[Order per : K.K. Agarwal, Member (T)]. - The brief facts of the case are that the appellant M/s. Castrol India Ltd. have two manufacturing units in Ballabhgarh which are engaged in the manufacture of lubricating oils. Unit CIL-I received base oils in tankers and additives in barrels which were blended and the lubricants so produced were cleared in bulk (in tankers), 1000 ltr. Cube and 205 ltr. barrels and sometimes in small packing of 20 ltr. to CIL-II, direct to OE customers or to their CFA/Depots. CIL-II received lubricants from CIL-I as well as from Silvassa plant of CIL in bulk. These lubricants were packed in small containers of 500 ml. 1 ltr., 2 ltr. 5 ltr., 50 ltr., 205 ltr. etc. and the same were then despatched to the CFA/depots. All the statutory records/documents were being maintained in the computer.

2. On the basis of some intelligence simultaneous searches were carried out in all the units of M/s. Castrol India Ltd. situated all over India. The present appeal concerns the investigation carried out in the two units at Ballabhgarh. During the course of investigation, physical stock taking is said to have been undertaken in CIL-II on 8-5-2001 in which various discrepancies were noticed in the opening balance, closing balance and issues as reflected in the Daily Tank Status Report, batch log-sheet and the issue and closing balance etc. shown in RG-23A Part-I register showing shortages of raw material issued for manufacture. In view this a complete scrutiny of all the records maintained by both the units was undertaken, as a result of which it came to notice that both the units had a practice of conducting physical stock taking in respect of both raw materials and finished goods at the end of each quarter in the course of which shortages/excesses were found. On punching the physical stock into the computer system negative/positive PIs denoting shortages/excesses were generated. However these shortages or excesses were not reflected in the Central Excise records and not reported to jurisdictional Central Excise authorities. The negative PIs and the balance shortages were considered as process loss within the condonable limits and accordingly no duty was paid. A show cause notice was therefore issued to both the units alleging that the negative PIs have been manipulated/reconciled on flimsy or illogical grounds. The show cause notice stated that M/s. Castrol India Ltd. were recording the stock of raw material in tanks both in the morning and evening by in built flow meter and by dip reading method on daily basis on DTSR. This document also showed, that shortages in respect of raw material and finished goods were observed on daily basis. A scrutiny of DTSR (Daily Tank Status Report) also revealed that there have been shortages in physical stock as compared to stock position reflected in RG23A Part-I register. The discrepancies noticed in DTSR were not corrected in the computer record on a daily basis and the raw material consumed in a particular day was not entered in RG23A Part I register even after the goods manufactured out of such material had reached the RG-I stage and that the finished goods manufactured on a particular day were not entered in RG-I even after the same were loaded in the tanker meant for clearance of such goods. Other documents maintained by the assessee viz. batch log sheet also showed removal without any corresponding entry in the accounting system. Based on this the show cause notice alleged that the appellants have fraudulently availed Modvat credit on raw material found short which appear to have been cleared without payment of Central Excise duty without reversal of Modvat credit and accordingly sought to demand Modvat credit amounting to Rs. 1,53,47,176/- in respect of raw material found short and consequently removed by CIL-I during the period June 1997 to December 2000 and Rs. 12,99,175/- for raw material found short from CIL-II during the period March 2001 to March 2002 along with interest and Central Excise duty amounting to Rs. 86,65,964/- in respect of finished goods found short during the period June 1997 to March 2000 by Unit I and Rs. 10,10,476/- for the period June 2000 to March 2002 by unit II and sought to impose penalty under Rule 57-I(4) and Section 11AC etc. The show cause notice was adjudicated by the Commissioner, who confirmed the duty amounting to Rs. 1,66,19,903/- regarding shortages found in the raw material and Rs. 98,76,450/- in respect of shortages found in finished goods and imposed penalty of equivalent amount.

