1. In both these appeals, filed by M/s. DSM Anti-Infective India (Pvt.) Ltd. the issue is whether the process undertaken by them on the defective bulk drug received back by them amounts to manufacture.
2. Shri V. Swaminathan, learned Consultant, submitted in respect of Appeal No. E/1117/2003-NBC that the Appellants manufacture Bulk Drugs; that they receive duty paid defective goods under Rule 173H of the Central Excise Rules, 1944 for repair/rectification; that after removing/rectifying the defects, the bulk drugs are sent back to the Customers without payment of duty after following the procedure prescribed for the purpose; that the Commissioner under the impugned Order No. 11/CE/JAL/2003, dated 4-3-2003, has confirmed the demand of duty and imposed penalty equal to the amount of duty holding that the impugned goods received from the buyers were rejected materials or meant for replacement and the process undertaken by them to make the goods fit for use amounts to manufacture as per Note 11 to Chapter 29 of the Schedule to the Central Excise Tariff Act.
3.1 The learned Consultant, further, submitted that the Commissioner has clearly held in the impugned Order dated 4-3-2003 that no new and commercially different and identifiable product, having distinct name, character or use had emerged as a result of the re-processing operations undertaken by them and hence there is no manufacture in terms of Section 2(f) of the Central Excise Act; that thus as per finding of the Commissioner himself, the processing operations undertaken by them on the returned goods does not amount to manufacture in terms of Section 2(f) of the Act.
3.2 He then contended that regarding applicability of Note 11 to Chapter 29, the Commissioner has categorically held that the first two ingredients, dealing with labelling or re-labelling and repacking from bulk packs to retail packs, are not attracted to the facts of the case nor is there any allegation to this effect in the show cause notice; that, however, the Commissioner has held that the third ingredient in the said Chapter Note, relating to "the adoption of any other treatment to render the product marketable to the consumer", is attracted for the following reasons:- (i) The re-processed goods, in some cases, had not been sent to the very same customers whom the defective goods were received from; (iii) The goods have become unmarketable when rejected by the customers and as such the activity of removing the defects in the rejected goods would amount to "rendering the product again marketable to the consumer." 4.1 The learned Consultant mentioned that the Commissioner has travelled beyond the show cause notice for there is no allegation at all in regard to the marketability factor in the notice except a re-production of the said Note; that in any case the findings of goods being sent to other persons after removing the defects and value addition are not relevant for invoking Note 11 to Chapter 29; that the Note talks about the treatment to the product and not the commercial aspects. He relied upon the decision in Lakme Lever Ltd. v. CCE, Mumbai, 2001 (127) E.L.T. 790 (Tribunal) wherein it has been held that the process to fall within the meaning of "any other treatment" must be one which confers upon the product attributes of marketability which it did not possess earlier.
4.2 He, further, mentioned that the goods in questions were already marketable at the time of its original clearance from the factory on payment of duty; that once the goods are marketable at the time of initial removal from the factory, it does not loose its marketability character because of some defects; that the re-processing operations undertaken on the defective goods is solely with a view to remove the defects pointed out by the customers and certainly not to make it "marketable" once again to the consumer especially when there is no change in the name character or end-use of the product. Reliance has been placed on the decision in the case of Lakme Lever Ltd., supra.
4.3 Finally he submitted that it is a settled principle of law, as has been held by the Appellate Tribunal and upheld by the Supreme Court in a number of cases that a substantive benefit, which is otherwise due to an assessee, should not be denied on the ground of technical reasons Formica India Division v. CCE, 1995 (77) E.L.T. 511 (S.C.); that thus if it is held that the process undertaken by them amounts to manufacture, they are eligible to take Modvat credit of the duty.
Reliance has also been placed on the decision in Bharat Wagon & Engg.
Co. Ltd. v. CCE, Patna, 2001 (131) E.L.T. 681 (Tribunal), wherein it has been held that in case of subsequent demands of duty Modvat credit of duty paid on the inputs is admissible irrespective of non-following of procedure. He finally mentioned that as they had followed all the procedures as prescribed under Rule 173H, nothing has been concealed from the Department, no penalty and interest can be demanded from them.
5. Countering the arguments, Shri Kumar Santosh, learned SDR, reiterated the findings as contained by the impugned Order dated 4-3-2003 and emphasised that the Appellant had filed D-3 declarations under Rule 173H mentioning therein that the duty paid goods were received back for the purpose of "testing" only whereas their customer's letter dated 26-12-2000 makes it clear that the goods were not in good condition and cannot be used and were sent back for replacement; that thus the Appellants had misdeclared to the Department that the goods were received back for testing only; that the bulk drugs received back were subjected to the physical process like drying, milling, blending, testing, repacking, re-labelling and putting a new lot No. and new expiry date and chemical processes like hydrolysis, crystallization, etc.; that this is apparent from the statements of Shri M.S. Negi, Senior Manager and Shri V.S. Maman, Senior Manager, that thus the products were subjected to treatment to render it marketable to the consumer; that the product was not marketable as it was received back from the customer as rejected material. He, further, submitted that Sub-rule (4) of Rule 173H of the Central Excise Rules, 1944 clearly provides that the benefit of duty free clearance would not be available if the process amounts to manufacture. He also mentioned that benefit of Modvat credit will also be not available as they had not followed any procedure for availing the same; that penalty is also imposable on them as they had misdeclared that the goods were received back only for testing and they had suppressed the fact of giving treatment to the rejected goods to make them marketable. In reply the learned Consultant mentioned that at the time of filing D-3 declaration, they cannot envisage the nature of processing required to rectify the defect; that this can be done only after the goods are received into the factory and inspected by the quality control department after a considerable time.
