2007 (12) TMI 326 - AT - Central Excise

Cenvat/Modvat credit - Inputs found short - Held that - In the present case, by any standards, the shortage is very much within the range. If the entire quantity of inputs received in the factory during the material period is taken, the shortage of issues for manufacture of final product is only 0.66%. If only the duty-paid inputs received in the factory during such period are considered, the shortage is only to the extent of 0.35% - it would be appropriate to hold that it is unreasonable to disallow to the assessee Modvat credit on the inputs found short - appeal allowed.

Summary

Issues:
1. Denial of Modvat credit on inputs found short
2. Demand of duty on coal ash cleared
3. Penalty imposed under Rule 173Q of the Central Excise Rules

Analysis:

Issue 1: Denial of Modvat credit on inputs found short
The appellants, a Public Sector Undertaking, challenged the denial of Modvat credit amounting to Rs. 69,15,108/- on inputs found short for the period 1995-96 to 1998-99. The Commissioner disallowed the credit as the code numbers of inputs claimed as excesses did not match those of inputs found short. The appellants argued that the shortage was only 0.66% of the total inputs consumed in manufacturing final products. They cited precedents where similar shortages were condoned. The Tribunal found that no inputs were diverted or removed without being used in manufacturing. The Tribunal noted inconsistencies in the accounts produced by the assessee but acknowledged a specimen instance where a set-off could have been allowed. Citing previous Tribunal decisions, the Tribunal ruled in favor of the appellants, holding the denial of Modvat credit unreasonable.

Issue 2: Demand of duty on coal ash cleared
The appellants also contested a demand of duty on coal ash cleared without payment during the period from 23-7-1996 to 31-3-1998. They argued that coal ash was not excisable, referencing a previous case where a similar product was held non-excisable. The Tribunal referred to a Supreme Court judgment stating that coal ash did not qualify as manufactured goods and, therefore, could not be subjected to excise duty. Consequently, the demand on coal ash was deemed unsustainable, and penalties were set aside.

Issue 3: Penalty imposed under Rule 173Q
The appellants were also challenging a penalty imposed under Rule 173Q of the Central Excise Rules, 1944, read with Section 11 AC of the Central Excise Act. However, the judgment did not provide detailed analysis or discussion related to this penalty, focusing primarily on the denial of Modvat credit and the demand of duty on coal ash.

In conclusion, the Appellate Tribunal CESTAT, Chennai set aside the impugned order, allowing the appeal of the appellants based on the unreasonable denial of Modvat credit on inputs found short and the unsustainable demand of duty on coal ash cleared. The judgment highlighted inconsistencies in the Commissioner's findings and relied on precedents to support the decision in favor of the appellants.