3. We have heard both sides.

4. The appellants’ submissions is that the demand is based purely on the negative PIs generated by their computer during their own stock taking and department has not conducted on independent investigation to show that there were shortages. No physical stock taking was conducted in Unit I to which 90% of the demand relates and that the computer was generating positive PIs also but the same have not been taken into account. It was submitted that the negative PIs are generated in the computer system not because of any inherent shortages but for the various reasons. The break-up is as follows :-

5. It was submitted that though they were taking daily dip reading of their tank in morning and evening to know opening and closing balance, they were maintaining other records like batch log-sheet under which the quantity issued for manufacture was reflected. However, no stock re-conciliation was done on daily basis as has been contended by the department and pleaded by the learned D.R. Reconciliation involved taking up physical inventory, reconcile the issues with respect to batch sheet, cardex and DTSR which was done on quarterly basis only. Whenever shortage and excess were detected in the quarterly reconciliation undertaken by them, an intimation was send to jurisdictional Superintendent intimating about the difference noticed during the physical count and the difference after reconciliation and thereafter from the quantity which could not be reconciled process losses were claimed up to 5% based upon the Deputy Chief Chemist’s report who have visited their plant and studied the process of manufacture. Same process losses were in fact condoned by the Deputy Commissioner vide his Order No. D-27/02 & D/28/02 both dated 15-2-2001 and by Commissioner (Appeals) vide his order dated 24-10-2000. In view of this it is incorrect to say that the department was not aware about adjustment of negative PIs with positive PIs and process loss as they were duly condoned. It was accordingly submitted that the learned D.R.’s contention that when shortages were detected on daily basis duty should have been paid on daily basis on the shortages so detected is incorrect as shortages were reconciled on a quarterly basis only and after necessary reconciliation with the documents taking into account the various errors in maintaining the account. In fact para 1.10 of the show cause notice admits that shortage and excesses were intimated to the Central Excise department on quarterly basis and therefore there was no ground for invoking extended period. The Commissioner has incorrectly rejected their contention that positive and negative PIs must be offset on untenable ground that documents submitted by them did not support their contention and in this regard Commissioner has just cited two examples that in respect of quarter ending September 1999 and March 2000 there are negative PIs but there are no corresponding positive PIs. It was pointed out to him that there were positive PIs in the subsequent quarters of equivalent amount but the same was ignored by him on the ground that positive and negative PIs should occur in the same quarter. It was explained that in respect of direct sales made to industrial institutes from the factory, the sales ledger was not automatically updated, as their JDE computer system module did not have a field for direct sales. This updating was subsequently done by regional sales office at Delhi on the basis of monthly advices send by the plant by the first week of the next month. This despatch made at the end of the month was not reflected in the computer system in the same month but was reflected in the first week of the following month and therefore computer entry in the month in which despatches were made will create a negative PIs whereas for the following months when the entry is made, computer will show a positive PIs. Similarly in respect of goods in transit, their Magnum Software System recorded receipt of material into plant stock as soon as it was despatched from Mumbai Port. However this consignment took on an average 4 to 6 days to arrive from Mumbai to Ballabhgarh. Thus consignment despatched from Mumbai during the last days of each quarter arrived physically in Ballabhgarh plant only in the beginning of the next month. Hence the book stock will show the material as received whereas physically the material arrived few days later, which is at the beginning of the next month. This will result in negative PI in one month and positive PI in the following month and vice versa as the case may be and if the month happen to be end of quarter it will be at the end of the quarter and the beginning of next quarter.

6. The learned Advocate submitted that one of grounds on which the Commissioner has disregarded the positive PI was that they have accepted part of shortages attributing it to be on account of process loss and in some cases on actual shortages which implies that whenever negative PIs were generated there was a real shortage. This is totally incorrect as the reconciliation statement submitted by them shows that over 78% of the duty is only in respect of compensating error and the balance was for various other reasons which have been totally explained. In a unit of their kind, process loss are bound to occur which may vary from time to time and therefore it is impossible to explain every loss with exact precision. Some amount of shortages have remained unexplained and accordingly have been treated as unaccounted for. However these losses are required to be condoned as long as they are within the normal range and not abnormal. It is their case that the losses are within the permissible limit and whenever there is a slight excess they have paid duty on the same, not because they were clandestinely removed, but on account of the fact that shortages could not be explained on account of any particular error when there are multiplicity of factors resulting in losses.

7. It was submitted that DTSR only gives a rough idea about the amount of stock that has been removed from the tank and a rough idea about the amount remaining in the tank. The daily balance in this report cannot be compared with the balance in RG-23A Part I register. DTSR would only show the quantity which has been issued for production. The entries in the RG-23A Part I register are entered only after completion of batch. This was a practice that has been followed and never objected to. The department has totally ignored the RG-23A Part I register. They have shown to the Commissioner that the quantity mentioned in the show cause notice had subsequently been entered in RG-23A Part-I register. Each entry is backed by a batch report which shows complete co-relation. It was further submitted that DTSR is not record on which clandestine removal can be alleged and even the show cause notice does not demand duty on the basis of DTSR figures.

