2023 (5) TMI 1022 - AT - Central Excise

Tribunal rules in favor of Steel Authority of India Ltd. in duty demand case, overturning penalties

M/s. STEEL AUTHORITY OF INDIA LTD Versus Commissioner of Central Excise, Mysore

The Tribunal found in favor of the appellants, M/s. Steel Authority of India Ltd., in a case concerning duty demands on differential stock values. The ... Clandestine Removal - shortage of stock - Demand of differential value of the stock - various differences in the physical stock of finished/semi-finished goods shown in their statement when compared with the adjusted RG-1 opening balance of stock of finished/semi-finished goods for the years 2001-02, 2002-2003 and 2003-2004 - validity of SCN - parameters relied upon by the authorities in the show-cause notice and the parameters relied upon by the learned Commissioner are at variance - HELD THAT:- The show-cause notices though demanded duty beyond the normal period fail to invoke proviso to Section 11A but the learned Commissioner in his impugned order invoked proviso to Section 11A and imposed penalty under Section 11AC which is beyond the scope of show-cause notices. In this regard, the Hon’ble Supreme Court in case of COMMR. OF CENTRAL EXCISE & CUSTOMS, SURAT VERSUS M/S SUN PHARMACEUTICALS INDS. LTD. & ORS. [2015 (12) TMI 670 - SUPREME COURT] has held that the genuineness of the price at which the physician samples were sold by the assessee to the distributors was not even doubted. It is only on the ground that the goods were not actually sold by the distributors to the physicians, which was the ground on which it was contended that the case was not covered under Section 4(1)(a). The Commissioner in present case has held that In fact, the genuineness of the price at which the physician samples were sold by the assessee to the distributors was not even doubted. It is only on the ground that the goods were not actually sold by the distributors to the physicians, which was the ground on which it was contended that the case was not covered under Section 4(1)(a) - further they held that In the instant case, discrepancies between the accounts (RG1) and the audited accounts have been noticed in respect of closing stocks. Since it is inherent from the very nature of estimation of stocks in steel factories that there will be variations between what is reflected in the RG1 and what is actually found, no malafide can be attributed in the discrepancies or inaccuracies found between the two figures which are based on estimates. In the absence of any mala fide, confiscation of goods found in excess stock and imposition of penalty is not warranted. In spite of these observations, he proceeds to impose invoke proviso to section 11A and impose penalty under Section 11AC which is legally not sustainable. The appellant’s in their own case reported in STEEL AUTHORITY OF INDIA LTD. VERSUS COMMISSIONER OF C. EX., MYSORE [2005 (10) TMI 181 - CESTAT, BANGALORE], the Tribunal has held that the discrepancy between the RG1 stock and the physical stock are based on the estimated production and not on actual weighment. Comparison between two estimations is inherently inaccurate. Because of these shortages, if any, is inflated due to errors in taking opening balance and physical stock. Considering the practical difficulties in estimating the actual stock and in view of the submissions made by the appellant, the Tribunal had set aside the impugned order. In the case of ROURKELA STEEL PLANT [SAIL] VERSUS COMMISSIONER OF C. EX., BHUBANESWAR [2000 (7) TMI 726 - CEGAT, KOLKATA], the Tribunal had held that even if there are differences in the stock taking and the shortages are found, the duty can be demanded only when they are removed from the factory. The findings on the clandestine manufacture and removal cannot sustain against the appellants as Revenue has not provide any proof of clandestine removal. Accordingly, demand was set aside. In the present appeal also even if the shortages are to be accepted, there is no iota of evidence either in the show-cause notices or in the impugned order to prove that these goods were clandestinely removed. The demands are set aside and accordingly, penalty is also set aside - Appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether excise duty can be demanded by comparing estimated production recorded in RG1 with estimated physical stock ascertained by volumetric conversion, i.e., whether comparison of two estimates furnishes a valid basis for duty demand. 2. Whether the Commissioner exceeded the scope of the show-cause notices by shifting the basis of demand from the parameters in the notices to ER1 returns versus audited books and thereby acted beyond the pleadings. 3. Whether invocation of the proviso to Section 11A (extended period) and imposition of penalty under Section 11AC (and Rules providing for confiscation/penalty) was permissible where the show-cause notices did not allege fraud, collusion, willful misstatement or contravention and did not invoke the proviso. 4. Whether demand and penalty can be sustained in the absence of any evidence of clandestine removal or proof of actual duty-evading clearances. 5. Applicability of prior Tribunal findings and administrative circulars recognizing the practical difficulties and accepted accounting practices in steel plants in assessing shortages and condoning losses. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of comparing RG1 estimated production with estimated physical stock (two estimates) as basis for duty demand Legal framework: Assessment of goods and levy of excise require a reliable basis for quantifying clearances/shortages; statutory and administrative assessments rely on returns (ER1/RG1) and physical stock taking but must reflect actual removals to attract duty. Precedent treatment: The Tribunal in its earlier decision on identical facts held that discrepancies arising from comparison of estimated RG1 and estimated physical stock are inherently inaccurate and cannot support a demand; that approach was relied upon by the Court in setting aside demands in similar factual matrices. Higher judicial authority has recognized limits on expanding grounds not pleaded in show-cause notices (see analysis under Issue 3). Interpretation and reasoning: The Court found that RG1 production figures are based on estimation, physical stock is volumetric estimate converted to theoretical weight, whereas clearances are on actual weighment at removal. Comparing two separate estimates (RG1 and physical stock) produces distortions; shortages so derived may be inflated by estimation errors in opening balances and stock-taking. Therefore, comparing these two estimates does not provide a reliable basis to infer clandestine removal or true shortages attracting