2018 (2) TMI 916 - AT - Central Excise

Receipt of motor vehicle chassis due to various defects - Revenue entertained a view that the processes undertaken by the appellant on such returned chassis will not amount to manufacture of any new item - applicability of rule 16 of CER - can there be a total dismantling and re-manufacture of such duty paid motor vehicle cleared in the form of chassis with all the requirements of engine, transmission system? Held that - there is no total dismantling and re-manufacture of the impugned goods in the premises of the appellants. There is no supporting evidence to that effect. In fact, we have all the indications to show that only replacement of various components, though critical has been undertaken. These are engine, gear box, steering system, axles etc. These are no doubt critical components of a motor vehicle. But replacement of such items will not amount to manufacture of motor vehicle. There is no ambiguity regarding the procedure to be followed by an assessee under Rule 16. Admittedly, the appellants did follow the procedure under Rule 16 in so far as re-credit availed upon return of defective goods. They did observe the procedure as per the Trade Notice 108/LTU dated November, 2008 issued by Commissioner, LTU. We are dealing with a part of provision of Rule 16 (2). Having held that the appellants did not undertake any processes amounting to manufacture, we note the said Rule will apply in full force. Regarding the claim of the appellants that certain numbers of returned chassis upon removal of defects, have been cleared either on physical exports out of country or to supply to EOU or supply under N/N. 108/95 - Held that - these products irrespective of the dispute under Rule 16 are otherwise eligible for clearance without payment. These can be verified from the documentary support that will be produced by the appellants - matter on remand. Penalty u/r 25 of CER - Held that - there is a case for the appellants for claiming interpretation of the provisions of Rule 16 - penalty not justified. Appeal allowed in part - part matter on remand.

Summary

Issues Involved:
1. Whether the processes undertaken on returned chassis amount to manufacture.
2. Applicability of Rule 16 of the Central Excise Rules, 2002.
3. Liability for differential duty and penalties under Rule 25 of the Central Excise Rules, 2002.
4. Eligibility for duty exemption for certain clearances (exports, EOU, Notification No. 108/95).

Detailed Analysis:

1. Whether the processes undertaken on returned chassis amount to manufacture:
The appellant argued that the extensive processes, including dismantling and reassembling of chassis with new parts, should be considered as manufacturing under Section 2(f) of the Central Excise Act. The Tribunal noted that while the appellant undertook significant replacements, the chassis frame remained unchanged. The Tribunal found no evidence of total dismantling and re-manufacture, concluding that the processes did not amount to manufacturing. Thus, the processes were deemed as repair and restoration, not manufacturing.

2. Applicability of Rule 16 of the Central Excise Rules, 2002:
The Tribunal examined Rule 16, which allows credit for duty-paid goods returned for re-making, refining, or re-conditioning. If the processes do not amount to manufacture, the re-credit must be reversed. The Tribunal confirmed that since the processes did not amount to manufacture, the appellant was required to reverse the re-credit taken upon the return of the chassis. The Tribunal found no ambiguity in Rule 16 and upheld its application in this case.

3. Liability for differential duty and penalties under Rule 25 of the Central Excise Rules, 2002:
The Tribunal upheld the differential duty demand but set aside the penalties. It acknowledged the appellant's argument regarding the interpretation of Rule 16 and the processes undertaken. The Tribunal noted that the demands were issued within the normal period and that the penalties were imposed under Rule 25. Given the circumstances and the appellant's interpretation of Rule 16, the Tribunal found a reasonable cause to set aside the penalties.

4. Eligibility for duty exemption for certain clearances (exports, EOU, Notification No. 108/95):
The Tribunal noted that clearances made for exports, to EOUs, or under Notification No. 108/95 are eligible for duty exemption. It directed that the differential credit/duty attributable to such clearances should not be liable for payment, subject to verification of documentary evidence provided by the appellant.

Conclusion:
The appeals were disposed of by upholding the differential duty demand but setting aside the penalties. The Tribunal directed the re-calculation of differential credit recoverable, considering the deductions for duty-exempt clearances.