2026 (1) TMI 321 - AT - Central Excise

Excise duty over sugar shortage and Cenvat credit on steel and capital goods: demands, penalties set aside.

Demand of excise duty based solely on sugar shortage detected on physical verification was held unsustainable because mere shortage, absent corroborative ... Disallowance of credit on various accounts - demand of Central Excise Duty on sugar found short during inspection by the Departmental Officers - Goods removed in clandestine manner - penalty imposed under Rule 25 of the Central Excise Rules, 2002 read with Section 11AC of the Central Excise Act, 1944 - difference of opinion - matter referred to Third Member. Whether the demand of excise duty on the stock of sugar found short consequent to physical verification is sustainable in law or not? - HELD THAT:- A clear-cut finding was given in the case of CCE, Kanpur vs. Minakshi Castings [2011 (8) TMI 896 - ALLAHABAD HIGH COURT] that mere shortage by itself does not lead to the conclusion of clearance of goods in clandestine manner - the said Order has not challenged by the department and thus the same has attained finality and cannot be contested at this stage. It is also found that instead of bringing fresh evidence of clandestine removal, the Adjudicating Authority has again confirmed the demand on the basis of mere shortage which cannot lead to a conclusion that there was a clandestine removal of goods. This issue is no more res integra and has been settled in various decisions relied upon by the Appellant. In this regard, I may refer to the decision of the Tribunal in the case of Star Alloys & Chemicals Pvt Ltd [2018 (4) TMI 363 - CESTAT NEW DELHI], wherein the Tribunal has held that mere shortage cannot lead to the conclusion of clandestine removal of goods in the absence of any other evidence brought on record by the Revenue showing such illegal activity on the part of the assessee. Further, Hon’ble Punjab & Haryana High Court in the case of CCE, Chandigarh vs. Kewal Garg [2019 (2) TMI 1624 - PUNJAB HARYANA HIGH COURT] has considered the issue of clandestine removal/shortage and upheld the order of the Tribunal by dismissing the appeal of the department. The view taken by the Member (Judicial) is legally correct. Whether the Cenvat Credit taken on HR Coils, Sheet, Shape, Section, Angle, Rod, Plate etc which were used for making base-structure, shades and civil-work in the factory, would be admissible or not? - Adjudicating Authority has denied the credit mainly on the basis of law laid down by the Larger Bench of the Tribunal in Vandana Global Ltd’s case [2010 (4) TMI 133 - CESTAT, NEW DELHI (LB)] - HELD THAT:- The said decision of the Larger Bench has been set aside by the Hon’ble Chhattisgarh High Court by relying upon the judgment of Hon’ble Gujarat High Court in Mundra Ports & Special Economic Zone Ltd’s case [2015 (5) TMI 663 - GUJARAT HIGH COURT]. In this regard, it may be noted that that Hon’ble Gujarat High Court in Mundra Ports & Special Economic Zone Ltd’s case [2015 (5) TMI 663 - GUJARAT HIGH COURT] has considered the amendment to Explanation-2 of Rule 2(k) of the Cenvat Credit Rules w.e.f. 07.07.2009 and after considering the other decisions of various Courts and the Rules, it was been observed by the Hon’ble Gujarat High Court - the Appellant are entitled to Cenvat Credit on these items, therefore, in this regard the view taken by the Member (Judicial) is legally correct. Whether credit can be allowed on capital goods after the factory has become operational? - Appellant has submitted that only allegation is that the capital goods were received after the factory became operational and there is no allegation that the capital goods were not received in the factory - HELD THAT:- Argument of the learned Counsel has a force that credit cannot be disallowed on capital goods simply because the same was received when the factory was in operation. Whether the Cenvat Credit taken on paints used for coating of base structure and shades and welding electrodes used for repairing purposes in the factory, would be admissible or not? - HELD THAT:- On this issue, both the Members of original bench have allowed the credit in the interim order, therefore, there is no need to give any finding on this issue. Whether the Cenvat Credit taken on HR Coils, Sheet, Shape, Section, Angle, Road, Plate etc which were cleared from the factory as such, would be allowable or not? - HELD THAT:- The Member (Judicial) has given the benefit of limitation on the ground that the issue of substantial amount was decided by the Larger Bench of the Tribunal in Vandana Global Ltd.’s case which has already been reversed by Hon’ble High Court. Therefore, the invoking the extended period of limitation cannot sustain; accordingly, on this issue, it is opined that the finding of the Member (Judicial) is correct. Whether the Cenvat Credit taken on Weigh Bridges installed outside the factory premises, would be valid or not? - HELD THAT:- The Member (Judicial) while dealing with this issue, has noted in para 11 of his interim order that “denial of credit on the ground that certain weigh bridges/weigh scales were removed outside factory, hence they were liable to pay the amount of credit availed under Rule 