HIGH COURT OF RAJASTHAN
Union of India
Hindustan Zinc Ltd.
D.B. Central Excise Appeal No. 30 of 2008
JANUARY 15, 2013
Dinesh Maheshwari, J
This appeal by the Revenue under Section 35G of the Central Excise Act, 1944 (‘the Act of 1944’) is directed against the order dated 20.11.2007 as passed in Excise Appeal No.466 of 2006-SM(BR) by the Customs, Excise & Service Tax Appellate Tribunal, New Delhi [‘the Tribunal’] affirming the order dated 29.11.2005 whereby, the Commissioner (Appeals-II), Jaipur [‘the Appellate Commissioner’] set aside the order dated 31.12.2001 as passed by the Adjudicating Authority who had disallowed Modvat/Cenvat credit in relation to the quantity of raw material, which was allegedly received short in the factory and had further ordered recovery of penalty and interest. This appeal has been admitted on the following substantial question of law: –
“Whether Cenvat Credit should not be disallowed on the quantity of raw material which had not been received in the factory and not been utilized in the manufacture of the finished goods by wilful suppression of the facts.?”
2. Briefly put, the relevant facts and background aspects of the matter are that the respondent-assessee is engaged in the manufacture of Zinc, Lead and Copper Sulphate Solution. Upon scrutiny of the records, it was found by the department that the assessee had shown transit losses of concentrate, which was one of the inputs in the manufacturing process. On being questioned, it was submitted on behalf of the assessee that the difference as shown in the balance-sheet was due to: (i) the difference in the readings of the weighing-scales installed at the mines and at the smelter; (ii) the human error in recording the measurement on the weighing scales; and (iii) the shortage due to dry age during the transit of the goods. It was submitted by the assessee that the concentrate, when cleared from mines, was in moist form and during movement, due to atmospheric conditions, there was natural drying of the moisture content resulting in minor difference in the quantity. Not satisfied with the explanation, the department issued a show cause notice on 27.08.2001 to the assessee proposing recovery of Modvat credit amounting to Rs. 5,62,417/- under Section 11A(1) of the Act of 1944 read with erstwhile Rules 57I and 57AH of the Central Excise Rules of 1944 (‘the Rules of 1944’) and Rule 12 of the Cenvat Credit Rules, 2001. The department also proposed to levy penalty and to recover interest. It was essentially alleged in the notice that the assessee had wrongly availed Modvat credit on the quantity of raw material, which was not received in the factory and not utilized in the manufacture of finished product; and the assessee wilfully suppressed the facts regarding transit losses of modvatable inputs and disclosed the facts to the department only when asked for. It was alleged that the assessee had, inter alia, contravened the provisions of Rules 57A, 57G and 57AB of the Rules of 1944.
3. After submission of the reply to show cause notice and hearing the assessee, the Adjudicating Authority, in its order dated 31.12.2001 recorded dissatisfaction over the suggestions made by the assessee and while rejecting the assessee’s case, disallowed the Modvat credit amounting to Rs. 5,62,417/-, imposed a penalty of equal amount under Section 11AC of the Act, and also ordered recovery of interest under Section 11AB of the Act. The Adjudicating Authority, inter alia, expressed its dissatisfaction in the following:-
“20. I find that in the present case the concentrates are transported from mines to the assessee’s smelter plant mainly in dumpers by road therefore possibility of loss of inputs by way of pilferage and theft during the transit cannot be denied. Therefore, I do not accept the contention of the assessee that losses shown in the balance sheets are only notional losses which had been occurred due to human error, moisture and weigh bridge difference. I also find that the ratio of judgments cited by the assessee in support of their contention is not applicable in the instant case in view of the fact that in both the cases the inputs were received in packed conditioned as such there remained no possibility of loss due to pilferage or theft during transit and in these cases loss was due to moisture but in the instant case the inputs are not received in packed condition and are transported about 80-100 Km in dumpers. Therefore, I have no hesitation to hold here that in this case the shortage of inputs namely concentrates was due to pilferage or theft occurred during the transit. Hence, the Modvat/Cenvat credit is not allowable in respect of quantity of inputs received short and not used in the manufactured of the final product.”
