Credit is admissible even if Inputs are discarded during manufacturing process

Dear Professional Colleague,

Credit is admissible even if Inputs are discarded during manufacturing process

We are sharing with you an important judgement of the Hon’ble Apex Court in the case of Union of India Vs. Asahi India Safety Glass Ltd [(2015) 58 taxmann.com 237 (SC)]  on the following issue:

Issue:

Whether Cenvat credit on Inputs can be denied when defect in raw material is detected after it undergoes certain process of manufacturing and whether it can be said that such raw material has not been used in the manufacture of final product?

Facts & Background:

Asahi India Safety Glass Ltd.  (“the Assessee” or “the Respondent”) are manufacturers of Toughened (Tempered) and Laminated Safety Glasses for Automobiles (“the glasses” or “final product”) falling under Chapter Heading No. 7004.10 and 7004.20 of the Central Excise Tariff Act, 1985. For manufacturing of final product, the Assessee was getting float glasses (“float glasses” or “Inputs”) as the main raw material and accordingly was taking Cenvat credit thereon. Since the Assessee was receiving float glasses in packaged form, some float glasses were found to be defective during manufacturing process and could not be used for final production.

The Department denied Cenvat credit on float glasses alleging that the Inputs were inherently defective and were neither used nor usable ‘in or in relation to manufacture of final product’. The Assessee approached the Hon’ble Settlement Commission and in the Application, it was admitted that the Assessee had received float glasses in packaged form and on the opening of the wooden boxes, certain float glasses were found to be broken and they were not used as Inputs while undertaking the manufacturing process. On that basis, it was admitted by the Respondent that Cenvat credit availed on the aforesaid defective float glasses amounting to Rs. 56,39,370/- had to be reversed.

However, the Hon’ble Settlement Commission opined that, in addition to broken float glasses, parts thereof were also found to be defective and not used for the final production. Hence, Cenvat credit availed by the Assessee amounting to 3,47,38,325/- (additional) also had to be reversed.

Thereafter, on Writ Petition being filed before the Hon’ble High Court of Delhi, it was held that once the float glasses were used for manufacture and manufacturing process had started and thereafter, if some latent defect was found and said portion had to be discarded, it cannot be said that it was not used for manufacturing of final product as Inputs. Accordingly, the case was remanded back to the Hon’ble Settlement Commission to consider the matter afresh.

Being aggrieved, the Department preferred an appeal before the Hon’ble Apex Court pleading that the Hon’ble High Court had no extraordinary jurisdiction under Article 226 of the Constitution of India to tinker with Order of Settlement Commission and thus, the High Court has exceeded its limits of jurisdiction by examining the matter afresh.

Held:

The Hon’ble Apex Court held that the High Court has not interfered with the factual aspects which were recorded by the Settlement Commission in its judgment. However, the High Court has stated the correct legal position where the Settlement Commission had gone wrong in law by concluding that Cenvat credit cannot be claimed on the discarded material which was found to be defective during manufacturing process. Thus, the High Court acted well within its jurisdiction under Article 226 of the Constitution of India.

Accordingly, the Hon’ble Apex Court dismissed the appeal filed by the Department and directed the Settlement Commission to take up the application of the Assessee, in terms of the judgment passed by the High Court and decide the same as early as possible and preferably within six months.

Hope the information will assist you in your Professional endeavours. In case of any query/ information, please do not hesitate to write back to us. 

Thanks & Best Regards. 
Bimal Jain
FCA, FCS, LLB, B.Com (Hons)
Email: bimaljain@hotmail.com

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