By TIOL News Service

NEW DELHI, JAN 22, 2013: THE appellants are engaged in the manufacture of parts and components of various engineering goods. The main raw material being used was Mild Steel items on which they were taking CENVAT credit.

On 20.12.02, the Central Excise officers visited the premises of the appellants and conducted a verification of inputs lying in stock as against inputs received in the factory as per their records. Based on the statements given to the bank, the officers assessed a shortage of 52,26,797 kgs of raw materials and made out a case [para 4 of SCN] that the appellants had taken Cenvat credit amounting to Rs.1,69,51,548/- on such quantity of inputs and cleared the goods without payment of duty.

Presumably, the officers were not so sure about the above shortage so side by side they also came out with another calculation of “shortage” in para 12 of the SCN based on opening stock of materials as on 01-04-2000 and taking into account receipts of raw materials and clearance of final products after that and this calculation lead them to a shortage of 29,37,295 Kgs of raw material. This ‘fallback' plan, they themselves were not so sure, they did not mention it explicitly for the purpose of demanding CENVAT credit but stuck to alleged shortage of inputs of 52,26,797 kgs.

However, the adjudicating authority confirmed the duty demand of Rs. 95,26,238/- (on 29,37,295 kgs of raw material based on calculation in para 12 of SCN) and a penalty of equal amount of Rs. 95,26,238/- was imposed under Rule 57-AH of Central Excise Rules, 1944 and Rule 13 of Cenvat Credit Rules, 2000.

Aggrieved by the said order, the appellants are before the CESTAT.

The appellant inter alia submitted that the demand is based on the stock statements given to their bankers for availing credit limits and the same showed receipts far in excess of what was accounted in their books; that the stock for each month declared to the bank included the stock received in the previous months and lying un-utilized; that the Department counted the same stock in each month and thus many times over and that has resulted in the alleged shortage of inputs in the factory; that they had taken credit of Rs. 1,29,31,823/- on materials purchased by them during the period whereas the show cause notice demanded reversal of Cenvat credit to the extent of Rs. 1,69,51,548/-.

It was also submitted that confirmation of duty demand by the adjudicating authority was also wrong as he had adopted a new approach other than what was adopted in SCN for demanding duty. Inasmuch as since the adjudicating order travels beyond the scope of the show-cause notice, the order is not maintainable. Moreover, no evidence regarding removal of clearance of inputs as such after taking credit or excisable goods manufactured using the raw materials allegedly found short is adduced by the department.

The appellant also informed the Bench that a similar show cause notice issued to their Unit No. II in the jurisdiction of the same Commissionerate was dropped by the adjudicating officer.

The Revenue representative justified the order of the lower authority and submitted that if there is any error in calculation the matter may be remanded.

The CESTAT was not all pleased with the investigation and remarked that the case was made in a very casual manner.

Some of the observations of the Bench need mention here -

++ We find that the case made out is one of shortage as on 20-12-2002 of inputs on which CENVAT credit was taken. This situation, if true, could be on account of clandestine removal of inputs on which CENVAT credit was taken. The situation could also arise due to bogus credits on the basis of documents without receiving goods covered by such invoices. It could also be due to clandestine manufacture of final products using the impugned inputs and clearing such final products without payment duty. But revenue has not found any evidence of instances of any such activity. The SCN mentions only the first type of possibility and not the second and third type of possibilities.

++ During stock taking or immediately thereafter the Revenue did not discuss with the appellants what their doubts were and seek clarification from the appellants. Thereafter they issued Show Cause Notice making a case of shortage of inputs based on the stock statements given by the appellants to the banks (para 4 of SCN). But the SCN had a fallback calculation based figures in balance sheet as on 01-04-2000 and receipts and issue thereafter as seen from paras 11 and 12 of SCN. When the obvious errors in the first approach were pointed out, the adjudicating authority adopted the latter method of determining the shortage. To this extent the argument of the appellant that duty demand is confirmed by adopting an entirely new basis is not correct.

++ It is seen that the method finally adopted in the impugned order is also faulty in as much as there are serious inaccuracies even in totalling of the work sheets. Further supplies made to all the customers were not taken into account. There are defects in the method adopted for arriving at weight of goods supplied to BHEL, their main customer. There are other issues like not taking into account the material lying as work-in-progress, material sent by them for job work etc. The argument that such material was never pointed out during stock taking is not a valid objection from Revenue because at the time of stock taking the reason for stock taking was not explained so that the appellants could point out errors due to such omissions. It is also not clear why the opening balance for the year 2000-01 is taken from balance sheet and thereafter the balance sheet figures of closing balance for that year and OB and CB for subsequent years are not taken note of and efforts made to point out discrepancies. On the whole the entire calculation gives the impression of a very raw method was adopted by interpreting figures in the balance sheet and account books of appellants without taking the help of the appellants or an accounting professional, muddling through making even totalling mistakes on the way. This type of case made by Revenue deserves to be dropped without further examination.

++ as per para 12 of the SCN the total receipts of raw material was 63,72,064 kg. Revenue's case is that out of this 29,37,245 kgs was removed as such. Then the question remains how all the works as per their accounts were executed by them. That is why the appellant is raising the issue that the Revenue's case suggests that the appellants were converting their accounted money into unaccounted money. That is to say the finding in the impugned order is to the effect that they had accounted raw materials but the accounted material was sold without accounting to generate unaccounted money. This is totally at variance with their financial position as reflected in their balance sheet. It is also submitted that they had paid total excise duty of Rs.2,85,31,963/- during the impugned period and the total Cenvat credit taken was of Rs.2,15,62,497/-, showing payment of duty on value addition of about 32%. If inputs involving duty element of Rs. 95,26,238/- is considered as clandestinely removed as inputs itself then the value addition becomes 137%.

++ We have not been able to understand whether the arguments given in para 25 of the order is the arguments of the appellants or the findings of the adjudicating authority. Since this para figures under the heading "Discussion and Findings" before para 22, we consider that para 25 gives the finding of the adjudicating officer. That being the case we are not able to understand the meaning of the sentence "All these facts have also been admitted in the show cause notice." appearing in the said paragraph. If the adjudicator has understood the allegations in the SCN as admission by the appellant then the adjudication order is not worth examining at all.

++ In the normal course when there are inaccuracies in adjudication, the Tribunal sends the case back for a de-novo consideration. But we are of the view that in this case the Revenue's case is without any substance and made by its own mistakes of numerous types and without an effort to understand the issues involved. Since we consider that this is a case made without the minimum diligence required, sending such matter for de-novo consideration will be another round of harassment for the appellants and most likely another round for wasting the time of the Tribunal also in a further litigation in second round. We also note that similar notice issued to Unit-II of the Appellant in the same jurisdiction has been dropped. On overall appreciation of the facts as brought out in the SCN and reply of the appellants and for reasons stated above we consider it fit to set aside the impugned order.

In fine, the order was set aside and the appeal was allowed.

Let the blame game begin!

(See 2013-TIOL-135-CESTAT-DEL)