2017 (1) TMI 790 - AT - Central Excise

Manufacturer wins appeal against duty evasion allegations due to discrepancies in claimed production levels.

The appellant, a manufacturer of Kraft Media Paper, was accused of clandestine activities resulting in duty evasion. The Revenue alleged suppression of ... Clandestine Removal - suppression of facts - validity of SCN - is the achieving of production more than double of the installed capacity possible? Held that: - on perusal of SCN, it was found that against installed capacity of 600 MT per annum or 1400 MT for 28 months, achieving production of 2015.788 MT is an impossibility. Thus, I am satisfied that the Show Cause Notice is based on imaginary and illusive data and/or based on misreading of the documents of the appellant and have got no legs to stand. Accordingly, I hold the Show Cause Notice is untenable and impugned order set aside - the appeal is allowed in part and remanded Adjudicating Authority for the limited purpose of recalculation of duty, during that time, or period in dispute, on clearances, as per returns - appeal allowed by way of remand. ISSUES PRESENTED AND CONSIDERED 1. Whether the appellant indulged in clandestine manufacture and clandestine removal of Kraft Media Paper, thereby evading duty. 2. Whether the appellant was disentitled to SSI exemption and liable to pay duty at higher rates (differential duty) for the period in dispute. 3. Whether the extended period of limitation could be invoked for demand of duty alleged to arise from clandestine manufacture/clearance. 4. Whether seized private records (RUD series registers, challan books, gate pass books) and physical stock inspection provided adequate and reliable evidence to sustain the demand, confiscation and penalty. 5. Whether confiscation of physical stock and imposition of penalty were justified on the materials on record. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Clandestine manufacture and clandestine removal: legal framework Legal framework: Requirement that clandestine manufacture/clearance be established on reliable evidence demonstrating discrepancy between produced quantity and accounted clearances; assessment must be consistent with physical capacity, statutory returns (RT-12/ER-1/RG-1), and accepted accounting practices. Precedent Treatment: No specific precedents were cited by the Tribunal; therefore the Court applied principles of evidentiary sufficiency and plausibility in light of production capacity and statutory returns. Interpretation and reasoning: The Tribunal analyzed the Revenue's calculations juxtaposed with statutory RT-12 returns and installed capacity. Revenue's figures produced an asserted clandestine production of 1,191,606 kg and clandestine clearance of 921,917 kg, leading to aggregate production (including RT-12) of 2,015,788 kg for the disputed 28-month period. The Tribunal compared that figure to the admitted installed capacity (600 MT p.a. = 1,400 MT for 28 months) and found the production figure to be materially in excess of physical capacity-an impossibility under the admitted facts. The Tribunal therefore concluded that the Show Cause Notice and consequent adjudication were founded on 'imaginary and illusive data' and/or misreading of documents. Ratio vs. Obiter: Ratio - a demand for clandestine manufacture/clearance cannot stand where the foundational calculations contradict admitted physical capacity and statutory returns; adjudicatory reliance on such implausible figures is untenable. Conclusion: The allegation of clandestine manufacture/clearance, as quantified by Revenue, was not sustained. The Tribunal set aside the impugned order insofar as founded on those calculations and directed reassessment based on clearances as per statutory returns. Issue 2 - Entitlement to SSI exemption and applicable duty rate (differential duty) Legal framework: SSI exemption and rates are determined by Notifications relied upon by the assessee; entitlement depends on compliance and whether clandestine manufacture/clearance disentitles exemption. Differential duty arises if exemption is found inapplicable. Precedent Treatment: No prior decisions directly relied upon; the Tribunal treated entitlement as fact-sensitive and dependent upon whether clandestine activity is proved. Interpretation and reasoning: Revenue alleged loss of entitlement because clandestine manufacture/clearance rendered the unit ineligible. The Tribunal found that the foundational clandestine figures were not credible. The appellant had produced classification lists, returns and had been subject to physical control regime; some differential duty was earlier deposited after opting to change notification benefit. Because the clandestine finding collapsed, the basis for denying SSI exemption in whole likewise failed. The Tribunal remanded to the adjudicating authority for limited purpose of recalculation of duty on clearances 'as per returns' for the