2014 (5) TMI 795 - AT - Central Excise

Area Based Notification No. 56/2002-CE dated 14.11.2002 - Shortage of stock - Clandestine activity - Held that - Both the units are located in area of Jammu & Kashmir and were enjoying the exemption Notification No. 56/2002. As per the said notification an assessee is entitled to avail the Cenvat credit of duty paid on the inputs. The said Cenvat credit is required to be first exhausted for payment of duty on the final product and thereafter the balance duty on the final product is to be paid out of the PLA. The duty paid out of PLA is subsequently refunded to the manufacturer. The said mechanism of payment of duty first by exhausting the credit amount and then by way of refund of the PLA duty amounts to exemption to an assessee located in the area of Jammu & Kashmir. The entire situation is Revenue neutral and no assessee would get benefitted by indulging into clandestine activity. Appellants have given suitable explanations for the removal of the aluminium coils to their sister unit, which the sister unit has accepted and was also in the process of returning the processed goods to M/s Alu Bond Enterprises. Mere non-following of the procedure, if at all, would not result in denial of credit. The shortages in respect of the other raw materials are marginal and keeping in view that the entire exercise is Revenue neutral, I find no favour that the impugned orders confirming demands against the appellants and confiscating the raw material and imposing penalty. Accordingly, the impugned orders are set aside - Decided in favour of assessee.

Issues:
1. Non-compliance with Rule 4(5) of Central Excise, 2004 for sending cenvatable raw material to job worker.
2. Shortage of raw materials found during inspection.
3. Confiscation of goods and imposition of penalties.
4. Interpretation of exemption Notification No. 56/2002 for units in Jammu & Kashmir.
5. Revenue-neutral mechanism for payment of duty and refund.
6. Adequacy of explanations provided by the appellants for the raw material transfer.

Analysis:

1. The judgment addresses the issue of non-compliance with Rule 4(5) of Central Excise, 2004 for sending cenvatable raw material to a job worker. The lower authorities found that the appellants did not follow the prescribed procedure, leading to the establishment of raw material shortage. Consequently, the appellant was held liable to reverse the credit, and goods sent back after conversion were seized with penalties imposed.

2. During the inspection, a shortage of raw materials, particularly aluminium coils, was discovered. The appellants explained that they had sent a portion of the coils to their sister unit for conversion on a job work basis. While shortages in other raw materials were minimal, the significant shortage in aluminium coils raised concerns.

3. The judgment delves into the confiscation of goods and imposition of penalties due to the established shortage of raw materials. Despite the procedural lapses, the appellants provided justifications for the transfer of raw materials, emphasizing the impending return of processed goods by the sister unit.

4. The interpretation of exemption Notification No. 56/2002 for units in Jammu & Kashmir was crucial in this case. The notification allowed for Cenvat credit on duty paid inputs, with a mechanism requiring the exhaustion of credit for final product duty payment before refunding the PLA duty. This mechanism aimed to provide exemption to assesses in Jammu & Kashmir, ensuring a revenue-neutral scenario.

5. The judgment highlights the revenue-neutral nature of the duty payment and refund mechanism, emphasizing that directing an assessee to reverse Cenvat credit could result in paying more duty on the final product but also receiving more refund. This approach was deemed favorable to the assessee and maintained revenue neutrality.

6. Evaluating the explanations provided by the appellants for the raw material transfer, the judgment concluded that mere procedural lapses should not lead to credit denial. Given the marginal shortages of other raw materials and the revenue-neutral nature of the situation, the impugned orders confirming demands, confiscating raw materials, and imposing penalties were set aside, with both appeals allowed for the appellants' benefit.

This detailed analysis of the judgment provides a comprehensive understanding of the issues involved and the rationale behind the decision rendered by the tribunal.

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