2015 (12) TMI 248 - AT - Central Excise

Appellant wins yarn shortage case, duty demand set aside. Wool waste duty upheld.

M/s. Uniworth Ltd. Versus CC & CE, Raipur

The Tribunal found in favor of the appellant, a 100% EOU, in a case involving alleged shortages of yarn and wool waste in their factory. It was determined ... Duty demand - Clandestine removal of goods - Shortage of goods - Held that:- While in the factory of UL shortage of 73.904 MTs. had been found, in the factory of UTL there was excess stock of 73.904 MTs. of mixed woollen yarn and as such, we are of the view that the alleged shortage in the factory of UL matches with the excess found in the factory of UTL. We also take note of the fact that the appellant under their letter dated 5.4.2000 addressed to the Asstt. Commissioner had intimated that they have identified about 75 MTs. of moth and mildew affected wool yarn and have decided to store it separately so that the other yarn do not get affected and that they intend to shift the same to other 100% EOU. UTL which is adjacent to premises of UL. This letter bears the stamp of the office of the Asstt. Commissioner and the receipt of this letter as such is not disputed. It is also seen that on 16.06.2000, the statement of Shri D.K. Kothari, General Manager had been recorded under Section 14 of the Central Excise Act, 1944 and on being questioned about shortage, had stated that this yarn has been shifted to another godown, as the yarn was damaged and moth eaten and as such, it is not the shortage. As regards the shortage of 1.603 MTs. of wool waste, this shortage is not denied and the explanation given by the appellant is that the same may be due to wrong recording of weight of the wood waste, as the wool being hygroscopic in nature tends to gain weight on account of absorption of moisture. But in our view, this explanation does not explain the shortage, as the stocktaking in the factory had been done during monsoon period in the month of June, 2000 when there is no question of yarn losing weight. In view of this, the duty demand of ₹ 12,564/- on the shortage of 1.603 MTs. of wool waste is upheld. - Decided partly in favour of assessee. ISSUES PRESENTED AND CONSIDERED 1. Whether alleged shortage of finished yarn detected in stock taking of one 100% EOU unit can be treated as clandestine removal liable to duty and penalty where an equal quantity is found in the godown of a separate but adjacent 100% EOU unit of the same group. 2. Whether communication by the manufacturer to the Assistant Commissioner requesting permission to shift moth- and mildew-affected yarn to the adjacent unit, and an earlier statement by the unit's General Manager that the yarn had been shifted, oblige the revenue to have made a positive record or denial before treating the shortage as clandestine removal. 3. Whether shortage of wool waste (1.603 MT) can be explained by hygroscopic properties of wool (gain/loss of moisture) and thus negate duty demand when stock taking occurred during the monsoon period. ISSUE-WISE DETAILED ANALYSIS - Issue 1: Treatment of alleged shortage in one unit where identical quantity found as excess in adjacent unit Legal framework: Central Excise law permits recovery of duty for clandestine removals detected by stock discrepancies and allows imposition of penalty where removal without payment is established; stock-taking and Panchnama evidence are relevant. Precedent Treatment: The Court relied on principles governing proof of clandestine removal by matching shortages and excesses and on requirement of concrete departmental findings; no specific prior case law was invoked or overruled in the judgment. Interpretation and reasoning: The Tribunal examined contemporaneous records - Panchnama, stock registers, a departmental-stamped letter from the manufacturer dated prior to stock taking, and the General Manager's statement recorded under statutory provision during stock taking - and found that the numerical shortage in Unit A (73.904 MT) corresponded with an equal excess in Unit B. The Tribunal placed weight on (a) receipt stamp on the letter intimating identification and proposed shifting of approximately 75 MT of moth- and mildew-affected yarn to the adjacent unit; (b) the physical proximity and common compound status of both units (both 100% EOUs); and (c) the General Manager's contemporaneous statement that the yarn had been shifted because it was damaged. The Tribunal found the Commissioner's adjudication defective for failing to rely on or supply the earlier recorded statement while instead depending on a later statement, and for not requiring the revenue to clarify its position after receiving the shifting-intimation letter. The Tribunal held that, given departmental control over both units and the receipt of the intimation, the finding of clandestine removal was not sustainable where an equal quantity was found at the adjacent unit and the owner had notified the department of the intended movement. Ratio vs. Obiter: Ratio - where a quantitative shortage in one controlled premises corresponds to an equal excess in adjacent controlled premises