Commr. of Central Excise vs Hindustan Zinc Ltd.

M.S. Ramachandra Rao, J.—This appeal is filed u/s 35G of the Central Excise Act, 1944 by the Revenue challenging the Final Order Nos. 771-774/2004, dated 27-5-2004 in Appeal Nos. E/71/2000 and E/758-760/2003 [2004 (172) E.L.T. 244 (Tri. - Bang.)] reversing the Orders-in-Original Nos. 2 to 4/03-04 (RP), dated 30-4-2003 and Order-in-Original No. 20/99-ASR, dated 18-10-1999 of the Commissioner of Central Excise and Customs, Visakhapatnam-I Commissionerate, Port Area, Visakhapatnam. The respondent is a company manufacturing zinc ingots, lead ingots, sulphuric acid, cadmium etc. It receives zinc concentrate and lead concentrate from different sources. On 6-8-1996, it filed declaration under Rule 57G of the Central Excise Rules, 1944 to avail Modvat credit of duty paid on zinc concentrates and lead concentrates and thereafter it was availing credit under Rule 57AA on the inputs zinc/lead concentrates.

The Revenue officials allegedly noticed shortage of Zinc/Lead concentrates when compared to book balances of material stores record during the course of their annual physical verification of stocks in the factory premises of the respondent; that the respondent was receiving Zinc/Lead concentrates from their mines; in the invoices received from their mines it was observed that dry weight alone was mentioned and valuation of material was done only in terms of dry weight; it was accounting for the same quantity of inputs as mentioned in their invoices in their material stores records as well as in Rule 57AE registers; on receipt of inputs, they were analyzed in their lab for estimating the moisture contained; after analyzing the moisture content, the actual dry weight of the inputs should have been arrived at and accounted for in the relevant registers; that the assessee accounted for the quantities mentioned in the invoices and also availed Modvat credit as mentioned in the invoices; it should have accounted for the actual quantity of input received basing on the analysis of moisture content and proportionate Modvat credit only should have been availed; by not doing so, the assessee had irregularly availed Modvat credit on the quantity of inputs found short at the time of physical verification; it is required to reverse such credit in terms of sub-rule (1) of Rule 57AH of the Central Excise Rules, 1944 read with Rule 12 of the Cenvat Credit Rules, 2001; the assessee''s contention that losses were due to natural causes is not tenable; it had not informed about shortage of input noticed at the time of physical verification of stocks to the department and thus suppressed information; by suppressing the information, it had utilized the Modvat credit irregularly and intentionally evaded payment of duty.

By invoking the extended period of limitation of time-limit beyond one year, four show cause notices were issued to the respondent assessee during the period between 1996-97 to 2000-2001 for recovery of an amount of Rs. 62,28,024/- towards recovery of Modvat credit irregularly availed.

After receiving the reply of the respondent, Orders-in-Original Nos. 20/1999-ASR, dated 18-10-1999 and 2 to 4/03-04 (RP), dated 30-4-2003 were passed by the appellant confirming the levy of duty of Rs. 54,70,576/- and a penalty of Rs. 33,70,041/- along with interest. He held that the respondent had failed to account for the shortage noticed in respect of Zinc and Lead concentrates in question at the time of their annual stock verification and the facts and circumstances of the case prove beyond doubt that the shortage noticed was not used in or in relation to the manufacture of its final products.

Aggrieved thereby, the respondent filed appeals before the Customs, Excise and Service Tax Appellate Tribunal, South Zonal Bench, Bangalore (for short "the Tribunal"). These appeals were numbered as appeal Nos. E/71/2000 and E/758-760/2003.

By Final Order Nos. 771-774/2004, dated 8-4-2004, the Tribunal allowed the appeals filed by the respondent.

Aggrieved thereby, the present appeal was filed by the Revenue.

Heard Sri A. Rajasekhar Reddy, learned Senior Counsel for the appellant and Sri Tej Prakash Toshniwal, learned counsel for the respondent.

It is the contention of the Revenue that the order of the Tribunal is erroneous; that the Tribunal erred in law in holding that 1% to 1.5% loss in the stocks is a reasonable loss during the process of manufacture and duty cannot be demanded on inputs which were lost during the process of manufacture; the loss had occurred not during the manufacture of the final product but prior to the manufacture of the product; that the shortage found was 25% of the concentrate which had not been put to production and not 1-1.5% as found by the Tribunal; the Tribunal erred in accepting that the shortage was required to be worked out with reference to the total quantity received during the year; the issue is shortage on the date of stock taking with respect to the quantity which should have existed at that time; the Tribunal erred in accepting the explanation of the respondent that shortages occurred due to handling loss during the process of taking goods from bay to bins and subsequent manufacturing losses, dry age of moisture content, inaccurate estimation due to volumetric stock verification, etc., which was not discussed by the Tribunal.

We are unable to agree with the contentions of the Revenue. We are of the view that the Tribunal rightly identified the issue as - whether the loss on the inputs which was found out by the respondent during their annual stock taking and which was written off by them in their books of account should be considered as loss which is allowable under Rule 57D of the Central Excise Rules, 1944 or whether duty should be charged on such loss. It rightly held that credit of duty cannot be denied or varied where input has become waste in or in relation to manufacture of final product; that the loss in stocks was detected in the annual stock taking which was accounted for by writing off the losses; the percentage of shortage found is less than 1.5% on an average for all the years in question; that after the inputs were received in the factory, there was a loss during the process of manufacture of finished products; the process of manufacture of finished products starts from the stage of taking raw material from the storage base to the factory and onward processes; under Rule 57D, on such losses, credit cannot be denied; a similar view was taken by it in the assessee''s own case in 2003 (110) ECR 704 where similar issue was considered by the Tribunal; that it is not the case of the department that inputs were cleared from the factory without payment of duty; Modvat credit in respect of losses to the extent of 10% is considered reasonable and is allowable; and therefore the Orders-in-Original are liable to be set aside. We are of the view that the Tribunal has rightly appreciated the evidence on record and came to the above conclusion. We are also of the view that no substantial question of law arises for consideration in this case. Therefore, the appeal filed by the Revenue is dismissed. No costs.