1. Revenue has filed this appeal against the Order-in-Appeal No.84/2005 (H-IV) CE, dated 30.06.2005, passed by the Commissioner of Customs & Central Excise (Appeals-II), Hyderabad.
The Respondents are manufacturers of Detonators, an excisable commodity. The Revenue proceeded against them on the ground that they had not paid the Central Excise duty involved oh the Detonators drawn as samples from the each line of production, batch-wise, for the purpose of conducting tests like drop test, shake test, snatch test, series firing, lead plate test, sand bomb test, buxton test, etc. The Original authority confirmed the duty of Rs. 3,60,362/- and imposed a penalty of Rs. 10,000/- under Rule 173Q and Rule 25 of the Central Excise Rules. The Respondents appealed to the Commissioner (Appeals) who allowed the appeal of the Respondents.
3. The Revenue is aggrieved over the decision of the Commissioner (Appeals). Hence they have filed this appeal on the following grounds : (i) The Original authority while confirming the demand of duty relied on the Apex Court decision in the case of ITC Ltd. v. CCE, Patna Commissioner (Appeals) allowed the appeal of the Respondents holding that the reason for holding that Cigarettes sent for quality control test are held to be dutiable as ITC Ltd. have failed to maintain accounts of cigarettes whereas in the present case, the Respondents produced the accounts of goods destroyed in quality control test before the authority and therefore held that the Apex Court decision is distinguishable to the facts of the present case.
(ii) In the present case, the Respondents had drawn samples after the goods had attained their finished goods stage and subsequent clearances, if any, attracts duty liability.
(iii) In the ITC Ltd. case, the Apex Court held that the manufacture of Cigarettes is completed when the same emerges in the form of sticks of cigarettes which are sent to the importer for quality control test. Therefore, the Apex Court concluded that the stocks of cigarettes which are removed for the purpose of test in the quality control laboratory located within the factory premises of the company are liable to pay duty. After concluding the above, the Apex Court has definitely not gone into the modalities/details of maintenance of accounts and instead confined its findings strictly to the facts of the case under reference which has no record of clearance made to testing.
(iv) In the present case, the Respondents had the following options before him: (a) In terms of Para 3.2.2 of CBEC's Central Excise Manual, the assessee is required to maintain a proper account of receipts and the utilization of samples in test, in the laboratory. The removal shall be in the same manner as the goods are removed for home consumption. The manufacturer shall prepare invoice under Rule 11 of the said rules and make issue entries for the goods (samples) in the Daily stock account. Appropriate duty shall be paid by the assessee on these samples before their removal for the test purposes unless otherwise exempted by a duty exempted notification; or (b) All the samples, cleared for testing shall be cleared on payment of duty and enter the balance quantities in their Daily stock accounts. Later basing on the QC Results they should either clear the balance quantity on payment of appropriate duty and if the QC did not clear for marketing, then they should approach designated authority as provided for under Rule 21 and seek remission of duty on such goods.
(v) The Apex Court has not even indicated that once the samples were accounted for, no duty demand can be made on the product.
5. Shri K.S. Reddy, the learned JDR re-iterated the grounds of the appeal.
6. Shri B. Seshagiri Rao, the learned Advocate appeared for the Respondents made the following submissions : (i) In the following case laws, it has been held that the goods are fully manufactured only after passing quality control test.
Therefore, samples drawn for testing are not liable to duty.Bhansali Engg. Polymers Ltd. v. Commissioner of Central Excise, Indore wherein it has been held that Goods being fully manufactured only after passing quality control tests, samples drawn for testing not liable to duty - Demand on samples not sustainable.Glaxo Smithkline Pharmaceuticals Ltd. v. CCE & C, Aurangabad wherein it has been held that as drugs could not be sold in market without compliance with Rules ibid, the samples were not marketable and they were not liable to duty - Sections 2 (f) and 3 of Central Excise Act, 1944.J.K. Industries Ltd. v. CCE, Jaipur 2003 (156) ELT 437 (Tri Del) wherein it has been held that Samples of tyred, drawn for testing in accordance with BIS Manual, destroyed during testing - testing being essential for making the goods marketable in absence of which the goods cannot be sold and they cannot be treated as marketable - Duty not chargeable.Traco Cable Co. Ltd. v. CCE, Cochin 2000 (126) ELT 643 (Tribunal) wherein it has been held that Telephone cables - Underground jilly filled telephone cables - Piece of Cables taken out from the drum used for mandatory quality control and which get destroyed in the course of quality control test, cannot be considered as excisable goods.
