2015 (6) TMI 1012 - AT - Central Excise

Inflated consumption of pig iron, CPC and iron and steel scrap - CENVAT credit demand - Held that - The allegation of inflated consumption of pig iron, iron and steel scrap and CPC is based only on calculations by the investigating officers which, in turn, are based on a series of assumptions regarding yield of mild steel from total raw materials charged, iron oxide content of sponge iron and out of which only 50% of iron oxide reacting with carbon, for which we do not find any concrete basis. No actual physical inspection to ascertain the actual proportion of sponge iron, pig iron, iron and steel scrap and CPC charged into furnace for manufacture of mild steel, and no tests to ascertain iron oxide content of sponge iron used, which were the easiest and simplest things to do have been done. In view of this, we hold that merely on the basis of assumptions of the department which are without any basis and the calculations based on these assumptions, the allegations of inflated consumption of pig iron, CPC and iron and steel scrap cannot be made against the appellant and the Cenvat credit demand based on such allegations would not be sustainable. - Decided in favour of assessee.

Issues Involved:
1. Alleged illicit diversion of Cenvat credit availed on inputs (pig iron, steel scrap, CPC).
2. Discrepancy between recorded and estimated consumption of raw materials.
3. Assumptions regarding iron oxide content in sponge iron and its impact on carbon content in mild steel.
4. Basis and validity of the department's calculations and assumptions.
5. Justification for the department's demand for recovery of Cenvat credit and imposition of penalties.

Issue-wise Detailed Analysis:

1. Alleged Illicit Diversion of Cenvat Credit:
The department alleged that the appellant inflated the consumption of pig iron, steel scrap, and CPC, leading to the illicit diversion of these materials without reversing the Cenvat credit. The investigation was based on assumptions about the iron oxide content in sponge iron and the carbon content in the final product, which were used to calculate the required consumption of raw materials. The appellant countered that these assumptions were incorrect and not based on actual testing or physical verification.

2. Discrepancy Between Recorded and Estimated Consumption:
The department calculated the consumption of raw materials based on the assumption that the yield of mild steel from the total raw materials should be 87%, whereas the appellant's records showed a yield of 77% to 81%. The department's calculations led to the conclusion that the appellant had shown inflated consumption of pig iron, steel scrap, and CPC. The appellant argued that the department's calculations were based on incorrect assumptions and did not consider the actual performance and characteristics of the raw materials used.

3. Assumptions Regarding Iron Oxide Content in Sponge Iron:
The department assumed that the iron oxide content in sponge iron was 8%, based on a standard book, and that only 50% of this iron oxide was available for reaction. The appellant provided an opinion from a chartered engineer stating that the iron oxide content could vary from 11% to 23.15%, depending on the quality of sponge iron. This variation would significantly impact the required consumption of pig iron and CPC for reducing the iron oxide to iron.

4. Basis and Validity of the Department's Calculations:
The department's calculations were based on several assumptions, including the iron oxide content in sponge iron, the carbon content in various raw materials, and the yield of mild steel. The appellant argued that these assumptions were not supported by actual testing or physical verification. The department did not conduct any tests to ascertain the actual iron oxide content in the sponge iron or the actual proportion of raw materials charged into the furnace. The appellant also pointed to conflicting opinions from technical experts regarding the required proportion of pig iron.

5. Justification for the Department's Demand and Penalties:
The department issued show cause notices demanding recovery of Cenvat credit and imposing penalties based on the alleged inflated consumption of raw materials. The appellant argued that the department's case was based solely on theoretical calculations and assumptions without any concrete evidence of illicit diversion. The Apex Court's judgment in the case of Oudh Sugar Mills Ltd. was cited, which held that duty demand cannot be confirmed purely on the basis of input-output norms without tangible evidence of duty evasion.

Conclusion:
The Tribunal found that the department's case was based on a series of assumptions without any concrete basis or actual testing. The assumptions regarding the iron oxide content in sponge iron, the yield of mild steel, and the carbon content in various raw materials were not supported by evidence. The department did not conduct any physical verification or tests to substantiate its claims. Consequently, the Tribunal held that the allegations of inflated consumption of raw materials and the resultant Cenvat credit demand were not sustainable. The impugned orders were set aside, and the appeals were allowed.

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