4. However, in the appeal filed by the assessee, the Appellate Commissioner in his order dated 29.11.2005 referred to a decision of the Tribunal in the case of Hindustan Zinc Ltd. v. CCE 2004 (172) ELT 244 (Tri – Bang.) and held that the Adjudicating Authority was not justified in disallowing Modvat/Cenvat credit in relation to the loss on the goods that was about 0.05% during the period in question. The Appellate Commissioner observed and held as under: –
“8. I have carefully gone through the case records and the submissions made by the appellants. The appellants relied upon the decision of the Hon’ble Tribunal in the case of Hindustan Zinc Ltd. v. Commissioner of Central Excise, Visak – 2004 (172) ELT 244 (Tri-Bang.). I have gone through the above decision and find that facts of the above case are akin to that of the subject case of the appellants as in the case relied upon, M/s. Hindustan Zinc Ltd. had been procuring lead and zinc concentrates from their own mines located at different places such as Jawar, Agucha etc. from where it was cleared on payment of duty and they took credit on duty so paid. The loss of concentrate which had taken place in the factory was detected in the annual stock taking and they accounted for the shortage found during stock taking at the end of each financial year by writing off these losses. The percentage of the shortage found was less than 1.5% on an average for the years 1997-98, 1998-99, 1999-2000 & 2000-01 which was found to be reasonable loss during the process of manufacture by the Hon’ble Tribunal, and it was held that duty cannot be demanded on the inputs which were lost during the process of manufacture.
9. I find that the above case law is squarely applicable on the present appeal as the losses of the appellants are less than 0.05% during the subject period. Therefore, following the ratio of the decision of the Hon’ble Tribunal cited in the foregoing para, I hold that disallowance of the Modvat/Cenvat credit of Rs. 5,62,417/- on the quantity of raw material detected short by the appellants during annual stock taking, is not proper as the adjudicating authority could not establish that such loss had occurred during transit of the goods from the mines of the appellants to its factory. Accordingly, the impugned order is set aside so far as it relates to disallowance of the Cenvat credit and recovery of interest thereon.
10. I find that equivalent penalty amounting to Rs. 5,62,417/- has been imposed on the appellants under proviso to section 11AC ibid read with erstwhile rules 57I & 57AH Central Excise Rules, 1944 and rule 13 of Cenvat Credit Rules, 2001. The appellant’s submission is that since this is not a case of short receipt of material at all, the appellant has correctly taken Modvat credit in respect of the inputs, therefore, the invoking of the extended period and penalty imposed upon them was not justified. I find that there is a lot of force in the appellant’s submission that they took the subject Cenvat credit on receipt of the material. Under the circumstances penalty imposed on the appellants under proviso to section 11AC ibid read with erstwhile rules 57I & 57AH Central Excise Rules, 1944 and rule 13 of Cenvat Credit Rules, 2001 is not proper and accordingly, the same is set aside.
11. The appeal is allowed.”
5. In further appeal by the Revenue, the Tribunal found no case for interference particularly after finding that the transit loss was a negligible one, only to the tune 0.05%; and there was no evidence on record that the respondent had diverted the duty paid inputs with intent to evade payment of duty. The Tribunal, inter alia, observed and held as under: –
“4. The contention of the respondent is that from the mines, the concentrate is transported in the dumper and packed at the time of clearance of concentrate from the mines, it is wet condition and during transportation, therefore, minor difference comes of due to loss of moisture contents during transportation. The respondent relied upon the decision of the Tribunal in their own case i.e.Hindustan Zinc Ltd. v. CCE reported in 2004 (172) ELT 244. In the present case, as the transit losses are less than 0.05% which are negligible and there is no evidence on record to show that respondent had diverted the duty paid inputs with intent to evade payment of duty. In these circumstances, I find no infirmity in the impugned order, the appeal is dismissed.”
6. Seeking to question the orders aforesaid, it is contended on behalf of the appellant-revenue that as per the admission of the respondent-assessee, whatever was the loss to the goods that had actually occurred prior to their receipt in the factory and, therefore, the Modvat credit on the quantity of the inputs, which were not received in the factory and had not been used in the manufacture of the final product, could not have been allowed to the assessee. It is also submitted that the facts of the present case, on material particulars, are different from the case relied upon by the Tribunal inasmuch as in the referred case, the fact was not in dispute that the inputs were received in the factory and, thereafter, credit was taken whereas, in the present case, the inputs were not received in the factory and were not utilized in the manufacture of the final product. It is also submitted that when the concentrates were transported to a distance of about 80 to 100 Kms from the mines to the smelter plant in dumpers by road, the contention of the assessee about loss due to natural drying of moisture content could not be considered correct because in the transportation over such a small distance, so much of quantity of inputs could not have been lost due to natural drying.
7. The learned counsel for the respondent-assessee has, on the other hand, duly supported the order impugned and has referred to the decision of this Court in Union of India v. Hindustan Zinc Ltd. 2009 (233) ELT 61. The learned counsel has contended that the natural causes ought to be given reasonable and liberal meaning with practical approach; and the shortage, which was less than 0.05% as reflected in the balance-sheet, could not have been taken to be that of any wilful suppression of facts.
