REMISSION IS ADMISSIBLE ON GOODS DAMAGED DURING MANUFACTURE

[Mr. M. GOVINDARAJAN]

M/s Maruti Udyog Ltd., is engaged in the manufacture of motor vehicles falling under Chapter 87 of First Schedule to Central Excise Tariff Act, 1985. The vehicles are cleared for house consumption on payment of appropriate duty of excise. The vehicles are also cleared for export under bond.  

After clearance of the vehicles from the factory some vehicles before reaching the destination viz., dealer's premises or port through which export is to be made, transit damage occur to the vehicles due to various reasons such as collusion of truck/trailers carrying vehicles with other vehicles, over turn of truck/trailers, truck/trailers carrying vehicles hitting bush of trees etc., The company categorizes the transit damages to vehicles in three categories as detailed below:

§ Category A pertains to vehicles which are repairable by dealers themselves;

§ Category B pertains to vehicles which are repairable but which are not meant for sale in market;

§ Category C pertains to vehicles which are repairable by the Company only.

The damages caused to vehicles are like damages to door, body shell etc., and such damages are essentially of a cosmetic nature like dents, scratches, fading of the paint finish to the bodies of the vehicles etc., The company replace body shells of the damages vehicles since they are a quality conscious company and even after repair, they want to provide a brand new car to their customers. 

The Excise Department issued various show cause notices covering the period from April 1999 to March 2002 to the company contending the process of repair undertaken by the company amounts to manufacture and demanding duty and proposed for imposition of penalty on the company. The Commissioner of Central Excise adjudicated the show cause notices and confirmed the demand of duty and also imposed penalty.

On appeal the CESTAT remanded the matter to the lower authorities for reconsideration in the light of the provisions of Rule 173L since the company is entitled to benefit under that rule. In the remand proceedings Commissioner of Central Excise passed an order confirming the demand of duty after adjusting the duty paid on body shells and modvat credit available on inputs used for repair. Again the Company filed an appeal before the Tribunal. 

The Tribunal held that the Commissioner has passed the impugned order without considering the claim under Rule 173L and raised a huge demand of Rs.10.5 crores. The reason given by the Commissioner for such a part disposal of the case on remand is that Rule 173L claim has to be determined by the Assistant Commissioner/Deputy Commissioner. The Tribunal did not agree with this course of action. This is a case where a consolidated disposal was called for and order passed indicating what is the net amount, if any, due from the assessee. Refusal to do so has led to very unjust duty demand. The Commissioner could have considered the 173L claims also simultaneously since Rules permit a higher officer to perform the functions of a lower authority.

The Tribunal observed that with regard to the demand in respect of goods cleared originally for export, the demand has been made without taking into consideration the provisions of Rule 173M. There is no allegation that the assessee had not brought back to the factory, the cars cleared for export and such return is covered by Rule 173M. The assessee has also accounted for the cars so returned. Therefore, the Tribunal held, the provisions of Rule 173M are intended clearly to cover situations like the present appellants. Therefore the Tribunal held that the demand is not sustainable.

With regard to the third demand in respect of 169 cars also, the duty demand is clearly unwarranted. Rule 49 makes it clear that duty is chargeable only on the removal of the goods from the factory or approved place of storage. Rule therefore, permits manufacturer to carry out whatever processes are required to make the goods marketable. In the present case the repair of cards damaged during the process of manufacture came within the scope of the rule. No dispute is raised that the cars were not damaged or that the appellant is using this as a cover for making other cars. In such circumstances, the Tribunal held that no duty demand should have been raised. Thus the Tribunal set aside the demand in respect of cards which had been originally cleared for export and later on brought back. Similarly it set aside the demand in respect of 169 cars. The demand in relation to the cars which had been cleared for home consumption and brought back subsequently for repair/re-making is remitted to the original authority for passing a fresh order taking into account the appellants' claim under Rule 173L also. 

The Department took the matter to the High Court raising the following questions of law (Commissioner of Central Excise, Delhi - III V. Maruti Udyog Ltd., - 2010 (253) ELT 22 (P&H)):

§ Whether the Hon'ble CESTAT was legally correct in setting aside demand in respect of cars which had been originally cleared for export but later on brought back to the factory of manufacture for being scrapped?

