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M/s. Orchid Health Care Versus CCE, Chennai And Vice-Versa

2018 (2) TMI 809 - CESTAT CHENNAI

Benefit of N/N. 52/2003 and N/N. 22/2003 - raw materials, capital goods imported and locally procured - whether the inputs and capital goods used in R&D is eligible for exemption from duty and whether the input services used in R&D is eligible for Cenvat credit? - Held that: - after the R&D process the samples of the final products undergo test and then are manufactured and exported by the appellants. It is very much clear that the R&D activities are directly linked to the process of manufac .....

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dvocate, for the Appellant/respondent Shri A. Cletus, ADC (AR) for the Respondent/appellant ORDER Per Bench The above appeals arise out of the same order and are disposed by this common order. Parties are hereby referred to as assessee and department for the sake of convenience. 2. The brief facts are that the assessees who are 100% EOU are engaged in the manufacture of Formulation and are registered with the Central Excise Department. The officers of the preventive unit on 22.04.2009 visited th .....

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for imposing penalties. After due process of law, the adjudicating authority confirmed the demand, interest and imposed penalties. In the SCN demands proposed were separately under Customs Act, 1962 and Central Excise Act, 1944. Hence assessee has filed appeal No. E/137/2011. However, while confirming the demands, the Commissioner did not specify the provisions of the two Acts separately and also had imposed reduced penalty of ₹ 50,00,000/- instead of imposing equal penalty under Section .....

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amp;D conducted by the appellants. The submissions of the Ld. Counsel are summarized as under:- a) Being a pharmaceutical industry, the establishment of R&D facility is a must as the Research and Development is required to continuously innovate both products and procedures. It is required to improve the efficacy of existing products as well as to innovate and improve the manufacturing process. The assessees who are an EOU had applied to the Development commissioner for the establishment of R .....

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re exported to the countries such as USA, UK etc. The R & D Centre is used for analysis of existing as well as new products to provide better yield and for development of new products. The development activities is undertaken in R&D Centre for filing ANDAs (Abbreviated Nee Drug) and the ANDAs is mandatory for any formulation/drug for obtaining approval from USA Drug authorities. The assessees undertake extensive research activity at the R&D Centre to decipher the components of the dr .....

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he manufacturing process of goods exported. b) The benefit of the notification is denied contending that the raw material and capital goods imported as well as legally procured availing benefit of notification are used for R&D and not for manufacturing process. The said allegation is based on wrong interpretation of the notification as well as wrong appreciation of the facts. He submitted that the raw materials and capital goods as well as input services which are used in relation to R&D .....

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on of chemical characteristics like Assay (to determine the potency of the active compound in the dosage), related substances (to determine the percentage of impurities) (iii) Finding out the Active ingredient in the innovator drug by performing dissolving test. (iv) Finding out the stability of the innovator drug at various storage conditions such as temperature and humidity. (v) The appellant after identifying the above characteristics produces sample drugs at the R & D Centre. This is ref .....

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egistration. d) The Ld. Counsel relied on the decisions in the case of CCE, Hyderabad Vs. Dr. Reddy Laboratories Ltd. 2010 (253) ELT 316 (Tri.-Bang.) and Serum Institute of India Ltd. Vs. CCE, Pune 2014 (309) ELT 519 (Tri.-Mum). It is submitted that though the decision in the case of Dr. Reddy Laboratories Ltd. (supra) was placed before the adjudicating authority, the same has been distinguished and not applied by the lower authority wrongly interpreting the said decision. The other decisions re .....

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said clause that the goods are to be used in the manufacture of articles for export or used in connection with the production or packing or job work for export of goods. Similarly, Notification No. 22/2003 dated 31.03.2003 grants exemption of locally procured goods without payment of duty on the condition that the said goods are used for the purpose of manufacture of articles for export or used in connection to production or packing or job work for export of goods. The Notification has to be con .....

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acture of goods, which are exported by the appellants. The reliance placed by the Ld. Counsel on the decisions are not applicable to the facts of the case for the reason that in the said decision only some quantity of the raw materials were used for R&D purposes. In the present case, the appellants have used substantial portion of the raw materials as well as capital goods for R&D purposes only. Such use cannot be equated with the use of the goods in manufacture of finished products. Tha .....

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62 does not allow an option to the adjudication authority to reduce the penalty. It is also pointed out by him that though in the SCN the allegations were raised mentioning the provisions under the Customs Act as well as Central Excise Act, the Commissioner erred in not quantifying the demand separately under these Acts. 4. Heard both sides. 5.1 The undisputed facts of the case are that the raw materials, capital goods imported and locally procured by availing exemption under the Notification No .....

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nt proposes to deny the benefit is that R&D activities are not part of manufacturing process. Thus, it is alleged that the products developed at R&D Centre are either exported or sold in DTA. The relevant portion of the SCN is reproduced as under for better appreciation:- 7. Whereas it appears that M/s. OHC-EOU have imported/locally procured raw materials and capital goods and have installed in R&D Centre and used the same in R&D Centre as well as availed service tax credit on th .....

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e production or packing of goods for export. Consequently, it appears that the aforesaid goods are not eligible to be imported without payment of duty under Notification No. 52/2003-Cus., dated 31.03.2003 as well as goods procured locally without payment of duty under Notification No. 22/2003-CE dated 31.03.2003 and they are also not eligible vis-a-vis service tax input credit on the services rendered to R&D Centre. 5.2 The appellants have explained in detail how the R&D activities are l .....

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s in our view is fully in order. A similar issue was discussed by the Tribunal in the case of Dr. Reddy Laboratories Ltd. (supra), where the Tribunal observed as under:- 3. After hearing both sides and perusal of the records, we find that the adjudicating Commissioner has considered all aspects of the case and has passed a detailed speaking order. He has also taken note of the fact that for manufacturing and exporting pharmaceutical products certain amount of research and development is required .....

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td. (supra) had occasion to analyze a similar issue. The relevant portion is reproduced as under:- 5. The contention of the appellant is that the appellants are manufacturing vaccines and for the manufacture of vaccines, a regular research and development is required. In these circumstances, the some inputs which were received without payment of duty, which are required for the manufacture of export goods are consumed to carry out the research and development for the improvement of products. Wit .....

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