Cenvat credit reversal for marginal raw material shortage is unwarranted absent evidence of clandestine removal or duty evasion.

Marginal shortage of raw material, standing at about 0.2% of total inputs, was treated as insufficient basis for reversal of Cenvat credit where there was no evidence of clandestine removal or consumption in the manufacture of dutiable final products without duty payment. The assessee's explanation, based on voluminous operations, movement of materials, and transition to a computerized accounting system, was accepted as a plausible commercial explanation. Small input variations within tolerance limits were treated as normal business practice, and in the absence of contrary evidence, credit could not be denied. On that basis, the demand and penalty were not sustainable.

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Issues: Whether reversal of Cenvat credit was warranted on account of shortage of raw materials where the shortage was marginal and the assessee explained the discrepancy as arising from voluminous operations and transition to a computerized accounting system.

Analysis: The shortage of raw material was admitted to be only about 0.2% of the total inputs. There was no evidence that the material had been clandestinely cleared or consumed in the manufacture of dutiable final products cleared without payment of duty. The assessee's explanation was supported by the scale of operations, the complexity of material movement, and the change in accounting method. In comparable circumstances, small variations in inputs within tolerance limits are to be treated as normal commercial and professional practice and not as a basis for denying credit, particularly when there is no contrary evidence.

Conclusion: Reversal of Cenvat credit was not justified, and the demand and penalty could not be sustained.

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