Custom, Excise & Service Tax Tribunal
M/S. Orchid Health Care vs Cce, Chennai-Iv on 19 January, 2018
IN THE CUSTOMS, EXCISE & SERVICE TAX
APPELLATE TRIBUNAL
SOUTH ZONAL BENCH AT CHENNAI
E/137/2011
(Arising out of Order-in-Original No. 30/2010 dated 23.12.2010 passed by the Commissioner of Central Excise, Chennai-IV).
M/s. Orchid Health Care : Appellant
Vs.
CCE, Chennai-IV : Respondent
E/146/2011 CCE, Chennai-IV : Appellant Vs. M/s. Orchid Health Care : Respondent Appearance Shri Raghavan Ramabhadran, Advocate, for the Appellant/respondent Shri A. Cletus, ADC (AR) for the Respondent/appellant CORAM:
Honble Ms. Sulekha Beevi, Member (Judicial) Honble Shri Madhu Mohan Damodhar, Member (Technical) Date of Hearing/Decision: 19.01.2018 FINAL ORDER No. 40337-40338/2018 Per Bench The above appeals arise out of the same order and are disposed by this common order. Parties are hereby referred to as assessee and department for the sake of convenience.
2. The brief facts are that the assessees who are 100% EOU are engaged in the manufacture of Formulation and are registered with the Central Excise Department. The officers of the preventive unit on 22.04.2009 visited the premises on the intelligence gathered that (i) the assessees have imported/purchased indigenous raw materials and capital goods without payment of duty and have used the same in R&D (ii) have availed irregular input tax credit on the services used in R&D and thereby availed wrong exemption benefit under EOU scheme. SCN was issued proposing to deny exemption under the Notification No. 52/2003-Cus dated 31.03.2003 and Notification No. 22/2003-CE and for recovery of the duty, interest and for imposing penalties. After due process of law, the adjudicating authority confirmed the demand, interest and imposed penalties. In the SCN demands proposed were separately under Customs Act, 1962 and Central Excise Act, 1944. Hence assessee has filed appeal No. E/137/2011. However, while confirming the demands, the Commissioner did not specify the provisions of the two Acts separately and also had imposed reduced penalty of Rs. 50,00,000/- instead of imposing equal penalty under Section 11 AC of the Central Excise Act, 1944. The department has filed appeal No. E/146/2011 aggrieved by the non-imposition of equal penalty and also alleging that the Commissioner has erred in not quantifying the demand separately under the proviso to Section 28 of the Customs Act, 1962 and under proviso to Section 11A (1) of CEA, 1944 and also in not imposing equal penalty.
2. On behalf of the assessee, the Ld. Counsel, Shri Raghavan Ramabhadran opened his arguments by explaining the necessity of R&D conducted by the appellants. The submissions of the Ld. Counsel are summarized as under:-
a) Being a pharmaceutical industry, the establishment of R&D facility is a must as the Research and Development is required to continuously innovate both products and procedures. It is required to improve the efficacy of existing products as well as to innovate and improve the manufacturing process. The assessees who are an EOU had applied to the Development commissioner for the establishment of R&D Centre for the Formulation Division. The permission was intimated vide letter dated 12.01.2005. So also they applied to the jurisdictional Dy. Commissioner of Central Excise on 06.02.2006 for inclusion of the plot numbers of the new R&D Centre in the ground plan of the factory. The Commissioner of Central Excise accorded permission vide his letter dated 18.07.2006 to include additional plot numbers of R&D in the registration/license already granted to them. The finished products are exported to the countries such as USA, UK etc. The R & D Centre is used for analysis of existing as well as new products to provide better yield and for development of new products. The development activities is undertaken in R&D Centre for filing ANDAs (Abbreviated Nee Drug) and the ANDAs is mandatory for any formulation/drug for obtaining approval from USA Drug authorities. The assessees undertake extensive research activity at the R&D Centre to decipher the components of the drugs, ingredients, its proportion and the properties of such components. The components are analysed and found by back working the drug. Samples produced are tested to ascertain the efficacy, quality and effectiveness of the formulation. Based on such test results, the production process is fine tuned. This testing and research cycle is continued till the drug produced is acceptable to export standards. That therefore the R&D Centre and its activities are essential and indispensible part of the manufacturing process of goods exported.
b) The benefit of the notification is denied contending that the raw material and capital goods imported as well as legally procured availing benefit of notification are used for R&D and not for manufacturing process. The said allegation is based on wrong interpretation of the notification as well as wrong appreciation of the facts. He submitted that the raw materials and capital goods as well as input services which are used in relation to R&D are nothing but use of the same in the process of manufacture of final products which are exported.
c) In fact, the actual process happening at the R&D Centre is directly linked with the manufacture of the final products and its consequent export. He summarized the process of R&D as under:-
(i) Identification of the chemical entity in the innovator drug, physical characteristics like weight, thickness, hardness and friability and disintegration time of the dosage form.
