2007 (10) TMI 91 - AT - Central Excise

Shortage of goods have been arrived at by the dept. by taking actual physical stock of goods with the book balance in the records No evidence of clandestine removal Penalty for shortage on account of process loss is not justified but for penalty on account of punching error, matter is remanded

Issues Involved:
1. Alleged shortages in raw materials and finished goods.
2. Alleged manipulation of negative PIs and non-reporting to Central Excise authorities.
3. Demand for Modvat credit and Central Excise duty.
4. Reconciliation of stock discrepancies and process losses.
5. Allegations of clandestine removal.
6. Imposition of penalties under Rule 173Q, Section 11AC, and Rule 209A.

Issue-wise Detailed Analysis:

1. Alleged shortages in raw materials and finished goods:
The investigation revealed discrepancies in the physical stock versus the computer records, leading to allegations of shortages in raw materials and finished goods. The appellants argued that the demand was based on negative PIs generated by their computer system during stock taking, which were not independently verified by the department.

2. Alleged manipulation of negative PIs and non-reporting to Central Excise authorities:
The show cause notice alleged manipulation of negative PIs and non-reporting of shortages/excesses to the Central Excise authorities. The appellants contended that the negative PIs were due to various reasons such as compensating errors, direct sales, goods in transit, punching errors, and process losses, and were reconciled quarterly.

3. Demand for Modvat credit and Central Excise duty:
The department demanded Modvat credit amounting to Rs. 1,53,47,176/- for raw material shortages and Rs. 86,65,964/- for finished goods shortages. The Commissioner confirmed the duty demand. The appellants argued that the demand was incorrect as the discrepancies were reconciled quarterly and reported to the authorities.

4. Reconciliation of stock discrepancies and process losses:
The appellants explained the discrepancies through a detailed reconciliation statement, attributing them to compensating errors (78.24%), direct sales (4.04%), goods in transit (2.33%), punching errors (9.74%), and actual process losses (4.90%). They argued that process losses up to 0.5% were condoned by the department and supported by previous decisions.

5. Allegations of clandestine removal:
The appellants contended that there was no evidence of clandestine removal, as no independent evidence such as transporter or gatekeeper statements was provided. They maintained that the discrepancies were due to accounting errors and process losses, not clandestine activities.

6. Imposition of penalties under Rule 173Q, Section 11AC, and Rule 209A:
The Commissioner imposed penalties equivalent to the duty demand. The appellants argued that penalties were unjustified as there was no suppression or evasion of duty. The Tribunal set aside the penalties, noting that the discrepancies were adequately explained and there was no evidence of clandestine removal.

Judgment:
The Tribunal concluded that the shortages in raw materials and finished goods were adequately explained by the appellants. The discrepancies were due to accounting errors and process losses, not clandestine removal. The demand for duty on shortages was largely unsustainable, except for punching errors and process losses beyond 0.5%. The matter was remanded to the original authority for reconsideration of documentary evidence. The penalties imposed were set aside, with the Commissioner directed to impose suitable penalties only if any duty was found payable on account of punching errors and process losses. Penalties under Rule 209A were also set aside due to the lack of confiscation of goods.

Disposition:
Appeals were disposed of as per the above terms.

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