2018 (2) TMI 284 - HC - Central Excise

Court affirms findings on shortages in manufacturing, upholds penalties.

The High Court upheld the findings of the Commissioner and the Appellate Tribunal, confirming that the appellant's shortages were not due to measurement ... CENVAT/MODVAT credit - manufacture of additives for lubricating oil - shortage of stock - The SCN were issued by the Commissioner of Central Excise, Chennai on the ground that during the course of verification of MODVAT/CENVAT credit accounts, and connected records, it was noticed by the Jurisdictional Range officer that the appellant was conducting physical stock taking of inputs on monthly basis and the quantity of inputs were found to be short and adjusted in the internal records, as consumption - demand of MODVAT/CENVAT credit taken on the inputs not used in the manufacture of final products during the period from January 2000 to March 2004, was issued u/r 13(2) of the CCR 2001 & 2002 and under erstwhile Rules 57 I(4), 57 AH(2) of CER, 1994 read with Section 11AC of the CEA, 1944. Contention of the appellant is that the shortage and loss are due to evaporation, due to reduction of viscosity and volatile nature of the inputs also. While using the inputs for the manufacture of final products, storage tanks are heated to reduce the viscosity, so as to facilitate the flow of inputs in the pipelines - the demand made by the authorities was for the reason that the inputs were not utilized fully, in the manufacturing process and the percentage of loss was, from 5.56 to 5.58%. Held that: - It is clear from the records that the appellant themselves have recorded such shortage of input, after the receipt of the inputs to their factory. While determining the shortage, it is clear from the records that the inputs found short, were not consumed, in the manufacturing process. When the inputs were not at all used in the process of manufacture, cenvat credit is not allowable. If there was shortage of physical stock, due to evaporation while heating (or due to weighment methods), the appellant could have explained the same, in their reply to the SCN. But it is clear that the appellant has neither explained the same before the officials nor before the Tribunal - It is seen that for the input OLOA 200, there was highest shortage of 12.658 MT in the month of January 2002 and 5.244 MT, in the month of March 2000. Similarly, in the case of Glissopal 1000, the highest shortage of 13.510 MTs was noticed in the month of May 2000 and 10.453 Mts, in the month of January 2001. The inputs have high viscosity and not volatile in nature. Considering the fact that shortage of inputs has been accounted only for specific months, and not in a continuous manner, it is established that shortage of inputs, is not on account of mere difference in variation of weighment methodology, but the said quantity of inputs have not been used in the manufacture of final products, after the receipt of inputs to the appellant factory. The shortage noticed is not a negligible quantity and that the appellant themselves have stated that the shortage is 5.58%. In the case of Bhuwalka Steel Industries Ltd., [2009 (11) TMI 177 - CESTAT, CHENNAI [LB]], the larger Bench of the Tribunal has clearly laid down that while complying the above tolerance limit for each entry is to be allowed, if there are any minor violations due to weighment method should be ignored, provided such violations are within the tolerance limit - Whereas, in the present case, the shortage is neither attributed due to volatile nature nor the percentage of shortage is negligible, as the appellant themselves have stated that the shortage is 5.58%. The appellant has failed to put forth any justifiable reason that the shortage was purely due to the difference in actual weighment, and mass-flow meter - It is a clear case of suppression of facts where the appellant has deliberately adjusted the shortage, as if it was used in the manufacture of final products, at the end of every month and created fresh opening balance at every month, without making reversal of credit on the shortage of inputs - the authorities below have rightly rejected the reasons given by the appellant for the loss/shortage of inputs and ordered as demanded in the SCN. Demand upheld - appeal dismissed - decided against appellant. Issues Involved:1. Legitimacy of CENVAT credit availed on inputs not used in the manufacture of final products.2. Validity of the Show Cause Notices and the extended time limit for demand.3. Justification for the shortages of inputs due to measurement methodologies, evaporation, and other factors.4. Imposition of penalties and interest on the appellant.Issue-wise Detailed Analysis:1. Legitimacy of CENVAT credit availed on inputs not used in the manufacture of final products:The appellant, engaged in the manufacture of additives for lubricating oil, availed CENVAT credit on excise duty paid on inputs and capital goods. Show Cause Notices were issued demanding the reversal of MODVAT/CENVAT credit taken on inputs not used in the manufacture of final products. The appellant contended that the shortages were due to heat, evaporation, and differences in measurement methodologies. However, the Commissioner found that the appellant adjusted the shortages in internal records as consumption without reversing the credit, indicating suppression of facts to evade duty. The Commissioner concluded that the shortages were not due to measurement differences but were actual shortages not used in manufacturing, thereby justifying the demand for reversal of credit.2. Validity of the Show Cause Notices and the extended time limit for demand:The Commissioner invoked the extended time limit under erstwhile Rules 57 I and 57 AH of Central Excise Rules, 1944, and Rule 12 of Cenvat Credit Rules 2001/2002, read with proviso to Section 11A(1) of the Central Excise Act, 1944, for the demand of credit on the shortages of inputs. The Commissioner held that the appellant suppressed facts to retain the credit involved on the shortages with an intention to evade payment of duty. The extended period was deemed applicable due to the deliberate adjustment of shortages by the appellant without informing the department.3. Justification for the shortages of inputs due to measurement methodologies, evaporation, and other factors:The appellant argued that the shortages were due to the physical nature of the inputs, measurement methodologies, and evaporation. However, the Commissioner found that there were no variations in physical stock and book stock for more than 70% of the period, indicating no issues with the measurement system. The shortages were substantial and not consistent with the appellant's explanations. The appellant's claim of evaporation loss was not substantiated, and the argument of inputs remaining in pipelines was not accepted. The shortages were attributed to the appellant's deliberate adjustment in internal records, not due to measurement differences or evaporation.4. Imposition of penalties and interest on the appellant:The Commissioner imposed penalties under Rule 13 or Rule 15 of Cenvat Credit Rules, 2002, and ordered the appellant to reverse the MODVAT/CENVAT credit availed on the shortages. The penalties and interest were upheld by the Appellate Tribunal, which dismissed the appellant's appeals and confirmed the orders disallowing credit and imposing penalties. The Tribunal found no infirmity in the orders passed by the authorities, and the High Court dismissed the appellant's civil miscellaneous appeals, confirming the Tribunal's final orders.Conclusion:The High Court upheld the findings of the Commissioner and the Appellate Tribunal, confirming that the appellant's shortages were not due to measurement differences or evaporation but were actual shortages not used in manufacturing. The extended time limit for demand was applicable due to suppression of facts, and the penalties and interest imposed were justified. The appellant's appeals were dismissed, and the orders of the Tribunal were confirmed.