(ii) Identification of chemical characteristics like Assay (to determine the potency of the active compound in the dosage), related substances (to determine the percentage of impurities)
(iii) Finding out the Active ingredient in the innovator drug by performing dissolving test.
(iv) Finding out the stability of the innovator drug at various storage conditions such as temperature and humidity.
(v) The appellant after identifying the above characteristics produces sample drugs at the R & D Centre. This is referred, as stated above, as the generic drug. The generic drug so produces is once again subjected to above tests to ensure the bioequivalence with the innovator drug. Thus, the appellant undertake extensive research activity at the R & D Centre to decipher the components of drugs, ingredients, its proportion and the properties of such components. Therefore, the R& D activities are integral part of the manufacture of final products for which the appellant has obtained the central excise registration.
d) The Ld. Counsel relied on the decisions in the case of CCE, Hyderabad Vs. Dr. Reddy Laboratories Ltd. 2010 (253) ELT 316 (Tri.-Bang.) and Serum Institute of India Ltd. Vs. CCE, Pune 2014 (309) ELT 519 (Tri.-Mum). It is submitted that though the decision in the case of Dr. Reddy Laboratories Ltd. (supra) was placed before the adjudicating authority, the same has been distinguished and not applied by the lower authority wrongly interpreting the said decision. The other decisions relied by the Ld. Counsel is CCE Ahmedabad Vs. Cadila Healthcare Ltd. - 2013 (30) STR 3 (Guj.).
3.1 On behalf the department, the Ld. AR, Shri A. Cletus, ADC, reiterated the findings in the impugned order. He submitted that the Notification No. 32/2003-Cus dated 31.03.2003 grants exemption to specified goods imported by 100% EOU on the condition that the said goods are used for the specified purpose mentioned in clause (a) (I) in the opening para of the above notification. Thus, it is said in the said clause that the goods are to be used in the manufacture of articles for export or used in connection with the production or packing or job work for export of goods. Similarly, Notification No. 22/2003 dated 31.03.2003 grants exemption of locally procured goods without payment of duty on the condition that the said goods are used for the purpose of manufacture of articles for export or used in connection to production or packing or job work for export of goods. The Notification has to be construed strictly. The Notification allows import of goods without payment of duty on the condition that the goods are used in the manufacture of articles for export. The appellants have used the imported goods as well as the locally procured goods for R&D activities. The R&D activity is distinct from the activity of manufacture. The goods having been used directly in R&D activities is not eligible for exemption. That the R&D activities/process cannot be considered as part of manufacture of goods, which are exported by the appellants. The reliance placed by the Ld. Counsel on the decisions are not applicable to the facts of the case for the reason that in the said decision only some quantity of the raw materials were used for R&D purposes. In the present case, the appellants have used substantial portion of the raw materials as well as capital goods for R&D purposes only. Such use cannot be equated with the use of the goods in manufacture of finished products. That the demand raised is legal and proper.
3.2 He also adverted to the grounds of appeal in Appeal E/146/2011 and contended that the Commissioner has erred in not imposing equal penalty. Having sustained the allegation that the goods are not used in the manufacture of export of finished products and that the extended period is invokable, the original authority ought to have imposed equal penalty. That the provisions under Section 11 AC of Central Excise Act, 1944 or Section 114A of Customs Act, 1962 does not allow an option to the adjudication authority to reduce the penalty. It is also pointed out by him that though in the SCN the allegations were raised mentioning the provisions under the Customs Act as well as Central Excise Act, the Commissioner erred in not quantifying the demand separately under these Acts.
