2004 (97) ECC 749 (Tri)

CUSTOMS, EXCISE & SERVICE TAX APPELLATE TRIBUNAL

New Delhi -- Bench-NB(A)

Hon'ble Justice (Mrs.) K.K. Usha, President and Shri C.N.B. Nair, Member (T)

Maruti Udyog Ltd.

Versus

CCE, Delhi-III

Appeal No. E/3790/2003/NB(A)

[Arising out of Order-in-Original No. 100/2003 dated 28.8.2003 of the Commissioner of Central Excise, Gurgaon]

Final Order No. 662/2004-NB(A), dt. 29.6.2004, Certified on 13.7.2004

Demand (C. Excise)

Denial of Modvat Credit -- Rule 57-I allows recovery of the credits incorrectly or improperly taken -- Demand is merely based on the shortages detected during physical tallying, that too without taking into account the excesses noticed -- Shortages in stock detected during physical verification is no positive evidence that the inputs found so short were disposed of in any manner other than in the manufacture of final products -- The very presence of unaccounted excess inputs worth more than Rs. 17 crores establishes that there are errors in the accounts/physical verification -- Evidence on record does not indicate any diversion of inputs in contravention of rules relating to utilisation of inputs -- There is no evidence to sustain a finding that this is a case of irregular or incorrect taking or utilisation of credit -- No demand can be raised under Rule 57-I -- Demand set aside.

PRESENT :

Shri V. Sreedharna, Advocate for the appellant.

Shri S.C. Pushkarna, JDR for the respondent.

Per : C.N.B. Nair

Under the order impugned, in this appeal, the Commissioner of Central Excise disallowed a Modvat credit of over Rs. 7.2 crores under Rule 57-I of the Central Excise Rules, 1944. The appeal is directed against such disallowance of credit.

2. The appellant is a manufacturer of automobile, its production being around 3.6 Lakhs automobiles in 2001-2002. While it pays central excise duty on the automobiles produced and cleared, it is entitled for availing of Modvat credit in respect of inputs (parts, components, consumables etc.) used in the production of those automobiles. The manufacture involves use of about 14,000 parts/inputs procured from several hundred suppliers. In a year, several lakh consignments of inputs are received (13.18 lakhs in 2001-2002). The accounting of these parts being a very complex problem the appellant carries this out on their computers. Annual physical check is also carried out. For the years 1999-2000, when the appellant carried out physical stock verification of the inputs, a large variation involving several crores (211) Rupees worth parts was observed. The appellant reconciled this variation and found that shortage worth Rs. 27.67 was not getting reconciled. Similar was the position in respect of excesses worth Rs. 17 crores. The order impugned has been passed in view of the shortages being unreconciled.

2. The submission of the appellant is that the shortages and excesses are merely the results of accounting errors and there is no wrong availment or utilisation of credit and that there is no requirement or justification to disallow the credit. It is the appellant's submission that a proper appreciation of the method of accounting and the chances of errors that such a complex system involves in view of the large numbers and volume, would satisfy that the non-reconciliation of a small (0.24) percentage of the inputs is intrinsic to the situation and no duty demand is warranted. At the outset, the appellant has pointed out that this level of accounting variation is commercially acceptable and that the appellant's auditors, namely Price Water House has certified to this with the following observations:

"5.3 The stocks of spare parts of the Company have been physically verified by the management at the year end and stocks of finished goods, stores and raw materials including components (except those in unopened boxes) have been verified subsequent to the year end as explained in Note 4(c) on Schedule 25. For stocks relating to tools with vendors and material with fabricators, confirmations have been obtained.

5.4            In our opinion, the procedures of physical verification of stocks followed by the management are reasonable and adequate in relation to the size of the Company and nature of its business.

5.5            Consequent to the large volumes leading to non-recording of individual issues of raw materials including components, book balances are not available for comparison with physical balances of these items. However, since the inventory is valued on the basis of physically verified stocks, as explained in note 4(c) on Schedule 25, the discrepancies have been adjusted in the accounts.

5.6            In our opinion, the valuation of stocks of finished goods, stores, spare parts and raw materials including components has been fair and proper in accordance with the normally accepted accounting principles in India and, read with note 5 on Schedule 25 regarding change in the method of valuation of inventories to conform to the Accounting Standard-2 issued by the Institute of Chartered Accountants of India resulting in the profit of the year being lower by Rs. 22 million, is on the same basis as in the earlier years."