8. The appellant thereafter referred to the reconciliation statement submitted by them regarding the negative PIs generated in the computer system in which 78.24% was on account of duty on compensating error, 4.04% on direct sales, 2.33% on goods in transit, 9.74% on punching error, 4.90% on actual process loss and 0.76% on wrong calculation of duty. The losses under various categories were explained as under:-

(1) Compensating errors

There are four types of compensating errors namely :

(i)      Same inputs received under different Item codes since received from different sources (stored in the same tank)

(ii)    Bulk barrel stocks contra entry errors

(iii)   Quarantined material in location code 01

(iv)   Finished goods stock maintained Lot No-wise

(i) Same inputs received under different Item codes since received from different sources stored in the same tank

It was submitted that the same base oil is accounted for source-wise and each source has different subject code. There are basically three base oils used as inputs namely S N 150 (Code 054). S N 500 (Code 126) and bright stock (Code 194). These are not interchangeable. These base oils are procured from different source and each source is given a separate subject code or suffixes such as A, X, B, C etc. The raw material is the same unless it is superior or premier grade in which case the subject code/suffix is ‘S’ or P’. The superior or premier grade can be used to manufacture lubricating oil that are to be manufactured from non superior/premier grade but not vice a versa. The error arises, because at times the issues have been recorded in the financial records as coming from one source sub code say 054A, whereas it has been physically issued from another sub code say 054B. In their written submission they had referred to variance reports generated during the stock taking and had given the Commissioner, two actual examples with reference to the variance report for the quarter ending 31-12-2001 read with RG-23A Part I register. The examples given clearly demonstrate that while there was shortages in respect of one code there was excess in respect of the other code with a slight variation of 293 Ltr. out of 39340 Ltrs. which was well within the permissible limit of the process loss and these have been condoned also by the department. It was submitted that the Commissioner has referred to the statement of their chemist that premier quantity cannot be mixed with the other quantity to rebut their claim of adjustment for such errors. It was however submitted that it is never their case that two different qualities are mixed together but what happens is that while the quality used are one and the same, a wrong entry by human error is made in respect of the other quality which results in shortages in respect of one quality and excess in other quality purely on account of wrong entries.

(ii) Bulk-barrel stock contra entry errors.

It was submitted that appellant received raw material in different pack size either in bulk or in barrel. They have given different code to each such pack code and are accordingly fed into the computer. Many times in view of clerical/punching errors the stocks get updated in different pack code creating a discrepancy in both the codes. After quarterly stock taking such errors are corrected by passing appropriate positive and negative PIs. The same applies to the finished goods. In other words there may be a positive variance in the item packed in bulk and negative variance in respect of the same item packed in barrel. It is immaterial whether the stocks is in bulk form or otherwise as long as the stock as per the excise book and physical stocks is available. The total quantity of the item in question in stock does not change. The errors only arose because of the incorrect punching in the computer.

(iii) Quarantined material in location code 01.

It was submitted that whenever material is received it is given a location code and the quantity received is entered into the computer. Subsequently, this material is declared by the quality control department as ‘Off-spec’ i.e. it is not to be used. This material is therefore quarantined and put in a separate location and given code 01. When the physical count is taken at the end of the quarter, no physical quantity of good material is found but the quantity which has been kept in a separate location and entered under location code 01 was found and separately entered in the computer under location code 01. The computer thus would show a receipt of the material but no physical balance and thus generated negative PI. In respect of the same material but under location code 01 the computer would show an identical positive PI. The physical stock of the goods remains the same and there is no shortage or excess. These are just compensating error and the negative PIs therefore cannot be taken in isolation. The Commissioner has accepted this in his finding portion but in his order portion has not given the duty benefit.

(iv) Finished goods stock maintained Lot No. wise.

The stock of finished goods in barrels are maintained under different lot numbers even for the same product pack. Unfortunately during stock taking and entering in the computer the stock of the same product pack has been entered under different lot numbers. Thus the stock of the product pack under one lot number would show a negative PI after stock taking is done and the other lot number of the same product pack would show a positive PI for the same quantity of the product pack. However the quantity of the stock of this product remains the same. This was demonstrated by them in the paper book submitted.

9. The above explains the duty on account of compensating error which form 18.24% of the total duty demand. Another 4.04% relates to the duty on direct sale quantity and 2.33% of duty on goods in transit quantity which has already been explained earlier being on account of difference in the date of entry in the computer and the date of actual receipt/despatch on account of deficiency in their computer system.

