By TIOL News Service

MUMBAI, DEC 18, 2013: THE appellant is a manufacturer of purified drinking water. The said product is supplied in polycarbonate bottles which are returnable and re-usable with a shelf life of around 50 cycles. The appellant avails CENVAT credit of the Excise duty paid on such bottles. After a few cycles, these bottles get damaged and cannot be used further for packing of the finished goods. Such bottles are cut into pieces and sold by the appellant to dealers in waste and scrap.

During February 2001, the appellant sold 8320MTs of such bottles as scrap valued at Rs.3,55,500/-. The department was of the view that the appellant has manufactured plastic scrap and, therefore, duty is demandable and accordingly quantified a duty demand of Rs.56,880/-.

The appellant also keeps three bottles of their finished goods as control samples from each batch of production as per the norms fixed by FDA. These bottles are retained to test the shelf-life of the product and to analyse customer complaints. However, the appellant failed to account for the production and clearance of the control samples of their finished goods. The number of such samples was estimated at 3033 valued at Rs.1,94,595/- involving a duty amount of Rs.31,981/-.

Resultantly, a SCN was issued on 15/02/2002 demanding excise duty of Rs.56,880/- on the scrap of polycarbonate bottles cleared during the month of February 2001 and Rs.31,981/- towards duty on control samples during the period March 1998 to July 2001.

The Joint Commissioner of Central Excise confirmed the aforesaid duty demands along with interest thereon and imposed penalties.

As the appellant failed before the Commissioner(A), they are before the CESTAT.

In the matter of the demand on "scrap", the appellant relied on the decisions in VVF Ltd. - (2009-TIOL-2584-CESTAT-AHM) and International Tobacco Company Ltd. - (2004-TIOL-16-CESTAT-DEL) where, in similar situations, it was held that waste and scrap getting generated during the process of manufacture or use of the goods cannot be considered as excisable goods and consequently cannot be subjected to central excise duty.

As regards the duty demand on "samples", the appellant submitted that samples drawn for testing purposes cannot be considered as excisable/marketable goods in view of the decisions in Dr. Reddy's Laboratories Ltd. - (2008-TIOL-472-CESTAT-BANG) & J.K. Industries Ltd. 2003 (156) ELT 437 and, therefore, the impugned demand is not sustainable in law and, therefore, the appeal be allowed.

The Revenue representative submitted that in view of the fact that the appellant has cut the bottles the scrap has come into existence and, therefore, the appellant can be construed as ‘manufacturer' of plastic scrap. As for control samples, since the appellant has not maintained any kind of records to show that these controlled samples were either tested or got consumed during the process of testing, the only conclusion that can be drawn is that the appellant has cleared the goods without payment of duty and, therefore, the demand would be sustainable.

The Bench found merits in the submission of the appellant in the context of the "scrap" issue and the case laws cited and observed -

"5.2 …The waste has arisen either on account of damage of the bottles during the process of use or the plastic bottle has been scrapped after use of the bottles in50 cycles. If by continuously using an item, the said item becomes a scrap, it cannot be said that the so-called waste is a manufactured product. Therefore, we agree with the contention of the appellant that they have not manufactured any waste and scrap of plastics and, therefore, the demand in this regard is not sustainable in law."

The demand of CE duty on the "control samples" was also set aside by observing that the samples were drawn as per the norms fixed by the FDA authorities and t here is also no evidence led by the Revenue to show that the appellant did not put to use the control samples by clearing them to customers. The case laws cited by the appellant were also found to cover the facts of the case.

It was also held that the case law cited by the Revenue representative of Commissioner of Central Excise, Chandigarh vs. Dabur India Ltd. - (2004-TIOL-719-CESTAT-DEL) did not support the case of the Revenue inasmuch as the Revenue had not adduced any corroborative evidence that the control samples have been removed from the factory and has not been consumed or lost or destroyed during the course of testing.

Holding that the demand cannot be sustained on both counts, the Bench allowed the appeal.

(See 2013-TIOL-1877-CESTAT-MUM)