Cenvat credit and clandestine removal require evidence, not presumptions, with penalties failing once duty demand is unproved.

Cenvat credit cannot be denied merely because inputs were consumed in failed trial batches where manufacture was attempted and the inputs were admittedly used in production. Clandestine removal cannot be inferred from input-output ratio, assumed higher productivity, or theoretical yield calculations alone; the Department must produce positive evidence of unaccounted manufacture or removal. Where the duty demand is not established, penalty and interest also have no independent footing and cannot survive. The note thus reiterates that presumptions and process-based estimates are insufficient to sustain denial of credit, clandestine removal, or consequential penal demands.

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Issues: (i) whether credit could be denied on inputs used in nine failed trial batches during manufacture; (ii) whether clandestine removal could be inferred merely from input-output ratio and alleged higher production, and whether penalty and interest could survive when duty demand was not established.

Issue (i): whether credit could be denied on inputs used in nine failed trial batches during manufacture.

Analysis: The inputs were admittedly issued for manufacture and were consumed in the course of production. Where manufacture fails and inputs are lost during the process, credit cannot be denied merely because the intended final product was not achieved. The factual admission that the nine batches were attempted in manufacture was sufficient to negative denial of credit.

Conclusion: The denial of credit was unsustainable and the assessee succeeded on this issue.

Issue (ii): whether clandestine removal could be inferred merely from input-output ratio and alleged higher production, and whether penalty and interest could survive when duty demand was not established.

Analysis: The allegation of excess production rested on the assumption that new technology should have yielded higher output. Mere installation of new machinery, however, does not by itself prove optimum production, particularly when trial batches and material loss are shown. Clandestine removal must be proved by positive evidence, and the burden lies on the Department. In the absence of material showing movement or removal of unaccounted goods, theoretical calculations and presumptions cannot sustain a finding of clandestine manufacture. Once the duty demand itself failed, no foundation remained for penalty or interest.

Conclusion: The finding of clandestine removal was unsustainable and the penalties and interest also failed.

Final Conclusion: The appeal succeeded in full, with the impugned order being set aside and the demand, credit denial, penalty, and interest all falling together.

Ratio Decidendi: Clandestine removal cannot be upheld on presumptions or theoretical yield calculations alone, and credit cannot be denied where inputs were admittedly consumed in manufacturing attempts that failed.

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