duty. Ratio vs. Obiter: Ratio - where both production and stock-taking are estimates and clearances are based on actual weighment, a finding of excise liability cannot rest solely on comparison between two estimates. Obiter - practical observations on estimation methodology and conversion factors for steel products. Conclusion: Demands founded on comparison of RG1 (estimated production) and estimated physical stock are legally unsustainable; such discrepancies, without corroborative proof of actual removal, cannot attract excise duty. Issue 2 - Legality of shifting basis of demand from show-cause parameters to ER1 vs audited books Legal framework: Principles of natural justice and rule of fair pleading require that the demand and penalty must conform to the grounds and parameters specified in the show-cause notice; adjudicatory authority cannot adopt a different factual/quantitative basis not contained in the notice. Precedent treatment: Higher judicial authority has held that an adjudicatory body cannot go beyond the scope of grounds set out in the show-cause notice; administrative demand must be limited to allegations made. Interpretation and reasoning: The show-cause notices calculated differential quantity by comparing RG1 and physical stock as reported by the assessee. The Commissioner, however, confirmed demand on differential between ER1 returns and audited books - a distinct metric not pleaded in the notices. The Court held this variance to be legally unsustainable because the basis for demand in the adjudication differed from the basis in the notice, denying the appellant the chance to meet the precise charge. Ratio vs. Obiter: Ratio - demand cannot be confirmed on a basis different from that pleaded in the show-cause notice; such a shift vitiates the order. Conclusion: The Commissioner's reliance on ER1 versus audited books, contrary to the pleading in the show-cause notices, rendered the demand unsustainable. Issue 3 - Permissibility of invoking proviso to extended limitation and imposing penalty when not invoked in show-cause notice Legal framework: Extended limitation/proviso to Section 11A and penal provisions (Section 11AC/Rules) can be invoked only where the show-cause notice pleads requisite factual allegations (fraud, collusion, willful misstatement or contravention) or otherwise the statutory condition for extended period is specifically set out; penalty must be within the ambit of charges communicated. Precedent treatment: Binding authority instructs that adjudicatory authorities cannot travel beyond grounds set out in show-cause notices; invocation of extended period/penalty not pleaded is impermissible. Interpretation and reasoning: The show-cause notices demanded duty beyond the normal period but did not allege fraud, collusion, willful misstatement or contravention nor invoke the proviso. Notwithstanding, the Commissioner invoked the proviso to the extended limitation provision and imposed penalty under the penal provision. The Court held that this was beyond the scope of the notices and therefore legally unsustainable. Even where adjudicator records findings suggestive of misconduct, invoking an extended limitation/penalty absent appropriate pleading breaches fairness and statutory limits. Ratio vs. Obiter: Ratio - invocation of extended limitation and imposition of penalty under statutory proviso is untenable when not pleaded in the show-cause notice; penalties cannot be imposed beyond the scope of allegations communicated. Conclusion: Invocation of proviso to the extended period and imposition of penalty where the show-cause notice did not allege the requisite grounds or invoke the proviso was held invalid; penalty set aside. Issue 4 - Necessity of evidence of clandestine removal to sustain demand and penalty Legal framework: Duty demands based on alleged shortage require positive evidence of clandestine removal or clearances without payment; mere discrepancies in stock or estimates do not substitute for proof of removal or evasion required to sustain confiscation/penalty. Precedent treatment: Tribunal and appellate authorities have set aside demands where no evidence of clandestine removal was furnished despite discrepancies in stock taking. Interpretation and reasoning: The record contained no evidence either in the show-cause notices or in the adjudication order to demonstrate clandestine removals or actual duty-evading clearances. The Commissioner's own reasoning acknowledged estimation-related discrepancies and absence of mala fide for stock variances, yet proceeded to confirm demands and penalties premised on extended period - an approach the Court rejected. Where goods are not available for confiscation and no proof of clandestine removal exists, demands based solely on estimation variances cannot stand. Ratio vs. Obiter: Ratio - absence of evidence of clandestine removal precludes sustaining demands and penalties based on stock discrepancies; imposition of penalty requires proof of culpable conduct or statutory basis. Conclusion: In absence of any iota of evidence proving clandestine removal or duty-evading clearances, demands and penalties could not be sustained and were set aside. Issue 5 - Relevance of administrative circulars and prior Tribunal findings on condonation of losses and estimation practices Legal framework: Administrative circulars recognizing industry-specific practices and providing guidelines for condonation of losses and examination of explanations are relevant to adjudication and may temper demands when estimation methods are accepted practice. Precedent treatment: Tribunal's earlier decision on identical facts, together with administrative circular guidance, was applied to conclude that estimation-based discrepancies are to be approached with caution and explanations considered. Interpretation and reasoning: The Court noted administrative circulars addressing steel plant accounting and the Tribunal's earlier favourable decision on the same factual matrix. Given practical difficulties in stock estimation and conversion, and that the department accepted principles in earlier periods, these materials support treating estimation-related shortfalls as not automatically indicative of duty evasion. Ratio vs. Obiter: Ratio - where industry-accepted estimation practices and prior Tribunal findings show that discrepancies arise from methodology, authorities must consider explanations and cannot treat every discrepancy as clandestine removal. Obiter - observations on proportionality in quantifying demands where some clearances exceeded ER1. Conclusion: Administrative guidance and prior Tribunal findings were applicable and, together with lack of clandestine-removal evidence, warranted setting aside the demands and penalties; appeal allowed.