By TIOL News Service

MUMBAI, APR 18, 2016: THE appellant is in the business of manufacturing of toilet soaps and detergents. Comprising, as they are, of chemicals and used for human consumption, strict adherence to quality is mandated. Accordingly, they are required to be tested at certain prescribed stages of the manufacturing process and samples drawn from each batch are to be retained for prescribed periods. The tests are conducted in the ‘in-house' laboratory with only minor loss arising therefrom. The substantial portion of material available after testing is put back in the production as are the control samples after lapse of the prescribed period of retention. Details of the samples drawn are maintained meticulously in the records.

CE duty demand notices were issued to the appellant in respect of the said samples and based on the Board circular No. 1/87-Cx. 6 issued under F. No. 224/7/86-CX.6 dated 15th January 1987 and further Circular no. 1/91-CX.3 dated 4th January 1991 which were in relation to cigarette samples the duty demands were confirmed by the original authority along with imposition of penalties, on company and company official, and the same were upheld by the Commissioner (Appeals). The period involved is February 1999 to July 2003; August 2003 to December 2004 and January 2005 to June 2005.

Aggrieved, the appellant is before the CESTAT.

After considering the submissions made by both sides, the Bench observed that the Supplementary Instructions issued by the CBEC detailing the procedure for drawal and accounting of samples for testing in Chapter 11, paragraph 3.2.2 mandate that in the absence of a specific exemption for samples taken outside the factory premises , they are liable to duty in a manner similar to goods removed from the factory of production.

Nonetheless, the CESTAT added -

"10. However, samples which are retained in the factory of production for a prescribed period for conformity with standards as well as those which are tested within the factory are not, in effect, removed from the factory and it would appear that these should not be held liable to excise duty at that stage. It would appear that the adjudicating authority has been over-zealous in interpreting the provision relating to duty liability on removal to be applicable to all samples because of juxtaposition of sentences. We have no doubt in our mind that drawing of samples and removal of samples are two different events and it is only the latter that calls for discharge of duty liability. To the extent that samples are reintroduced into the production process, they would, undoubtedly, make their way into stock of finished goods and would, in due course, be removed on payment of duty. Even if the samples were to lose their identity and characteristics in testing, the cost of such samples would, in the normal course of business, be absorbed into the finished products which are subject to duty. There is, therefore, no logic in concluding that there is a loss of revenue on account of drawal of samples to the extent that those are retained or tested within the factory of production."

Placing reliance on the decisions in Thermax Cullgian Water Technologies Ltd. - 2013-TIOL-1877-CESTAT-MUM and RPG Life Sciences Ltd. - 2010-TIOL-830-HC-MUM-CX, the CESTAT concluded that in view of the instruction prescribing duty payment only upon removal from the factory, the levy of duty on samples drawn for testing within the factory is without authority of law.

The impugned orders were set aside and the appeals were allowed.

(See 2016-TIOL-914-CESTAT-MUM)