ORDER
K.K. Agarwal, Member (T)
1. The facts of the case are that the appellants M/s DGP Hinoday Industries Ltd are engaged in the manufacture of S.G. Iron Castings and the main raw material for the finished product was Cold Rolled Cold Anneale i scrap. This scrap was being procured by the appellants by placing purchase orders with various registered scrap dealers of iron and steel located at Pune and Mumbai. The scrutiny of the invoices, on the basis of which the appellants have availed Modvat/Cenvat credit, revealed that in a number of cases they have availed the credit on the scrap, which had been described as “MS Off cuts”, “Off cut of MS sheets”, and “scrap of MS off cuts”. It was also observed that such off cuts have mostly originated from M/s Telco, Pimpri, Pune, and Bajaj Auto Ltd, Akurdi, Pune, Bajaj Auto Ltd, Aurangabad. Samples of various types of scrap generated in M/s Bajaj Auto Ltd and M/s Telco were taken. Mr. Joshi, Section Manager, Central Stores of Bajaj Auto Ltd, has, in his statement, inter alia stated that the scrap cleared by Bajaj Auto was classified in to various categories (a), (h), (c). (d) and (e), depending on the size and shape and type of the scrap which were being cleared.
2. Scrutiny of purchase orders, placed by the assessee with their suppliers of scrap, showed that the assessee had mentioned their requirement of scrap as “ferrous waste and scrap of iron and steel of various forms like off-cuts, trimmings CRCA scrap, steel stamping scrap, MS scrap, end piece scrap, side trimming, melting scrap etc in baled form as per chemical composition, free from rust, grease, mud and oil etc and it should be in the form of hydraulically pressed bundles or coils.” The purchase orders were being placed by Mr. R.G. Gurjar, Director Finance, Mr. D.P. Kulkarni, Associate Vice President, Mr. S.B. Vaidya, Assistant G.M. Materials, Mr. L.R. Shaikh, Project Manager and Mr. Niranjan Upalkar, Assistant Manager, Purchase, of the assessee.
3. Scrutiny also revealed that the major supplier of the scrap to the assessee were M/s Kanchenjunga Impex, Mumbai, M/s Mehta Trading Corporation, Mumbai, M/s Madhuban Trade Steels Pvt. Ltd., Pune, M/s J.N. Traders, Pune, and M/s Mahalaxmi Steel Corporation, Pune. It was also revealed that in many invoices, on the basis of which Modvat/Cenvat credit had been availed by the assessee, the description of material was given as “M.S. Off-cuts”, “Off-cuts”, “Off-cuts of MS”, “Steel sheet scrap” etc and the sale value from the second stage dealer to the assessee was lower than (he purchase value by the first stage dealer from the source i.e. the original scrap manufacturers such as M/s Bajaj Auto Ltd, Pune, M/s Telco, Pinipri, Pune etc. Further, while the description given in the Modvat/Cenvat invoices was “MS. Off-cuts”, “Steel scrap”, “M.S. scrap ‘V.H.R. Trimmings”, etc, the description given in the corresponding delivery challans and commercial invoices raised by the registered dealers were CRCA scrap, melting scrap, scrap of iron arid steel, punching scrap, punching dal etc.
4. During the course of investigation, vendor evaluation report revealed that the said report has been prepared by Mr. B.N. Rao, Assistant Manager Quality Assurance Department of the assessee, who after visiting the premises of the scrap suppliers and after verifying the various facilities available with the scrap suppliers has given grading as per the points scored by the suppliers in the prescribed vendor evaluation questionnaire. Further in the remark column of the said proforma the Manager, Quality Assurance has put a remark ‘vendor approved for CRCA supplies’. At the end of the said proforma the dated signatures of the supplier of the scrap have also been obtained.
