify such availment of input credit in any way. It will be a record based mistake. You do not fulfil the conditions of Rule 16 in this way.

[Ganeshan Kalyani]

Sir, the excise duty on returned goods is eligible for cenvat credit, there is no doubt. The item which is sent to you along with your goods returned, is new to you then it can be construed then you have purchased it afresh. In this case you should be able to take credit, provided a condition that it said item should undergo a process and a distinct identity product should come into existence. In your case it is missing. Hence credit becomes ineligible. Thanks.

[KASTURI SETHI]

Well explained by Sh.Ganesha Kalyani Sir. Now all doubts should be cleared to the querist.

[Guest]

Thank you so much kasturi sir and kalyani sir for giving your valuable time and suggestion.

AI Summary

Cenvat credit on returned goods permitted only if returned items are reusable in manufacture; scrap is ineligible. Cenvat credit on excise duty paid for goods returned by a customer is allowable only if the returned finished goods can be recycled or used as inputs in the manufacture of a dutiable final product; scrap or waste not so usable is not eligible. An item newly received with the returned goods may be treated as a purchase and eligible for credit only where it undergoes a process conferring a distinct identity for use in manufacture. Claiming credit on a finished product and clearing it as scrap without meeting Rule 16 conditions and proper valuation records is not permissible.