2023 (11) TMI 1385 - AT - Central Excise

Minor Stock Discrepancies Not Enough for Duty Evasion Claims Under Customs Law Section Rules

CESTAT Kolkata held that minor discrepancies in raw materials and work-in-progress, when adjusted against excesses, were negligible and did not indicate ... Clandestine removal - audit shortages found - shortage of input, work-in-progress and finished goods without considering the excess was found during the course of audit - HELD THAT:- There is certain excesses and certain shortages on the raw materials and work in progress. There is no shortage on finished goods. On adjusting all the figures of shortages and excesses, the difference is very negligible and it is to be ignored. In the case of National Engineering Industries Ltd. [2015 (10) TMI 1555 - CESTAT NEW DELHI] it was held that 'In the absence of any such corroboration the assessee’s plea on the no sustainability of order reversing credit or demanding duty has strong force and is to be admitted. Accordingly, we find the reversal of credit on the raw material and the demand of duty on the finished goods solely on the ground of physical stock taking done by the assessee is not sustainable in the facts and circumstances of the present case.' The adjustment of shortages and excesses of the goods allowed as per the chart given. As the difference is very negligible, this can be ignored. The contention of the Appellant is agreed upon that the shortages, if any, on the raw material or work in progress would not automatically lead to the conclusion that the goods have been manufactured and clandestinely cleared. In this case, it is observed that there is no evidence on record to establish any clandestine manufacture or clearance without payment of duty - the demand confirmed in the impugned order based on shortages found in the Cost Audit Report is not sustainable. As there is no suppression with intention to evade payment of duty established, no penalty is imposable in the facts and circumstances of the case. Appeal allowed. ISSUES: Whether demand of central excise duty can be confirmed on shortages of raw materials, work-in-progress, and finished goods without considering corresponding excesses found during audit.Whether mere physical shortage or excess in inventory necessarily indicates clandestine removal or unaccounted clearance of goods.Whether demand raised invoking extended period of limitation is sustainable in absence of evidence of suppression or clandestine clearance.Whether penalty can be imposed when demand is based solely on statutory auditors' report without evidence of suppression or intention to evade duty. RULINGS / HOLDINGS: The demand of duty confirmed solely on shortages without considering the excesses is unsustainable as it violates the principle of natural justice; the net shortage after adjustment is negligible and 'is to be ignored.'The presence of 'shortages, if any, on the raw material or work in progress would not automatically lead to the conclusion that the goods have been manufactured and clandestinely cleared.'The demand raised on the basis of the statutory auditors' report without corroborative evidence of clandestine removal or suppression is not sustainable, and the invocation of extended limitation period is not justified in such circumstances.Since the demand is based on the auditors' report and no suppression of facts or intention to evade duty is established, 'no penalty is imposable' in the facts and circumstances of the case. RATIONALE: The Court applied the legal framework under the Central Excise law and relied on principles established in precedents including decisions of the Tribunal and the Hon'ble Apex Court that recognize minor variations in inventory as 'process loss' or accounting discrepancies inherent in large-scale manufacturing with computerized accounting systems.The Court referred to the statutory provisions under the Companies Act, 1956 relating to cost audit reports and physical verification of inventory, emphasizing that shortages and excesses must be considered together rather than in isolation.The Court followed the reasoning in the decision of National Engineering Industries Ltd., which held that minor variations below tolerance limits do not justify reversal of credit or demand of duty absent evidence of clandestine removal.The Court rejected the Revenue's contention that physical verification must be conducted by officers before allowing adjustment of shortages with excesses, noting that the physical inventory was conducted by the assessee and that accounting errors or complexities can explain discrepancies.The Court emphasized the principle of natural justice by holding that ignoring excesses while confirming demand on shortages alone is impermissible.No dissent or doctrinal shift was recorded; the judgment aligns with established jurisprudence on inventory discrepancies and excise duty demands.