JUDGMENT
S.S. Sekhon
1. Consequent to the decision in Writ Petition Nos. 1416 and 1417 of 1996 by the Hon’ble High Court of Judicature at Madras, this appeal is taken up for a hearing and a decision thereafter.
2. M/s A.V.R. Chemicals (P) Ltd., L. 4 No. 2/88 Adavipolam, Yanam a declarant under Modvat scheme are engaged in the manufacture of Zinc Oxide. They had opted for availing deemed Modvat credit, in respect of inputs viz, zinc waste and scrap falling under Heading No. 7902.00 of Central Excise Tariff Act, 1985 as provided under Rule 57G (2) of Central Excise Rules, 1944 and filed a declaration under Rule 57 G on 27.1.1989 and the same has been acknowledged by the Assistant Collector of Central Excise, Kakinada on 2.2.1989.
3(a). Investigations were conducted by Anti-Evasion Unit, Kakinada Division, Kakinada and during the course of investigation a sample of zinc waste and scrap used as input in the manufacture of Zinc-Oxide by M/s A.V.R. Chemicals (P) Ltd., Adavipolam, Yanam was drawn on 6.9.1990 and sent to Chemical Examiner, Custom House, Madras for test. They vide report L. No. 2519/90 dated 26.10.1990 reported that the sample does not merit to the classifiable under Chapter sub-heading No. 7902.00 of Central Excise Tariff as ‘Zinc Waste & Scrap’. Further, the Chemical Examiner, vide his report referred to above also noted as “The sample does not have the characteristic of Zinc Waste & Scrap”. It may be considered as ‘Zinc-ash/residues’.
(b) Rule 57G(2) of Central Excise Rules, 1944 read with Government of India’s Order F. No. 342/1/88-TRO dated 1.3.1989 as superseded, does not provide for deemed Modvat credit on ‘Zinc ash and Residue’ It was found that an amount of Rs. 15,12,222.80 was taken as deemed Modvat credit and entered into R.G. 23A Part II Register in respect of the quantity totally weighing 400.26 MTs under the name ‘Zinc Waste & Scrap’ received and used as input in the manufacture of Zinc Oxide, during the period from 27.1.89 to 10.11.90.
(c) Relying upon the following documents–
(i) RG 23A Pt I & Pt II from 27.1.1989 to 10.11,90 wanted by the appellant.
(ii) Chemical Examination Report dtd. 26.10.90.
a show cause notice was issued on 3.1.1991 proposing to deny the credit of Rs. 15,12,222.80 under the provision of Rule 57I read with Section 11A and why penalty should nto be imposed under Rule 173Q.
(d) The Collector after hearing the party confirmed a demand of Rs. 13,05,990.00 and imposed a penalty of Rs. 5 lakhs under Rule 173Q of the Central Excise Rules, 1944 after arriving at the following findings:
“7. From the returns and other documents submitted by the assessee, it is seen that the inputs have been purchased form M/s A.M. Enterprises, Hyderabad on most of the occasions before the issue of show cause notice. After the detection of the case, i.e., since November 1990, the assessee has not purchased any consignments from the said supplier. It is also seen that the inputs have been purchased at costs ranging between 4,000 to Rs. 10,000 except 4 consignments bought from February 1989 to August 1989 and one consignment in January 1990. The recovery from the inputs having value ranging between Rs. 4,000 to Rs. 10,000 also ranged between 20% to 40%. However, after the detection of the case i.e. November 1990, it is seen that the inputs have been bought from different suppliers like M/s Roopam Enterprises, Hyderabad, M/s Sahu Traders Bombay, M/s Universal Hardware & Metal Market etc, and that the cost has ranged between 14,000 to Rs. 46,000. It is also seen that the market price of Zinc Waste & Scrap during the material period was much higher than that indicated in the invoices. Since the price of Zinc Waste & Scrap was in the range of Rs. 14,000 to Rs. 46,000 during the material time, the conclusion that is inescapable is that they must have
used Zinc Ash/Residue in place of Zinc Waste/Scrap. It is also seen that the chemical analysis of the samples drawn from the consignments purchased after November 1990 shows very high Zinc content i.e. 60 to 90% while in the earlier sample the Zinc content ranged from 20% to 50%. It is also seen that the recovery of Zinc Oxide from Pre-November 1990 consignments were relatively low ranging from 20 to 40% while the post-November 1990 samples show very high percentages ranging from 60 to 90%. I have come to the conclusion that the assessee has very ingenuously made use of low priced input for availing of Modvat credit. My conclusion is based on the various parameters such as price of the input, recovery percentage, wastage, percentage, etc. which when correlated indicate that the raw material used was Zinc Ash/Residue and not zinc waste/scrap. Another contention of the assessee was that it would be unprofitable if Zinc Oxide was manufactured from Zinc Ash/Residue. This does not appear to be tenable, since the deemed Modvat credit availed by the assessee is the same in respect of the cost of input whether it is Rs. 6,000 or 40,000 probably the relative margin of profit must be even higher in the case of low cost input.
