Clandestine removal demands need corroborated evidence; internal incentive sheets, third-party invoices and untested statements were insufficient here.

Clandestine removal allegations require cogent, corroborated evidence of actual manufacture, clearance and supporting circumstances. Incentive sheets recovered from residential premises were held to reflect only gross production for incentive purposes and not necessarily finished manufacture, while photocopies of invoices recovered from a third party, without investigation at consignees or transporters and without corroborating material such as raw material procurement or electricity use, were insufficient to prove parallel clearances. A selective reading of a fax was also found inadequate to establish PETN diversion, and the denial of effective cross-examination undermined reliance on adverse statements. On this basis, the duty demand, interest and penalties were set aside.

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Issues: (i) Whether the incentive sheets recovered from the residential premises could be treated as reliable evidence of actual manufacture and clandestine clearance of explosives; (ii) whether the photocopies of invoices recovered from a third party, without further investigation, were sufficient to sustain the charge of clandestine removals and consequent duty demand; (iii) whether the allegation regarding diversion of PETN and the denial of cross-examination justified confirmation of demand and penalties.

Issue (i): Whether the incentive sheets recovered from the residential premises could be treated as reliable evidence of actual manufacture and clandestine clearance of explosives.

Analysis: The production of explosives was subject to quality control and packing before entry in the statutory records. The incentive sheets reflected only gross production for incentive purposes and did not necessarily represent finished, marketable manufacture. In the case of explosives, completion of manufacture depended upon the stage of quality control and packing, and the statutory record could be different from internal incentive calculations. The adjudicating order was also found to have reproduced the show cause notice without addressing the defence in a reasoned manner.

Conclusion: The incentive sheets were not accepted as a true reflection of actual manufacture or clandestine clearance, in favour of the assessee.

Issue (ii): Whether the photocopies of invoices recovered from a third party, without further investigation, were sufficient to sustain the charge of clandestine removals and consequent duty demand.

Analysis: The photocopies were treated as parallel invoices, but no effective investigation was carried out at the end of the consignees or the transporters to establish that the goods were actually cleared without payment of duty. The record lacked supporting material such as proof of procurement of additional raw materials, increased electricity consumption, transport trail, or other corroborative evidence necessary to establish clandestine manufacture and removal. Mere recovery of third-party documents was insufficient to discharge the Revenue's burden.

Conclusion: The evidence was held insufficient to sustain the demand based on alleged parallel invoices, in favour of the assessee.

Issue (iii): Whether the allegation regarding diversion of PETN and the denial of cross-examination justified confirmation of demand and penalties.

Analysis: The allegation of PETN diversion rested on a selective reading of a fax message, which on a proper reading did not support the charge in the manner alleged. The request for cross-examination of the witness from whose statement adverse inference was sought had not been effectively honoured, and reliance on such statement without allowing fair testing was not justified. Since the foundational duty demand was not established by reliable evidence, the connected penalties also could not survive.

Conclusion: The allegation of PETN diversion was not proved and the denial of effective cross-examination could not sustain the demand or penalties, in favour of the assessee.

Final Conclusion: The duty demand, interest and penalties were set aside because clandestine manufacture and removal were not proved by reliable and corroborated evidence.

Ratio Decidendi: A charge of clandestine removal must be proved by cogent, corroborated evidence showing actual manufacture, clearance and supporting circumstances; internal records or third-party photocopies, without proper investigation and fair opportunity of cross-examination, are insufficient to sustain duty and penalties.

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