ORDER
S.S. Sekhon, Member (T)
1. Appellants were issued a notice as it was noticed –
(i) They had a practice of receiving returned rejected consignments of Aluminium foil for repairs & reconditioning & were reselling the same after doing the needful. Such Aluminium sheet & rejected foil were declared as inputs. Such of these foils which could not be refurbished and resulted in scrap were being cleared, as scrap on payment of duty.
(ii) It was observed that subsequent resales were made at much reduced price which they charged for virgin foils. The scrap percentage was substantially high at 40%. In absence of records & no distinction between virgin & rejected foils & scrap having been generated from Aluminium foil, the assessee was charged for.
(a) Contravention of Rule 57F(i)(ii) inasmuch as assessee had
(i) Removed inputs as such at lower price without having undertaken on them any process or removed them as waste & scrap of Aluminium.
(ii) Duty was not determined to the extent of credit availed.
(b) Contravention of Rules 57G(3) inasmuch as true & proper accounts were not maintained.
(c) Suppression of facts of removal of inputs at low price in the guise of substandard final product or removal of in or as waste/scrap contravened the provisions, which require recovery under proviso to Section 11A(1) read with Rule 9(2) & Rule 57-I(1) of duty & imposition of penalty under 173Q(1) & confiscation under Rule 173Q(2)
1.2 Commissioner confirmed the charges & upheld recovery of demands & imposed penalties, hence this appeal.
2.1 Appellants had taken the plea that notice was issued on 5-1-2000 & due to repeal of Rule 57-I and the decision in case of Kolhapur Cane Sugar Works Ltd. the present demands could not be sustained. The Commissioner vide para 32 of the impugned order held that support sought by the decision of Kolhapur Cane Sugar case, by assessee have been over taken case by Section 38A of Budget 2001, vide which savings Clause has been inserted & maintain ability of notice invoking proviso to Section 11A(1) would lead to acceptance of sustainability of the notice.
2.2 Substitution of Rule 57-I & other Modvat Credit rules by notification 27/2000 CE (NT), dated 31-3-2000 v/ill not impugn the present proceedings issued vide notice dated 5-1-2000 i.e. be for substitution as urged by the ld. CA for the appellant following Sunrise Structures & Engrs. Ltd. A/711 to 722/WZB/04-CII, dated 27-8-2004 where the notice was issued on 19-6-2001 i.e. after substitution.
2.3 On merits, the Commissioner has found –
(i) clearance of rejected material described as ‘inputs’ on which assessee had availed Modvat credit without subjecting them to any process of manufacture by paying lower duty because of lower valuation while selling, by the assessee a lower rate.
(ii) clearance of rejected material received by terming these as inputs by clearing these as scrap without subjecting them to any process of manufacture.
Now regarding the second aspect. It is important to note that during the subject period the assessee had discontinued the use of furnace i.e. from mid-November, 1995 rendering remelting not possible. The processes possible by the assessee during relevant time were –
(a) cold rolling, wherein percentage of loss or generation of scrap would be negligible;
(b) the process of slitting and trimming, involving cutting operation of foil and side cutting, etc. wherein the loss percentage was minimal;
(c) the process of lamination which is only external surface application process.
Accordingly, in the processes carried out on the rejected Aluminium foil for obtaining laminated Aluminium foil, only small percentage of scrap could be generated.
In the above background and without taking support of any documents/accounts being maintained/furnished by the assessee they are claiming 40% of scrap. Accordingly, I am of the view that whatever amount has already been paid by the assessee is rightly recoverable from the assessee and accordingly, adjust the same against the demand.
It is not disputed by the assessee that they had not maintained any records/documents as regards the accountal of the utilization of the rejected goods for the so called manufacture of finished products.
Computation of duty liability has been worked out by taking the accounted scrap figure as 40% and giving allowance of 10% to scrap that may have been generated during normal course in respect of regular production and also that may have generated during the processes undertaken by the assessee on the subject inputs. The reasons for considering only 10% has already been discussed in para 34 of my findings. Now as far as clearance of the remaining 70%, the statement of Shri M.N. Kulkarni, employee of the assessee reveals that they had cleared the inputs after carrying out certain processes which has been discussed in the preceding para; that the inputs were cleared as such without any processing; and (iii) cleared as process waste and scrap.
Here the assessee have contained that the Department have not given any evidence of how they have considered the scrap generated as 30%. Here it is to note that the records maintained by the assessee reveal clearance of 40% scrap during the said period. However, in view of the discussions above, the assessee not having maintained any records of the inputs vis-a-vis final products and scrap generated, the onus is on the assessee to substantiate their contention by facts. Accordingly, I cannot consider the assessee’s contention.
In all the three cases, duty was discharged at prevailing rates and reassessed value worked out by the assessee. This 70% consists of clearances of category (i) and (ii) which in view of my discussions in the preceding paras have to be cleared as per provision of Rule 57F(1)(ii).
