2015 (6) TMI 402 - AT - Central Excise

Denial of MODVAT Credit - Defective goods - inputs found short on the basis of general ledger stock of stock adjustment account - Held that - On perusal of the Report of Defective Work in this case, the appellant initially availed modvat credit on the inputs/parts of watches, at the time of receipt of the same, before putting to use, the appellant has conducted certain tests to find out whether the inputs to be usable or not. The inputs which did not find fit to be used, the appellant has reversed credit thereon. Rest of the inputs which were found were issued by the appellant for processing or assembling of watches, and during the course of manufacture of watches, certain inputs were found defective and during further test or certain inputs were lost while manufacturing the goods. - The defective goods were found only after inputs were issued for processing or assembling of watches. This fact has not been disputed and on the basis of record it is ascertained that these inputs were issued for manufacturing watches. Therefore, it cannot be said that the inputs were not put to use. Therefore, in terms of Rule 57D of erstwhile Central Excise Rules, 1944, the inputs have become waste during the course of manufacture or used in or in relation not the manufacture of the final product are eligible for modvat credit. - inputs were issued for manufacturing of watches and the same were found defective during the process of manufacture or during the course of Research and Development process which is integral part of the manufacturing process. - when float glass has been put to use and it was found defective, modvat credit cannot be denied. For shortage of inputs, the appellant have explained general ledger of stock adjustment account reflected the shortages of inputs on physical verification. However, in the same general ledgers excesses have also been found over the recorded balances of various inputs. It shows that the inputs have been short accounted in some cases and in some other cases the inputs are in excess, therefore, there is no actual shortage of inputs. The shortages and excesses are due to the fact that stock accounting used to be done on weighment basis since the minute inputs ran into millions and physical counting is not possible. The Commissioner has not given any credence to the defence taken by the appellant for shortages of the inputs have not verified the said fact with cogent evidence. Therefore the defence taken by the appellant is acceptable. Accordingly, I hold that there is no shortage of inputs as explained by the appellant. Further all the shortages/rejections have been supported by the chartered accountant certifying the same which has not been controverted by the Revenue with cogent evidence. - appellant has taken modvat credit correctly and consequently they are not required to reverse the modvat credit taken by them. In the circumstances, the penalty is not imposable on the appellant. Therefore, I do not find any merit in the impugned order and the same is set aside. - Decided in favour of assessee.

Summary

Issues:
1. Denial of cenvat credit on inputs due to being destroyed as defective.
2. Adjudication of demands proposed in the show cause notice.
3. Disallowance of credit and imposition of penalty by the Commissioner.
4. Allegation of shortage of inputs and excesses in stock adjustment account.

Issue 1: Denial of Cenvat Credit on Inputs:
The appellant appealed against the denial of cenvat credit on inputs, contending that the inputs were used in the manufacturing process of wrist watches, leading to waste during production. The Tribunal remanded the matter back to the adjudicating authority for a detailed examination of the records, emphasizing the distinction between defective inputs not used in manufacturing and inputs becoming waste during the manufacturing process. In the remand proceedings, the Commissioner disallowed credit and imposed a penalty, leading to the appellant's further appeal.

Issue 2: Adjudication of Demands:
The Commissioner disallowed credit of a significant amount and imposed an equivalent penalty, which the appellant contested. The appellant argued that all inputs were utilized in the manufacturing process, citing relevant case law to support their position. The Commissioner, based on the report of rejection of defective work, concluded that inputs were destroyed before use, leading to the denial of credit. The Tribunal examined the contentions of both parties in detail.

Issue 3: Disallowance of Credit and Penalty:
The appellant argued that the inputs were indeed used in the manufacturing process, and any waste or defects arose during production, making them eligible for credit under Rule 57D of the Central Excise Rules. The Tribunal analyzed the Report of Defective Work and established that the inputs were issued for manufacturing watches and were found defective during the production process or during Research and Development activities integral to manufacturing.

Issue 4: Allegation of Shortage of Inputs:
Regarding the alleged shortage of inputs, the appellant explained discrepancies in the stock adjustment account, attributing them to the weighment-based stock accounting method due to the large quantity of inputs. The Tribunal found that shortages and excesses in the account did not indicate actual shortages, as supported by a reconciliation statement and certification from a chartered accountant. The Tribunal held that the appellant correctly availed cenvat credit and was not liable for penalty, ultimately setting aside the Commissioner's decision.

In conclusion, the Tribunal allowed the appeal, ruling in favor of the appellant on all issues raised, emphasizing the proper utilization of inputs in the manufacturing process and dismissing the allegations of shortages or incorrect credit availing. The judgment highlighted the importance of adherence to the provisions of Rule 57D and relevant case law in determining the eligibility for cenvat credit on inputs.