Alladi Rock Driling Equipments(P) Ltd. vs The Commissioner of Central Excise and Customs

Challa Kodanda Ram, J.—The Central Excise Appeal filed u/s 35G of the Central Excise Act, 1944 (for short ''the Act'') arises out of the order dated 08.04.2005 in Appeal No.E/52/02 passed by the Customs, Excise and Service Tax Appellate Tribunal (for brevity "CESTAT), South Zonal Tribunal, Bangalore.

Admitted facts of the case are that the appellant is a manufacturer of DTH hammers, button bits and other parts of boring machinery falling under Chapter Heading 84 & 82 of the Central Excise Tariff Act. On 21.09.1996, excise officials conducted a surprise check on the premises of the appellant-company and found shortage of 24,360 numbers of Tungsten Carbide buttons, an input, which is used in the manufacture of drill bits. During the inspection, panchanama was also drawn wherein it is recorded that on verification of the records and on physical verification of the finished and unfinished goods lying in the factory premises, there was shortage of 24,360 T.C. buttons apart from other finished goods. It is also recorded in the panchanama that an approximate quantity of 10.115 MTs. steel scrap (no verification by weighing was carried out) was found lying in the factory premises. On the same day, statement of one E. Rambabu who is the Office Assistant and In-charge of maintenance of Central Excise records, was also recorded, wherein he had explained reasons for shortage of 24,360 numbers of T.C. bits. His statement reads as under:

I agree with the consent of the Panchanama, you have asked me to explain the reasons for shortages. In this connection, I have to state that we have not verified the stock of buttons for quite sometime and as such the shortage might have occurred for over a period of time. In regard to other inputs, you have verified and found tallied with statutory register. In respect of maintenance of RG 1 register, I am to inform that we did not maintain any production slip however as soon as the finished goods are ready, the Quality Control Inspector informed us that we enter in RG 1 register and afterwards we issue invoice for clearance of the finished goods on payment of duty.

The sum and substance of the above quoted statement is to the effect that as a matter of practice, utilization of the T.C. buttons is tallied only with the final utilization of the buttons in the final product at the time of its removal on payment of excise duty and there is no inventory management being done by the appellant. This was the consistent stand of the appellant all through before the authorities below. On a notice issued to the appellant directing it to show cause as to why the Modvat Credit was availed shall not be withdrawn on input i.e. T.C. buttons which was found to be in shortage and why penalty proceedings should not be initiated, a detailed explanation was submitted explaining the process of manufacture and the manner in which T.C. buttons were used and how certain amount of wastage occurs in the process of manufacture. Along with the reply to the show cause notice, sworn affidavits of Y. Krishna Murthy, Quality Control Supervisor, and Sri K. Babu, Excise Assistant and Sri K.V. Naga babu, Production Supervisor were also filed. Further, in the reply dated 30.05.1997, a categorical assertion was made that the scrap of approximately 10.115 MTs. of spoilt button bits in which T.C. bits in one form or the other embedded, etc. was lying in the premises and the Deputy Commissioner to whom explanation was submitted was requested to visit the factory for factual verification of the statements. Being not satisfied with the explanation submitted by the appellant, the Assistant Commissioner passed an order dated 21.08.1997 and the same was confirmed by the Commissioner and also by the Tribunal. In the final analysis, the result of the orders passed by the respective authorities is to the effect of denial of Modvat Credit on the input to the extent of shortage of 24,360 numbers of T.C. bits.

In the above stated facts, the appellant preferred the present appeal. Three substantial questions of law are said to be arising from the orders of the Tribunal for adjudication are raised:

a) Whether the Appellate Tribunal is correct in law in ignoring the submission of the appellant that the defective T.C. buttons were lying in the factory premises in the heap of scrap material that was recorded in the Panchanama and erred in concluding that there was shortage of stock without causing verification of the scrap?

b) Whether the Appellate Tribunal is correct in law in holding that wastage of 10% to 20% cannot be considered as production loss or waste without there being any evidence on record to support such a finding and without considering the evidence placed on record by the appellant?

c) Whether the Appellate Tribunal is correct in law in denying MODVAT Credit to the appellant on 24,360 Nos. of T.C. buttons and in confirming penalty of Rs. 25,000/- levied on the appellant?