The total credit availed by the assessee on the rejected goods account for as inputs is Rs. 61,53,933/-. 90% of such credit is Rs. 55,38,539.70. However. Department has demanded duty to the extent of Rs. 54,10/124/- by considering both aspects separately i.e. 30% rejected goods cleared as such but at scrap value and 70% cleared as rejected goods as such as elaborately shown in para 9 & 10 of the show cause notice. Also final liability has been worked out by adjusting duty already paid to final demanded duty of Rs. 35,72,637.55 whereas aggregate liability sought to be confirmed is Rs. 54,10,424/- which includes Rs. 18,37,787/- paid by the assessee under protest on the subject issue. Accordingly, there appears to be no variation in the calculation of duty liability and I uphold the demand as alleged in the show cause notice in view of the discussions in the preceding paras.
Now regarding the question of refund of Rs. 18,37,787/- which the assessee have already paid, I do not find any justification on the assessee’s submissions as it is an admitted fact that they had not maintained any records for accounting these inputs vis-a-vis final products nor have they produced any documentary evidence to substantiate their claim for clearances of the waste and scrap when in his statement Shri M.N. Kulkami has admitted that scrap generation was on account of non-conformity to metallurgical composition, failure to meet parameters viz. bursting strength, VTS, inadequate annealing, failure to meet physical properties viz width, built up, etc. Thus it was assessee, themselves who were deciding whether the goods were to be disposed of as scrap or otherwise without adhering to the laid norms as per Central Excise Rules for considering as item as waste and scrap. Accordingly, I do not find any substance in the assessee’s submission as the assessee had taken the law in their own hands by interpreting the rules for their convenience.
2.4 The appellants have contended & admit –
That the final products which were rejected by appellants customers could be grouped in the two categories, the first category being goods which appeared to be as such that they could be resold by carrying out minor repairs, refurbishing or repacking them. In respect of these goods, D3 declarations were filed under Rules 173H and Rule 173L. The other category of goods were those which needed to be subject to processing such as lamination, slitting, trimming etc. In respect of this category, appellants were availing Modvat credit after filing necessary declarations under Rule 57G.
2.5 On the D3 declared goods, the provision of Rule 173L & 173H & consequent duty refunds have to be arrived at since there is no challenge, to that procedure not having been followed; when goods of same case were again cleared on payment of duty.
2.6 As regards returned goods, on which credit was availed, after the declarations have been filed, there subsequent removal have to be governed by the Modvat rules. The rules do not stipulator require maintenance of any separate records of inputs whether returned after sales or fresh receipts inputs have to be treated as ‘inputs’ & accounted for as prescribed. The fixing of small percentage as scrap on lamination process is an assumption followed by the adjudicator. As to when the input shall become waste & scrap and has to be treated as such should be and at the option of the assessee, who availed the Modvat Credit and this position has been upheld by the Larger Bench in the case of Wyeth Laboratories . Therefore the finding, on presumption that 40% scrap is excess, that it should not exceed 10%, cannot be upheld. It cannot be a cause for duty demand differentials, as made act.
2.7 As regards the duty differential demands on 70% approximation of the resales, made at prices lower than existing rates & 30% were cleared as scrap is without any basis. The finding that returned goods could be used only as inputs, as these could not be melted, the furnace being closed/shut, the use & in manufacture has not been therefore established, overlook the fact of the process undergone/undertaken on the foil viz. re-annealing, slitting, edge trimming, pancaking, lamination, built up, breaking etc which these returned goods were subjected. They would be process of manufacture if not incidental/ancillary to manufacture to render the goods marketable. That the goods have been returned by the buyers for reasons of not meeting, purchase, specifications would itself indicate that initial removal on payment of duty was not of marketable goods but was attempt at passing of defective goods which were not acceptable as marketable. Since process incidental/ancillary to rendering of the goods as marketable would qualify the application of manufacture & consequent levy thereafter, we find no merits in the Commissioners view that the good i.e. inputs were not manufactured in to final products.
2.8 When manufacture has taken place, duty liability as per Section 3 read with Section 4 valuation has to be determined on clearance of such re-returned goods. Demands under Rule 57F(i)(ii) are not called for. Since goods are not virgin quality foils. The reduced value ipso facto cannot be doubled since it is a commercial reality that non virgin quality products would fetch a lower price. Differential duty demands therefore as proposal cannot be upheld.
2.9 Differential duty demands on Scrap & clearance of removal of returned goods in this case where input credit was awailed is therefore not upheld. The refund, under Rule 173L/173H on returned goods as cleared will have to be reconsidered by the proper officer on case to case basis. Appeal is to be remitted for such determination. Penalty in the facts of this case is not called for & is to be set aside.
3.1 In view of the findings, the appeal is allowed as remand in above terms.
(Pronounced in Court on 1-7-2005)