The Hyderabad Bench of the Customs Excise and Service Tax Appellate Tribunal (CESTAT) observed that Alleged Clandestine Production Vague and Unsupported by Prescribed Norms and thereby quashed the excise duty demand
On March 27, 2008, officials inspected the company, leading to a Show Cause Notice on April 29, 2009, citing Rule 9(5) violations of the Cenvat Credit Rules (CCR 2004). The company allegedly failed to maintain accurate records and selectively paid duties, resulting in accusations of duty evasion and fraudulent Cenvat credit from 2004 to 2008. The Director, Mr. Ram Prasad, faces penalties for overseeing alleged production suppression and clandestine removal of goods. During the visit, crucial records were reportedly withheld, prompting their seizure in a subsequent search under panchnama.
Respondent Counsel A.V.L.N. Chary, contended that after scrutinizing balance sheet data from 2004-05 to 2007-08, significant variations in production parameters, especially power consumption per unit of ingot production, were noted. The essential raw materials for manufacturing MS ingots were sponge iron, pig iron, and/or scrap, with differing usage percentages depending on the technology used. The industry standard, relying on the mix of various grades of sponge iron and/or charge mix with pig iron/scrap, appeared unreliable. The revenue, therefore, considered power consumption as a parameter to estimate yield.
The legal representative for the appellant B.V. Kumar emphasized that the goods in question were not utilized as raw materials for ingot manufacturing but were employed in the production of capital goods and accessories essential for factory operations. For instance, angles, beams, and channels played a role in crafting EOT Cranes used for material handling, including the transfer of MS ingots. Plates and coils were employed in maintaining the induction furnace within the factory. These parts underwent periodic repairs and maintenance, crucial for preventing furnace leakage or breakage. MS bars, used to stir molten steel, melted and became part of the final product.
The Revenue’s representative supported the contested order, highlighting the alleged failure of the Appellant to maintain proper records observed during inspection. Records in a regional language (modi script) lacked a Form-IV register for raw materials. The gate register indicated the receipt of bazaar scrap, but corresponding entries were missing, suggesting clandestine operations.
The counsel pointed out that the Appellant’s explanation for MS angles, bars, etc., in relation to Cenvat credit was deemed unsatisfactory. Rule 22 mandated accurate production records, allegedly neglected by the Appellant. Moreover, a heat register was reportedly absent, and locally procured scrap lacked documented purchase records.
The two member bench of the tribunal comprising Anil Chowdari member (Judicial) and A.K.Jyotishi member (Technical) concluded that the Appellants maintained detailed transaction and production records, submitting accurate returns and prescribed forms.
The demand for alleged clandestine production and clearance of goods lacks clarity, violating norms and the Supreme Court’s precedent in the RA Castings Pvt Ltd case.
Regarding the Rs.61,90,180/- disallowed Cenvat credit, items like MS angles, bars, coils, etc., were legitimately used in production, including constructing an EOT Crane and periodic furnace lining repair. MS bars, used in stirring molten steel, become part of the steel and are consumed in finished goods manufacturing. The bench observed that the Appellants rightfully claimed Cenvat credit, rendering the disallowance unwarranted.
In view of bench observations and findings, allowed these Appeals and set aside the Impugned Order. All penalties were also set aside.
Accordingly, Appeals are allowed with consequential benefits.
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