2014 (11) TMI 116 - AT - Central Excise

Discrepancy in stock - shortage in stock of inputs - Cenvat Credit - Whether the shortage of raw material/inputs has been correctly explained and whether the appellant is required to reverse the Cenvat Credit availed on such short found raw materials - Held that - Adjudicating Authority has not controverted or disputed the figures of procurement of the 5 raw materials in question as well as the consumption thereof. The Adjudicating Authority has tried to work out the %age of shortage as against the physical stock on the day of visit of the DGCEI authorities. In our considered view this is incorrect way of conclusion that the appellant is ineligible to avail Cenvat Credit of the quantity without shortage. It is a common knowledge that in the industry herein the appellant is engaged in, there is always loss during the manufacturing of the final products, as the inputs/raw material are melted in a furnace and the final products emerge in the form of blocks, flats etc. We find from the entire adjudication order that there is no weightage given by the Adjudicating Authority for the possible and explainable losses during the manufacturing process wherein these 5 raw materials are consumed. As the Adjudicating Authority has not disputed the quantity of the receipt of the 5 raw materials in the year 2004-05 and consumption thereof, the shortage noticed which is 0.42% and 0.43%; is in our view can be attributed to manufacturing loss and within tolerance limit of the industry. Since there is no dispute as to the receipt and consumption of the raw material and there being no allegation of clandestine removal of the inputs, the shortages found during the visit of the officers being within the acceptable tolerance level of shortages, the impugned order that confirmed the demands against the appellant is unsustainable and is liable to set aside and we do so - Decided in favour of assessee.

Summary

Issues involved:
1. Shortage of raw materials detected during a search operation.
2. Demand for duty on raw materials due to alleged misuse of Cenvat credit.
3. Contestation of shortage explanation and imposition of penalties.
4. Interpretation of industry norms and tolerance limits for shortages.
5. Reversal of Cenvat credit based on shortage of raw materials.

Issue 1: Shortage of raw materials detected during a search operation.
The appeal was filed against an Order-In-Original (OIO) dated 3.4.2006, where officers found discrepancies in stock during a search operation at the appellant's premises. Out of 42 inputs, shortages were detected in 5 inputs compared to the records. The appellant contested the demand for duty, stating that the shortages were within tolerance limits and explained as part of the manufacturing process.

Issue 2: Demand for duty on raw materials due to alleged misuse of Cenvat credit.
A show cause notice was issued for demanding duty on raw materials, alleging that the appellant had availed Cenvat credit but not used the raw materials for the intended purpose. The Adjudicating Authority confirmed the demand, interest, and penalties based on the shortages found during the search operation.

Issue 3: Contestation of shortage explanation and imposition of penalties.
The appellant contested the shortage explanation, arguing that the shortages were negligible and within industry norms. They cited previous judgments to support their claim that if shortages are not due to clandestine removal and are within tolerance limits, demand cannot be raised. The Adjudicating Authority's failure to consider the explanations provided by the appellant was highlighted.

Issue 4: Interpretation of industry norms and tolerance limits for shortages.
The Tribunal analyzed the industry norms and tolerance limits for shortages in the manufacturing process. It was noted that losses during manufacturing, especially in melting raw materials, are common. The appellant's explanation that the shortages were within acceptable limits and attributed to manufacturing losses was considered valid.

Issue 5: Reversal of Cenvat credit based on shortage of raw materials.
The Tribunal found that since there was no dispute regarding the receipt and consumption of raw materials, and no evidence of clandestine removal, the shortages found were within acceptable tolerance levels. The impugned order demanding duty and penalties was deemed unsustainable and set aside, allowing the appeal with consequential relief.

This detailed analysis of the judgment showcases the issues involved, the arguments presented by both sides, and the Tribunal's reasoning in reaching its decision to set aside the impugned order.