(Audit observations in Balance Sheet for 1999-2000)

3. It is being pointed out that it is not practicable to receive, store and issue inputs and to strike balance of these transactions on a daily basis in a register or in such a conventional method of book-keeping. Therefore, the method adopted by the appellant is that there is no separate store for the inputs; they are delivered by the suppliers at the required locations in the production plant. The receipt of the inputs is captured from the supplier's documents by the computer. Similarly, the consumption of inputs is worked out pro-rata on a monthly basis from the number of cars produced and the number of parts required for the manufacture of each variety of vehicle. The appellant has pointed out that errors can creep in for many reasons, like incorrect part numbers being captured in the computer data, consumption of parts in the manufacture of sub-assemblies going unrecorded, errors in noting down the various types of parts during physical verification, etc. The appellants also pointed out that, during reconciliation, though the Customs Authorities have accepted many of the shortages as explained and reconciled, a huge quantity of excesses of about Rs. 17 crores remains unreconciled on account of the fact that the shortages and excesses are in respect of parts in respect of different varieties of vehicles. It is the submission of the appellants that the exclusion of the parts found in excess while tallying the account is not correct or justifiable at all inasmuch as these parts also form part of the inputs recorded in the appellant's input accounts.

4. The substance of the appellants' submission is that any large organisation has to put up with some discrepancies noticed on stock taking and in the absence of evidence of diversion or mis-utilisation, no demand is justified. In support of this contention, it is being pointed out that the shortages come to a clearly negligible percentage and Tax Authorities also should accept the variation and not raise any demand. It is being submitted that a demand for return of credit under Rules 57-I can arise only in cases involving taking of credit on account of error, omission or mis-conception. According to the appellant, none of these ingredients is present in the appellant's case. Sub-rule (2) of the Rule contemplates full accounting for of the disposal of inputs. The rule does not permit of disallowance of credit in the absence of any evidence that the inputs have been disposed of in any manner other than the ones provided for in the Reles. The Ld. Counsel for the appellants also submitted that it is well settled that Tax Authorities should follow a prudent approach while determining tax liabilities and the decisions must be informed by commercial practice.

5. As against the above contentions of the assessee, the Ld. DR has contended that as the assessee had failed to "fully account for" the disposal of the inputs in the manner provided, the credit taken is liable to be denied and recovered in respect of the inputs found short. He emphasized that the authorities had allowed the appellant benefit to the extent they had succeeded in reconciling the shortages and in accounting for the inputs in question. The duty demand is only in respect of quantities where the assessee has failed to account for the proper disposal of the inputs, despite chance being given and efforts being made. He has also pointed out that no such dispute has arisen in other major auto companies and that they were all accounting receipts, storage and issues.

6. We have perused the records and considered the submissions made by both sides. The recovery of modvat credit has been ordered under the impugned order on the basis that the appellant has failed to fully account for the inputs (Rule 57I). This rule allows recovery of the credits incorrectly or improperly taken. In the present case, there is no allegation that original credit taken was incorrect or improper. The allegation is that, in view of the shortages noticed, the appellant has failed in showing that the inputs on which credit had been taken had been properly disposed of in terms of the Rules. Broadly speaking, the disposals allowed under the Rules are, use in the manufacture of final products, and clearance of inputs after reversal of the credit. In the present case, the demand is on account of the fact that there are some shortages which are not reconciled. The appellant's submission is that full reconciliation is not possible and that that is no ground to hold that goods have been improperly disposed of. The appellants have explained that they have a detailed and reliable system of accounting of inputs and that all aspects including pilferage are taken care of. It has been pointed out that wherever the inputs have been disposed of other than in the manufacture of final products, including pilferages detected, the appellants have reversed Modvat credit. It is also their contention that the shortages in stock detected during physical verification is no positive evidence that the inputs found so short were disposed of in any manner other than in the manufacture of final products. These submissions of the appellant merit acceptance. The very presence of unaccounted excess inputs worth more than Rs. 17 crores establishes that there are errors in the accounts/physical verification.

7. The appellants have a huge and complex accounting problem. It is beyond manual tally. The appellants have put in place sophisticated computer based accounting systems to ensure accuracy and efficiency. The evidence on record does not indicate any diversion of inputs in contravention of rules relating to utilisation of inputs. The demand is merely based on the shortages detected during physical tallying, that too without taking into account the excesses noticed. Since there is no evidence, that the excesses are not the result of clandestine receipt of inputs, the same view is required to be taken in regard to shortages also, that the shortages are not the result of any clandestine or unauthorised utilisation of the inputs. The shortages thrown up also do not account for much. The appellants' Management as well as its auditor have accepted the differences between the physical stocks and the procurement as normal and something to be put up with. It is a very small (0.24%) fraction of the inputs received. It is well settled that Tax Authorities also should go by the normal commercial and professional practice. If the shortages are within the tolerance limits fixed by an efficient Management and certified to as within the norms by qualified accounting professionals, it would be unreasonable and unfair for Tax authorities to take a different view. In these circumstances, we are of the view that there is no evidence to sustain a finding that this is a case of irregular or incorrect taking or utilisation of credit. In such a situation, no demand can be raised under Rule 57-I. The demand is accordingly, set aside and appeal is allowed with consequential relief to the appellant. Amounts already deposited by the appellant, on account of this dispute, shall be returned to it.

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