2023 (6) TMI 448 - AT - Central Excise

Tribunal upholds pig iron shortage demand but allows credits on iron products

The Tribunal upheld the demand for shortage of pig iron but set aside the disallowed credits on iron and steel products, welding electrodes, MIG wires, ... Recovery of Central Excise duty - shortages of 189.50 MT of Pig Iron - valid reasons for shortages were given or not - HELD THAT:- The shortage was noticed during the course of stock taking by the Anti Evasion wing of Haldia Commissionerate. The Appellant could not offer any valid reason for the shortages. In fact the Appellant has paid the duty and cess along with interest on the shortages. Hence, the demand of duty and cess along with interest on the shortages upheld. Since there was no proper explanation for the shortages, the penalty imposed under section 11 AC of the Central Excise Act,1944 also upheld. Irregular availment and utilization of credit on the Angles, Channels, Beams, Joists etc - HELD THAT:- The said items of iron and steel products were the inputs used in the manufacture of capital goods and the said capital goods were in turn used in the manufacture of their final products. The said goods were also used in the pollution control system. The structure and effluent system are taken together will constitute a unit of pollution control system - As per Rule 2(k) of Cenvat Credit Rules, 2002, Input includes goods used in the manufacture of capital goods which are further used in the factory of the manufacturer. In the present case, the Angles, Channels, Beams, Joists are the inputs used in the manufacture of capital goods namely, pollution control system. The structure and effluent system are taken together constitute a unit of pollution control system. Hence, it can be construed that the Angles, Channels, Beams are used in the manufacture of capital goods and hence they fall within the ambit of ‘inputs’ eligible for credit - The Appellant are eligible for the credit of Rs.5,82,44,793.93 availed on the Angles, Channels, Beams, Joists used in the manufacture of capital goods. Disallowance of credit taken on welding Electrodes and MIG wires - HELD THAT:- The Appellant stated that the the said goods were used in the manufacture of capital goods and in the repairs and maintenance of plant and machineries and hence they are eligible for the credit. In support of their contention, they relied upon the decision in the case of AMBUJA CEMENTS EASTERN LTD. VERSUS COMMISSIONER OF C. EX., RAIPUR [2010 (4) TMI 429 - CHHAITISGARH HIGH COURT], wherein it has been held that CENVAT credit is available to welding electrodes used in the repair and maintenance of machineries - the Appellant are eligible for the credit of Rs33,63,796.67 on the welding Electrodes and MIG Wires used in repair and maintenance of machineries, as inputs’ under Rule 2(k) of the CENVAT Credit Rules, 2004. Denial of credit availed on 73.66 M.T of Iron ore Fines on the ground that they were not used in the manufacture of final products - HELD THAT:- The Appellant stated that the fines contained in the Ore procured by them from M/s Tata Metalinks were ‘thicker’ in size which can be used in their DRI plant to produce ‘sponge iron’. It is observed that the receipt and duty paid nature of the iron ore are not in dispute. The Appellant states that the iron ore fines received by them were thicker in size and can be utilised to produce ‘sponge iron’. There is no evidence brought on record to disprove this claim. Since, the receipt and duty paid nature of the inputs are not in dispute and no other evidence brought on record to establish that the iron ore fines were not utilised in the manufacture of their final products, it is held that the Appellant are eligible for the credit of Rs 23680.68 availed on the iron ore fines. The demand of Rs. 3,82,278/- confirmed in the impugned order on the shortages of 189.50 MT of Pig Iron. The demand of interest and penalty on this count is also confirmed. The other demands on Angles, Channels, Beams Joists and welding electrodes, MIG Pipes and the demand on Iron Ore fines set aside. Accordingly, the impugned order is modified on the above lines. Appeal disposed off. ISSUES PRESENTED AND CONSIDERED 1. Whether the demand of Central Excise duty, education cess and secondary & higher education cess on the shortage of 189.50 MT of pig iron, together with interest and penalty under Section 11AC, is sustainable where shortages were found on stock verification and no satisfactory explanation was offered. 2. Whether CENVAT credit of Rs.5,82,44,793.93 availed on Angles, Channels, Beams and Joists is admissible under the CENVAT Credit Rules when such items are claimed to have been used in the manufacture of capital goods (pollution control system) and thereby in the manufacture of final products. 3. Whether CENVAT credit of Rs.33,63,796.67 availed on welding electrodes and MIG wires is admissible as inputs used in the manufacture of capital goods and/or in repairs and maintenance of plant and machinery. 4. Whether CENVAT credit of Rs.23,670.68 availed on 73.66 MT of iron ore fines is admissible where the Department contends such fines are unusable (would damage blast furnace) but assessee claims they were of usable size and consumed in manufacture (sponge iron). 5. Whether the adjudication (impugned order) is vitiated by violation of principles of natural justice (order passed ex parte) or barred by limitation for the periods in issue. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Duty, interest and penalty on shortage of pig iron Legal framework: Proviso to sub-section (1) of Section 11A of the Central Excise Act (recovery/appropriation of amounts paid), rules under Central Excise Rules (including Rule 25(a),(b),(d) for imposition of penalty), and Section 11AC for penalty where credit wrongly taken/shortages without explanation. Precedent Treatment: No specific precedents were relied upon by the Court for this point; adjudication based on facts and statutory provisions. Interpretation and reasoning: The Anti-Evasion unit's stock verification revealed a shortage of 189.50 MT. The assessee offered no valid explanation for the shortage. The assessee had paid duty and cess with interest; appropriation was lawful. Absence of a satisfactory explanation rendered the imposition of duty, interest and penalty appropriate under the statutory scheme. Ratio vs. Obiter: Ratio - where statutory records show shortage and no acceptable explanation is offered, duty and cess (with interest) may be confirmed and penalty under relevant provisions imposed. No obiter observations