5. Statements of various officers of the company Mr. D.B. Ghate, Production Manager, Mr. B.N. Rao, Assistant Manager, Quality Assurance Department, Quality Assurance Department of assesses, Shri D.M. Kundnani, Section Officer, Stores Department, were recorded, wherein, on being shown the sample of off-cuts drawn from the factory premises of Telco and M/s Bajaj Auto Ltd, stated that they have never received such types of off-cuts in their factory for the purpose of melting. Shri A.K. Deodhar, Works Accountant & authorized signatory, in his statement, inter alia stated that they require CRCA scrap only in baled form free from rust, oil. grease etc of the size which can be fed in the furnace installed in their factory, and the nature of scrap received by them is similar to the scrap bales that appear in the photographs taken during Panchnama on 9.10.2000. He further stated that they are always receiving the scrap in baled form and that they have never received the scrap in loose form i.e. in the form of off-cuts, trimmings, steel stamping scrap, MS scrap etc as the purchase order is for issue of scrap in baled form only. He admitted that off cuts of MS sheets as mentioned in the invoice was not received and the description as scrap mentioned in the dealers invoice do not match with the description of the scrap received in the factory. He also, after seeing the sample of off-cuts drawn from Bajaj Auto Ltd, Pune and M/s Telco, Pune, stated that he had not seen scrap of the type of samples in scrap pit of the company. Shri P.S Kamat, Sr. General Manager (Manufacture & Admn) also stated that for manufacturing their finished goods, they require only CRCA scrap and that he does not know what is meant by ‘off cuts” and why the same has been mentioned in their purchase order. After seeing the samples he also admitted that the scrap of that type have not been received in their factory. Shri S.B. Vaiclya, AGM Materials, in his statement, stated that he does not have in-depth knowledge of scrap. However, he places the purchase order for scrap by giving description as off cuts, trimmings, CRCA scrap, side trimmings, melting scrap etc and that all the descriptions given in the purchase order is as per prevalent market purchase.
6. During the course of investigation, the statement of second stage registered dealers, who had supplied the scrap to the assessee were also recorded. Shri Manoj Mehta partner of M/s Mehta Trading Corporation. Mumbai, in his statement, stated that he was required to supply scrap of various types in baled form with certain chemical composition to the assessee as per their purchase order and that the scrap supplied was always in baled form and that they were required to supply various types of scrap such as waste and scrap, trimming scrap, punching scrap, MS scrap, end cutting scrap, stamping scrap etc in bundled form. As regards the identification of scrap received by them from first stage dealers, he stated that the scrap could not be identified with the description given in the invoices but that they, however, relied on the first stage dealers as they were dealing with those dealers for many years. Regarding identification of scrap after bundling, he revealed that it is difficult to identify the scrap as it loses its shape and size and become compact and as such they identify the scrap by then judgment and experience in trade. He further stated that he earned profit by way of selling part material at higher price on non Modvat/Cenvat basis and thereby maintained overall profitability in the said transaction. He also stated that the material received at their godown is segregated according to shape and size and that the value of the segregated material depends on the use of the customers and that after segregating the melting scrap is sold to foundries.
7. Statement of Shri Pritish Jam, Director of M/s Madhuban Trade Steel Pune was recorded in which he stated that he purchased the scrap directly from manufacturer and from unregistered dealers also. He also admitted that though it was difficult to co-relate bundled material with particular original invoice received from their supplier, they came to know to which invoice the bundled material belongs to with experience in the trade. On being shown the invoices issued by his firm to the assessee wherein the sale value is much lower than the purchase value, he stated that the first stage dealers sold the scrap to them at a lower rate after segregating the good quality reusable scrap. Similar statements were given by Shri A.K. Japher, partner of M/s J.N. Traders, Pune, Shri B.V. Yadav, proprietor of M/s Mahalaxmi Steel Corporation, Pune, and Shri Rajendra Singh. President of M/s Kanchenjunga Impex Pvt. Ltd. Mumbai.