8. Having given a thoughtful consideration to the rival submissions and having examined the record, we find the approach of the Appellate Commissioner as also of the Tribunal justified and in accord with law.
9. In the present case, lead and zinc concentrates were received by the assessee in its factory whereupon credit had been taken. The assessee had accounted for the shortage in the raw material found during stock taking by writing off these losses. The percentage of shortage found had been about 0.05% during the subject period. The explanation given by the assessee had been that the loss occurred due to dryage of the moisture content and some likely difference in weighment. The significant aspect of the matter is that it had not been the case of the revenue that any part of the duty paid inputs were diverted from the factory with intent to evade duty.
10. In our view, it would be too impracticable and unrealistic to ignore in such a matter the ground realities and the natural causes where the excavated contents were being transported from mines to the factory; and where the contents were susceptible to dryage due to atmospheric conditions apart from the likelihood of some slight error in recording of measurements due to human or mechanical error. In the cited decision reported in Hindustan Zinc Ltd. (supra), this Court has, of course, considered the provisions of Rule 21 as contained in the Central Excise Rules, 2001 but for their relevance on principles, the following observation could usefully be taken note of:-
“12. In our view, the expressions, being “natural uses” and “unavoidable accident” are required to be given, reasonable and liberal meaning, lest the provisions of Rule 21, so far they relate to admissibility of remission, on these two grounds, is rendered altogether otiose. If things were to be stretched in the manner, and to the extent, as the learned counsel for the appellant wanted us to, probably, no loss or destruction, would fall in either of these clauses, obviously, because in either case, grounds may be projected, on the anvil of requirement of appropriate storage, or safety measures, and so on and so forth. Even in cases of “unavoidable accident” it can always be contended, that the accident could be avoided by taking recourse of one or more measures. Thus, a bit liberal rather more practical approach is required to be taken in the matter. Of course, we quiet agree with the learned counsel, that mere accounting practice of the assessee, could not be considered for granting remission, under Rule 21, rather, only requirement of Rule 21 is, that the concerned authority should be satisfied that goods have been lost or destroyed, by “natural causes” or by “unavoidable accident”.
13. Then in very nature of things, contemplated by Rule 21, the aspect of satisfaction, about the destruction or loss of goods, by natural causes or unavoidable accident, is essentially a subjective satisfaction of the authority concerned, and that having been recorded by the learned Tribunal, it is a pure satisfaction of fact, altogether subjective. The findings recorded by the Tribunal have already been quoted above, which in our view leaves no manner of doubt that the learned Tribunal had independently recorded its satisfaction about the loss, or destruction having been sustained by the assessee under the circumstances as covered by Rule 21. Then, merely because the Tribunal also referred to, or relied upon the accounting policy, which as held above, is not relevant, would not in any manner vitiate the finding, recorded by the Tribunal. The findings remains the findings of fact.”
11. We may also usefully refer to Rule 57D of the Rules of 1944, as then applicable, as under:-
“Rule 57D. Credit of duty not to be denied or varied in certain circumstances.- (1) Credit of specified duty allowed in respect of any inputs shall not be denied or varied on the ground that part of the inputs is contained in any waste, refuse, or by-produce arising during the manufacture of the final product, (or that the inputs have become waste in or in relation to the manufacture of the final product) whether or not such waste, refuse or byproducts is exempt from the whole of the duty of excise leviable thereon or is chargeable at nil rate of duty or is not specified as a final product under rule 57A…..”
12. Thus, the principles available in the rules and in the law explained by this Court are clear that credit of duty cannot be denied or varied where input has become waste in or in relation to manufacture of final product; and more of practical approach is required to be taken in these matters.
13. In a comprehension of the position of facts and application of the relevant principles of law, in the first place, we are unable to find any evidence on record on the part of the appellant that the respondent-assessee had, in any manner, diverted the duty paid inputs with intent to evade duty. Hence, there does not appear any basis to consider it to be a case of “wilful suppression of facts” as indicated in the formulated question. Then, all said and done, the shortage had been of about 0.05% and factors as indicated by the assessee about some difference in the weighing scale or of the human error and of the loss in transit due to drying of moisture contents cannot be ignored altogether.
14. In an overall analysis, we are unable to find any basis for the Adjudicating Authority’s observations about pilferage or theft having occurred during transit. On the other hand, the order as passed by the Appellate Authority and as approved by the Tribunal appears to be more in conformity with the ground-realities; and when a case of wilful suppression and diversion of the goods had not been established, disallowance of credit could not have been considered justified.
15. In view of the foregoing, the answer to the formulated question is against the Revenue and in favour of the assessee.
16. Consequently, the appeal fails and is, therefore, dismissed. No costs.