3(5) of the Cenvat Credit Rules.” The Member (Judicial) has also observed that “as per the details in the Annexure enclosed with the SCN, the items are not weigh bridges but are weigh scales; it is clear from Annexure-G of the SCN that 9 weigh scales, which were of higher capacity, were installed in the factory itself and balance 41 weigh scales of lower capacity were installed at the Agriculture Fields to weigh the sugarcanes from the farmers during the crushing season; the said weigh scales of smaller capacity are not permanently removed from the Appellant’s factory and the issue regarding the eligibility of credit on weigh scales has been decided in the case of Triveni Engg. & Inds. Ltd. [2014 (9) TMI 680 - CESTAT NEW DELHI]”; hence, the Member (Judicial) has allowed the credit - there are no infirmity in the finding of the Member (Judicial) on this aspect which is based upon the earlier decision of the Tribunal in the case of Triveni Engg. & Inds. Ltd. Whether the Cenvat Credit taken on Computers installed in Offices of the party, would be legally correct or not? - HELD THAT:- This issue is squarely covered by the decision of the Tribunal in the case of Maruti Suzuki Ltd vs. CCE, Gurugram [2023 (2) TMI 66 - CESTAT CHANDIGARH]. By following the said decision, the Member (Judicial) has allowed the credi - there are no infirmity in the finding of the Member (Judicial) on this aspect also. Whether the Appellant are liable to pay service tax under reverse charge mechanism on freight amount paid for transportation of sugarcanes from cane collection centers to the factory? - HELD THAT:- It is found that both the Members of original bench have allowed the appeal on this issue vide the interim order, therefore, there is no need to give any finding on this issue. Extended period of limitation - HELD THAT:- The Member (Judicial) has held that major amount involved, was earlier decided against the assessee by the Larger Bench in Vandana Global Ltd.’s case which has already been reversed by Hon’ble High Court of Chhattisgarh; also, the issue relates to interpretation of the same; therefore, the invocation of extended period of limitation was held to be bad as held by the Member (Judicial). Accordingly, on this issue also, the finding of the Member (Judicial) is correct. Whether the demand for normal period is sustainable when the extended period of limitation is not invokable? - HELD THAT:- If the SCN was issued invoking the extended period of limitation and subsequently, it was found that invocation of extended period could not sustain then the demand for the normal period also cannot be upheld in view of the judgement of Hon’ble Supreme Court in the case of Collector of C.Ex, Jaipur vs. Alcobex Metals [2003 (3) TMI 98 - SUPREME COURT] that when the combined SCN is issued for both normal and extended period, and the extended period is not held sustainable then the entire SCN has to be quashed. Similar view has been taken by the Hon’ble Calcutta High Court in the case of Infinity Infotech Parks Ltd vs. UOI [2014 (12) TMI 36 - CALCUTTA HIGH COURT] as well as by the Tribunal in the cases of Shyam Spectra Pvt Ltd [2024 (8) TMI 95 - CESTAT NEW DELHI] and R.S. Financial Services [2024 (8) TMI 1520 - CESTAT CHANDIGARH]. Penalty under Rule 25 of the Central Excise Rules - HELD THAT:- When the demand is set aside on merit, then the penalty under Rule 25 cannot be upheld and the Member (Judicial) has rightly set aside the same. The view taken by the Member (Judicial) is justified in law - Now, let the matter be placed before the original Division Bench for drawing majority view. Majority order - In view of the majority order, the appeal is allowed with consequential relief, as per law. 1. ISSUES PRESENTED AND CONSIDERED (i) Whether central excise duty and penalty could be sustained solely on the basis of shortage of finished goods found on physical verification, where the record contained no corroborative evidence of clandestine removal, notwithstanding that duty had been paid at the time of detection. (ii) Whether Cenvat credit on iron and steel items used for fabrication of base structures, foundations, shades and related works within the manufacturing set-up was admissible for the relevant period, and whether receipt of such items after the factory became operational could, by itself, justify denial of credit. (iii) Whether Cenvat credit was admissible on paints and welding electrodes used for coating/protection and repair/maintenance purposes in the factory. (iv) Whether credit on weigh-scales/weighing equipment installed at agricultural fields/cane collection points for seasonal weighment of sugarcane, and credit on computers installed in office, could be denied on the ground of being outside the factory/office use. (v) Whether service tax under reverse charge on freight for transportation of sugarcane from collection centres to the factory was payable where the freight was borne by farmers through deduction from their bills and where the record did not establish 'GTA service' by requisite documentary basis. (vi) Whether extended period of limitation could be invoked for recovery of duty/credit/service tax in the circumstances of the case, and the consequential sustainability of interest and penalties. 