10. It was submitted that 9.74% of the total duty demand has been reconciled by them on count of punching error in quantity which means that while the documents shows clearance or receipt of ‘X’ quantity, the entry punched in the computer reflect ‘Y’ quantity and for this necessary reconciliation statement was submitted but the Commissioner has ignored the same saying that it is not supported by any document. Our attention was invited to the reconciliation statement for the quarter July to September 1999 where in respect of two inputs 0306/S1 and 0306/S2 8000 Ltrs. and 10000 Ltrs. issued for production against issue document (TNB) Nos. 601665 and 601666 were missed to be punched as issues in the JDE (computer raw material ledger). However these quantities were recorded in the cardex of input maintained only to track available stocks of inputs. Therefore at the time of physical stock taking at quarter end there was shortage of 8000 and 10000 Ltrs. respectively of the above two inputs as compared to JDE raw material register as shown in their reconciled sheet Roll No. 8 & 9 at page 525, cardex of inputs 0306/S1 at page 552 and cardex of inputs 0306/S2 (at page 552 and 556 of paper book II Volume II). Similarly in the reconciliation statement for the quarter September to December 2000, there was punching error of posting part quantity of sale of one furnished product in another resulting in stock difference. There was a clearance for sale of 9000 Ltrs. each in September 2000 and October 2000 recorded in RG-I (Page No. 400 & 401 of Paper Book II Volume II) of product code 0254/01. However the sales quantity erroneously posted in JDE stock ledger was 4000 in each month instead of 9000 each (pages 402 & 403). The balance quantity of 5000 Ltrs. of this quantity sold in each month were erroneously posted in the JDE ledger of product code 0245/01 (page No. 404). This resulted in difference in the book and physical stock of the product.

11. Process loss - It was submitted that out of total duty demanded about 4.90% concerns duty in respect of actual process loss. The reconciliation statement submitted by them claimed the process of .5%. These are the losses which have been considered to be genuine even by the Deputy Chief Chemist who had visited their unit and has opined that 0.9% process loss should be considered as genuine. They also referred to the decision of the Tribunal in the case of Hindustan Petroleum Corporation Ltd. v. Commissioner of Central Excise, Calcutta-I - and Denso Kirloskar Industries Pvt. Ltd. v. C.C.E., Bangalore  - where such losses were allowed. It was further submitted that it has been allowed in their own case by various authorities i.e. Deputy Commissioner, Commissioner (Appeals) etc.

12. The last category of the demand which accounts for 0.76% of the total duty demanded is on account of wrongly working out the value of the raw materials on the basis of landed cost plus overheads in the show cause notice. Even if it is presumed but not admitted that the raw materials have been cleared as such, as per the statutory provisions, they are required to only reverse the credit taken on the same and it cannot be considered as manufactured by them so as to add to the cost of input which are already manufactured, the overhead expenses. This is patently wrong.

13. In view of above it was submitted that all the losses have been fully explained and there is no cause for demand of duty.

14. It was submitted that the allegation of clandestine removal is not based on any independent evidence whatsoever. There is no evidence of any transporter, gate keeper, purchaser, employee etc. that any goods were removed clandestinely and without payment of duty. Their security agency has stated that not a single item is removed without entry in the record. Excesses and shortages have to be set of against each other as held by the Tribunal in the case of Indian Oil Corporation Ltd. - & . They have submitted an input output ratio for the period 1997 to March 2002 certified by Chartered Accountant which shows that the total consumption to production is 99.54%. The balance .46% being wastage which is much below 0.9% opined by the Deputy Chief Chemist. The Commissioner has not accepted the input output ratio on the ground that very good ratio has come on account of the fact that positive PIs has been deducted by the appellants from the total raw material consumed which is totally erroneous as positive PIs are not actual receipt. Actual receipt was recorded in RG-23A Part I register. The positive PI is only correction entry made in the books of account after comparing book stock with the physical stock at the time of stock taking out.

15. It was also pointed out that similar issues in respect of Patalganga plant has been decided in their favour and the Commissioner has set aside the entire demand except Rs. 85 lakhs and though the department is understood to have filed an appeal against the same, they have not filed appeal in respect of adjustment of positive and negative PIs and therefore a contrary view cannot be taken in the present case. Similar demand has been dropped in respect of Wadala plant.

16. As regards penalty since there has been no suppression and evasion of duty, penalty on the company is not called for. As regards penalty under Rule 209A as there is no confiscation of any goods in the order which is a must for imposing penalty under Rule 209A penalties cannot be imposed.

