No excise duty demand on differential value of stock of finished or semi-finished goods

The CESTAT Bangalore in M/s. Steel Authority of India Ltd. v. The Commissioner of Central Excise [Appeal No. E/562/2008 dated May 25, 2023] set aside the order demanding excise duty on differential quantity of goods based on the ER-1 returns as against the quantity of goods shown in the audited books of accounts. Held that, discrepancy on comparison of values stated in RG-1 and the physical stock statement prepared by the assessee is inherently inaccurate because both are estimated value.

Facts

M/s. Steel Authority of India ("the Appellant") is engaged in the business of manufacturing of iron and steel products and it conducts annual stock verification of finished/ semi -finished goods manufactured every financial year. 

The Revenue Department found various differences between physical stock of finished/semi-finished goods shown in Appellant’s stock statement when compared with the adjusted RG-1 for the year 2001-02, 2002-03, 2003-04 (“the Impugned Period”).  Subsequently, the Revenue Department (“the Respondent”) issued 3 Show Cause Notices dated April 4, 2003, March 19, 2004, and April 7, 2005, ("the Impugned SCNs”) respectively for the Impugned Period, demanding excise duty on the goods found short during the comparison. Later, the Respondent vide an Order ("the Impugned Order”) confirmed the demand of duty.

Being aggrieved, this appeal has been filed.

The Appellant contented that the goods recorded in RG-1 are based on estimated production, whereas, physical stock of goods was recoded on the basis of volumetric estimation and goods are physically weighed only at the time of clearance from the factory/deport. Thus, comparison of estimated production and estimated physical stock of goods is totally incorrect and will lead to improper conclusion. Further, the demanded duty is on the basis of differential quantity of goods based on ER-1 and goods shown in audited books of accounts. 

Issue

Whether the Revenue department was correct in issuing SCN on the basis of difference values stated in RG-1 and physical stock statements as reported by the Appellant ?

Held

The CESTAT Bangalore in Appeal No. E/562/2008 held as under:

• Observed that, the Respondent vide the Impugned Order has demanded the duty on the differential quantity between ER-1 and audited books which appears to be beyond the framework of Impugned SCNs. The parameters relied upon by the Respondent in the Impugned SCNs and the parameters relied upon in the Impugned Order are at variance, which is legally not sustainable.
• Further observed that, the Impugned SCNs did not allege fraud, collusion, willful misstatement or contravention of the provisions of Central Excise Act. However, the Respondent had invoked proviso to Section 11A of the Central Excise Act, 1944 (“the Central Excise Act”) to impose penalty under Section 11AC of the Central Excise Act, which is beyond the scope of Impugned SCNs. 
• Relied on its earlier judgment in Appellant’s case [2006 (200) ELT 229 (Tri. -Bang,)], wherein, it was held that, the discrepancy between the RG-1 stock and the physical stock are based on the estimated production and not on actual weighment. Thus, comparison between two estimations is inherently inaccurate and considering the practical difficulties in estimating the actual stock.
• Opined that, even if there are differences in the stock taking and the shortages are found, the duty can be demanded only when the goods are removed from the factory.
• Held that,the Impugned SCNs and the Impugned Order have failed to prove that there was any illicitly removal of goods these goods were clandestinely removed.
• Set aside the Impugned Order.