§ Whether the Hon'ble CESTAT was legally correct to set aside demand of duty on 169 cars, which were manufactured and scraped?

§ Whether the Hon'ble CESTAT was legally correct in remitting the case to the original adjudicating authority for passing fresh orders regarding party's claim under Rule 173L for which the competent authority is Assistant Commissioner/Deputy Commissioner having jurisdiction over the factory?

The department raised the following contentions before the High Court:

Ø The entire matter should be remanded;

Ø There can be no piecemeal adjudication;

Ø Regarding Rule 173H the Tribunal has wrongly held that no duty is payable;

Ø The issue of 169 cars was not correctly decided by the Tribunal as Rule 49 and Rule 9 applies squarely to the present case;

The respondent company submitted the following:

Ø The present case is not at all concerned with the vehicles which get damaged after being delivered to dealers, but they only bring back those vehicles to their factory, which got damaged in transit;

Ø The number of vehicles to which damages occur is very few as compared to total number of vehicles manufactured and sold by respondents;

Ø No substantial question of law arises for the consideration of this Hon'ble Court;

Ø All questions raised by the revenue are questions of facts;

Ø The Tribunal is the last fact finding authority and the Tribunal has arrived at a correct conclusion after going through detailed facts involved in the present case;

Ø Even if the activities of the repair undertaken by them amounts to manufacture, under Rule 173L also, they would be entitled for refund of duty paid which would be more or less equal to duty payable on the clearance of repaired vehicles;

Ø Once the activities of repair undertaken amount to manufacture, the respondents would also become entitled for credit of duty paid on body shells as also credit reversed on parts, used for repairing;

Ø On an overall basis, under Rule 173H, the Respondents have paid excise duty much higher than duty that would have been payable if they would have followed procedure under Rule 173L.

The Court heard both sides. The Court held that the Tribunal has applied its mind and after proper appreciation of facts has held that no duty can be demanded in respect of repaired vehicles that were exported as also internally damaged vehicles that were cleared on payment of duty. The Tribunal has also correctly held that it would be unfair if the demand by denial of Rule 173H is not taken concurrently with the refund claim under Rule 173L as in such a situation, duty demand would get fastened on the respondents. The Tribunal has also correctly held that a higher officer can perform the functions of the lower authority.

In considering the first issue the Court held that the Tribunal in its Final order categorically held that Rule 173L of Central Excise Rules, 1944 is applicable to the present case. The Tribunal also allowed the respondents to stake claim of refund under Rule 173L before proper authority who has to take necessary action in accordance with the provisions of law. Therefore the tribunal has only remanded back the matter. Therefore there is no question of law involved in the present matter. The Court further held that the decision of CESTAT for remitting the case to the original authority for passing a fresh order, taking into account the claim of respondents under Rule 173L with regard to cars cleared for home consumption but brought back to the factory because of irreparable damage is legally correct and justified as a higher authority can always assume the jurisdiction of the lower authority. Hence no question of law arises in the present case as the Tribunal has only remanded back.

In considering the second issue the Court held that CESTAT has correctly held that demand in respect of the goods initially cleared for export and brought back to the factory is not maintainable as the provisions of Rule 173M cover this situation. In the present case the damaged vehicles received by the respondents are not being scrapped as major parts like engine, tyres etc., comprising a vehicle remain intact and this is evident from the fact that engine number of the vehicle remains same. Thus, Tribunal has correctly applied the provisions of Rule 173M in the present case. Thus the Tribunal has correctly applied the provisions of Rule 173M and no question of law arises.

In considering the third issue the Court held that the Tribunal has correctly held that the repair of cars damaged during the process of manufacture came within the scope of Rule 49 as Rule 49 makes it clear that duty is chargeable only on the removal of the goods from the factory or approved place of storage. The Tribunal has rightly set aside the demand in respect of cars which had been originally cleared for export but subsequently brought back to the factory premises. The demand of duty in respect of 169 cars has also been right set aside. The Tribunal has rightly remitted the matter to the original authority for passing a fresh order taking into account the appellants claim under Rule 173L also.

The Court, therefore, found no infirmity in the order passed by the Tribunal and dismissed the appeal.