Credit reversal on inputs written off as shortage due to difference in stock taking under different methods.

PJ/Case Law/2014-15/2347

Case:- PHILIPS CARBON BLACK LTD. V/S COMMISSIONER OF CENTRAL EXCISE, BOLPUR

Citation:- 2012 (277) E.L.T. 347 (Tri. – Kolkata)

Brief facts:- The appellant is a manufacturer of black carbon. During the course of manufacturing of said output, they required inputs, like, Imported Feed Stock, Carbon Black Stock, CBFS-HPL, LDO, Tar Oil and Coal Tar. The appellants are maintaining “Daily Records o Raw Material” by adopting actual quantity of its stock consumed and closing stock of the stock in storage tanks and this has been arrived at from the flow meter installed in their factory for receipt of such inputs. In pursuant to the Board’s Circular, the appellants are also taking reading of monthly stock by the computerized method of measurement i.e. dip method. The dispute is that there is a difference in the stock as measured between the flow meter and dip method. The appellants written off the shortages of inputs arrived at by way of dip method. The allegation of the department against the appellants is that as there were shortages of inputs during measurement through dip method and the said inputs have been written off, therefore, the appellants are required to reverse the Cenvat credit taken on the inputs which found short by way of dip method. Therefore, a show cause notice was issued for demanding the differential duty for the period April, 1999 to October, 2003. 3 show cause notices were issued on 23-2-2002, 5-6-2003 &30-1-2004. The adjudicating authority confirmed the demand along with interest and penalty against the said adjudication. The appellants are in appeal.

Appellant’s contentions:-Dr. Samir Chakraborty, Ld. Advocate for the appellants appeared and submitted that in the course of manufacturing activity, the appellants are having a flow meter at the entry point of the inputs and measurements were taken at the entry point through flow meter and credit is taken on the basis of the measurement of flow meter confirming duty paid on inputs. From the flow meter, the inputs are kept in the storage tank and on monthly basis, the appellants are measuring their stock through dip method. Whatever quantity they found short and excess, the appellants are counting the same in their books of account and after making adjustment, they write off the same in their books of accounts for their accounting purposes. Therefore, it does not means that appellant has not utilised the said inputs in the manufacturing of their final product. Moreover, whatever the inputs have been received by them have been used in the manufacturing of their final product. There is no allegation against the appellants that they have diverted any inputs from their factory, which have not been utilized. He further submitted that whatever the inputs are found short, the same are a process loss. Therefore, the credit cannot be denied. To support his contention, he placed reliance in the cases of Hindustan Zinc Ltd. v. Commissioner of Central Excise, Jaipur reported in 2003 (162) E.L.T. 243 (Tri. – Del.), Indian Petrochemicals Corpn. Ltd. v. Commr. of Central Excise & Customs, Daman v. Narendra Impex reported in 2011 (265) E.L.T. 332 (Guj.). Therefore, in the above facts and circumstances of the case, he submitted that the credit cannot be denied.

Respondent’s contentions:-On the other hand ld. A.R. for the department submitted that in this case, the appellants themselves have written off the shortages of inputs in their books of account, which has not gone in the manufacturing of their final product. As per Cenvat Credit Rules, an assessee is entitled to take credit on the inputs which has gone in the manufacturing of final product as the same has been written off, therefore, the said shortages of inputs have not gone in the manufacturing of final product, therefore, they are not entitled the credit of inputs on these shortages. He also relies on the decision of the Hon’ble Bombay High Court in the case of Commissioner of Central Excise &Customs, Aurangabad v. Greaves Cotton Ltd. reported in 2008 (225) E.L.T. 198 (Bom.).

Reasoning of judgment:- After considered the submission made by both side. In this case, the fact is that the appellant has written off the quantities of inputs found short or excess by way of adjustment in their books of account after measurement of inputs by way of dip method. Therefore, the fact is admitted that they have written off the stock of inputs in their books of account and admitted the shortages. As per the Cenvat Credit Rules, 2004, an assessee is entitled to take credit on inputs which has gone in the manufacturing of final product. Admittedly, when these inputs have been found short and the said shortage has not gone in the manufacturing of final product, therefore, the appellants are required to reverse the cenvat credit on those shortage after adjusting the excess quantity during the course of stock taking by way of dip method. The case laws relied upon by Ld. Advocate for the appellant are not similar to the facts of this case. In this case, the shortages were written off by the assessee in their books of account. In this case, the appellants themselves have admitted the shortages. Therefore, the case laws relied upon by the Ld. Advocate are not relevant to the instant case. As held by the Hon’ble High court of Bombay in the case of greaves cotton ltd. (cited supra), the Hon’ble High court held that, neither extended period is invokable nor penalties are imposable in these circumstances. Therefore, we also hold that the demand within a period of limitation is sustainable and no penalty is levied in this case. As we have held that the demand for limited period is sustained on the quantities written off after adjustment by the appellants and no penalty is leviable, therefore, the matter to the adjudicating authority for limited purpose of quantification of duty on the net amount written off of within normal period of limitation. No penalty is leviable in this case as held above. Appeal as well as cross-objection is disposed off in the above manner.

Decision:- The appeal is dismissed.

Comment:- The analogy of the case is that when the assessee have themselves written off the quantities of inputs found short or excess by way of adjustment in their books of account after measurement of inputs by way of dip method, it means that they have admitted the shortage. Accordingly, as per the Cenvat Credit Rules, 2004, the assessee is required to reverse the cenvat credit on those shortage after adjusting the excess quantity during the course of stock taking by way of dip method.

Prepared by: Monika Tak

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PJ/Case Law/2014-15/2347

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