Sri C.V. Narasimham, learned counsel for the appellant, submits that the findings of the authorities below are perverse inasmuch as there is consistent explanation for shortage which was ignored. He further submits that the shortage of T.C. bits is inherent in the very manufacturing process, and more importantly, the wastage scrap which was lying in the premises was offered for verification but verification was not done. He also submits that there are no valid and cogent reasons in the orders of the authorities for ignoring the statements made by way of affidavits filed by the appellant explaining the process of manufacture and the reasons for shortage of the input material. He would further point out that the statements recorded were of contemporaneous nature and cannot be brushed aside in view of the consistency in all the statements and submits that some element of wastage is inherent in any manufacturing process and it is well-recognized in any industry. He would draw the attention of this Court to the statement which was filed before the Tribunal on 08.04.2005 whereunder they had claimed a reasonable wastage at the rate of 10.46%.

On the other hand, Sri V. Gopala Krishna Gokhaley, learned Standing Counsel for the Department has contended that the authorities below have consistently held that there was no proper explanation with regard to the shortage of inputs, and that being a finding on a question of fact, this Court, in exercise of its jurisdiction u/s 35G of the Act, should not normally interfere with such finding. He further submits that even assuming without conceding the wastage of 10% which is required to be allowed on verification of the facts and figures and after taking into account for the stock lying with the appellant on the date of inspection, still there was shortage of 11,715 numbers of T.C. buttons for which no explanation was forthcoming. In that view of the matter, the learned counsel would urge this Court to dismiss the appeal by confirming the orders of the Tribunal.

We have considered the rival submissions and found from the record that the consistent stand of the appellant with respect to the possibility of wastage in the very manufacturing process has been neither rejected nor denied by the authorities below at any point of time. The orders passed by the authorities below also do not indicate that there was any physical verification carried out by the Department officials with regard to the claims made by the appellant. On the contrary, so far as the appellant is concerned as is reasonably possible they had in fact invited the Department officials to come and inspect the scrap lying in the premises which was, as a matter of fact, not done. The controversy in issue could have been resolved easily if only the Department officials had physically verified and made a little effort in verifying the veracity of the categorical assertions of the appellant in their reply to the show cause notice along with the sworn affidavits of three of their employees, who were involved in the manufacturing process. It cannot be denied that the aspects with regard to the process of manufacture such as quality control, the wastage that may arise in the process of manufacture can be best ascertained only from the persons whose work is totally confined to the manufacturing process. When an opportunity is afforded to the Department officials to verify the asserted facts on behalf of the manufacturer, non-denial of such asserted facts and non-verification of the veracity of such asserted facts would be relevant factors when the disputes of this nature are required to be considered. The explanation for shortage of input is on two counts. Firstly, the wastage occurs when the duty paid buttons are grinding and being fitted into the size of the holes in the drilling bits which sometimes turn out smaller in size, and the said bits are discarded as wastage in scrap; Secondly, in the process of production of button bits, some button bits are fixed into the holes while some of them break either in part or in full resulting in getting stuck up in the holes which are also discarded as they are not up to the standard. In all, as an industrial norm, the wastage of 15% to 20% was claimed by the appellant. It also cannot be denied that in every manufacturing process especially the process in the nature of the product which the appellant is involved in, a certain amount of wastage arises. The appellant, all through, had been claiming wastage at the rate of 15% to 20%, and had in fact, before the Tribunal, filed a statement setting out the facts and figures ascertaining wastage of 10.46% which was also not denied by the authorities below.

In the facts and circumstances of the case, we can reasonable allow wastage of 10% especially considering the fact that the size of the T.C. bits ranging from 13 mm x 19 mm Dia of one inch length could easily get damaged and lost during the process of handling. Hence, the appellant, in our view, is entitled to claim certain amount of wastage in the process of manufacture and the shortage of material input which has not been used in the process of manufacture on which Modvat credit is claimed is required to be adjusted by considering these aspects.

In the facts of the present case, we can take 10% as the wastage. The levy of penalty, therefore, cannot be attributed to any mala fide action on the part of the appellant in claiming Modvat Credit. In that view of the matter, the levy of penalty of Rs. 25,000/- is also unsustainable and required to be set aside.

In the result, the appeal is allowed in part directing the authorities below to allow Modvat Credit by giving an allowance of 10% of the total quantity purchased as wastage. The authorities below may modify their orders to the extent indicated above and pass consequential orders. No order as to costs.