8. As a consequence of above investigation, a show cause notice was issued to the appellant M/s D.G. Hinoday Ind Ltd, in collusion and in connivance with registered dealers have fraudulently raised and utilized inadmissible Modvat credit on iron and steel scrap which was not received by them against the invoices issued by the dealers. The input goods that is iron and steel scrap received by DGP Hinoday Ind Ltd were not the same as described in the invoices accompanying the goods. Registered dealers appeared to have substituted the high valued iron scrap received from original manufacturer and in its place supplied scrap of lower value and or inferior quality but have issue invoices for higher value scrap received by the original manufacturer to facilitate availment of inadmissible/fraudulent credit by the assessee. Accordingly, show cause notice proposed to deny Cenvat credit amounting to Rs. 85,82,288/- and to impose penalty of equal amount along with interest and penalty under Rule 173Q(a)(bb) of the Central excise Rules, 1944. Penalty was also proposed against Shri R.G. Gurjar, Director, Finance, Shri P.B. Vaidya, General Manager (Taxation) under Rule 209A, Rule 26 of the Central Excise Rules, 2001-02 against registered scrap dealers at Madhuban Trade Steels Pvt. Ltd, M/s J.N. Traders Kasarwadi, Pune, M/s Mahalaxmi Steel Corporation. Pimpri Pune, and M/s Shaima Iron & Scrap Traders, M/s Mehta Trading Company, and M./s Kunchenjunga Impex Pvt. Ltd under Rules 25 & 26 of the Central Excise Rules, 2001/2002 and Rule 173Q(1) for willfully entering incorrect particulars in the RG23D register and issuing excisable invoice for goods other man those cleared by the original manufacturer on payment of duty and thereby knowing and deliberately aiding and conniving with M/s DGP Hinoday Industries to enable them to fraudulently avail inadmissible Modvat/Cenvat credit.
9. The show cause notice was adjudicated by the Commissioner, who confirmed the duty demand of Rs. 85,82,288/- along with interest, and imposed penalty of equal amount. He also imposed a penalty of Rs 5.00 lakhs on Shri P.B. Vaidya, General Manager Taxation under Rule 209A; Rs. 5.00 lakhs each on M/s Shaima Iron & scrap Trader, J.N. Traders, M/s Madhuban Trade Steel Pvt. Ltd, M/s Kanchenjunga Impex, and M/s Mehta Trading Co under Rule 1731(1)(bbb) of the Central Excise Rules, 1944 and under Rule 25 and 26 of the Central Excise Rules, 2001 and Rule 2002. All these notices on whom duty has been confirmed and penalties imposed are in appeal before us.
10. Shri Prakash Shah, the Ld Advocate for the assessee, submits that the appellant is engaged in the manufacture of hot rolled iron castings and for that purpose received duty paid waste and scrap for the purpose of melting. They also received scrap from various second stage dealers, who, in turn, were getting the material from the first stage dealers. What was received by them was scrap in baled and bundled form and in no other form nor there is any allegation to that effect. The main allegation against them is that while the invoices described the scrap as MS off-cuts, off cuts of iron and steel. HR strips, sheets etc the goods actually received by them did not correspond to the description in the invoice and therefore what was received by them was other than the goods described in the invoices on the basis of which they have taken the credit and therefore such credit was admissible. The allegations are based on the fact that the material purchased by them was having a price lower than at which the same was purchased by scrap dealers from the manufacturer like Telco and Bajaj. It was submitted that during the course of investigation, statements of first and second stage dealers have been recorded and they have categorically stated that they received the scrap from Bajaj and Telco, which was further segregated by them on the basis of their size and these were sold at different rates as per the requirement of foundries. While piece of bigger size fetched higher value than the rate at which it was procured by them from the original manufacturer, the pieces of lower size were sold at lesser price than the rate at which they were originally procured. However, over all they were maintaining a profit. The pieces of lower than size were compressed and baled and what was supplied to the appellant was only scrap in baled and bundled form. Reference was invited to statement of Shri M.A. Joshi, Section Manager, Central Stores of M/s Bajaj Auto Ltd dated 14.11.2000 in which he has described that the off cuts is divided into five categories (A), (B), (C), (D) and (E). From his statement, it would appear that the segregation is on the basis of shape i.e. rectangular and circular etc and not with respect to size and therefore to draw inference that since the scrap is already segregated does not need further segregation is incorrect, in view of the fact that the first stage dealers were doing the segregation as per the size and material of lower size was being sold at cheaper rate. Therefore, merely because the material was received at a cheaper rate does not mean that the invoices accompanying them did not describe the goods correctly. The dealers have stated that this lower size off cuts could be baled and bundled. It is not the revenue’s case that their furnace is incapable of melting such off cuts. In fact the revenue has advanced the charge of substitution of scrap only in those cases where the invoices reflected a price lower than the procurement price of the first stage dealer. It was submitted that such invoices are to the extent of 20 to 25% whereas the balance invoices are at a rate higher than at which the material was procured by the first stage dealer. Therefore, the revenue’s contention that off cuts cannot be used in their foundry or that what was received by them was not off cuts cannot stand, as no such allegation has been made when the invoice price accompanying the scrap was at a price higher than the procurement price by the first stage dealer.