period in dispute. Ratio vs. Obiter: Ratio - entitlement to exemption cannot be negated solely on the basis of implausible production/clearance computations; recalculation must proceed from statutory returns where clandestine activity is not satisfactorily established. Conclusion: The Tribunal held that appellant remains entitled to consequential benefits in law; directed reassessment confined to clearances declared in statutory returns, thereby disallowing Revenue's wide denial of SSI exemption premised on the discredited clandestine calculations. Issue 3 - Extended period of limitation Legal framework: Extended limitation for adjudication can be invoked where suppression or collusion is established; invocation requires satisfactory material justifying extended period. Precedent Treatment: None cited; Tribunal applied standard that extended limitation cannot rest on infirm or implausible allegations. Interpretation and reasoning: Revenue invoked extended limitation based on alleged suppression revealed by seized private records and inspection. The Tribunal found the core suppression calculations to be imaginary and inconsistent with installed capacity and RT-12 returns, undermining the factual basis for invocation of extended limitation. Although the adjudicating authority earlier held extended limitation applicable because appellant could not satisfactorily explain excess stock, the Tribunal found that the explanatory and documentary material (including returns and capacity) rendered revenue calculations unreliable. Ratio vs. Obiter: Ratio - extended limitation cannot be applied where the foundational facts supporting suppression are not established with credible, non-illusory data. Conclusion: Extended period of limitation could not be sustained on the materials relied upon by Revenue; the impugned extended-period demand was set aside as part of the broader finding that the Show Cause Notice was untenable. Issue 4 - Evidentiary value of private records and seized documents (RUD series, challans, gate passes) and physical inspection Legal framework: Private records and seized documents may be evidence of clandestine activity if they are credible, consistent with other records, and not fabricated; physical stock counts must be reconciled with statutory registers and capacity. Precedent Treatment: No authorities cited; Tribunal applied principles of consistency, plausibility and corroboration by statutory records (RT-12/ER-1) and physical capacity. Interpretation and reasoning: Revenue relied on private registers (RUD-13, RUD-15), challan books and gate pass books to calculate unaccounted production/clearance. The Tribunal scrutinized these records and noted irregularities (handwritten serial numbers, missing triplicate copies, discrepancies between private and statutory registers). More importantly, statutory RT-12 returns reflected production and clearance figures inconsistent with Revenue's clandestine computation; the aggregate figures produced by Revenue were implausible when compared with admitted installed capacity. The Tribunal therefore concluded that the private records and seized materials did not provide a reliable basis to sustain the demand. Ratio vs. Obiter: Ratio - private records, even when seized, must be assessed against statutory returns and physical capacity; where they produce implausible results or are inconsistent, they cannot found a demand for clandestine production/clearance. Conclusion: The seized private records and challenged documents were insufficiently reliable to sustain the clandestine-production allegations; reliance on them led to misreading of documents and an untenable Show Cause Notice. Issue 5 - Confiscation and penalty Legal framework: Confiscation and penalty require establishing contravention and quantifying duty; imposition must rest on credible evidence of clandestine removal or short-levy/short-payment. Precedent Treatment: None relied upon; Tribunal assessed justification in context of primary finding on clandestine activity. Interpretation and reasoning: Confiscation of 16.293 MT and penalty of Rs. 2,00,000/- were predicated on the clandestine manufacture/clearance and short payment findings. Given the Tribunal's determination that the foundational clandestine calculations were imaginary and misread, the subsisting justification for confiscation and penalty failed. The Tribunal allowed relief from the impugned adjudication and remanded only for recalculation of duty on declared clearances. Ratio vs. Obiter: Ratio - where the underlying allegation of clandestine manufacture/clearance fails for want of credible evidence, consequential confiscation and penalty cannot stand. Conclusion: Confiscation and penalty sustained on the basis of the discredited clandestine findings were set aside; the matter was remanded solely to recalculate duty on clearances as per statutory returns and to give consequential relief in accordance with law.