Input-output norms alone cannot justify customs duty demand without independent evidence of diversion or non-use of imported materials.

Standard input-output norms could not, by themselves, sustain a show cause notice or duty demand where there was no independent allegation or evidence of diversion of imported materials. Mere excess wastage over prescribed norms was treated only as an indicator, not conclusive proof of non-use of imported goods for manufacture, and the assessee's reply was not read as an admission of diversion or suppression. Because the foundation for the proceedings failed, the demand could not be upheld under the proviso to Section 28 of the Customs Act, 1962, and the duty demand was set aside while the penalty order remained undisturbed.

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Issues: (i) Whether standard input-output norms could, by themselves, form the sole basis for issuance of the show cause notice and confirmation of duty in the absence of an allegation of diversion of imported materials. (ii) Whether the demand of duty could be sustained under the proviso to Section 28 of the Customs Act, 1962 on the facts of the case.

Issue (i): Whether standard input-output norms could, by themselves, form the sole basis for issuance of the show cause notice and confirmation of duty in the absence of an allegation of diversion of imported materials.

Analysis: Standard input-output norms were treated only as an indicator and not as a conclusive basis to infer non-use of imported material. Mere excess wastage over the prescribed norms, without anything more, was held insufficient to justify a finding that the imported goods had not been used for manufacture. The absence of any allegation of diversion was material, and the assessee's reply was not read as an unconditional admission of diversion or suppression.

Conclusion: The show cause notice and the consequential duty demand could not be sustained merely on the basis of input-output norms; the issue was answered in favour of the assessee.

Issue (ii): Whether the demand of duty could be sustained under the proviso to Section 28 of the Customs Act, 1962 on the facts of the case.

Analysis: Since the foundation for the proceedings was held unsustainable, the attempt to uphold the demand under the extended demand provision was also rejected. The Court declined to travel further into limitation once the basic premise for issuance of the notice itself failed.

Conclusion: The demand of duty under the proviso to Section 28 of the Customs Act, 1962 was not sustainable and the issue was answered in favour of the assessee.

Final Conclusion: The appeal succeeded, the duty demand was set aside, and the order vacating penalty was left undisturbed.

Ratio Decidendi: Input-output norms are only a guiding indicator and cannot, by themselves, justify a demand or adverse inference of non-use or diversion when there is no independent allegation or evidence of diversion.

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