R&D/Test Samples Not Finished Goods; No Clandestine Removal Can Be Alleged: CESTAT
Pranav B Prem
The New Delhi Bench of the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) has held that samples cleared for research and development (R&D) or quality testing purposes cannot be treated as finished goods, and their dispatch to a laboratory cannot be construed as clandestine removal. The bench consisting of Justice Dilip Gupta (President) and P. Anjani Kumar (Technical Member) ruled that the movement of test samples to an in-house laboratory at Surat was a legitimate part of the assessee’s manufacturing and development process and did not amount to removal of excisable finished products.
The assessee, Navin Fluorine International Ltd., was engaged in Contract Research and Manufacturing Services for various fluorochemical products based on client specifications. As part of the development process, small quantities of samples were required to undergo further testing and research. Since the Dewas facility did not have the necessary equipment, these samples were regularly dispatched to the assessee’s in-house testing laboratory at Surat, Gujarat. The company consistently maintained that these were not commercial clearances but internal movements for R&D purposes.
The Revenue issued a show cause notice alleging that the samples sent to Surat were identical to entries listed in the assessee’s finished goods list, and therefore amounted to removal of excisable finished products without payment of duty. It framed this as an instance of clandestine removal and proceeded to demand duty along with penalty. The Commissioner confirmed the allegations, treating the samples as finished products cleared without duty.
On appeal, the assessee argued that the products dispatched to Surat were never finished goods but merely “development samples” meant for quality checks. It produced covering letters, test reports, consumption certificates, and internal communications showing that the goods were experimental samples used strictly for R&D and not for commercial use or market dispatch. It was also demonstrated that the quantity was extremely small and insufficient to be treated as marketable finished goods.
The Tribunal undertook a detailed examination of the documents and found that the evidence overwhelmingly supported the assessee's position. It highlighted that the department failed to bring any material on record to prove that the samples resembled commercially marketable finished goods or that they were diverted for sale. The Tribunal firmly rejected the assumption that mere similarity in description between test samples and finished goods established clandestine removal.
CESTAT observed that the department had not undertaken any investigation at the Surat facility, nor did it inspect the records or physical samples to verify the claim. The entire case of the Revenue was based on presumptions rather than concrete evidence. In contrast, the assessee’s documentation clearly established that the samples were part of an internal R&D cycle.
The bench held that testing samples and finished goods cannot be equated. R&D materials often go through multiple processes, iterations, and refinements before attaining final form and commercial viability. Samples meant exclusively for internal testing, even if similar in description to finished goods, cannot be presumed to be intended for sale or treated as excisable clearances. Accordingly, the Tribunal set aside the Commissioner’s order and ruled in favour of the assessee. It held that the dispatch of samples for testing purposes did not amount to clandestine clearance and that no excise duty was payable.
Appearance
Counsel for Appellant/ Assessee: Udayan Choksi
Counsel for Respondent/ Department: Ratnesh Kumar Mishra
Cause Title: Navin Fluorine International Limited v. Commissioner, CGST and Central Excise
Case No: Excise Appeal No. 51623 Of 2022
Coram: Justice Dilip Gupta (President), P. Anjani Kumar (Technical Member)
