CENVAT Credit Available Even If Returned Machinery Not Sent Back to Same Buyer: CESTAT

The Mumbai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that a manufacturer is entitled to avail CENVAT credit on duty-paid goods returned to the factory for remanufacture, even if the remanufactured machine is not subsequently supplied back to the same customer who originally returned it. The bench of Justice (Dr.) Suvendu Kumar Pati (Judicial Member) examined Rule 16(1) and Rule 16(2) of the Central Excise Rules and noted that the provisions permit availment of credit where duty-paid goods are returned for being “re-made, refined, re-conditioned or for any other reason.” Consequently set aside a demand of ₹23.40 lakh along with interest and penalty raised against Grafica Flextronica. The appeal was filed by Grafica Flextronica against an order of the Commissioner (Appeals) affirming recovery of allegedly inadmissible CENVAT credit amounting to ₹23,40,974 along with interest and equal penalty. The department had invoked the extended limitation period while raising the demand. The dispute arose after the company sold a screen-printing machine to M/s Yogi Display Arts Pvt. Ltd. on payment of central excise duty. Subsequently, due to technical defects, the machine was returned to the manufacturer along with the original invoices. Upon receiving the machine back, Grafica Flextronica availed credit of the duty originally paid, relying on Rule 16 of the Central Excise Rules, 2002. The company then used components of the returned machine to manufacture a smaller machine, which was sold to another customer, M/s Ace Media Solutions Pvt. Ltd., Bengaluru, on payment of applicable excise duty. The remaining unused components were cleared as scrap after payment of duty. The department contended that the credit was wrongly availed because the returned machine was not repaired or remade and sent back to the same customer who had originally purchased and returned it. According to the department, Rule 16 contemplated return of the same goods to the original buyer after repair or reconditioning. It also relied upon a CBEC Circular dated 21 June 2001 and certain earlier judicial precedents to argue that the assessee had failed to comply with procedural requirements and that the availment of credit was irregular. The appellant argued that Rule 16(2) specifically applies where returned goods undergo a manufacturing process. Once a new machine was manufactured from the returned machine’s components and duty was paid upon clearance of the newly manufactured product, the benefit of credit could not be denied merely because the machine was sold to a different customer. The company further submitted that neither Rule 16 nor the CBEC Circular requires the remanufactured goods to be supplied back to the same buyer. It also relied on judicial precedents holding that there is no statutory requirement that returned goods must be cleared to the same party who returned them. The Tribunal observed that Rule 16(2) only requires payment of duty at the time of subsequent removal of the goods after manufacture. Importantly, the rule nowhere stipulates that the goods must be returned to the same customer from whom they were received. The Bench emphasized that the expressions “re-made,” “re-conditioned,” or “for any other reason” do not require the final product to be identical in shape, size, or configuration to the original returned product. What is relevant is that the process results in manufacture and duty is discharged when the resultant goods are cleared. Addressing the department’s reliance on the CBEC Circular, the Tribunal held that the circular’s reference to goods being “eventually returned” primarily relates to Rule 16(1) and cannot be used to restrict the scope of Rule 16(2). The Bench observed that the statutory rule itself contains no requirement that the remanufactured goods must be supplied back to the original buyer. The Tribunal further noted that while not all components of the returned machine had been used in the new machine, the unused parts were cleared as scrap upon payment of duty. If the department believed proportionate reversal of credit was required in respect of scrap components, it ought to have specifically raised such a proposal in the show-cause notice. Since the notice was founded only on the allegation that the machine was not returned to the original customer, the department could not subsequently expand the scope of the dispute. The Tribunal also criticized the Commissioner (Appeals) for introducing a new ground that the appellant had failed to establish practical use of the old machine’s components in the new machine. According to the Bench, this issue was never the basis of the show-cause notice and therefore could not legally be used to sustain the demand. It reiterated the settled principle that appellate authorities cannot travel beyond the allegations contained in the show-cause notice and cannot confirm demands on entirely new grounds. Allowing the appeal, CESTAT held that the CENVAT credit availed by Grafica Flextronica was legally admissible under Rule 16 of the Central Excise Rules, 2002. The Tribunal set aside the orders of the lower authorities and directed the department to refund the confirmed demand of ₹23,40,974 along with applicable interest within two months. Case Details Case Title: Grafica Flextronica Versus Commissioner of GST & CE, Palghar Citation: JURISHOUR-1575-CES-2026(MUM) Case No.: Excise Appeal No. 86211 of 2017 Date: 03.06.2026 Counsel For Appellant: C.A. Prakash Jhalari, Advocate Counsel For Respondent: Rajiv Ranjan, Authorized Representative Click Here To Read Order Read More: No Penalty Without Confiscation of Imported Goods: CESTAT

CENVAT Credit Available Even If Returned Machinery Not Sent Back to Same Buyer: CESTAT

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