Full Judgment
There were conflicting statements from the office incharge of the appellants firm and from Shri N.K. Dani, partner about the disposal of the rejected bottles. The office incharge person indicated that rejected bottles are broken whereas the partner said that they were reused. On a clarification, the partner, further, stated that such re-use was only upto 8-1-1987. Thereafter, all the bottles were not re-used, as the disposal drew objection from Drug Controller. The department, further, found that the bottles had been used for supply of samples, which were cleared duty-free under Notification No. 171/70 and thus, the Modvat credit has been mis-used on a final product, which was cleared under exemption. The department found that besides this mis-use of the credit, the appellants had also taken credit on bottles broken during handling whereas only on the bottles broken during the actual process of manufacture, credit can be availed of. So also the department found that credit on bottles which were rejected, cannot be allowed but has to be reversed. After issue of show cause notice on 19-3-1991, duty was demanded for the period March, 1986 to October, 1990, which was ultimately confirmed by the Additional Commissioner, who also was of the view that a deterrent penalty was called for in this case and he imposed a penalty of Rs. one lakh.
2. We have heard Shri Upadhayay, ld. Counsel for the appellants and Shri Mewa Singh, ld. SDR. Taking up of the order to reverse the Modvat credit on samples cleared duty-free under Notification No. 171/70, it may be stated - that such an order calling for reversing of the credit is valid as Rule 57C of the Central Excise Rules clearly mandates that no Modvat credit is permissible on the inputs used in the manufacture of goods which are cleared under full duty exemption or where they are chargeable to nil rate of duty. The contention that these are cleared for use within the factory under Notification No. 171/70, will not advance the case of the appellants so long as they remain clearances of finished product under exemption notification without payment of duty.
Therefore, in the facts of this case, the order of the lower authority in respect of this demand is upheld.3. In respect of Modvat credit on bottles broken during handling, the demand for duty on such bottles does not seem to be justified. The final product here manufactured by the appellants is I.V. Fluids which have to be manufactured in accordance with the U.S.P. standard. The final product is used by direct injection into blood stream. The product is to pass through strict quality control. The bottles to be used have to be subjected to washing and cleaning several times and therefore, this process of thorough washing and cleaning is necessarily related to ensure the final emergence of the bottled I.V. Fluids which answer the specification in U.S.P. In such a situation, the process of washing and cleaning is integral to the manufacture of the medicine and bottling thereof become an integral part of the manufacturing process.
In this view of the matter, the bottles broken, at these stages, should get the benefit of Rule 57D which says that credit allowed on the inputs should not be denied on the ground that part of the inputs is contained in waste arising during the manufacture of the final product.
So also in the case of rejected bottles, the rejection of these bottles occurs at the inspection stage and due to the very nature of the product, strict quality control is essential and prescribed. It is also not disputed that only after the final product passes the quality tests, they are accounted for in the statutory RG 1 register. The Drug Controller Regulations also bar re-use of the bottles. In such a context, the ratio of the Tribunal decision in the case of Union Carbide India v. C.C.E. reported in 1994 (74) E.L.T. 381 would apply.
The Tribunal held in that case that goods rejected during testing and inspection cannot be denied Modvat credit on their inputs, but will be eligible for Modvat in terms of Rule 57D (1) provided that such rejected waste is destroyed in accordance with the procedure under Rule 57F prescribed for the purpose. Therefore, we hold that same will apply in the present case in respect of rejected bottles which emerge before the RG 1 stage and Modvat credit thereon cannot be denied in terms of Rule 57D(1) subject to these being destroyed as per procedure in Rule 57F. That brings us to the question of quantum of penalty. The Additional Commissioner seems to have taken an adverse view because of the slow response from the appellants to the Department's queries which he termed as non-cooperation. Be that as it may the quantum of penalty has to be commensurate with the nature of offence and duty involved. In this case, in the view we have taken as above, the demand for duty will be much lower than, as confirmed in the impugned order. The fact also remains that the period involved related from the inception of Modvat credit scheme. In these circumstances, a much lower penalty is called for which is accordingly reduced from Rs. one lakh to Rs. five thousand. The appeal is disposed of in the above terms.