2004 (12) TMI 10 - AT - Central Excise

CENVAT / Modvat credit - due to evaporation of moisture contents, there was weight loss in gypsum after receipt in the factory to the time of their utilization in the manufacture.

Summary

Issues:
Whether Modvat credit is available for the loss of inputs due to evaporation of moisture contained therein.

Analysis:
The issue referred to the Larger Bench was whether Modvat credit would be available for the loss of inputs due to evaporation of moisture contained therein. The respondents were engaged in manufacturing Cement falling under Chapter 25 of CETA, 1985 and availing Modvat credit on various inputs, including Phospho Gypsum. The revenue contended that duty paid on the loss of weight due to evaporation cannot be allowed as Modvat credit if the weight of the input attributable to the loss was not actually used in the final product. The Referral Bench noted conflicting Tribunal decisions on similar cases. The revenue argued that only the quantity of input actually used in manufacturing final products is entitled to credit, citing Rule 57A of Central Excise Rules, 1944 and previous Tribunal decisions.

The respondents had received duty-paid Phospho Gypsum as per the invoice, with moisture content included. Some negligible moisture loss occurred during storage due to atmospheric conditions. The revenue claimed that the loss of moisture during storage should not be eligible for Modvat credit as it was not used in manufacturing. However, the Assistant Commissioner and the Commissioner (Appeals) accepted the respondents' explanation that moisture loss occurred during the continuous manufacturing process and did not warrant denial of Modvat credit. The Commissioner (Appeals) highlighted Board instructions stating that credit should not be denied for invisible losses like moisture. The loss of moisture during the manufacturing process was considered a process loss and deemed admissible for Modvat credit.

The Assistant Commissioner's reasoning was supported by the Tribunal's decision in another case where loss of moisture during the manufacture of cement was deemed unavoidable, and Modvat credit was allowed. The Tribunal referred to a previous decision where an assessee was entitled to full duty paid at the supplier's end, even for moisture lost in transit. The Tribunal concluded that the total quantity of inputs and duty paid should be considered for Modvat credit, and denial of credit should only apply if the inputs themselves are lost before use.

The Tribunal found merit in the Assistant Commissioner's reasoning and held that the respondents had paid for the entire quantity of inputs, including moisture content, and no claim was made for the loss of moisture. The Tribunal also noted that previous orders in the respondents' favor had attained finality as they were not challenged by the revenue. The Tribunal distinguished a previous case involving loss of molasses during storage, stating that the loss of moisture content in the current case was different and eligible for Modvat credit. Consequently, the issue referred to the Larger Bench was answered in favor of the assessee, and the appeal papers were to be sent back for further proceedings.