11. The other argument of the revenue is that what was required by M/s DGP Hinoday Industries Ltd was only CRCA scrap and nothing else, while the invoice show the receipt of MS off cuts, HR punching, HR trimming scrap etc which cannot be used in their foundry. It was submitted that MS off cuts were cold rolled annealed and not hot rolled. MS off cuts can be both of cold and hot rolled varieties. It was submitted that the scrap was received from the automobile units, whose requirement is that of cold rolled products only and the invoice issued by them show the classification of off cuts as that of cold rolled sheets only. Attention was also invited to HSN Explanatory Notes on Chapter 72.09 where also it has been stated that cold rolled iron steel products find their main use in the automobile industries. Therefore a wrong inference has been drawn that what was received as MS off cuts etc was not CRCA, when the fact is that they were CRCA and nothing else and no evidence has been brought on record by revenue to establish mat these were of the hot rolled variety. As regards the allegation of the scrap pertaining to HR variety, it was submitted that mainly the requirement of the foundry is, that the scrap should be free from oil, grease, rust and of lower carbon cortent and as long as the scrap meet those specifications, the same were usable in their foundries. The scrap received by the unit was tested for its chemical composition and only when it was found to be of required specification, that the same was used. HR scrap received by them was also found to conform to their specidcation and was accordingly used in their melting furnace. In view of this, it was submitted that what was received by them was as per their purchase order and there was no mismatch in the description given in the excise invoice and the scrap received by them. Commercial invoices were as per purchase order but the goods received in any case were waste and scrap and were CRCA scrap only and therefore there was no contradiction in the description between the two invoices as long as the scrap was that of cold rolled cold annealed only and not otherwise. The scrap may be off cuts, may be trimmed, nay be punched but they all fall in the general category of CRCA scrap.
12. Reference was also invited to the decision of the very same Commissioner in the case of Pefco Foundry into which the Commissioner has referred in the impugned order-in-original as being identical to the present case and stated that the Commissioner has now dropped the proceedings in the case of Pefco Foundry. Reference was also invited to the CEGAT decision in the case of Business Combines Ltd and Ors v. CCE, Nasik 2005 TIOL-1158 (CESTAT-Mum), where similar view was taken and the charge was that the first stage dealer has charged lower price than his procurement price which would go to show that the scrap received was other than the one described in the invoices. Attention was also invited to CEGAT’s decision in the case of Kohinoor Trading Co v. CCE, Thane II 2006 (197) ELF 294 (Tri-Mum) wherein it was held that:
Cenvat/Moedvat – Sorting of scrap by dealers, selling good quality scrap at higher prices than purchase price – Part of low quality melting grade scrap sold to appellant and deficit stock in a particular consignment made up from duty paid scrap lying in godown of registered dealers – Modvat credit admissible in respect of such scrap – Rule 57G of erstwhile Central Excise Rules, 1944 – The dealers purchase duty paid scrap from original manufacturers under the cover of invoice issued under Rule 52A. The scrap is received in mixed form. The dealers, in their premises, sort the mixed scrap. After sorting, good quality scrap is sold at prices higher than purchase price, with or without passing on the Modvat benefit to the customers. Out of low quality melting scrap, some part is sold to the appellants. The deficit stock in a particular consignment is made up from the duty paid scrap lying in the godown of the registered dealers. There is no allegation/finding of non duty paid scrap being received or short quantities having been received. The dealers having sorted the scrap is not fatal to deny the credit, since dealers registered under Modvat scheme are permitted to transfer credit and required to keep accounts of only such goods, on pro rata basis which are sold/transferred by them in Modvat chain. It is clear that only duty paid scrap has been supplied to the appellants. FIFO principle has been accepted by Board (refer to Sr. No 19 of Trade Notice No. 63/Mumbai-III/General/(33)/190 of Bombay III Collectorate and Circular No. 261/6/5/84-CX. 8, dated 17.7.1984 also accept the position for grant of such facility in deserving cases. ‘Scrap’ could be an eminently suitable commodity to be eligible to this benefit of Trade Notice No 63. Commissioner should have considered these instructions of the Board and granted the benefit of credit.
