Inventory mismatch of RM PM

[Asked by Guest]

Dear Team,

the above subject mention, we have reconcile and found short inventory of RM PM.

in this case can we reverse excise duty. kindly request give your opinion with reference.

Regards,

Pradip

[KASTURI SETHI]

Yes you will have to reverse cenvat credit along with interest on the raw material found short.If you do it on your own, no SCN will be issued. No penalty will be imposed. This is the legal benefit of reconciliation and verification of stock in the interest of an assessee.

[Mahir S]

Sir,

It is surprising that there is shortage in the raw material inventory, as movement of inputs are monitored in stores and then in production process till manufacture of finished goods.

Department shall always rightly presume that finished goods have been manufactured from such raw material found short and have been cleared without payment of duty.

Hence, excise duty is required to be paid on the Value of the quantity of finished goods, which could have been manufactured from such raw materials found short.

[YAGAY and SUN]

CENVAT Credit – Reversal of CENVAT credit solely on the ground of physical stock taking.

In this matter, it has been held by the Hon’ble Tribunal that 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 due to the nature and possibility of accounting error. M/s National Engineering Industries Ltd VS. Commissioner of Central Excise, Jaipur-I and Vica-Versa. 2015 (10) TMI 1555 - CESTAT New Delhi.

[KASTURI SETHI]

I again agree with Ms. YAGAY AND SUN. We cannot JUMP at the conclusion of shortage of finished goods only on the ground of shortage of raw material. There are so many other vital factors to be considered.

[Mahir S]

Department is not free to Allow/Disallow/Quantify the Reconciliation provided by the assessee for shortages the of raw materials found in the factory premises.

Department may allow such reconciliation if the difference found short is negligible and within limits.

Further, it is at the discretion of the department to Agree/Disagree to such reconciliation of stock', else department may carry out further investigation both within and outside the factory premises for the inputs procured , finished goods manufactured/cleared and scrape generated thereof.

[PARTHASARATHY V]

There is no such pre condition or clear law to demand duty for the shortage of RM/PM to link with FG. For a given product manufacture, need number of components and lot of process to be carried out. Generally in industry there is slight shortage of a RM PM which doesn't mean that they manufacture the FG and cleared without payment of duty.

It is better to pay the appropriate duty for the shortage of RM PM and submit the details along with list of duty paid, with interest also in writing to Jurisdictional RO. Which saves from further investigation / quarries.

[PARTHASARATHY V]

In addition to CENVAT you have to reverse the VAT Input credit taken also.

[Mahir S]

I was just now going through the judment of the case law cited above i.e -- M/s National Engineering Industries Ltd VS. Commissioner of Central Excise, Jaipur-I and Vica-Versa. 2015 (10) TMI 1555 - CESTAT New Delhi

While reading , I came across the following findings in the said case law judgement :-

We find that the shortages and excesses found during physical stock verification which remained un-reconciled are within the tolerance limit keeping in view the thousands of types of raw material and finished goods involved in the accounting by the assessee.

In view of above, it is clear that the shortages during reconciliation was allowed in above case only as it was with in the tolerance limit; otherwise it would not have been allowed.

AI Summary

Reversal of cenvat credit for unexplained raw material shortages may trigger interest, investigations, or departmental scrutiny.
Unexplained shortfall on physical stock verification may require reversal of CENVAT credit with interest; voluntary self-reversal typically prevents a show-cause notice or penalty. Tribunal authority and commentary caution against automatic duty demands based solely on stock-taking, noting accounting errors and tolerance limits; departmental discretion to accept reconciliations or pursue investigations remains, and VAT input credit should also be considered when regularising shortages.