Pradeep Jain - Chartered Accountant

PJ/CASE STUDY/2009-10/026

09 January 2010

Case Study

Prepared By:-

CA Pradeep Jain,

and Megha Jain

Introduction: -

When the goods are sold, they are weighed. And on the basis of their weight the Assessable Value is calculated. From the said assessable value, excise duty is computed. Now, sometimes in transit, some quantity is lost in case of gases or liquid items or there is difference in weights due to weighing taking place at different scales. Can it be said that, it is short receipt of the quantity of inputs? And on that basis can the credit of the excise duty paid can be denied on the ground that the said quantity was not actually received? These issues were raised in the case under study and have been answered by the Larger Bench of the Tribunal.

Relevant Legal Provisions: -

Rule 3(1) of the Cenvat Credit Rules, 2004 - Eligibility of excise duty as Cenvat credit:

A manufacturer or producer of final products shall be allowed to take credit (hereinafter referred to as the CENVAT credit) of -

(i) The duty of excise specified in the First Schedule to the Tariff Act, leviable under the Act;

(ii) The duty of excise specified in the Second Schedule to the Tariff Act, leviable under the Act;

(iii) The additional duty of excise leviable under section 3 of the Additional Duties of Excise (Textile and Textile Articles) Act, 1978 (40 of 1978.

(iv) The additional duty of excise leviable under section 3 of the Additional Duties of Excise (Goods of Special Importance) Act, 1957 (58 of 1957);

(v) The National Calamity Contingent duty leviable under section 136 of the Finance Act, 2001 (14 of 2001), as amended by section 169 of the Finance Act, 2003 (32 of 2003) which was amended by section 3 of the Finance Act, 2004 (13 of 2004);;

(vi) The Education Cess on excisable goods leviable under clause 81 read with clause 83 of the Finance Bill (No.2), 2004, which by virtue of the declaration made in the said Finance Bill under the Provisional Collection of Taxes Act 1931 (16 of 1931), has the force of law;

(vii) The additional duty leviable under section 3 of the Customs Tariff Act, equivalent to the duty of Excise specified under clauses (i), (ii), (iii), (iv), (v) and (vi) above; and

(viii) The additional duty of leviable under section 157 of the Finance Act, 2003 (32 of 2003)

paid on any inputs or capital goods received in the factory on or after the first day of March, 2002, including the said duties paid on any inputs used in the manufacture of intermediate products, by a job-worker availing the benefit of exemption specified in the notification of the Government of India in the Ministry of Finance (Department of Revenue), No. 214/86- Central Excise, dated the 25^th March, 1986, published vide number G.S.R. 547 (E), dated the 25^th March, 1986, and received by the manufacturer for use in, or in relation to, the manufacture of final products, on or after the first day of March, 2002.

Explanation.- For the removal of doubts it is clarified that the manufacturer of the final products shall be allowed CENVAT credit of additional duty leviable under section 3 of the Customs Tariff Act on goods falling under heading 98.01 of the First Schedule to the Customs Tariff Act.

CCE, Chennai v/s M/s Bhuwalka Steel Industries Ltd

[2010-TIOL-19-CESTAT-MAD-LB]

Brief Facts of the Case: -

- The respondent-assessee is using the re-rollable steel items as inputs in the manufacture of their final products. They were availing cenvat credit of duty paid on these inputs.

- Since there was shortage of inputs covered by the relevant invoices vis-à-vis Weighment slips, the Department sought to deny credit on the quantity short received by the respondent.

- The matter reached the Tribunal. Before the Single Member Bench of the Tribunal, Revenue has relied on the cases in which it was held by the Divisional Bench that any quantity of inputs not physically received in factory was not eligible for Modvat Credit. On the other hand respondent has also claim support from some cases, in which the contrary decision was upheld by the Division Bench.

- After noting the conflicting decision of the Tribunal as above, the learned Single Member directed to place the records before the Division Bench.

- The Divisional Bench noted the conflicting decisions of the Tribunal and referred the matter to be resolved by the Larger Bench of the Tribunal.

Revenue’s Contentions: -

¨ The Revenue contended that the impugned goods were re–rollable Steel items and hence there is no chance of natural loss during transit in respect of such goods. As per Rule 3 (1) credit of duty paid can be taken only when any input or capital goods actually received in the factory of manufacturer of the final product.

¨ The Revenue further contended that where either the entire quantity of goods or part of the goods are diverted and not received in the factory of the manufacturer of the final product, there cannot be any question of allowing any credit in respect of such goods not received.

¨ Revenue has relied upon the judgments given in the cases of Bombay Dyeing & Mfg. Co. Pvt. Ltd. vs. Commissioner of Central Excise, Mumbai [1999 (113) E.L.T. 331 (Tribunal)] and Mukand Ltd. vs. Commissioner of Central Excise, Mumbai-III [2002 (150) E.L.T. 168 (Tri - Mumbai)] –DB]

Respondent’s Contentions: -

Respondent have relied upon the following cases in support of their contentions: -

¨ Neera Enterprises vs. Collector of Central Excise, Chandigarh–[1998 (104) E.L.T. 382 (Tribunal)].