13. In view of the above, it was submitted that there has been no substitution of inputs as alleged and they have taken credit only in respect of the goods described in the invoices and therefore entire demand and penalty is required to be set aside against them and their officers.
14. Shri Prakash Shah, Ld Advocate for the appellants also raised the point on limitation. It was submitted that the invoices issued by the second stage dealers were duly verified by the Central Excise officers and the classification and description of the goods was clearly shown in the invoices which also give reference regarding classification and rate at which it was procured from the original manufacturer. Invoices did show that the goods being sold at a price less than the procurement price and therefore the matter was in the knowledge of the department and no suppression can be alleged, as these invoices were always submitted along with RT12 Returns.
15. Similar submissions were made by Shri V.S. Sejpal, Advocate and Shri V. Sridharan, Advocate in respect of second stage dealers, the other appellants, wherein it was submitted that the dealers have supplied material as per the invoice description and that the segregation was done by the first stage dealer and there is no evidence from the Revenue that they have procured low quality scrap from market for substitution and in the absence of any evidence such charge cannot be sustained against them and therefore the imposition of penalty was unwarranted.
16. Shri S.N. Prasad, the Ld D.R. on behalf of the revenue submitted that the Commissioner’s finding is well founded, as samples were drawn from the scrap cleared by the original manufacturer like Bajaj Auto and Telco and photographs were taken baled & bundled scrap and after comparison he found that the photographs of the off cuts did not match with the one received by M/s DGP Hinoday. He laid great emphasizes on the point that the requirement of the appellant were that of CRCA scrap only as is evident from the statement of the various officers of the appellant but credit has been availed on invoices showing the description of the goods as HR scrap. HR trimmings and HR sheet cutting scrap and therefore it is clearly established that the scrap was substituted. The officers of the company were shown samples of the scrap drawn from the premises of M/s Bajaj Auto and Telco and they stated that they have never seen such type of scrap having been received in their factory and this establishes beyond doubt that what was received by them was not the scrap obtained from M/s Bajaj Auto and Telco but was substituted. He referred to the statement of Mr. M.A. Joshi, Section Manager of Stores of M/s Bajaj who stated that off cut manufactured by them are cleared under five categories and that off cuts of type (b) and (c) is used for manufacture of components only and therefore the question of melting does not arise. He also referred to the findings of the Commissioner that CRCA scrap was available at a much lower price than the price of off cut and therefore there was no need for the appellant to procure a high cost scrap when the scrap for their purpose was available at much lower price. However, on being questioned by the Bench, as to why a charge of substitution has not been alleged against the appellant in respect of those invoices, which happened to be in majority, where the scrap was received at a price higher than the procurement price, he stated that this was for want of sufficient evidence against the appellant as scrap procured being of a higher value, prima facie the intention could not have been doubted.
17. As regards limitation, it was submitted that what the officers verified was whether the description and other particulars tallied with the one given in the manufacturer’s invoice and at that time they were not required to go into the sale price of the dealer.
