CESTAT allows CENVAT credit appeal, finds 0.28% variance industry-acceptable, demand time-barred without proper investigation

CESTAT Chandigarh allowed the appeal regarding CENVAT credit denial for scrapped/raw materials. The tribunal found the case was based solely on ledger entries without proper investigation or recorded statements. The appellant maintained proper records verified by drug authorities and provided chartered accountant certification showing only 0.28% variance, which is industry-acceptable. Following Tata Motors precedent, CESTAT held CENVAT credit cannot be denied on theoretical input variance. The demand was also time-barred as it was based only on audit without further investigation, and the appellant regularly filed returns without suppressing material facts to evade duty payment.

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Issues Involved:
1. Entitlement to Cenvat Credit on scrapped/lost raw and packing materials.
2. Validity of the impugned demand based on audit records.
3. Applicability of the limitation period for issuing the show cause notice.

Issue-wise Detailed Analysis:

1. Entitlement to Cenvat Credit on Scrapped/Lost Raw and Packing Materials:
The appellant is engaged in the manufacture of medicaments and avails Cenvat Credit on inputs and capital goods. During an audit for the year 2016-17, it was observed that certain amounts related to scrapped/lost raw and packing materials were not used in the manufacturing process. Consequently, a show cause notice was issued, and the adjudicating authority confirmed the demand. The Commissioner (Appeals) upheld this order, leading to the present appeal.

The appellant argued that the impugned order was unsustainable as it was based solely on ledger entries without proper inquiry or investigation. The ledger entries were related to quantity variance between actual and standard consumption, and there was no evidence of input write-off. The appellant's records, verified by drug authorities and supported by a Chartered Accountant's certificate, showed no input write-off. The variance was only 0.28%, which is typically accepted in the industry. The appellant cited several precedents, including decisions from CESTAT Bangalore, Andhra Pradesh High Court, Rajasthan High Court, and CESTAT Mumbai, which supported their case.

2. Validity of the Impugned Demand Based on Audit Records:
The appellant contended that the demand was based solely on ledger entries without any further inquiry or investigation. The ledger entries reflected quantity variances within acceptable industry norms. The appellant maintained proper records verified by drug authorities and provided a Chartered Accountant's certificate confirming no input write-off. The variance of 0.28% was considered negligible. The appellant cited several judicial decisions, including Tata Motors Ltd. vs. Commissioner of Central Excise, Pune-I, which held that minor discrepancies in inventory due to human error or accounting practices should not lead to denial of Cenvat Credit. The Tribunal in Tata Motors' case emphasized that such discrepancies are commercially acceptable and do not indicate clandestine removal or non-receipt of inputs.

3. Applicability of the Limitation Period for Issuing the Show Cause Notice:
The appellant argued that the demand was barred by limitation. The show cause notice was issued on 07.02.2020 for the period 2016-17, which was beyond the prescribed limitation period. The appellant regularly filed returns and was subjected to periodic audits, with no suppression of material facts to evade duty. The Tribunal found that the show cause notice was issued based solely on audit findings without further inquiry or investigation. Given the appellant's compliance with filing returns and undergoing audits, the demand was deemed barred by limitation.

Conclusion:
After considering the submissions and perusing the material on record, the Tribunal found that the entire case was built on ledger entries without proper inquiry or investigation. The appellant maintained proper records verified by drug authorities, and the Chartered Accountant's certificate confirmed no input write-off. The variance of 0.28% was within acceptable industry norms. The Tribunal relied on several judicial precedents, including Tata Motors Ltd. vs. Commissioner of Central Excise, Pune-I, which supported the appellant's case. The Tribunal concluded that the impugned order was not sustainable in law and set it aside, allowing the appeal with consequential relief. The demand was also found to be barred by limitation, as the show cause notice was issued solely based on audit findings without further investigation. The appeal was allowed with consequential relief as per law.

Order Pronounced:
(Order pronounced in the open court on 04.06.2024)

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