Modvat Credit on Inputs – Shortage due to evaporation loss

An assessee is entitled to modvat Credit on duty paid inputs utilized in the manufacture of dutiable final product. The credit of duty paid on inputs is normally taken immediately on receipt of the inputs in the factory. There would be a time gap between the taking of credit and utilization of such inputs. Thus the manufacturer has to ensure that the inputs have in fact been used for manufacture at a later stage. If such inputs are not in fact used for the intended purpose then the department will raise a demand for the credit taken by the assessee.

It is possible that all such inputs are not utilized for manufacture due to its shortage in quantity. The shortage can be due to evaporation of the inputs or other contents of the inputs as a result of storage, the difference in weight due to atmospheric changes (petroleum products), handling losses etc.

One such issue arose in the case of Cce vs. Associated Cement Companies Ltd. which was referred to the Larger Bench for their consideration as to whether the modvat credit would be available to the shortage in weight of the inputs on account of evaporation of moisture contained therein?

Facts of the case: The assessee was engaged in the manufacture of cement which was liable to excise duty and accordingly availed the benefit of modvat credit on various inputs including phospho gypsum. Due to its natural characteristics, there would be a variation in the weight of the said input. For example, there would be a reduction in weight as a result of loss in its moisture content due to evaporation or increase in its weight as a result of absorption of moisture. The variation in weight occurred due to the atmospheric conditions and not due to physical removal or addition of quantities of the input.

Because of fluctuation in weight which resulted in shortage the department issued a show cause notice seeking to demand the duty on such shortage. It was averred in the show cause notice that since there was loss of weight on account of evaporation, from the time the goods were received in the factory to the time of their utilization in the manufacture of final products, duty paid on such inputs lost cannot be allowed as modvat credit, inasmuch as the weight of the gypsum attributable to the loss has not been actually used in the manufacture of final products.

The Referral Bench took note of the two contra decisions by the Tribunal in the case of the respondent’s own case (Order No. C-IV/458/WZB/2004 dated 16-12-2003, vide which the revenue’s appeal was rejected as also of an another decision of the Tribunal in the case of Adhesives & Chemicals reported in 1999 (113) ELT 609 (Tri.) wherein considering the loss of inputs namely toluene lost due to evaporation, modvat was held as inadmissible on the lost quantity.

The department thus submitted that as per the provisions of erstwhile Rule 57A of Central Excise Rules, 1944, only such quantity of the input which has actually been used in the manufacture of the final products is entitled for the benefit of the credit. Inasmuch as there was shortage in the weight of the gypsum during storage before the same was issued for use in the final products, such quantity cannot be said to have been used in the manufacture of the final products and as such in terms of the provisions of Rule 57A, the credit would not be available on the same. Thus the Tribunal’s decision in the case of adhesives & chemicals referred supra was relied upon.

The Larger Bench on going through various arguments held as follows:

There is no dispute that the assessee had received the entire quantity of duty paid phospho gypsum as per the weight shown in the manufacturer’s invoice and the consideration has been paid to the supplier for the full quantity.

The assessee had submitted that in sunny weather conditions the moisture evaporates resulting in reduction in weight and in rainy weather conditions the moisture might also get added thereby resulting in increase in weight. Further, it was submitted that some moisture loss also occurred at the time of feeding the gypsum to the cement mill on account of the high temperature of the mill.

The above submissions of the assessee was accepted by the Assistant Commissioner who dropped the proceedings against them.

The Commissioner of Central Excise (Appeals) too, did not find any substance in the revenue’s contention and therefore rejected the revenue’s appeal.

Relying upon the factual understanding outlined by the Assistant Commissioner, the Larger Bench further observed that the assessee has paid for the entire quantity of goods and the duty has also been paid on the said consignment on the total weight. No claim has been made by the assessee from their suppliers on account of this loss of moisture. As such, it is the total quantity of the inputs and total quantum of duty paid on the said inputs, which has to be taken into consideration for the purposes of the modvat Credit in terms of Rule 57A. Thus the credit cannot be varied on account of moisture loss as it is not a case of loss of the inputs prior to their use. Denial of credit can only be considered when the inputs themselves are lost prior to their use.

