Losses Of Upto 1% Can Be Allowed Without Detailed Scrutiny : CESTAT

The Hyderabad Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has quashed the demand of excise duty against Hindustan Petroleum and held that losses of up to 1% can be allowed without detailed scrutiny.

The two-member bench headed by Justice Dilip Gupta (President) and P.V. Subba Rao (Technical Member) has observed that there was no allegation, let alone evidence, that the losses were not genuine or that the products were suspected to have been diverted or pilfered.

The appellant, M/s Hindustan Petroleum Corporation Limited, Vishakapatnam, is a government of India undertaking which refines crude petroleum and manufactures various finished petroleum products such as HSD, motor spirit, naptha, superior kerosene oil, furnace oil, bitumen, jute batching oil (JBO), and LSHS.

The appellant was aggrieved by the order passed by the Commissioner of Central Excise, Vishatapatnam, as amended by a corrigendum. The commissioner demanded an amount of Rs. 1,06,58,056 from the appellant as duty under the proviso to Section 11A (1) of the Central Excise Act, 1944, along with interest under Section 11AB.

Usually, when goods are manufactured, duty becomes payable when they are cleared from the factory. However, Rule 20 of the Central Excise Rules, 2002 provides for the Central Government to extend the facility of removing goods from the factory of production to a warehouse, or from one warehouse to another warehouse, without payment of duty.

The provisions of Rule 20 of the Central Excise Rules, 2002 further provide that in the case of warehousing, the responsibility for payment of duty on the goods that are removed from the factory lies with the consignee. If the goods which are dispatched for warehousing are not received in the warehouse, the responsibility for payment of duty shall be on the consignor.

The appellant has several local marketing installations which were registered as warehouses under the provisions and the appellant was entitled to remove the finished products to these LMIs. If goods which are manufactured are lost due to natural causes or accidents, the duty can be remitted by the Commissioner as per Rule 21 of the Central Excise Rules. Such losses are common in petroleum products as they are volatile by nature. As per the instructions of the Central Board of Excise & Customs, losses of petroleum products in storage, pipeline deliveries, transit losses etc. are permissible up to some limits. The assessors must submit a monthly cumulative loss/gain statement that includes storage losses, gains, and LMI transit losses and gains for all petroleum products at 15 degrees Celsius.

The appellant submitted that it had switched over to a new ERP system which resulted in teething troubles and consequential delays in submitting statements of loss of the products during transit.

The appellant submitted the details of the losses to the Commissioner during the hearing, which were considered by the Commissioner to some extent, and duty has been remitted by the Commissioner under Rule 21 of the Central Excise Rules. The Commissioner has not remitted duty on some portion of the losses, which resulted in the confirmation of demand in the order.

The appellant submitted that CBEC has prescribed a limit of 1% without reference to any specific products and the losses incurred by them in this case were below 1%. Therefore, the duty needs to be remitted. There was no allegation or evidence that any of the goods had been clandestinely removed from the factory or sold.

The appellant contended that the only ground on which the Commissioner had not remitted some losses was that she had considered the limits set in the CBEC's Circulars of 1956 and 1959 and allowed remission of duty on products which were indicated in the Circulars. According to the subsequent circular dated 19.10.1981, losses of up to 1% should be tolerated, and the authorities do not need to conduct a thorough investigation to confirm the veracity of the reported loss.

The department contended that remission of duty by the Commissioner can only be considered if the appellant applies for remission, but it has not applied for remission at all. It was not a case of remission being allowed or otherwise, but it was a case of goods being sent out for warehousing from the factory to the LMIs but not eligible for remission at all. It was not a case of remission being allowed or otherwise, but it was a case of goods being sent out for warehousing from the factory to the LMIs but not being received for as per the re-warehousing certificates issued by the officers at the destinations.

The tribunal found that in respect of certain commodities such as sulphur, naphtha, JBO, ATF, etc., the Commissioner has reckoned a condonable limit of 0%. This is probably because these products were not mentioned in the Circulars of 1956 and 1959. However, the 1981 Circular of the Board clarifies that losses of up to 1% can be allowed without detailed scrutiny and losses above 1% can be condoned after scrutiny.

Case Title: Hindustan Petroleum Corporation Limited Versus Commissioner of Central Excise, Central Excise Building, Visakhapatnam

Citation: Excise Appeal No. 209 of 2009

Date: 01.09.2022

Counsel For Appellant: Advocate Narendra Dave

Counsel For Respondent: Authorized Representative V.R. Pavan Kumar

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