and there exists contemporaneous departmental receipt of intimation about shifting damaged goods together with a recorded statement by the manufacturer's manager admitting shifting, the revenue's conclusory treatment of the shortage as clandestine removal is unsustainable absent explanation or contrary departmental finding. Obiter - observations on the impracticality of clandestine overnight shifting in physically controlled premises given the presence of departmental staff. Conclusion: The duty demand and penalty in respect of the 73.904 MT shortage of yarn were set aside as the shortage was not found to be a genuine clandestine removal given matching excess, prior intimation to the department, and the General Manager's contemporaneous statement. ISSUE-WISE DETAILED ANALYSIS - Issue 2: Effect of manufacturer's request to shift damaged yarn and departmental response obligation Legal framework: Administrative fairness and evidentiary obligations require that when an assessee notifies or seeks permission from the tax authority regarding movement of dutiable goods, the authority should record and respond; failure to do so bears on whether movement was clandestine. Statements recorded under statutory provision during inspection form part of the record and should be considered in adjudication. Precedent Treatment: No specific authorities cited; tribunal applied principles of procedural fairness and proper reliance on contemporaneous records. Interpretation and reasoning: The Tribunal found the letter dated prior to stock taking, bearing the Assistant Commissioner's office stamp, placed a duty on the revenue to clarify whether permission was granted or denied before treating the movement as clandestine. The Commissioner's approach - treating the letter as only a request and relying on a later statement while ignoring or not furnishing the earlier contemporaneous statement to the appellant - was criticized as inadequate. The Tribunal emphasised that where both units were under physical control of excise officers, the onus was on the department to record or clarify such intimation rather than proceed to demand duty and penalty without addressing the contemporaneous evidence provided by the assessee. Ratio vs. Obiter: Ratio - departmental receipt of a written intimation about shifting damaged stock coupled with failure to respond or otherwise clarify undermines treating subsequent shortage as clandestine removal; such communications and contemporaneous statements must be considered and furnished to the assessee. Obiter - remarks that departmental control over premises increases expectation of active clarification by officials regarding reported movements. Conclusion: The Commissioner's failure to act upon or give findings regarding the intimation letter and the earlier statement rendered the duty and penalty findings in respect of the yarn shortage unsustainable. ISSUE-WISE DETAILED ANALYSIS - Issue 3: Explanation for shortage of wool waste by hygroscopic properties during monsoon Legal framework: Shortage in stock may be explained by bona fide factors (e.g., inherent properties of goods affecting weight); revenue may accept scientific/commonsense explanations if credible in context of timing and conditions of stock taking. Precedent Treatment: No prior decisions were cited; tribunal applied factual and scientific reasoning particular to hygroscopic materials and seasonal conditions. Interpretation and reasoning: The appellant's explanation that wool being hygroscopic may gain or lose weight was examined against the timing of stock taking (June, monsoon). The Tribunal reasoned that absorption of moisture in monsoon would lead to gain, not loss, of weight; thus hygroscopicity does not plausibly explain the observed shortage of 1.603 MT. The absence of an alternative adequate explanation or evidence to demonstrate measurement error led the Tribunal to uphold the duty demand for this quantity. Ratio vs. Obiter: Ratio - scientific property-based explanations for shortage must be contextually consistent (season, direction of weight change); where the explanation is inconsistent with prevailing conditions, the shortage remains attributable to removal and duty demand may be sustained. Obiter - none beyond application of commonsense climatic effect on hygroscopic materials. Conclusion: The duty demand of Rs. 12,564/- in respect of shortage of 1.603 MT of wool waste was upheld; the hygroscopicity explanation was rejected as inconsistent with monsoon-period stocktaking. OVERALL CONCLUSION 1. The adjudicated duty demand and penalty in respect of the 73.904 MT shortage of various yarns were set aside because the shortage matched an equal excess found in an adjacent, controlled unit, and because the revenue failed to address or rely upon contemporaneous communications and statements indicating authorised/known shifting of damaged stock. 2. The duty demand in respect of the 1.603 MT shortage of wool waste was upheld because the appellant's scientific explanation was inconsistent with the timing and conditions of stock-taking and did not satisfactorily account for the shortage.