Central Excise - CENVAT Credit on returned goods - Duty paying Documents - Adjudication Order beyond the scope of Show Cause Notice not sustainable - CESTAT by majority

NEW DELHI : THIS is an appeal filed by M/s Dhanuka Pesticides Ltd against the order in appeal dated 8.12.2004. The brief facts of the case are that the appellants are manufacturers of Pesticides/Insecticides and are availing the cenvat credit on inputs used in the manufacture of pesticides/insecticides. On the visit to their factory on 26.11.2001, it was found by the officers that appellants had availed cenvat credit in respect of rejected goods received back in part consignments from their own sales depot under the cover of challans/bills/invoices issued by the

depot. The Assistant Manager of the appellant in his statement has stated that none of Depots were registered with the Central Excise Department and challans/bills/invoices did not indicate duty-paying particulars. Therefore, the department felt that the appellants were not entitled to cenvat credit on challans/bills/ invoices as these documents did not belong to category of documents specified under Rule 7 of Cenvat Credit Rules. Accordingly, three show cause notices for different periods were issued to the appellants demanding the credit along with interest and also proposing imposition of penalty on them. Three show cause notices were adjudicated by the Additional Commissioner on 19.3.2004 who confirmed the demand of duty amounting to Rs. 46,51,067/- along with interest and also imposed penalty of Rs. 15 lakhs on them under Rule 13 of Cenvat Credit Rules. The appellants challenged the order of Original Authority before the Commissioner (Appeals) who vide the impugned order has rejected their appeal. The appellants are in appeal before this Tribunal against the order passed by the Commissioner.

The dispute in the appeal is regarding the availability of cenvat credit of duty paid on its returned goods.

Member (T): held that for availing the cenvat credit under Rule 16, the goods returned back to the factory should be duty paid. The documents submitted by the appellants to the department failed to establish the duty paid character as the goods are not verifiable with the documents submitted by the appellants. The appellants are clearing the goods from the factory in the packing of five numbers or multiple of five whereas it is observed by the lower authorities that in number of cases, the goods were not received in the packing of five or multiple of five but received in such quantities which are neither in five numbers nor multiple of five. It is also observed by the lower authorities that the goods have not been received in the same packing in which they were originally cleared from the factory and their identification with the duty paying documents is a remote possibility. This is also admitted fact that the batch number of goods are mentioned on the outer packing of the goods which means no such batch number was mentioned on the goods themselves. In such a situation, identity of goods received back cannot be verified with goods originally cleared.

He was therefore, of the view that the duty paid character of the goods received in peace meal is not verifiable. The lower authorities are justified in denying the credit to the appellants.

Member (J): did not agree. She observed,

First of all the allegations in the show cause notice was that documents issued by the sales depots on the basis of which the appellant have availed the credit are not prescribed documents in terms of Rule 7 of the Cenvat Credit Rules, 2002.

As is seen from the above notice, the Revenue proposed to deny the credit on the sole ground that the delivery challans issued by the sales depots are not prescribed documents under Rule 7 and as such, the credit availed by the appellant was not proper. However, while adjudicating, lower authorities have drifted from the said allegation and has extended the scope of proceeding by introducing another allegation that the goods received back from the sales depots cannot be correlated with the goods originally cleared.

It is well settled law that the orders beyond the scope of allegations made in the show cause notice are not sustainable. There was no allegation in the notice doubting the fact of returned goods being different than the one originally cleared. The revenue cannot make out a new case at the adjudicating or appellate stage. As it is well settled that the Revenue has to adjudicate the matter on the basis of allegations made in the show cause notice and no new case can be made out without putting the assessee on notice, and as such, on this short ground itself the impugned orders are required to be set aside.

In any case the provisions of Rule 16 allows the assessee to receive back the damaged originally cleared goods and to avail the credit of duty paid at the time of original clearance if the said returned goods were inputs. The Revenue's objection that credit cannot be availed on the basis of documents of the sender of the goods has no merits inasmuch as in that case the manufacturer assessee would never be able to take the credit thus defeating the very purpose of existence of Rule 16.
As regards the identity of returned goods, there is no requirement in terms of said Rule to establish the identity of the returned goods and to co-relate the same with the originally cleared goods with reference to any identification marks etc.

The provisions of Rule 16 is a beneficial piece of legislation allowing the manufacturer to avail the credit of duty in case of return of goods which were originally cleared by him on payment of duty.

In any case, the appellants have produced on record the detailed chart showing co-relation of each of the returned consignment with the original clearance. I really fail to understand if such a co-relation with the original duty paying document is not sufficient, the assessee manufacturer of such type of goods will never be able to avail the benefit of Rule 16.

She no merit in the impugned order and accordingly set aside the same and allowed the appeal with consequential relief to the appellant.

Due to the difference of opinion, the matter went to the THIRD MEMBER

Third Member : The Third Member observed, "Primarily reading of show cause notice and page 7 of the paper book reveals that while Revenue intended to make a case under Rule 16 Central Excise Rules 2001, it proceeded to make allegation under Rule 7 of Cenvat Credit Rules 2001. No doubt Rule 7 lends support to Rule 16. But substantial allegation when appears to be under Rule 16 adjudication proceeded to examine technicality of that Rule without testing the principal allegation. Such observation is suffice to answer the difference Ld. Judicial Member examining rule 7 in para 12 of the order reached to conclusion which appears to be proper. Accordingly, the difference is to be answered in favour of the assessee and ordered accordingly."

Final Order : In view of the majority order, the impugned order is set aside and appeal is allowed with consequential relief to the appellant.