2016 (11) TMI 1329 - AT - Central Excise

Clearance of defective and rejected goods - In the ER 1 return, appellant were reflecting 98% of their production as prime quality CTD bars and rounds whereas in the commercial sale invoice, the said goods were being cleared as defective - Held that - I find that entire case of the Revenue is based upon the financial calculation of profit and loss of the manufacturing unit. In fact, Commissioner (Appeals) has observed that circumstantial evidence produced on record leads to inevitable fact that raw material supplier (M/s ASRM) was only selling cenvatable invoices without supply of goods. Inasmuch as no retailer can survive if more than 80% of its final product were held to be defective/rejected/scrap. As regards the present appellant, they have shown receipt and utilization of raw material in their factory and have taken the benefit of Cenvat credit based upon the cenvatable invoices issued by registered dealer. Statements of authorised representative of the appellant as also of the dealer are to the effect that inputs stand supplied to them under the cover of proper cenvatable invoices. Statements of representative of the M/s ASRM is to the effect that during the relevant period lot of their product came out to be defective and rejected and as such, same was sold after discharging the central excise duty leviable thereon. Admittedly, the appellant need the raw material for the production of their final product and if, as per the Revenue, such material has not been received by them from M/s ASRM, they were not in a position to manufacture the final product. Revenue has not shown any alternative source of such procurement of raw material. Appeal allowed - decided in favor of appellant.

Summary

Issues:
1. Denial of Cenvat Credit to the appellant for procuring defective raw material.
2. Allegation of diversion of prime quality goods by the manufacturer.
3. Lack of evidence regarding clearance of prime quality goods to other buyers.
4. Reliance on circumstantial evidence by the Revenue.
5. Utilization of raw material by the appellant based on cenvatable invoices.

Analysis:
1. The appellant, engaged in manufacturing steel ingots, procured defective raw material from a manufacturer. Revenue alleged that the manufacturer showed a high percentage of clearance of defective goods, leading to denial of Cenvat Credit to the appellant. The contention was that the appellant's raw material procurement was flawed as the manufacturer diverted prime quality goods. However, the appellant argued that they purchased goods from a registered dealer in good faith and should not be penalized for the manufacturer's actions.

2. The Revenue believed that the manufacturer sold prime quality goods in the open market while invoicing them as defective to the appellant. The lower authorities upheld this belief, relying on financial calculations and circumstantial evidence. The Commissioner observed that the manufacturer was possibly selling cenvatable invoices without supplying the goods. However, no concrete evidence was presented to prove this diversion of goods by the manufacturer.

3. Despite the Revenue's contentions, no proof was provided regarding the clearance of prime quality goods to other buyers or an alternative source of raw material procurement by the appellant. The lack of evidence raised doubts about the allegations made against the appellant and the manufacturer. The absence of proceedings against the manufacturer further weakened the Revenue's case.

4. The Revenue's case heavily relied on financial calculations and circumstantial evidence. The authorities concluded that the manufacturer's actions indicated a scheme to sell cenvatable invoices without supplying the goods. However, the Tribunal noted that such conclusions based on circumstantial evidence should be substantiated with concrete proof, which was lacking in this case.

5. The Tribunal found that the appellant had proper documentation of raw material receipt and utilization based on cenvatable invoices. Statements from the appellant's representative and the dealer confirmed the supply of inputs through valid invoices. In contrast, the lack of evidence regarding an alternative source of raw material procurement or diversion of prime quality goods weakened the Revenue's case. The Tribunal, therefore, set aside the impugned order and allowed the appeal in favor of the appellant.