Gowri Shankar, Member (T)
1. The major question for consideration in these appeals, one by the assessee, and other by its director (on whom penalty under 209A has been imposed) is the extent of invisible loss that is permissible. The appellant manufactures steel forgings. Its process of manufacture commences with billets and rods which it receives. The goods are sometimes subjected to heat treatment for tampering. They are thereafter cut to the required size; cut pieces heated to high temperature and forged by dies. The rough forging is trimmed and holes made in it. Subsequently it is heat treated and then subjected to shot blasting to remove scale deposited during the heat treatment. The final operation is grinding, to remove projection or burns as a result of forging to give the product a smooth finish. During all these processes, there is loss of material that is worked upon. Such loss may be visible as in the case of shaving, trimming etc. Some of the loss however is invisible as in the case of fine dust or micro particle that arise during heating or grinding in the sense that they are not available for recycling. The appellant had maintained that so called invisible loss would average about 8%. The department, apparently based on experiment conducted by it and taking into account the availability of materials found in the appellant’s factory demanding duty on the scrap cleared without payment of duty. The show cause notice took note of 1.47% of loss in determining the amount of scrap. Notice issued to the appellant for this another contravention which we shall discuss later, alleged that after adding tins quantity to the weight of the castings cleared on payment of duty (as disclosed in the production report of the appellant) after taking into account the weight of the scrap that was obtained from remaining quantity had been cleared clandestinely. It therefore demanded duty equal to the Modvat credit taken on the inputs which were not accounted for. Based apparently on these data, demand was also raised on the scrap allowed to have been generated and cleared without payment of duty. Whereas the demand under Rule 57-I for credit is for the period from August 1993 to March 1998, the demand on the second ground for duty is for the financial year 1996-97, 1997-98. In the order impugned in the appeal, the Commissioner has after considering the submission made by the appellant, held that the invisible loss would be 5.5% and recalculated the demand for duty taken as credit and for the duty payable on scrap accordingly. He has also imposed penalty.
2. One of the points which was urged by the appellant before us in hearing was that during the pendency of the proceedings before the Commissioner, the cost auditor had been appointed under Section 14A of the Act to statute and report the loss in the appellant’s factory and that despite being asked, the Commissioner did not make available its report. We had thereafter asked the departmental representative to procure and submit this report. This has been done and we have considered it.
3. This report by Amir Apte, cost auditor indicates the average burning loss of 12 samples produced of 5.48% of the cut weight of the raw material received. This report of the cost auditor indicates on the basis of 12 sample products the total invisible loss works out to about 8% of the cut weight. It is clear from the annexure to his report that he has taken into account 12 products out of roughly 700-800 castings that the appellant manufactures. He has worked out the loss for each product, taking into account weight of its forgings and arrived at an average invisible loss as a percentage of the input which he also described as blank. (The advocate for the appellant is not able to say what the difference is between the inputs and the blank.) Having done so for each of the 12 products, he arrives at an average loss as proposed of the invisible loss and the total weight of the input.
4. Now the appellant had claimed an average of 8% for the five year period as invisible loss. The figures varied from year to year depending, we are told, upon the nature of the product manufactured. One product might require the materials to be subjected to different processes, some requiring heat treatment, others not etc. This objection it appears to us would apply to the conclusion of the cost accountant. The loss as a percentage of input varies as from a low of 0.41 in the case of slack adjuster to a high of 10.40 in the case of second speed gear 207. The total quantity of loss in the factory would directly depend upon the extent to which each of these products is manufactured, if the entire production was of speed adjustment the loss would not exceed 0.41%. If, on the other hand the total production was of speed gear 207 it would be high as 10.40%.
5. The Commissioner has in his order arrived at 5.5% as invisible loss on the basis of “enquiry in the trade and the experiment conducted in the factory”. So far his experiment in the factory is concerned, it is wrong, for the reason that we have cited above. The contention of the appellant was no trade enquiries have been cited, cannot be rebutted by the departmental representative. In view of these factors, it appears to us appropriate and it was agreed by both sides, entire question should be gone into once again in the light of the report of the cost auditors. We however note the point made by the advocate for the appellant that he reserves the right to question the report of the cost auditor and to lead evidence to rebut what the auditor has said. Accordingly we agree that the department should have an opportunity to consider such evidence if it is produced.
6. We therefore remand the question of determination of invisible loss or any demands for duty or as a result that may arise. The liability of duty of 1.5 MT of scrap which was seized is not questioned by the advocate for the appellant and the Commissioner’s order determining the duty on this is confirmed.
7. The second issue relates to undervaluation of the scrap cleared by the appellant. The Commissioner has enhanced the value declared of all scrap which was cleared at below Rs. 6 per kg. No cogent reasons are indicated by the Commissioner for enhancing the value of the scrap in some cases. His reliance upon various invoices and purchase order to show that this was sold at different prices does not support his conclusion. These orders, as pointed out to us, relate to different kinds of scrap. There is also no evidence cited of additional consideration having been received for this scrap. The scrap generated by the appellant is in the nature of a by-product which arises in the course of manufacture of the intended final product. We are not able to see why the contention of the appellant that different kinds of scrap are sold at different price should not be accepted, particularly in the absence of any allegation of deliberate undervaluation and held that demand for duty on this court is not sustained by sufficient evidence.
8. The remaining question is assessment of rejected ball bearing ring. Appellant initially sent this to SKF Ltd. and returned as not meeting its specifications. It thereafter was sold to three buyers at a price around Rs. 6 per kg. The Commissioner has ordered the value to be enhanced Rs. 11 to 12 per kg. We are not able to accept the contention of the appellant that since good scraps were not sold as finished product, the appellant did not necessarily then sell at commercially viable prices. This simplistic argument goes on the basis that the bearing parts having been rejected by one manufacturer would become scrap. It is not in dispute that a significant portion of these bearings rejected by one manufacturer were in fact produced for sale as components or spare of bearings. It does not explain whether these goods were classified as scrap or parts of bearings. In any event, there is nothing to show that it has been approved as scrap. In these circumstances, taking into account the fact that these bearing parts were subjected to significant processes and contain significant portion of chromium and are made of specially formulated alloy, it appears to us the price at which the appellant sold the goods were in fact too low. We also note in the case of six sales of the goods, department found evidence of additional consideration over and above the sale price. At the same time, the Commissioner’s conclusion that he has decided on an ambit figure increase for which we do not find any evidence or logical reason. We are therefore of the view that this aspect should also be examined once again and determined afresh. Since the major part of the matter is remanded, the liability to penalty on the assessee is also required to be looked afresh, as also confiscation of plant and machinery.
9. The appeal is accordingly disposed of.