2013 (3) TMI 114 - HC - Central Excise

Cenvat Credit disallowed on the quantity of raw material not been received in the factory and not utilized in the manufacture of the finished goods - assessee charged for wilful suppression of the facts - assessee is engaged in the manufacture of Zinc, Lead and Copper Sulphate Solution - Held that - Lead and zinc concentrates were received by the assessee in its factory whereupon credit had been taken. The assessee had accounted for the shortage in the raw material found during stock taking by writing off these losses. The percentage of shortage found had been about 0.05% during the subject period with explanation given that the loss occurred due to dryage of the moisture content and some likely difference in weighment. The significant aspect of the matter is that it had not been the case of the revenue that any part of the duty paid inputs were diverted from the factory with intent to evade duty. Thus it would be too impracticable and unrealistic to ignore in such a matter the ground realities and the natural causes where the excavated contents were being transported from mines to the factory, and where the contents were susceptible to dryage due to atmospheric conditions apart from the likelihood of some slight error in recording of measurements due to human or mechanical error. Thus, the principles available in the rules and in the law explained by this Court are clear that credit of duty cannot be denied or varied where input has become waste in or in relation to manufacture of final product, and more of practical approach is required to be taken in these matters. Unable to find any evidence on record on the part of the appellant that he had, in any manner, diverted the duty paid inputs with intent to evade duty. Hence, there does not appear any basis to consider it to be a case of wilful suppression of facts . The shortage had been of about 0.05% and factors as indicated by the assessee about some difference in the weighing scale or of the human error and of the loss in transit due to drying of moisture contents cannot be ignored altogether - unable to find any basis for the Adjudicating Authority s observations about pilferage or theft having occurred during transit. The order as passed by the Appellate Authority and approved by the Tribunal appears to be more in conformity with the ground-realities and when a case of wilful suppression and diversion of the goods had not been established, disallowance of credit could not have been considered justified - in favour of assessee.

Summary

Issues Involved:
1. Whether Cenvat Credit should be disallowed on the quantity of raw material not received in the factory and not utilized in the manufacture of finished goods due to wilful suppression of facts.

Detailed Analysis:

1. Background and Facts:
The respondent-assessee engaged in manufacturing Zinc, Lead, and Copper Sulphate Solution showed transit losses of concentrate, an input in the manufacturing process. The department issued a show cause notice proposing recovery of Modvat credit, penalty, and interest, alleging that the assessee wrongly availed Modvat credit on raw material not received in the factory and wilfully suppressed facts regarding transit losses.

2. Adjudicating Authority's Decision:
The Adjudicating Authority disallowed the Modvat credit amounting to Rs.5,62,417/-, imposed a penalty of equal amount under Section 11AC of the Act, and ordered recovery of interest under Section 11AB. The Authority rejected the assessee's explanation of losses due to human error, moisture, and weighbridge differences, suggesting instead that the losses were due to pilferage or theft during transit.

3. Appellate Commissioner's Decision:
The Appellate Commissioner referred to the Tribunal's decision in Hindustan Zinc Ltd. and held that disallowing Modvat/Cenvat credit for a loss of about 0.05% was unjustified. The Commissioner found the losses reasonable and not attributable to any diversion of duty-paid inputs with intent to evade duty. Consequently, the disallowance of credit and the penalty were set aside.

4. Tribunal's Decision:
The Tribunal upheld the Appellate Commissioner's decision, noting that the transit loss was negligible (0.05%) and there was no evidence of intent to evade duty. The Tribunal dismissed the Revenue's appeal, finding no infirmity in the impugned order.

5. Revenue's Appeal and Contentions:
The Revenue contended that the Modvat credit should not be allowed for inputs not received in the factory. They argued that the facts differed from the Hindustan Zinc Ltd. case, as the inputs were not received in the factory and were not utilized in manufacturing. They also questioned the assessee's explanation of losses due to natural drying over a short transit distance.

6. Respondent-Assessee's Contentions:
The respondent-assessee supported the impugned order, referencing a decision of the High Court in Union of India Vs. Hindustan Zinc Ltd., arguing that natural causes should be given a reasonable and liberal interpretation and that a shortage of less than 0.05% did not indicate wilful suppression of facts.

7. High Court's Analysis and Conclusion:
The High Court found the Appellate Commissioner's and Tribunal's approach justified. It noted that the assessee had accounted for the shortage during stock taking and that the loss was due to natural causes like drying of moisture content and minor weighment errors. The Court emphasized practical and realistic considerations, ruling out any evidence of diversion of duty-paid inputs with intent to evade duty. The Court referenced Rule 57D of the Central Excise Rules, 1944, which allows credit even if inputs become waste during manufacturing.

The Court concluded that there was no basis for the Adjudicating Authority's observations about pilferage or theft and that the disallowance of credit was unjustified. The formulated question was answered against the Revenue and in favor of the assessee, leading to the dismissal of the appeal.

Conclusion:
The appeal by the Revenue was dismissed, affirming that Cenvat credit should not be disallowed for minor losses of raw material due to natural causes during transit, and there was no evidence of wilful suppression of facts by the assessee.