8. I therefore do not agree with the assessee’s contention that there was no suppression of facts since he has wrongly filed statutory declarations. It is seen that the Modvat declaration is that the inputs are hard waste and scrap while the chemical report states that the material tested was Ash/Residue. Not only from this, but also from the circumstantial evidence as discussed in the above paragraphs the conclusion is inevitable that the assessee has used low priced raw material to avoid higher costs and to illegally avail of Modvat credit. In view of the fact that the officers had only documentary declarations before them. I consider that the assessee has deliberately misled the officers in accepting the declarations for obtaining Modvat credit.
9. I have carefully gone through the contention of the assessee with regard to the various orders of the CEGAT to the effect that the test report of one sample cannot be extended to all the prior consignments. The CEGAT orders quoted by the assessee are:
(i) Kiran Spinning Mills Ltd., v. Collector of Central Excise (Bom.), 1998 (33) ELT 137 (Tri)
(ii) M/s Standard Woollen Mills v. Collector of Central Excise, Chandigarh, 1987 (28) ELT 417 (Trib.)
(iii) Govt. of India in reference M/s Aggarwal Metal Works, Rewari, 1982 ELT 682 (Govt. of India)
(iv) M/s Pattani Chemicals v. Collector of Central Excise, Rajkot, 1991 (35) E.C.R. 48 (CEGAT SL-C)
However, I do not consider that the present case in any way comparable to the ones discussed in the CEGAT judgments quoted above, as there is a deliberate attempt in the instant case to misled the Department and it has been foiled by the department by way of collecting documentary evidence to the effect that what has been actually used from October 1989 was Zinc Ash/Residues. I also find that in respect of some of the consignments which have been purchased at a higher cost and in which the Zinc content was very high have also been included in the show cause notice. Such consignments should be excluded for reversing of the Modvat credit. I have considered that the consignments received in the month of February 1989 to August 1989 and January 1990 are zinc scrap waste
as the value declared In the Invoices are above Rs. 10,000 and the recovery percentage is more than 40%,
10. The assessee also made a wilful mis-statement as to the real input that was used in the manufacture of final product. Knowing that the cost of Zinc Ash/Residue in the guise of zinc scrap ranges between Rs. 4,000-Rs. 10,000 whereas the cost of Zinc scrap ranges between Rs. 14,000-Rs. 46,000 the assessee chose the former and willfully misdeclared so as to avail the credit wrongly, which he is not entitled to. It is further supported by the fact that the assessee had switched over to the purchase of input @ Rs. 14,000 to Rs. 46,000 per M.T. from different suppliers after the detection of the case, which conclusively proves that the assessee knows the variation between Zinc Ash/Residue and Zinc scarp, not withstanding the description shown in the invoices as Zinc scrap for zinc ash/residue for the period prior to November, 1990.”
The present appeal is against this order.
4. After hearing both sides and considering the material it is found–
(a) There is force in the appellants submissions that rates of raw materials purchased subsequently has no relevance as arrived at by the adjudicator and the appellants have not been placed on notice as regards this aspect.
(b) Re-testing of the sample as provided for under the rules should have been ordered since the appellants had challenged the same. The test report therefore cannot be relied upon. The Chemical Examiner has gone beyond his brief in suggesting classification. In any case this test report cannot be applied for all the “Waste & Scrap” received in the past. Devoid of this report there is nothing on record to question the nature of the input.
(c) The invocation of Section 11A(1) in this case is no permissible.
(d) The District Industries Officer has clearly certified that the plant & machinery existing then cannot be used to manufacturing Zinc Oxide of Zinc Ash/Residue. The finding by the adjudicator as to how and why low contents could be used by the appellants is only has presumption. The order omits to answer the evidence provided by the industries Officer. HSN defines ‘Waste & Scrap of Zinc to be resultant waste out of working on material, etc. why the entity herein could not be so has not been arrived at. Investigation should have been done at suppliers end to establish the commercial understanding of the disputed product. Different percentages of Zinc content have been shown in test reports of other samples. Therefore we find no material to confirm the adjudicator’s findings.
(e) When we find no reason to deny the deemed credit, there can be no orders on penalty.
5. In view of our findings the order is set aside and appeal is allowed.