¨ Commissioner of Central Excise & Customs, Aurangabad vs. Sipta Coated Steel Ltd. [2000 (125) E.L.T. 578 (Tribunal)].

¨ Mardia Chemicals Ltd. vs. Commissioner of Central Excise, Rajkot[2003 (158) E.L.T. 378 (Tri. - Mumbai)].

¨ Gharda Chemicals Ltd. vs. Commissioner of central Excise, Mumbai[2004 (176) E.L.T. 296 (Tri. - Mumbai)].

¨ Commissioner of Central Excise, Rajkot vs. Bombay Dyeing & Manufacturing Co. Ltd. [1998 (97) E.L.T. 101 (Tribunal)]

¨ Bhilwara Spinners Ltd. vs. Commissioner of Central Excise, Jaipur[2004 (177) E.L.T. 597 (Tri. – Del.)]

¨ Tata Motors Ltd. vs. Commissioner of Central Excise, JSR [2005 (179) E.L.T. 413 (Tri. - Kolkata)].

¨ Commissioner of Central Excise, Vadodara–I vs. Nirma Ltd. [2005 (192) E.L.T. 304 (Tri. - Mumbai)].

¨ Estee Auto Pressing Pvt. Ltd. Vs. Commissioner of Central Excise, Chennai–III [2007 (209) E.L.T. 211 (Tri. - Chennai)].

¨ UOI vs. Bhilwara Spinning Ltd. [2008 (222) E.L.T. 362 (Raj.)]

Question for Consideration: -

The question referred to the Larger Bench of the Tribunal was: -

Whether Cenvat Credit can be denied on the ground that the weight of the inputs recorded on receipt in the premises of the manufacturer of the final products shows a shortage compared to the weight recorded in the relevant invoice?

Reasoning of the Judgement: -

The Larger Bench held as under: -

v The Larger Bench held that it cannot be denied susceptible to transit loss on account of such goods being of hygroscopic nature or of volatile nature. There can also be cases of difference in weight on account of difference in the weighing scales at both ends, i.e., at the point of dispatch and at the point of receipt.

v The Larger Bench noted that in some of the cited decisions it was held that negligible percentage of difference on account of transit loss as a result of evaporation etc. should be ignored and full duty credit should be allowed. Some other decisions cited have taken note of the difference that may arise on account of weighing on different scales at the dispatch and receiving ends it has been held therein that such differences can be ignored as per tolerance limits prescribed under the Standards of Weights and Measures Act, 1976 and credit allowed accordingly.

v The Larger Bench further held that different types of shortages cannot be dealt with according to any one inflexible and fixed standard for the purpose of allowing credit under Rule 3 (1) of the Cenvat Credit Rules, 2004. Decision to allow or not to allow credit in any particular case will depend upon various factors such as the following:

(i) Whether the inputs / capital goods have been diverted en – route or the entire Quantity with the packing intact has been received and put to the intended use at the recipient factory?

(ii) Whether the input goods are hygroscopic in nature or are amenable to transit loss by way of evaporation etc?

(iii) Whether the impugned goods comprise countable number of pieces or packages and whether all such packages and pieces have been received and accounted for at the receiving end?

(iv) Whether the difference in weight in any particular case is on account of weighment on different scales at the dispatch and receiving ends and whether the same is within tolerance limits with reference to the standards of weights and measures Act, 1976?

(v) Whether the recipient assessee has claimed compensation for the shortage of goods either from the supplier or from the transporter or the insurer of the cargo?

v The Larger Bench held that all these factors listed above and any other relevant factor has to be kept in view in deciding any particular case as to whether the entire consignment has been received at the end of the recipient assessee without any diversion. Tolerance in respect of hygroscopic, volatile and such other cargo has also to be allowed as per industry norms excluding, however, unreasonable and exorbitant claims. Similarly, minor variations arising due to weighment by different machines will also have to be ignored if such variations are within tolerance limit.

v In the end, the Larger Bench held that each case has to be decided according to merit and no hard and fast rule can be laid down for dealing with different kinds of shortages.

Decision of the Larger Bench: -

Reference answered accordingly. Appeals returned to the concerned Division Bench for deciding the matters on merit.

Comments & Conclusion: -

In our view, it is a very good decision. Now, the Department should not give more emphasis on the shortages which are due to factors like less purity in goods, evaporation of goods which are of gaseous and liquid nature. And while deciding, the departmental officials should take the above laid down factors in mind. In this way, the department can save money and precious time which is spent in litigation. However, seeing the nature of department, the litigation is going to increase as they will contend that the shortage is not due to above listed reasons but it is due to another reason and credit will be disallowed. If this was contended that whole amount of duty is paid by the assessee to manufacturer then the credit will be allowed even if loss might be due to genuine or another reason then the litigation might have come to an end. Normal cause of shortage will vary from industry to industry and department will say that reason of shortage is not normal or this industry. Litigation will still go on………

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PJ/CASE STUDY/2009-10/026
09 January 2010

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