2015 (9) TMI 1079 - AT - Central Excise

CENVAT Credit - Credit availed in respect of defective goods - Held that - When inputs are defective on account of supplier s fault then the same are rejected and sent back to the supplier by reversing the CENVAT Credit. The remaining inputs have to be treated as inputs cleared for manufacture of the finished goods a negligible part of which become damaged during the course of assembly of finished goods. Percentage of such loss is only 0.28 to 0.49% of the total value of the inputs/parts utilized by the appellant. The same is also converted into scrap by the appellant and sold on payment of duty. - So far as demand of ₹ 8,65,408/- is concerned it is observed from the case records that the same pertains to inputs found short. It is also observed that this shortage was as a result of verification undertaken by the Audit of the appellant much before the same was detected by the Revenue. Appellant was thus aware of such shortages and still did not reverse the credit on these shortages until detected by the department. Therefore, extended period will be applicable for the demand of ₹ 8,65,408/- and penalty under Section 11AC of the Central Excise Act, 1944, read with relevant CENVAT Credit Rules, is imposable. However, no option of 25% reduced penalty was extended to the appellant by the Adjudicating authority. - As penalty under Section 11AC of the Central Excise Act, 1944 has been upheld the other penalty of ₹ 5,00,000/- imposed upon the appellant is set aside - Decided partly in favour of assessee.

Summary

Issues:
1. Confirmation of demands for inadmissible CENVAT Credit, interest, and penalties.
2. Denial of credit for inputs scrapped during manufacturing process.
3. Time-barred nature of the demands.
4. Applicability of penalties under Section 11AC of the Central Excise Act, 1944.

Issue 1: Confirmation of Demands
The appeal was filed against an Adjudication Order confirming demands for inadmissible CENVAT Credit, interest, and penalties. The appellant argued that certain inputs were found short during physical verification, and the remaining credit was denied by the Adjudicating authority. The appellant maintained that defective inputs were sent back to vendors, and the scrap generated during the manufacturing process should not disentitle CENVAT Credit. The appellant cited internal audit procedures and relevant case laws to support their arguments.

Issue 2: Denial of Credit for Scrapped Inputs
The major demand pertained to CENVAT Credit availed by the appellant for inputs deemed defective or damaged during the assembly of finished goods. The Adjudicating authority contended that such inputs were known to be defective on receipt and could not be considered used in manufacturing. The appellant argued that the inputs were rejected if found defective due to supplier fault, and the negligible percentage of damaged inputs were converted into scrap and sold after paying duty. Case laws and circulars were cited to support the appellant's position.

Issue 3: Time-Barred Nature of Demands
The appellant argued that the entire demand was time-barred as the extended period was not invokable. They contended that declarations regarding waste and scrap were filed with the department, reflecting no suppression on their part. The appellant relied on a case law to support their assertion that the 25% penalty option under Section 11AC was not extended to them. The Tribunal found that the extended period of 5 years could not be invoked for the demand related to scrapped inputs.

Issue 4: Applicability of Penalties
Regarding the demand for inputs found short, the Tribunal observed that the appellant was aware of the shortages before they were detected by the Revenue. The extended period was deemed applicable for this demand, and penalties under Section 11AC of the Central Excise Act, 1944 were imposed. The appellant was granted the option of paying a reduced penalty if done within a specified period. The other penalty imposed was set aside, and the appeal was allowed only to the extent indicated in the order.

This detailed analysis of the judgment addresses the issues of confirmation of demands, denial of credit for scrapped inputs, time-barred nature of demands, and the applicability of penalties under Section 11AC of the Central Excise Act, 1944.