Warranty Parts Lose SAD Exemption, but Revenue‑Neutral Credit Survives Without Penalty: CESTAT Chennai

CESTAT Chennai upheld recovery of ₹1.16 crore special additional duty on components Acer India sent for warranty replacement, but allowed CENVAT credit on it and set aside both penalties for want of intent.

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Chennai, has held that components imported without special additional duty (SAD) under the end-use concession, but sent to service centres for free warranty replacement, were not used in manufacture. The SAD of ₹1,15,69,622 was therefore recoverable with interest under Rule 8 of the Customs (Import of Goods at Concessional Rate of Duty for Manufacture of Excisable Goods) Rules, 1996. Because the duty was fully creditable, no intent to evade was shown, so the credit was allowed and both penalties set aside [Acer India (Private) Limited v. Commissioner of GST & Central Excise, Puducherry, 2026-juristway.com-3325-CESTAT(Chennai)-CE].

The Bench of Vasa Seshagiri Rao, Member (Technical), and Ajayan T.V., Member (Judicial), heard the appeal; the order was written by Mr. Ajayan. Acer makes computers at Puducherry and, between April 2011 and August 2015, imported microprocessors, hard disc drives and similar parts without SAD. Its quarterly returns reported everything as consumed, and end-use certificates were issued. After an audit query of 7 Apr 2015, it disclosed that some parts went to support locations for warranty use. The show cause notice (SCN) followed on 6 Apr 2016.

On merits, the Tribunal held that warranty use is not use in manufacture, that end-use certificates are not orders under the Central Excise Act, and that SAD is charged on import whether or not VAT is later paid. Revenue neutrality does not erase a liability, as held in Precision Moulds and Dies v. Commissioner (2025). Applying Commissioner of Central Excise, Ahmedabad v. Gujarat Ambuja Exports Ltd. (2016), it held that Rule 8 recovery is not governed by Section 28 but must be made within a reasonable time, which was met here.

On intent, the Tribunal found that Acer stood to gain nothing. Rule 3(1) of the CENVAT Credit Rules allowed credit of this duty, and the second proviso to Rule 3(5) exempts inputs removed for free warranty. The parts were only 0.55% to 1.60% of the imports, and the clearances were declared in ER-1 returns. Following Uniworth Textiles Ltd. v. CCE, Raipur (2013), mere non-payment is not suppression, and a penalty under Rule 15 is “never automatic”.

The Tribunal upheld the SAD demand and interest of ₹36,57,166, adjusting ₹5,61,264 already paid. It set aside the penalty under Section 114A, held the credit admissible, and set aside the penalty under Rule 15 read with Section 11AC. The appeal was partly allowed.

2026-juristway.com-3325-CESTAT(Chennai)-CE