Rule 173H records and strict reading of exemption conditions defeated clandestine manufacture, duty demand, confiscation and penalties.

Contemporaneous statutory records showing receipt of polycarbonate containers back for repair, including intimation forms, Form V entries and invoices cross-referencing earlier clearances, supported treatment under Rule 173H and negatived clandestine manufacture. The departmental reliance on the security supervisor's register and statement was found unreliable, especially without cross-examination, and there was no convincing evidence of excess raw material procurement. The exemption under Notification No. 5/98-CE was also available because the record did not show prohibited credit on goods manufactured in the same factory, and Modvat credit on inputs for another product did not breach the condition. Duty demand, confiscation, redemption fine and penalties therefore could not stand.

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Issues: (i) Whether polycarbonate containers cleared from the factory were fresh goods clandestinely manufactured and cleared, or goods earlier returned by buyers and cleared after repairs under Rule 173H of the Central Excise Rules, 1944; (ii) whether exemption under Notification No. 5/98-CE dated 2-6-1998 was available; and (iii) whether the duty demand, confiscation, redemption fine and penalties were sustainable.

Issue (i): Whether polycarbonate containers cleared from the factory were fresh goods clandestinely manufactured and cleared, or goods earlier returned by buyers and cleared after repairs under Rule 173H of the Central Excise Rules, 1944.

Analysis: The statutory documents, including the intimation forms acknowledging receipt back of the goods, the Form V register, and the invoices showing cross-reference to earlier clearances, established that the goods were received back for repairs and were cleared after reprocessing. The departmental case rested mainly on the security supervisor's register and statement, but those materials were found unreliable and, in any event, cross-examination was not afforded. The surrounding circumstances, including the absence of convincing evidence of procurement of excess raw materials and the lack of reliable proof of clandestine manufacture, did not support the allegation that the cleared goods were freshly manufactured bottles.

Conclusion: The allegation of clandestine manufacture and clearance was not proved, and the clearances were held to be covered by Rule 173H.

Issue (ii): Whether exemption under Notification No. 5/98-CE dated 2-6-1998 was available.

Analysis: The exemption for goods of the relevant tariff headings was subject to condition No. 10, which barred availing credit of duty paid on products manufactured in the same factory. The record did not show that credit had been taken on the bottles or on any other product manufactured in the factory in the manner contemplated by the condition. Availment of Modvat credit on inputs used for another product did not violate the condition, and the exemption could not be denied on that basis.

Conclusion: The assessee was entitled to exemption under Notification No. 5/98-CE dated 2-6-1998.

Issue (iii): Whether the duty demand, confiscation, redemption fine and penalties were sustainable.

Analysis: Once the receipts under Rule 173H were accepted and the exemption was held available, the duty demand could not survive. The confiscation of bottles found in the factory, as well as confiscation of land, building, plant and machinery, lacked evidentiary foundation. The penalties under Section 11AC of the Central Excise Act, 1944 and the redemption fine imposed in relation to the confiscation also could not stand.

Conclusion: The duty demand, confiscation, redemption fine and penalties were unsustainable.

Final Conclusion: The impugned order was set aside and the appeals were allowed with consequential relief in accordance with law.

Ratio Decidendi: When contemporaneous statutory records conclusively show receipt of goods back for repair and re-clearance after reprocessing, and the departmental case is based on unreliable material without proper cross-examination or corroboration, allegations of clandestine manufacture and consequent duty, confiscation and penalty cannot be sustained; exemption conditions must be construed according to their text and cannot be enlarged by implication.

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