Duty demand for alleged diversion of yarn failed where the Revenue lacked corroborative evidence of non-receipt or local diversion.

Duty demand, interest and penalties on PTY/PFY were found unsustainable where the Revenue relied mainly on oral statements of suppliers, transporters and employees without corroborative documentary evidence of non-receipt or diversion. The assessee's records showed procurement under CT-3, use of the yarn in terry towel borders, physical stock in the factory, and samples of exported goods. In the absence of reliable proof that the goods were diverted to the local market or not used in manufacture of export goods, the allegation failed. The penalty on the managing director also could not stand once the underlying demand was not established.

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Issues: Whether the duty demand, interest and penalties were sustainable on the allegation that PTY/PFY were diverted and not received for use in manufacture of export goods.

Analysis: The Revenue's case rested mainly on oral statements of suppliers, transporters and some employees, with no corroborative documentary evidence establishing that the goods were not received by the assessee or were diverted to the local market. The assessee produced material showing procurement of PTY/PFY under CT-3 and use of such yarn in borders of terry towels, supported by physical stock found in the factory and samples of exported towels. In the absence of reliable evidence of non-receipt or clandestine diversion, the allegation of diversion and the resulting duty demand could not be sustained. The penalty on the managing director also could not survive once the demand itself failed.

Conclusion: The duty demand, interest and penalties were set aside and the appeal was allowed in favour of the assessee.

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