2. ISSUE-WISE DETAILED ANALYSIS A. Demand of duty and penalty based on shortage of finished goods Legal framework (as discussed by the decision-making opinions): The Tribunal considered the legal requirement that clandestine removal must be proved by the Department through positive/corroborative evidence, and that mere discrepancy/shortage in stock is insufficient to infer clandestine clearance. Interpretation and reasoning: The majority accepted that the earlier remand directions required examination of corroborative evidence beyond shortage, but the adjudication after remand again rested only on shortage and admission of shortage. The majority held that, even if shortage was admitted and duty was paid, absence of evidence such as transport documents, buyer identification, sale proceeds trail, or any other supporting material meant clandestine removal was not proved. The majority also relied on the controlled nature of the commodity as a factor undermining an inference of open-market clandestine sale without supporting proof. Conclusion: Duty demand founded only on shortage, without corroborative evidence of clandestine removal, was held unsustainable; consequently, penalty linked to such demand was also not sustainable. B. Cenvat credit on iron and steel items used for base structure/foundations/shades/civil-related works; and receipt after the factory became operational Legal framework (as discussed by the decision-making opinions): The Tribunal examined admissibility of credit for the period prior to 07.07.2009 and considered that denial based solely on the earlier larger bench view (applied by adjudication) could not stand in light of subsequent binding judicial views holding that the 07.07.2009 amendment was prospective and that the earlier larger bench approach was not good law for the prior period. Interpretation and reasoning: The majority held that for the period involved (prior to 07.07.2009), credit could not be denied merely by relying on the earlier larger bench decision, as later higher judicial decisions had disapproved that approach and treated the amendment as prospective. On the 'post-commissioning receipt' objection, the majority found no evidence in the record to conclude that receipt after the factory became operational established non-eligible use; it treated capital goods receipt as an ongoing process and held that operational status alone was irrelevant where receipt in the factory was not disputed. Conclusion: Denial of credit on iron and steel items for the impugned period was set aside; credit was held admissible, including where goods were received after the factory became operational, absent evidence proving non-eligible use. C. Cenvat credit on paints and welding electrodes used for coating/protection and repairs Interpretation and reasoning: The Tribunal treated these credits as covered and allowable on the basis that the issue stood settled, and found no sustainable ground in the impugned order to deny credit on these items used for factory purposes such as coating/protection and repair/maintenance. Conclusion: Credit on paints and welding electrodes was held admissible. D. Credit on weigh-scales/weighing equipment installed at agricultural fields/cane collection points and credit on computers installed in office Interpretation and reasoning: The majority accepted the factual characterization that the disputed items were weigh-scales (not weighbridges) used for sugarcane weighment during the crushing season, with a portion installed in the factory and the remainder deployed at fields/collection points without being treated as permanent removals from the factory set-up. On this basis and applying the cited coverage, denial of credit was rejected. Credit on computers installed in office was also allowed by applying the cited Tribunal view treated as covering the issue. Conclusion: Credit on the weighing equipment and office computers was held admissible; denial was set aside. E. Service tax under reverse charge on freight for transportation of sugarcane Interpretation and reasoning: The majority found, on the record, that the freight was borne by farmers and merely deducted by the assessee from farmers' bills, so the assessee did not bear the freight liability. It also accepted that the demand was not sustainably supported as 'GTA service' on the record basis relied upon. Conclusion: Service tax demand under reverse charge on the sugarcane freight was set aside. F. Extended limitation; interest and penalties Interpretation and reasoning: The majority held that invocation of the extended period could not be sustained in the circumstances, including that the principal dispute turned on interpretational/legal position that had seen conflicting views and later reversal of the basis relied upon by adjudication. With the substantive demands/denials set aside, the Tribunal held that interest and penalties could not survive. Conclusion: Extended period was held not invocable on the facts as appreciated by the majority; interest and all penalties were set aside as consequentially unsustainable. FINAL DISPOSITION (MAJORITY): The impugned order was set aside and the appeal was allowed with consequential relief in accordance with law.