Cenvat-style reprocessing records defeated clandestine clearance demand on rejected duty-paid goods returned for replacement.

Duty on alleged clearances of rejected materials and samples was found unsustainable because the record showed that duty-paid rejected goods were returned for reprocessing and then redespatched after rectification. The Tribunal accepted the assessee's private records, departmental verification, officers' statements, and manufacturing flow chart, which together supported the reprocessing explanation. It also noted that the demand was drawn from the assessee's own records and that objections based on balance-sheet entries went beyond the show cause notice. The demand founded on a theory of clandestine clearance therefore failed, and the dropping of the demand was upheld.

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Issues: Whether the demand of central excise duty on the alleged clearances of rejected materials and samples, treated by the assessee as goods received back for reprocessing and replacement, was sustainable.

Analysis: The show cause notice proceeded on the allegation that the rejected goods were not received back for reprocessing in the manner contemplated by the rules and that the clearances were a device to remove fresh manufactured goods without duty. The Tribunal found that the departmental record, the private records maintained by the assessee, the statements of the officers, and the verification of the manufacturing flow chart all supported the position that duty-paid rejected goods were returned for reprocessing and redespatched after rectification. It was also noted that the demand was worked out from the assessee's own records showing return of goods for reprocessing, and that the objection regarding balance-sheet entries went beyond the show cause notice. The explanation that the expression referring to free replacement denoted replacement after reprocessing of returned rejected goods was accepted.

Conclusion: The duty demand on the alleged clandestine clearances of rejected materials was not sustainable, and the Commissioner's order dropping the demand was upheld in favour of the assessee.

Ratio Decidendi: Where the evidence shows that rejected duty-paid goods were returned for reprocessing and the demand is based on allegations not supported by the show cause notice or by the record, duty cannot be demanded on a theory of clandestine clearance.

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