18. We have considered the submissions. We find that the allegations regarding substitution of the raw material, on which credit has been taken, is based mainly on the ground that the invoices showed a price less than the procurement price of the first stage dealer from the original manufacturer of scrap and that while the requirements of the appellant were that of CRCA sheets, what was received by them was mainly off cuts and HR scrap, HR trimmings and HR steel sheets, cuttings etc. We find that no tangible evidence has been brought by the revenue to establish that there has been substitution of the goods. There is no evidence of procurement of lower quality scrap of description other than the one given in the invoices by the second stage dealers and it is subsequent supply to the appellant and the inference has been drawn only because of the lower price. We find merit in the submission of the appellant that if the revenue’s case is that off cuts were knowingly received or used in their factory, then a similar charge should also have been leveled against them in respect of those invoices where the description is that of MS off cuts etc only but the price was higher than the procurement price of the first stage dealer and such sales go to the extern of 70 to 85%. For the same reasons we also do not find any merits in the Commissioner’s finding that CRCA scrap was available in the market at a much lower price and there was no need for the appellant to procure scrap at a higher price as there is evidence to show that the appellant did receive scrap of much higher price for which no allegation has been made by revenue in the Show Cause Notice. The dealers have stated that the scrap has been segregated by them according to the sizes and therefore the reasoning that the scrap was already segregated into five categories i.e. (a), (b), (c), (d) and (e) and therefore did not need further segregation is also not acceptable, as it has been stated that the categories were according to shape of the scrap and not according to size and what the dealers were doing was segregating them according to their size. No contrary evidence has been brought by revenue to controvert the statement recorded from these dealers. The revenue has laid a great emphasis on the fact that what was required by the appellant was that CRCA scrap only and what was received was off cuts and HR scrap. However, the revenue failed to establish that MS off cuts were not CRCA but hot rolled. On the contrary, the appellants have been able to show that automobile industries needs CRCA products only because of their functional requirement and not hot rolled and have supported the same by reference to HSN Explanatory Note on Chapter Heading 72.09. Since, it is not denied that the scrap was received from automobile industries only, the same has to be considered as that of CRCA only. No evidence is brought on record to show that the scrap other than CRCA has been procured from elsewhere. We further find that there is no allegation that the size of the furnace was such that off cuts received by the appellant could not have been melted and in any case the dealers have said that off cut of smaller size punching scrap, framing scrap etc were compressed, bundled and therefore they could have been used in the furnace. We also find that on exactly similar grounds the same Commissioner has dropped the proceedings in the case of Pefco Foundry. We also note that the Tribunal in the case of Kohinoor Trading and Business Combines Ltd cited supra have taken a view that mere fact that the invoices of the scrap show a price lower than that of the procurement price does not establish that the scrap received was other than that described in the invoices. We also agree that there is no mismatch in the commercial invoices and excise invoices, as commercial invoice gave a general description, whereas the excise invoice gave specific description indicated in the invoices under which the scrap was received. However, we find merit in the revenue’s contention that since HR scrap was of no use to the appellant as there are categorical statements from their officers that no HR scrap was ever received in their factory, the scrap relatable to invoices describing the same as HR sheets, HR cuttings, HR trimmings etc could not have been used in their factory and therefore the credit corresponding to that cannot be made available. The applicants however state that there are only 13 instances where HR scrap has been received (a statement not refuted by revenue) and the duty involved on such invoices comes to Rs. 1,17,675/-. This is held to be inadmissible. The appellants have also stated that though they have contested this amount but since the amount is small they are prepared to pay duty on the same.
19. We find that there is no case on merits. Hence we do not consider the necessity of going into the aspect of limitation.
20. The appeal is allowed as per above terms.
21. Since the demand itself has been held to be non maintainable, as above, the penalties imposed on M/s DGP Hinoday Industries Ltd and its officers and the various second stage dealers etc are set aside.
22. The appeals are accordingly allowed in respect of all the appellants but for the demand of Rs 1,17,675/-, as stated above.
(Pronounced in Court on 16.11.2006)