Clandestine clearance allegations fail where no duty demand is raised, Modvat credit is reversed, and IC engines form part of pump sets.

Clandestine clearance allegations relating to IC engines were found unsubstantiated, and the show cause notice did not raise any duty demand for the alleged clearances. On that basis, confiscation and penalty could not be sustained. The assessee's reversal of Modvat credit further supported the view that no surviving demand remained. A Board circular treating IC engines as an integral part of PD pump sets also reinforced the conclusion that the clearances were not independently dutiable. The order dropping the proceedings was upheld and the Revenue's appeal was dismissed.

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Issues: Whether the Commissioner (Appeals) was right in dropping the demand and consequential confiscation and penalty proceedings where the allegations of clandestine clearance of IC engines were not substantiated, no duty demand had been raised in the notice, Modvat credit had been reversed, and the Board circular treated IC engines as an integral part of PD pump sets.

Analysis: The proceedings were founded on the allegation that IC engines were cleared in the guise of exempt PD pump sets, but the record did not substantiate that allegation. The show cause notice referred to a challan describing the goods as IC engine, PD pump and tool box, yet no duty demand was raised for the alleged clearance of IC engines. In the absence of a duty demand, confiscation and penalty could not be sustained. The reversal of Modvat credit by the assessee also supported the view that no further demand survived. The Board circular clarified that IC engines may be treated as an integral part of PD pump sets, which reinforced the conclusion that no duty was otherwise demandable on the clearances in question.

Conclusion: The order dropping the proceedings was upheld and the Revenue's appeal was dismissed.

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