Clandestine manufacture must be proved by corroborated evidence; untested statements and machine recovery alone cannot sustain duty demand.

Revenue failed to prove clandestine manufacture and removal of pan masala containing tobacco where the sample reports showed tobacco but did not establish the required presence of betel nuts for classification. The record also lacked evidence of procurement or use of betel nuts or of purchase and consumption of the main raw materials, and the machines were not shown to be operating or connected for use. Retraction of statements, absence of lawful testing of those statements, and uncorroborated third-party material collected behind the assessee's back left the demand unsupported. In the absence of proof of manufacture of notified goods, the packing-machines declaration requirement was inapplicable, and the duty demand, interest and penalties were set aside.

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Issues: Whether the Revenue had proved clandestine manufacture and removal of pan masala containing tobacco and whether the demand of duty and penalties could be sustained on the basis of machine recovery, sample reports and statements recorded during investigation.

Analysis: The demand was held to rest on insufficient evidence. The sample reports indicated the presence of tobacco but did not establish the essential presence of betel nuts required for classification as pan masala containing tobacco. No evidence of procurement or use of betel nuts, nor of purchase or consumption of the main raw materials, was brought on record. The machines were not shown to be operating or connected for use, and the record did not contradict the defence that they were not in working condition. The statements relied upon by the department were retracted, were not tested in the manner required by law, and third-party material collected behind the assessee's back was not corroborated by independent evidence. The statutory declaration requirement under the packing-machines rules was also not attracted in the absence of proof of manufacture of the notified goods.

Conclusion: The Revenue failed to establish clandestine manufacture and removal, and the duty demand, interest and penalties were unsustainable. The appeals were allowed and the impugned order was set aside.

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