- (1.) This appeal by the Revenue under Section 35G of the Central Excise Act, 1944 ('the Act of 1944') is directed against the order dated 20.11.2007 as passed in Excise Appeal No. 466 of 2006-SM(BR) by the Customs, Excise & Service Tax Appellate Tribunal, New Delhi ['the Tribunal'] affirming the order dated 29.11.2005 whereby, the Commissioner (Appeals-II), Jaipur ['the Appellate Commissioner'] set aside the order dated 31.12.2001 as passed by the Adjudicating Authority who had disallowed Modvat/Cenvat credit in relation to the quantity of raw material, which was allegedly received short in the factory and had further ordered recovery of penalty and interest. This appeal has been admitted on the following substantial question of law:- Whether Cenvat Credit should not be disallowed on the quantity of raw material which had not been received in the factory and not been utilized in the manufacture of the finished goods by wilful suppression of the facts.? Briefly put, the relevant facts and background aspects of the matter are that the respondent-assessee is engaged in the manufacture of Zinc, Lead and Copper Sulphate Solution. Upon scrutiny of the records, it was found by the department that the assessee had shown transit losses of concentrate, which was one of the inputs in the manufacturing process. On being questioned, it was submitted on behalf of the assessee that the difference as shown in the balance-sheet was due to: (i) the difference in the readings of the weighing-scales installed at the mines and at the smelter; (ii) the human error in recording the measurement on the weighing scales; and (iii) the shortage due to dryage during the transit of the goods. It was submitted by the assessee that the concentrate, when cleared from mines, was in moist form and during movement, due to atmospheric conditions, there was natural drying of the moisture content resulting in minor difference in the quantity. Not satisfied with the explanation, the department issued a show cause notice on 27.08.2001 to the assessee proposing recovery of Modvat credit amounting to Rs. 5,62,417/- under Section 11A(1) of the Act of 1944 read with erstwhile Rules 57I and 57AH of the Central Excise Rules of 1944 ('the Rules of 1944') and Rule 12 of the Cenvat Credit Rules, 2001. The department also proposed to levy penalty and to recover interest. It was essentially alleged in the notice that the assessee had wrongly availed Modvat credit on the quantity of raw material, which was not received in the factory and not utilized in the manufacture of finished product; and the assessee wilfully suppressed the facts regarding transit losses of modvatable inputs and disclosed the facts to the department only when asked for. It was alleged that the assessee had, inter alia, contravened the provisions of Rules 57A, 57G and 57AB of the Rules of 1944.
(2.) After submission of the reply to show cause notice and hearing the assessee, the Adjudicating Authority, in its order dated 31.12.2001 recorded dissatisfaction over the suggestions made by the assessee and while rejecting the assessee's case, disallowed the Modvat credit amounting to Rs. 5,62,417/-, imposed a penalty of equal amount under Section 11AC of the Act, and also ordered recovery of interest under Section 11AB of the Act. The Adjudicating Authority, inter alia, expressed its dissatisfaction in the following:- 20. I find that in the present case the concentrates are transported from mines to the assessee's smelter plant mainly in dumpers by road therefore possibility of loss of inputs by way of pilferage and theft during the transit can not be denied. Therefore, I do not accept the contention of the assessee that losses shown in the balance sheets are only notional losses which had been occurred due to human error, moisture and weigh bridge difference. I also find that the ratio of judgments cited by the assessee in support of their contention is not applicable in the instant case in view of the fact that in both the cases the inputs were received in packed conditioned as such there remained no possibility of loss due to pilferage or theft during transit and in these cases loss was due to moisture but in the instant case the inputs are not received in packed condition and are transported about 80-100 Km in dumpers. Therefore, I have no hesitation to hold here that in this case the shortage of inputs namely concentrates was due to pilferage or theft occurred during the transit. Hence, the Modvat/Cenvate credit is not allowable in respect of quantity of inputs received short and not used in the manufactured of the final product.
(3.) However, in the appeal filed by the assessee, the Appellate Commissioner in his order dated 29.11.2005 referred to a decision of the Tribunal in the case of Hindustan Zinc Ltd. v. COMMISSIONER OF CENTRAL EXCISE, 2004 172 ELT 244 and held that the Adjudicating Authority was not justified in disallowing Modvat/Cenvat credit in relation to the loss on the goods that was about 0.05% during the period in question. The Appellate Commissioner observed and held as under: - 8. I have carefully gone through the case records and the submissions made by the appellants. The appellants relied upon the decision of the Hon'ble Tribunal in the case of Hindustan Zinc Ltd., vs. Commissioner of Central Excise, Visak, 2004 172 ELT 244 . I have gone through the above decision and find that facts of the above case are akin to that of the subject case of the appellants as in the case relied upon, M/s. Hindustan Zinc Ltd. had been procuring lead and zinc concentrates from their own mines located at different places such as Jawar, Agucha etc. from where it was cleared on payment of duty and they took credit on duty so paid. The loss of concentrate which had taken place in the factory was detected in the annual stock taking and they accounted for the shortage found during stock taking at the end of each financial year by writing off these losses. The percentage of the shortage found was less than 1.5% on an average for the years 1997-98, 1998-99, 1999-2000 & 2000-01 which was found to be reasonable loss during the process of manufacture by the Hon'ble Tribunal, and it was held that duty cannot be demanded on the inputs which were lost during the process of manufacture. 9. I find that the above case law is squarely applicable on the present appeal as the losses of the appellants are less than 0.05% during the subject period. Therefore, following the ratio of the decision of the Hon'ble Tribunal cited in the foregoing para, I hold that disallowance of the Modvat/Cenvat credit of Rs. 5,62,417/- on the quantity of raw material detected short by the appellants during annual stock taking, is not proper as the adjudicating authority could not establish that such loss had occurred during transit of the goods from the mines of the appellants to its factory. Accordingly, the impugned order is set aside so far as it relates to disallowance of the Cenvat credit and recovery of interest thereon. 10. I find that equivalent penalty amounting to Rs. 5,62,417/- has been imposed on the appellants under proviso to section 11AC ibid read with erstwhile rule 57I & 57AH Central Excise Rules, 1944 and rule 13 of Cenvat Credit Rules, 2001. The appellant's submission is that since this is not a case of short receipt of material at all, the appellant has correctly taken Modvat credit in respect of the inputs, therefore, the invoking of the extended period and penalty imposed upon them was not justified. I find that there is a lot of force in the appellant's submission that they took the subject Cenvat credit on receipt of the material. Under the circumstances penalty imposed on the appellants under proviso to section 11AC ibid read with erstwhile rule 57I & 57AH Central Excise Rules, 1944 and rule 13 of Cenvat Credit Rules, 2001 is not proper and accordingly, the same is set aside. 11. The appeal is allowed.;