2004 (4) TMI 197 - AT - Central Excise

Cenvat/Modvat - Demand duty on input lost during the process of manufacturing - Written off the shortages of stock - Irregular availment of Modvat credit on lead and zinc concentrate found short and written off - limitation period - Whether the loss on inputs during annual stock taking is allowable u/r 57D of the Central Excise Rules - HELD THAT - We find that the explanation given by the appellants is that the reason for the shortage is due to handling loss during the process of taking the goods from bay to bins and subsequent manufacturing losses. They have given other reasons also like dryage of the moisture content, inaccurate estimation due to volumetric stock verification etc. There is no doubt that the inputs were received in the factory. It is also not the case of the department that these were cleared from the factory, without payment of duty. Therefore, these have been used within the factory and that use may be either in the manufacture of the finished products or in the loss during the process manufacture of the finished products which starts from the stage of taking the raw materials from the storage bay to the factory and onward processes. Therefore, the losses have occurred during these processes. According to Rule 57D, on such losses credit cannot be denied. We find that in this case, the appellants have written off the shortages which were lost during the process of manufacture. Therefore we find that 1% to 1.5% loss in the present case is a reasonable loss during the process of manufacture and duty cannot be demanded on the inputs which were lost during the process of manufacture. Therefore we set aside the orders of the Commissioner and allow all the appeals.

Summary

Issues Involved:
1. Irregular availment of Modvat credit on lead and zinc concentrate found short and written off.
2. Whether the loss on inputs during annual stock taking is allowable u/r 57D of the Central Excise Rules.
3. Applicability of the limitation period for demanding duty.

Summary:

Issue 1: Irregular Availment of Modvat Credit
The appellants, engaged in the manufacture of Zinc Ingots, were charged with irregularly availing Modvat credit on lead and zinc concentrate found short and written off in the balance-sheet for the years 1996-97 and 1997-98. The shortages, less than 1.5%, were attributed to handling loss, moisture loss, fly-over losses, and approximate weight measurements. The appellants argued that the entire quantity of inputs was received and used within the factory, and the losses were part of the manufacturing process. They relied on Rule 57A(4) and various judicial decisions to support their claim that credit cannot be denied for such losses.

Issue 2: Allowability of Loss on Inputs u/r 57D
The Tribunal examined whether the loss on inputs found during annual stock taking and written off in the books should be considered allowable under Rule 57D. Rule 57D states that credit of duty shall not be denied if inputs become waste in or in relation to the manufacture of the final product. The Tribunal found that the inputs were received and used within the factory, and the losses occurred during the manufacturing process. The Tribunal cited previous decisions, including their own in Final Order No. A/373/03-NB-C, and concluded that credit cannot be denied for such losses. The Tribunal also referenced cases like HPCL v. CCE and Modi Cement Ltd. v. CCE, which supported the admissibility of Modvat credit for losses during manufacturing.

Issue 3: Applicability of Limitation Period
The appellants argued that the entire demand was barred by limitation as there was no fraud, wilful mis-statement, collusion, or suppression of facts. They contended that the credit was taken on documented quantities received in the factory, and the department's demand was based on shortages found during their own verification. They relied on judicial decisions like CCE v. Chemphar Drugs & Liniments and Pushpam Pharmaceuticals Co. v. CCE to argue that the longer period of limitation could not be invoked when facts were known to the department and proper accounts were maintained.

Conclusion:
The Tribunal concluded that the losses were reasonable and occurred during the manufacturing process. Therefore, credit cannot be denied under Rule 57D. The orders of the Commissioner were set aside, and all appeals were allowed.