(e) CCE, Indore v. Surya Roshini Ltd. wherein it has been held that no excise duty is leviable on bulbs which get destroyed in the process of quality control test in the factory itself.ITC Ltd. v. CCE, Patna held that Cigarette sticks destroyed in the course of quality control test - Excisability - Non-maintenance of any account in relation to the destruction of cigarette sticks during the course of quality control test - No reason assigned for not producing any account either before the assessing authority or before the Tribunal - Excise duty was leviable on the entire stock of cigarette sticks sent to the laboratory for quality control test.RPG Cables Ltd. v. CCE, Bangalore 2004 (61) RLT 1017 (CESTAT - Ban.) wherein it has been held that Quality control test - Wires and Cables - entered in RG1 after winding on drums - appellant claims certain samples of Wires & Cables taken out as customer insisted for mandatory testing before taking delivery.Manali Petrochemicals Ltd v. Commissioner of C. Ex., Chennai 2004 (167) ELT 434 (Tri. - Chennai) wherein it has been held that Removal of goods to R & D Section for testing which is situated within factory compound and also marked in Ground Plan - Nod duty is demandable.Neelkamal Plastics Ltd. v. CCE, Noida wherein it has been held that no duty is payable in respect of the goods which were destroyed during testing.ITC Ltd. v. CCE, Kolkata-VI 2006 (195) ELT 179 (Tri. Kolkata) wherein it has been held that Samples destroyed during course of quality control tests in laboratory within factory premises - Appellants maintained complete account relating to destruction of goods during such test - No duty leviable - Demand not sustainable.
Further the learned Advocate pointed out that as per Para 141 of the Explosives Act, 1884, there are certain requirements as under : 141. Restrictions on sale of explosives - (1) No person shall sell any explosive to any person who is not authorized to possess such explosives under these rules.
(2) No person shall sell, deliver or cause to be delivered to any person any explosive that has deteriorated or is defective.
In view of the above decision and also requirement of Explosive Act, unless testing is completed, the Detonators cannot be considered as fully manufactured product and are not marketable.
(ii) The learned Original authority in Para 9 of the impugned order has mentioned that the Basic Manual of Department Instructions on Excisable Manufactured Products also does not specify RG. 1 stage for detonators. In such a situation, holding that in process, detonators which are yet to be subjected for testing had attained the stage of final product, is not sustainable.
(iii) The samples drawn for testing within the factory will get consumed and completely destructed / destroyed in the process of testing. As the samples were destroyed during testing in the factory they are not liable for duty in view of the large number of decisions cited supra.
(iv) Para 3.22 of Excise Manual Supplementary Instructions issued by the Central Board of Excise & Customs, mentioned in the grounds of appeal, will be applicable only in respect of the samples drawn from fully manufactured goods and entered into RG-1.
(v) The Commissioner (Appeals) has correctly distinguished the Apex Court decision in ITC Ltd. case from the facts of the present case.ITC Ltd. v. CCE, Kolkata-VI, cited supra, relied on the decision of the Apex Court in the case of ITC Ltd. (supra) held that samples destroyed during the course of quality control test within the factory premises when complete account is maintained cannot be subjected to duty.
5. We have gone through the records of the case carefully. In the ITC Ltd. case decided by the Apex Court and cited at various places, the following observations in Para 18 has been made : Coming now to the second question, it may be stated that the learned Counsel appearing on behalf of the Revenue could not dispute the proposition that the quantity of cigarette sticks that is destroyed in the course of quality control test is not liable to excise duty.
From this, it is very clear that the Apex Court has laid down that when product is destroyed in the course of quality control test, it is not liable to Excise duty. The Commissioner (Appeals) has rightly distinguished the facts of the present case from those in the ITC Ltd. case. Since ITC Ltd. had not maintained proper account of Cigarette destroyed in the quality test, the Apex Court ruled that the Excise duty was leviable on the entire stock of cigarette stocks sent to the laboratory for quality test. In the present case, it is not in dispute that the Respondents had maintained proper accounts of Detonators taken for testing. It is also a fact that after testing, the detonators got consumed or destroyed. Even following the ratio of the Apex Court decision in the case of ITC Ltd. (supra), Kolkata Bench of the Tribunal in the case cited supra has held that when the appellants maintained complete account relating to destruction of goods during testing, the demand is not sustainable. The Explosive Act also laid down that explosives which is deteriorated or defective cannot be sold.Therefore, mandatory samples have to be taken for testing and these samples got destroyed. The explosives become marketable only after the sample tested from each batch. In view of the plethora of the decisions cited by the Respondents, we are of the view that the Order-in-Appeal is legal and proper. The Revenue's appeal has no merit. Hence the same is dismissed.