The decision of the Tribunal in the case of P.K.P.N. Spinning Mills Ltd., vs. Commissioner of Central Excise, Coimbatore (1997(89) ELT 588 (Tri.) was also relied upon wherein under similar facts and circumstances it was held that an assessee would be entitled to full duty paid at the suppliers end and in respect of full quantity, which was received at their premises without any loss of moisture of the fibre on the way. Modvat credit is available to the extent of duty, which was attributable to the goods received in the factory. Inasmuch as full quantity has been received the modvat credit attributable to the weight of the moisture lost in transit from the suppliers end to the assessees end cannot be denied.

Also the Tribunal in the assessee’s own case decided earlier have passed orders against the revenue, which have not been challenged by the revenue before the higher appellate forum and have thus attained finality.

The department’s reliance on the Tribunal decision in the case of U.P. Co-operative Sugar Factory vs. Collector of Central Excise, Meerut (1998 (101) ELT 215 (Tri.) was also found not applicable. In the said case the Tribunal was dealing with the loss of molasses during storage of the same and held that said loss was not covered by Rule 57D of Central Excise Rules. Whereas in the instant case, it is not loss of the input themselves but loss of moisture content contained in the inputs. Hence the ratio of the said decision was distinguished.

In view of the foregoing, the issue referred to the Larger Bench is answered in favour of the assessee.

Cash refund of cenvat Credit

In the case of cce vs. Fal Industries Ltd. the respondents had availed Modvat Credit of  Rs. 2,53,551/- on capital goods (imported by them) on the strength of Bill of Entry dated 30-11-1994. The original authority disallowed the credit to the party. The first appellate authority set aside the order of the lower authority and allowed the credit to the assessee. Pursuant to the order passed by the Commissioner (Appeals), the jurisdictional Deputy Commissioner allowed the assessee to take re-credit of the above amount in their CENVAT account. The party, however, could not take such re-credit as, by that time, they had closed down their unit, followed by cancellation of Central Excise registration. Therefore, they requested for cash refund of the above amount, which was declined by the Deputy Commissioner. On an appeal, however, the Commissioner (Appeals) allowed cash refund to the assessee.

The department filed the appeal before the Hon’ble Tribunal.

The Tribunal noted that the lower appellate authority had relied on the Tribunal’s decision in CCE, Ahmedabad vs. Arcoy Industries [2004 (170) E.L.T. 507 (Tri.-Mumbai)] to hold that the assessee was entitled to cash refund. The revenue has sought to distinguish the said case, by submitting that the assessee in that case was unable to avail Modvat credit on account of having moved out of the Modvat scheme and not on account of having closed down their unit. It is also submitted that the CBEC has permitted cash refund only in the case of export rebate. Reference was also made to sub-rule 3 of the erstwhile Rule 57S of the Central Excise Rules, 1944 and it has been stated that the said provision prohibited refund, in cash or by cheque, of any amount of capital goods credit.

The assessee relied on the following decisions of the Tribunal in support of the submission that, as the assessee had closed down their unit and surrendered their registration and was consequently unable to take any Modvat Credit, they were entitled to cash refund of the above amount:-

1. CCE, Ahmedabad vs. Arcoy Industries [2004 (170) E.L.T. 507 (Tri. – Mumbai)]

2. CCE, Ahmedabad vs. Babu Textile Industries [2003 (58) R.L.T. 826 (CESTAT – Mum.)]

3. CCE, Bhubaneswar vs. Indian Aluminium Co. Ltd. [2002 (139) E.L.T. 125 (Tri. –Kolkata)]

The Tribunal after examining the rival arguments held that the assessee is eligible for cash refund of the duty amount in the circumstances of this case. In the case of Babu Textile Industries (supra), the departmental authorities had denied cash refund of an amount of duty but allowed the party to take credit of such amount in their Modvat account. The Tribunal noted that the party was not in a position to avail such credit on account of their being a SSI unit availing exemption from payment of duty on their final product. Accordingly, the Tribunal ordered cash refund to the assessee. On a similar set of facts, the Tribunal allowed cash refund to the claimant in the case of Arcoy Industries (supra) also.