17. We have considered the submissions and we are of the view that/ the shortages in the raw material and the finished product in respect of  both the units have been adequately explained above. We note that the shortages have not been arrived at by the department by taking actual physical stock of goods lying in the factory with the book balance in the records. The shortages have been arrived at from the appellants own record, when they have taken physical inventory of the goods at the end of each quarter and were noticing shortages and excesses and were registering them in the form of negative and positive PIs. The manner of generating negative and positive PIs has been fully explained on account of accounting error which the department itself has noticed at the time of physical stock taking done in Unit II (here we also note physical weighment was done but only entries made in the DTSR were compared with entries made in other record). There is not an iota of evidence regarding clandestine removal. Even though when the plant has been functioning for years together not a single instance of clandestine removal has been detected. In a lubricating industry, when different method of weighment i.e. dip reading, flow meter are employed variation in weights are bound to occur. Losses in the form of spillage etc. as opined by the Deputy Chief Chemist cannot be ruled out an have been condoned by the department up to .5% in the past. When the discrepancies have been fully explained by giving exhaustive reconciliation statement, the same cannot be discarded just by picking up one or two examples to show that there was some inaccuracy though we do observe that even the so called inaccuracy pointed out by the Commissioner have been sufficiently explained by the appellants before us. We therefore find no reason to demand duty on shortages of both raw material and finished product except on account of punching error and process losses as we are fully satisfied with the explanation given by the appellant.

18. As regards punching errors as per the appellants’ own say, the duty involved is Rs. 25,87,042/- and form 9.74% of the total duty demand, we find that the Commissioner has rejected the plea of the appellants for lack of documentary evidence to establish such errors. We have perused the reconciliation statement furnished by the appellants and we find that in many cases the shortages are not supported by documentary evidences. Appellants have been able to give few documentary evidence which on their own admission do not cover the entire errors. Since these errors are not negligible and constitute about 10% of the demand, they cannot be ignored. Similarly in respect of the process losses which constitute 4.9% of the total demand roughly amounting to Rs. 13,00,271/- losses up to .5% alone are to be condoned as this has been established practice admitted by the appellant where they themselves were limiting the process losses up to .5% and were paying duty in respect of loss beyond that. These were unexplained losses and consequently attributed as process loss. The possibilities of these losses being on account of other than process loss also cannot be ruled out. Further merely because in some industries like IOCL etc. the loss beyond .5% has been condoned does not mean that similar percentage should be applied across the board to every industry. Loss may differ from industry to industry and the products manufactured some of which may be more volatile and others may be less and therefore once the appellants have themselves considered .5% as a bench mark which must be on some rational consideration loss only up to .5% of the total production should be condoned. For these purposes matter is remanded back to the original authority with liberty to the appellants to produce all the documentary evidence before the Commissioner and Commissioner should consider such documentary evidence and thereafter give his finding on the same. At this stage we make it clear that duty demand amounting to Rs. 2,00,902/- due to addition of overheads in determining the cost of production is also held to be unsustainable as in respect of inputs found short, all that is required, is to reverse the credit equivalent to the amount taken at the time of receipt of the inputs. This demand is therefore not sustainable.

19. As regards penalty of Rs. 1,66,19,903/- and Rs. 98,76,450/- imposed on CIL-I under Rule 173Q and Section 11AC and penalty of Rs. 7,45,807/- and Rs.  61,372/- imposed on CIL-II, the same is also set aside in view of the substantial amount of demand but for punching error being held as unsustainable with a liberty to the Commissioner to impose suitable penalty as may be deemed fit taking into account the final duty payable by the appellants if any on account of punching error and process losses.

20. As regards imposition of penalty of Rs. 5 lakhs on Shri D. Arvind, Sr. Manager (indirect Taxation), Rs. 1 lakh on Shri Vivek Sharma, Manager (Finance). Rs. 10 lakhs on Shri N. Chandrashekharan, the then Commercial Controller and Rs. 10 lakhs on Shri Mukesh Palta, the then Director (Finance) under Rule 209A, we find that penalty can be imposed under Rule 209A only if it is found that the concerned persons have dealt with the goods in any manner which they knew are liable to confiscation and in this case no goods have been held liable to confiscation and accordingly penalty under Rule 209A on these appellants cannot be sustained and is accordingly set aside.

21. Appeals are disposed of as per above terms.

(Pronounced in Court on 12-10-2007)