ORDER
Archana Wadhwa, Member (J)
1. Nobody is present on behalf of the appellant company. Accordingly, we have heard learned D.R., Shri KJ. Sanchis, JDR for Revenue, and have gone through the impugned Order.
2. The appellants are engaged in the manufacture of parts of I.C. Engines like Petter Connecting Rods and Lister Connecting Rods. The said goods were being cleared by them on the basis of the invoice-value, for which a declaration was filed by them. During the period from January, 1994 to March, 1994, the appellants cleared 2028 pieces of Petter Connecting Rods at price of Rs. 26,750/-(Rupees twenty-six thousand seven hundred and fifty); 482 pieces of Lister Connecting Rods at price of Rs. 10,700/- (Rupees ten thousand seven hundred) under different gate passes. Inasmuch as the price of Petter Connecting Rods/Lister Connecting Rods, as per the other invoices issued by the appellant company, was around Rs. 125/- (Rupees one hundred and twenty-five), the Revenue, while scrutinizing their RT-12 returns, entertained a view that the value of clearances at this price should be worked out to Rs. 3,13,750/- (Rupees three lakh thirteen thousand seven hundred and fifty). Inasmuch as the appellant company had shown the total value of Rs. 37,450/- (Rupees thirty-seven thousand four hundred and fifty), the Revenue raised the show cause notice for recovery of duty of Rs. 41,445/- (Rupees forty-one thousand four hundred and forty-five) on the differential value. The said Notice was confirmed by the Assistant Commissioner, who also imposed personal penalty of Rs. 10,000/- (Rupees ten thousand).
3. In their appeal before the appellate authority, the appellant company contended that the goods shown in the invoices in question, were not finally manufactured goods, but were Connecting Rod and Petter Connecting Rod Rejections and Undersized Turning Scrap. Inasmuch as there was no regular buyer of these items, they had been accumulated in the appellant company’s unit over a period of time and the total quantity of 2 MTs. and 5 MTs. respectively, was sold by them on weight basis instead of piece-wise basis. As such, they pleaded that inasmuch as the goods in question were substandard parts not sold as regular parts, they should be considered as waste and scrap.
4. The above contention of the appellant company was considered by the Commissioner (Appeals) in the following terms:
The appellants are under permission for manufacture of Connection Rods and Petter Connecting Rods, which are claimed to be of specific dimensions and have other specifications. These are utilized as parts of diesel engines and, therefore, have to conform to precise specifications. In the manufacture thereof, the appellants have also inadvertently produced undersized rods which could not be used as parts of diesel engine and, therefore, have to be treated as scrap, or rejections. The evidence in the invoice also reflects the fact of rejection of the rods sold on weight basis. The 7 tonne total quantity, involving duty of Rs. 41,445/- is said to be the value and duty of such rejection lot which had accumulated over a period of time, and this sale was one-time sale of rejected goods. This quantity is also claimed to be only a small percentage of the total manufacture made by the appellants over a period of time.
After observing as above, the appellate authority further observed as follows:
If this be the facts ascertainable from the record, I find no reason for imposing duty liability on these rejected parts at the value determined for standard sized parts. However, I find from the impugned order that the appellants are also charged with wrongly declaring such parts as scrap. This is sought to be established by the facts of entries contained in the RG-I register where the same quantity of 2028 Petter Connecting Rods and 482 Connecting Rods have been shown as production and accounted for and that no quantity of scrap is said to be generated and therefore available for sale as scrap made by the appellants.
I find it difficult to believe that in the process of manufacture of turning rods by machining process no rejections are noticed. Every factory is bound to turn up with some rejections in manufacture, which necessarily require the forgings to be discarded and sold as scrap. However, this would constitute a small percentage of the total manufacture.
At this stage, when the goods have already been sold off as scrap, it is not possible to make the correct determination of such scrap generated for sale as scrap; yet there is a reasonable basis in the appellants’ claim of having generated some scrap also. I think the fair proposition in these circumstances would be to conduct enquiry of the percentage of scrap generated over a period of one year by physical verification of the stock of scrap generated and available in the appellant unit at present and thereafter allow the benefit of scrap in respect of such quantities. The appellants should also be asked to give a reasonable explanation for having entered the said numbers of rejected Petter Connecting Rods and Turning Rods in RG-I Register, when the same were known to them to be substandard, but no remark to this effect has been given in the register.
In order to enable this action I am setting aside the impugned order with the directions that the demand should be modified in accordance with the directions contained in this order. Penalties should only be resorted to in de novo proceedings, if the percentage of substandard stock/scrap normally generated are found to be much lower than the quantities sold out by the appellants as scrap in this case.
In de novo proceedings, lower authorities again confirmed the demand on the same reasoning. Hence the present appeal.
5. As is clear from the earlier Order of the Commissioner (Appeals), the emergence of substandard qualities of the parts is not being doubted, and in fact, it is admitted by the Commissioner (Appeals) that the appellant company’s final product is a highly technical item involving fine precision, and any variation in quality results in rejection of the same by the customers, except from expressing some doubt about the quantum of generation of such substandard goods.
6. We find that there is nothing on record to discard the appellant company’s contention. There is no evidence of any flow-back of money from the customers on this count. We also find force in the appellant company’s contention that the goods were sold on the basis of weight, thus leading to credential to their claim that the same were rejected parts and hence scrap. Had they been regular parts, they would have been sold on the basis of pieces and not weight. Merely because the goods were entered initially in the RG-I Register and no remarks about their being substandard were made thereagainst, that by itself, may not be reasons sufficient to reject the appellants’ claim of having sold the goods as scrap, as discarded goods, in the absence of any evidence to the contrary. In view of the above, we find no merits in the Revenue’s stand. The impugned Order is accordingly set aside and the appeal allowed with consequential reliefs to the appellants.
(Pronounced)