Is remission admissible on finished goods received back in factory under Rule 16?
AN assessee had a peculiar problem recently. Some of the finished goods removed from the factory were received back due to quality complaints. The assessee availed CENVAT Credit on the finished goods received back under Rule 16 of the Central Excise Rules “as if the goods are received as inputs” under CENVAT Credit Rules, 2004. The goods received back were to be cleared again on payment of duty after reprocessing, but unfortunately the finished goods brought back were destroyed in a fire accident before reprocessing.
Now, can the assessee claim remission under Rule 21 of the Central Excise Rules 2002 and for the purpose of remission, can the goods be treated as finished goods?
This is indeed a tricky situation but it seems remission cannot be denied by treating them as inputs for the following reasons:
Though these goods are deemed as inputs, their character of being duty paid final products remains and they are eligible for remission.
Rule 16 allows duty paid finished goods from any manufacturer to be brought back to the factory of any manufacturer for remake, repair or reconditioning.
Rule 21 does not specify that the goods on which remission is sought should be manufactured by the same manufacturer. Rule 21 also provides that remission can be sought by a manufacturer that the goods are unfit for consumption. Now this can be viewed as 'unfit for consumption' in his own manufacturing process under Rule 16 or as 'unfit for consumption' by his customers.
In both the situations, the goods being duty paid finished goods, the duty on such goods has to be remitted by treating them as final products only. It is by deeming fiction, these finished goods are treated as inputs for extending CENVAT Credit facility.
To draw a parallel, earlier, in Central Excise Rules, there was Rule 57(F)(ii) according to which, when any inputs are removed as such from the factory, the assessee has to pay duty on the inputs “as if such inputs are manufactured in the factory”. This had resulted in disputes relating to the inputs received from Small Scale Units at concessional rate of duty. Revenue insisted that when such inputs are removed as such, the assessee has to pay full duty instead of concessional rate of duty originally availed as credit. The dispute was finally settled by the Larger Bench () by holding that “the legal fiction of treating the inputs as having been manufactured by the recipients of the inputs was only to see that the manufacturer restores the original position by debiting the same rate of duty at which he had taken the credit”.
Thus, Rule 16 also creates a legal fiction to facilitate the availment of CENVAT Credit by deeming fiction that the finished goods are inputs and there should not be absolutely any problem in this regard.
But the issue has another dimension. Remission is allowed under Rule 21 only before removal of the goods from the factory and there is a lot of dispute as to whether remission can be sanctioned once the goods were removed from the factory. This issue has been referred to the President to consider whether the disputed issue should be placed before the Larger Bench in 2009-TIOL-2566-CESTAT-AHM.