2016 (8) TMI 531 - AT - Central Excise

Demand - Differential duty - unexplained shortage of raw materials - stock verification method adopted - Held that - it is found that in the method of stock verification adopted, there is bound to be variation. Further the variation found is about 10% in the case of raw material and less than 5% in the stock of finished goods which I hold as normal variation in such method of calculation. Secondly it is found that the appellant had given cogent explanation regarding the shortage of raw material within 5 days of inspection, by stating that the raw material charged in the furnace had escaped to be noticed in the stock verification and the same was not entered in the stock records/RG1, and accordingly there is no discrepancy in the stock of raw material. Therefore, the variation found is a normal variation and no adverse inference could be drawn. - Decided in favour of appellant

Summary

Issues:
- Confirmation of duty on stock of raw material and finished goods found short along with penalty
- Adequacy of explanation for the shortage of raw material
- Application of penalty under Rule 25 of Central Excise Rules and Section 11 AC of the Act
- Legal validity of the method of stock verification adopted
- Rejection of appellant's explanation without verification
- Comparison with relevant case laws

Confirmation of Duty and Penalty:
The appellant appealed against the Order-in-Appeal confirming duty on the stock of raw material and finished goods found short during an inspection. The inspection revealed discrepancies in the stock of MS angles, flats, and ingots, leading to shortages. The appellant initially accepted the shortage but later explained that certain inputs had been missed in the stock records. Despite the explanation, a Show Cause Notice was issued proposing a significant demand, which was confirmed along with a penalty under Rule 25 of Central Excise Rules and Section 11 AC of the Act.

Explanation for Shortage of Raw Material:
The appellant contended that the proposed demand was based on presumption and assumption, emphasizing that the stock verification method used allowed for variations. The appellant provided a detailed explanation for the shortage of raw material, attributing it to missed inputs in the furnace that were not recorded in the stock records. However, this explanation was rejected without actual verification, leading to the imposition of the duty and penalty.

Validity of Stock Verification Method:
The appellant's counsel argued that the method of stock verification, involving the weighing of a sample of items and extrapolating the total stock, inherently led to variations. Citing previous case laws, the counsel highlighted that in the absence of evidence of clandestine removal, penalties should not be imposed solely based on apparent stock shortages.

Rejection of Explanation Without Verification:
The Tribunal noted that the appellant had promptly provided a reasonable explanation for the shortage within days of the inspection. However, this explanation was dismissed without verification, leading to the imposition of duty and penalty. The Tribunal emphasized that the rejection of the explanation without proper verification was unjustified.

Comparison with Case Laws:
Both parties relied on various case laws to support their arguments. The appellant cited cases where penalties were not imposed in the absence of evidence of clandestine removal, emphasizing the importance of proper verification before drawing adverse inferences. On the other hand, the revenue cited cases where courts upheld penalties based on stock shortages and admissions by the appellants.

In the final judgment, the Tribunal found that the variation in stock levels was within normal limits for the method of calculation used. It acknowledged the appellant's explanation for the shortage of raw material and criticized the rejection of the explanation without verification. Consequently, the Tribunal allowed the appeal, setting aside the impugned order and directing any consequential relief to the appellant in accordance with the law.