material to other issues. Conclusion: Demand of Rs.3,82,278 (duty, cess and interest) on shortages is upheld; penalty under Section 11AC is upheld. Issue 2 - CENVAT credit on Angles, Channels, Beams, Joists (claimed as inputs/capital goods) Legal framework: CENVAT Credit Rules - definition of 'input' and 'capital goods' (Rule 2(k) of CENVAT Credit Rules, 2004; earlier Rule 2(k) / 2(g) concepts referenced), entitlement to credit where goods are used in manufacture of capital goods which are further used in the factory. Precedent Treatment: Assessee relied on an array of authorities to support eligibility; the Tribunal applied the statutory definition and reasoning from prior decisions recognizing inputs used in manufacture/repair as eligible. Specific precedents relied upon by the assessee were considered but decision turned on statutory definition and facts. Interpretation and reasoning: The Angles, Channels, Beams and Joists were found to be used in manufacture of capital goods, namely the pollution control system (structure and effluent system forming a unit). Under Rule 2(k), inputs include goods used in the manufacture of capital goods which are further used in the factory of the manufacturer. Given the factual finding that these iron/steel items formed part of the pollution control capital installation integral to manufacturing operations, they fall within the statutory definition of 'inputs' eligible for credit. Ratio vs. Obiter: Ratio - where goods are used in the manufacture of capital goods that are further used in the factory (here, pollution control system), such goods qualify as 'inputs' under Rule 2(k) and CENVAT credit is admissible. Observation distinguishing purely structural/non-manufacturing uses is implicated by the holding. Conclusion: CENVAT credit of Rs.5,82,44,793.93 on Angles, Channels, Beams and Joists is allowed; the disallowance in the impugned order is set aside. Issue 3 - CENVAT credit on welding electrodes and MIG wires (repairs & maintenance / capital goods) Legal framework: CENVAT Credit Rules - definition of 'inputs' and entitlement to credit for goods used in repair and maintenance of plant and machinery; Rule 2(k) / Rule 2(g) interpretive provisions as applied. Precedent Treatment: Reliance on decision(s) permitting CENVAT credit for welding electrodes used in repair and maintenance (Tribunal and High Court decisions, including a decision permitting credit for welding electrodes used in repairs). The Tribunal explicitly cited and followed authority holding welding electrodes used in repairs and maintenance are inputs entitled to credit. Interpretation and reasoning: The assessee asserted welding electrodes and MIG wires were used in manufacture of capital goods and in repairs/maintenance. The Tribunal relied on precedent (Ambuja Cement decision summarized in the impugned record) and statutory definitions to hold that such consumables used in repair and maintenance of plant and machinery qualify as inputs under Rule 2(k)/(2(g)) and hence are eligible for CENVAT credit. Ratio vs. Obiter: Ratio - welding electrodes and similar consumables used in repairs and maintenance of plant and machinery are inputs for purposes of CENVAT credit and such credit is admissible. This follows and applies existing precedents. Conclusion: CENVAT credit of Rs.33,63,796.67 on welding electrodes and MIG wires is allowed; the disallowance and associated penalties are set aside. Issue 4 - CENVAT credit on iron ore fines Legal framework: CENVAT Credit Rules - admissibility of credit where inputs are received, duties paid, and actually used in manufacture of final products; burden to establish non-use or unusability by the Department. Precedent Treatment: No new precedent overruled or distinguished; approach followed is evidentiary and fact-driven consistent with principles that where receipt and duty paid nature is not disputed and Department fails to disprove utilisation, credit may be allowed. Interpretation and reasoning: The assessee had receipts of iron ore with fines component and duty paid on those receipts. Department's contention that fines were 'poison' for blast furnace was supported only by a statement from supplier's officer; assessee contended fines were of thicker size usable in DRI plant to make sponge iron. There was no documentary or other evidence to rebut the assessee's claim or to show non-utilisation. As receipt and duty-paid status was undisputed and Department failed to prove non-use, credit was allowable. Ratio vs. Obiter: Ratio - where inputs are duty paid, and Department fails to produce evidence disproving utilisation in manufacture of final products, CENVAT credit on such inputs must be allowed. Observations on standards of departmental proof and reliance on documentary evidence are instructive for similar factual disputes (ratio on evidentiary burden). Conclusion: CENVAT credit of Rs.23,670.68 on iron ore fines is allowed; the disallowance in the impugned order is set aside. Issue 5 - Alleged violation of natural justice and limitation defense Legal framework: Principles of natural justice (opportunity of personal hearing) and limitation provisions for issuance of show-cause notices/demands under Central Excise law. Precedent Treatment: Assessee pleaded several authorities on limitation and bonafide belief for exclusion of extended period; Tribunal considered them in submissions but disposition turned on factual findings and legal characterisation of inputs. Interpretation and reasoning: The Tribunal recorded the assessee's contentions (order passed ex parte; limitation) but its final determinations on each substantive demand show the Tribunal treated evidence and procedural sufficiency as adequate for adjudication: shortages were proved by stock verification and no satisfactory explanation offered; for credit items the Tribunal found factual basis and applied statutory definitions to allow credit. The Tribunal did not find the limitation or procedural objections sufficient to negate the substantive findings; no specific finding of vitiation for violation of natural justice was recorded. Ratio vs. Obiter: Obiter/factual - while procedural objections were raised, the Tribunal's disposition indicates those objections did not prevail on the facts. No general pronouncement altering the law on limitation or natural justice was made. Conclusion: Procedural objections (ex parte adjudication and limitation) were not accepted as sufficient to overturn the substantive findings; demands allowed or disallowed based on evidentiary and statutory analysis rather than on procedural infirmity.