Cenvat credit on marginal stock variation is not denied when measurement differences explain the shortage and no diversion is proved.

Cenvat credit on inputs cannot be denied merely because stock verification shows a marginal shortage where the variation is explained by natural differences in temperature and density measurement of lubricating oil. Where goods were received in sealed condition, invoices reflected the dispatched quantity, and there was no proof of diversion, clandestine clearance, or non-use in manufacture, credit on the invoiced quantity was allowed. A demand raised beyond the normal period was also treated as unsustainable because the record did not show suppression of facts or clandestine removal. The note treats these principles as supporting maintenance of credit and rejection of the extended demand.

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Issues: (i) Whether Cenvat credit could be denied merely because a shortage of raw materials was noticed during stock taking, where the discrepancy was said to arise from temperature and density variation in measurement of lubricating oil. (ii) Whether the demand was otherwise sustainable when the notice was issued beyond the normal period and the department had not shown diversion or clandestine clearance of inputs.

Issue (i): Whether Cenvat credit could be denied merely because a shortage of raw materials was noticed during stock taking, where the discrepancy was said to arise from temperature and density variation in measurement of lubricating oil.

Analysis: The shortage was found in stock records, but the goods were received in sealed condition and the invoices showed the quantity dispatched. The discrepancy was held to be marginal and explainable by natural variation in volume and density when measurements are taken at different temperatures. There was no finding that the inputs were not received for use in manufacture or that the goods were diverted.

Conclusion: Cenvat credit could not be denied on this ground, and the assessee was entitled to credit on the invoiced quantity.

Issue (ii): Whether the demand was otherwise sustainable when the notice was issued beyond the normal period and the department had not shown diversion or clandestine clearance of inputs.

Analysis: The show cause notice was issued after the relevant period, and the record did not show any clandestine removal or suppression of facts by the assessee. The Tribunal also treated the earlier relied upon contrary decision as inapplicable on the facts and noted that the larger bench view supported allowance of credit where the variation was within tolerable limits and no diversion was established.

Conclusion: The extended demand was not sustainable.

Final Conclusion: The appeal failed in full, and the order dropping the proceedings was sustained on both merits and limitation.

Ratio Decidendi: Cenvat credit on inputs cannot be denied for marginal stock variation attributable to natural measurement differences, in the absence of diversion, clandestine clearance, or proof that the inputs were not received for manufacture.

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