6.1 In respect of Appeal No. E/329/2003-NBC, the learned Advocate submitted in addition that the entire demand of duty is time-barred as the period involved is 13-5-1997 to 10-7-1999 and the show cause notice has been issued on 12-3-2001 which is much beyond the normal period of limitation of one year specified in Section 11A(1) of the Central Excise Act; that the extended period of limitation is not invocable as nothing has been suppressed from the Department, for, there is a clear admission in the show cause notice that they "have been following the procedure as laid down under Rule ibid" (Rule 173H); that they have been filing the D-3 declarations regularly and the clearance of re-processed goods without payment of duty has been duly intimated through RT-12 Returns; that moreover clearances are effected under invoices prescribed under Rule 52A of the Central Excise Rules, 1944.
Finally he submitted that it is a settled principle of law that in a Revenue neutral situation, where the Modvat credit is otherwise available to the assessee himself, the department cannot invoke the extended period by alleging suppression of facts. Reliance has been placed on the decision in Harbanslal Malhotra & Sons v. CCE, Kolkata, 2002 (141) E.L.T. 521 (Tribunal).
6.2 The learned SDR countered the argument by contending that D-3 intimation were filed for the purpose of "testing" only of the returned goods and not for remarking of the same and as such extended time-limit is invocable for the purpose of demanding duty.
7. We have considered the submissions of both the sides. Admitted facts are that the Appellants manufacture bulk drugs which are cleared by them on payment of duty. The bulk drugs so cleared by them are returned by their customers for re-processing. The Appellants remove the bulk drugs after reprocessing without payment of duty under the provisions of Rule 173H of the Central Excise Rules, 1944. The learned SDR has referred to the statement dated 16-9-1999 of Shri M.S. Negi, Sr.
Manager, who has deposed that the rejected materials on receipt are checked by Quality Assurance and on their recommendation or on the recommendation of Process Development Laboratory, the product is issued to the Plant for re-processing which may include drying, milling, blending, testing by Quality Assurance, repacking, re-labelling and putting a new lot number and new expiry date; that product may be processed chemically also which means hydrolysis, crystallization. It has also been stated by Shri Negi that the product is considered as a fresh material as if manufactured and allotted fresh lot number. Bulk Drugs, manufactured by the Appellants fall under Chapter 29 of the Schedule to the Central Excise Tariff Act. Note 11 to this Chapter reads as under: "In relation to products of this Chapter, labelling or re-labelling of containers and repacking from bulk pack to retail packs or the adoption of any other treatment to render the product marketable to the consumer, shall amount to manufacture." 8. We find substantial force in the submission of the learned SDR that the processes as undertaken by the Appellants are covered by the phrase "the adoption of any other treatment to render the product marketable to the consumer." After the product was initially cleared, their customers found it to be defective, meaning thereby that the product in question was not marketable and for this reason the product has been returned by their customers to the Appellants for re-processing with a view to remove the defect and make the same marketable. Thus there is no force in the submission of the learned Consultant that the goods were marketable at the time of initial removal from the factory. The product was not found fit for use by their customers which goes to show that the product was not marketable and it has been rendered marketable only after the treatment given to it by the Appellants. We thus hold that the provisions of Note 11 to Chapter 29 are attracted in the present matters and the processes undertaken by them would amount to manufacture read with Section 2(f) of the Central Excise Act. We also do not agree with the learned Consultant that the Adjudication Order is beyond the scope of the show cause notice inasmuch as the show cause notices clearly mention that the re-processed product is considered as a fresh material as if manufactured and goods are released for sale and provisions of Note 11 to Chapter 29 have been invoked in the show cause notices. The decision in the case of Lakme Lever Ltd. is not applicable as the facts are entirely different. In the said matter, the Canteen Stores Department of India (CSD) which sells the goods manufactured by M/s. Lakme Lever Ltd., through its retail outlets to Members of Armed Forces, requested the Appellants to sort and pack the goods in the manner that would attract its customers. For example a carton of lipstick would be sold containing 12 lipsticks of one colour. In the case of CSD however, a carton contained 12 assorted colours of lipstick. In view of these facts, the Tribunal held that "if the products were already marketable any amount of treatment to enhance its marketability would not amount to manufacture within the meaning of this Note. That treatment does not render it marketable when it earlier was not." 9. We agree with the learned SDR that the extended period of limitation for demanding duty is invocable as the Appellants did not disclose the actual processes to be undertaken by them on the returned goods at the time of filing D-3 declaration. It is not disputed by the Appellants that they had mentioned only "testing" in the declarations filed by them. The plea of Revenue neutrality also does not help the Appellants as the Revenue has also alleged value addition in the re-processed goods which has also not been rebutted by the Appellants. However, the benefit of Modvat credit of the duty already paid cannot be disallowed to the Appellants on the plea that the Modvat procedure was not followed by them. It has been held by the Tribunal in Bharat Wagon & Engg. Co. Ltd. v. CCE, Patna, 2001 (131) E.L.T. 681 (Tribunal), following the decision of the Supreme Court in Formica India Division v. CCE, 1995 (77) E.L.T. 511 (S.C.), that "in subsequent demands of duty Modvat credit of duty paid on the inputs is admissible irrespective of non-following of procedure ........ The procedure for availing Modvat credit was not being followed by Appellants because the final product was being cleared without payment of duty in which case credit was not admissible to them." Accordingly we hold that the Appellants are eligible for Modvat credit of the duty paid earlier on the bulk drugs by them subject to the condition that they produce the duty paying documents to the satisfaction of the adjudicating authority.
10. We, therefore, remand both the matters to the adjudicating authority for allowing the Modvat credit on production of the duty paying documents by the Appellants within 8 weeks of receipt of this Order. In view of this we set aside the penalty and interest and leave these aspects to be decided by the adjudicating authority.