4. Heard both sides.
5.1 The undisputed facts of the case are that the raw materials, capital goods imported and locally procured by availing exemption under the Notification No. 52/2003 and Notification No.22/2003 have been used substantially for R&D process by the appellants. It is also not disputed that the department was aware of the existence of R&D Section inside the manufacturing premises of the appellants. The only point that arises for consideratin is that whether the inputs and capital goods used in R&D is eligible for exemption from duty and whether the input services used in R&D is eligible for Cenvat credit. The ground on which the department proposes to deny the benefit is that R&D activities are not part of manufacturing process. Thus, it is alleged that the products developed at R&D Centre are either exported or sold in DTA. The relevant portion of the SCN is reproduced as under for better appreciation:-
7. Whereas it appears that M/s. OHC-EOU have imported/locally procured raw materials and capital goods and have installed in R&D Centre and used the same in R&D Centre as well as availed service tax credit on the services rendered to R&D Centre. The products and process developed at R&D Centre is for the purpose of filing ANDAs and to increase the yield of the existing process and also for development of new products. The products developed at R&D Centre are neither exported nor sold in DTA. The said imported/locally procured raw materials and capital goods installed and used in the R&D Centre as well as services rendered to R&D Centre cannot be said to be used in connection with the production or packing of goods for export. Consequently, it appears that the aforesaid goods are not eligible to be imported without payment of duty under Notification No. 52/2003-Cus., dated 31.03.2003 as well as goods procured locally without payment of duty under Notification No. 22/2003-CE dated 31.03.2003 and they are also not eligible vis-a-vis service tax input credit on the services rendered to R&D Centre. 5.2 The appellants have explained in detail how the R&D activities are linked to the process of manufacture. We find that after the R&D process the samples of the final products undergo test and then are manufactured and exported by the appellants. It is very much clear that the R&D activities are directly linked to the process of manufacture of the final products of the appellants. The appellants being a 100% EOU, the finished products are exported. Therefore, the availment of concession of duty on inputs and capital goods and Cenvat credit on input services in our view is fully in order. A similar issue was discussed by the Tribunal in the case of Dr. Reddy Laboratories Ltd. (supra), where the Tribunal observed as under:-
3.?After hearing both sides and perusal of the records, we find that the adjudicating Commissioner has considered all aspects of the case and has passed a detailed speaking order. He has also taken note of the fact that for manufacturing and exporting pharmaceutical products certain amount of research and development is required for meeting the stringent requirement of the Certification Authorities in the export market before the goods can be actually exported. He has also taken into account the fact that the respondents have fulfilled the export obligation and achieved net NFEP. He has gone by the parameters of the Exim Policy in regard to broad-bonding as also treatment of waste and scrap and rejects involved in the manufacture, of exports goods. 5.3 The Co-ordinate Bench of the Tribunal in Serum Institute of India Ltd. (supra) had occasion to analyze a similar issue. The relevant portion is reproduced as under:-
5.?The contention of the appellant is that the appellants are manufacturing vaccines and for the manufacture of vaccines, a regular research and development is required. In these circumstances, the some inputs which were received without payment of duty, which are required for the manufacture of export goods are consumed to carry out the research and development for the improvement of products. Without the research and development, the manufacturing process cannot be undertaken and completed properly. The appellants relied upon the decision of the Tribunal in the case of CCE, Hyderabad v. Dr. Reddy Laboratories Ltd. reported in 2010 (253) E.L.T. 316. The contention is that the Tribunal in a similar situation upheld the order passed by the lower authority whereby the confirmed demand on the same ground is set aside.
6.?The Revenue relied upon the findings of the lower authority and submitted that as the raw material received without payment of duty is not used for the manufacture of final product hence the appellants are not entitled for the benefit of the Notifications.
7.?We find that in the present case the appellants being a 100% EOU made import of certain raw material without payment of duty by availing the benefit of the above-mentioned Notifications. Part of the raw material is used for research and development activity which is essential for manufacture of human vaccines. The Tribunal in the case of Dr. Reddy Laboratories Ltd. (supra) rejected the contention of the Revenue that the manufacturer is liable to pay duty in respect of the raw material obtained without payment of duty, which is used for research and development purposes. In the present case, we find that there is no allegation that the raw material which is procured without payment of duty is diverted or not used within the 100% EOU as the research and development facility is within the 100% EOU. In these circumstances and in view of the above decision of the Tribunal, we find merit in the contention of the appellant. The impugned order is set aside and the appeal is allowed.
6. From the discussions made above and following the precedent decisions in the case of Dr. Reddy Laboratories Ltd. and Serum Institute of India Ltd., (supra), we are of the considered opinion that the demand cannot sustain. The impugned order is set aside. The appeal filed by the assessee is allowed and the appeal filed by the department is dismissed.
(Operative part of the Order pronounced in the open Court)
(MADHU MOHAN DAMODHAR) (SULEKHA BEEVI C.S.)
MEMBER (TECHNICAL) MEMBER (JUDICIAL)
BB
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