2023 (6) TMI 696 - AT - Central Excise

Tribunal overturns order lacking evidence, discrepancies insufficient to prove wrongdoing. Failure to verify weakens Department's case.

The Tribunal allowed the appeal, setting aside the impugned order due to the lack of concrete evidence supporting the allegations of clandestine ... Clandestine manufacture and removal - copper wire - trading the goods without bringing to their factory - basis of the allegation is that the descriptions of the goods given in the respective purchase invoices do not tally with the description of the goods mentioned in the sales invoices. HELD THAT:- On going through the purchase and sales invoices, it is found that though there are some apparent discrepancies/contradictions in the description of the goods; also contradictions in the statements of the Transporter and Director vis-à-vis invoices, however, such contradictions cannot itself establish that the appellant had received the purchased goods in their factory, processed and converted into finished goods cleared without payment of duty. At best it can raise a suspicion about the genuineness of the transaction and be ground for further investigation. The Department has not carried out thorough investigation of the matter even though the investigation took two years after the audit objection. The intimation letters written by the appellant to the Range Superintendent from time to time informing the invoice no, vendor’s name, quantity of material purchased and received in transporter’s premises viz. Kamal Roadways duly acknowledged by the Inspector of the Range Office, being not contradicted by the Revenue about its genuineness, weighs in favour of the appellant. No investigation was carried out after intimation letters were received in the Range office even though these were addressed from time to time, much before the audit objection, no verification was carried out. Therefore, it is difficult to accept the allegation of the department that the quantity of goods as shown in the purchase invoices were brought into the factory, processed, converted into finished goods and removed clandestinely without payment of duty. The impugned order is set aside and the appeal is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the Department discharged the burden to prove clandestine manufacture and clearance of finished goods from the factory without payment of duty, as alleged for the period March 2012 to March 2013. 2. Whether discrepancies between descriptions in purchase invoices and sales invoices, together with statements of management and transporters, suffice to establish clandestine manufacture and removal in the absence of direct evidence. 3. Whether the administrative steps taken by the appellant (intimations to Range Office and application for permission to trade) and absence of follow-up investigation by the Department affect the sustainability of the demand. 4. Whether, on the material on record, the appellate authority correctly confirmed demand, interest and penalty for alleged clandestine clearance. ISSUE-WISE DETAILED ANALYSIS Issue 1: Burden of proof to establish clandestine manufacture and clearance Legal framework: For a demand based on clandestine manufacture and removal, the Department must establish manufacture and clearance without payment of duty by cogent evidence; burden is on the Department to prove the allegation rather than on the assessee to negative it. Precedent Treatment: The judgment reiterates the settled principle that allegations of clandestine removal require proof by 'clinching evidences' and cannot rest on mere assumptions or presumptions (appellant relied on authorities to this effect). Interpretation and reasoning: The Court examined the record and found no direct evidence that purchased goods were brought into the factory, subjected to manufacturing processes and then cleared without payment of duty. Statements of the Director and transporters did not admit receipt at the factory; contradictions and discrepancies exist but are not affirmative proof of clandestine manufacture. The Court also noted the Department did not pursue in-depth post-intimation investigation despite receiving contemporaneous intimation letters. Ratio vs. Obiter: Ratio - The Department failed to discharge the legal burden of proving clandestine manufacture and clearance; suspicion or contradictions alone are insufficient. Obiter - Observations that such discrepancies may ground further investigation. Conclusion: Demand could not be sustained on the available evidence; benefit to appellant. Issue 2: Sufficiency of circumstantial evidence (invoice description discrepancies and witness statements) Legal framework: Circumstantial evidence can support an inference of clandestine activity only when it is reliable, cogent and establishes the necessary link to manufacturing and removal beyond reasonable doubt/ to requisite statutory standard. Precedent Treatment: The decision recognizes authorities cited by both sides dealing with the weight to be attached to discrepancies and circumstantial material, but emphasizes that circumstantial evidence must be corroborative and not merely raise suspicion. Interpretation and reasoning: The Court reviewed purchase invoices showing generic descriptions (e.g., 'copper wire' or 'conductor bit') and sales invoices showing detailed thickness. While these are inconsistent, the Tribunal held that such contradictions do not automatically establish that processing occurred in the factory. The transporter's statement about goods being kept up to one week, contrasted with sales after three months, was an unexplained discrepancy but not conclusive proof of manufacture. The Court treated these as grounds for further inquiry rather than conclusive proof of clandestine clearance. Ratio vs. Obiter: Ratio - Invoice description discrepancies and contradictory statements, without supporting investigative findings, are insufficient to establish clandestine manufacture and removal. Obiter - Such contradictions justify further, thorough investigation by the Department. Conclusion: Circumstantial discrepancies on record do not meet the evidentiary threshold to confirm duty demand. Issue 3: Effect of appellant's administrative intimations and Department's failure to investigate Legal framework: Notifications/intimations to the Range/Preventive office about purchases and their storage with transporters, if contemporaneously made and acknowledged, constitute relevant material that the Department must verify; failure to act may weaken the Department's case. Precedent Treatment: The Tribunal relied on the principle that administrative inaction and lack of verification after receipt of material information weigh against sustaining a demand founded on an adverse inference. Interpretation and reasoning: The appellant produced intimation letters to the Range Superintendent giving invoice details and transporter storage, acknowledged by the Inspector of the Range Office. The Department did not contradict the genuineness of those intimations nor undertake verification at the purchaser/transporters' end. The Preventive report, prepared two years after audit and initially not furnished to the appellant, was central yet not followed by adequate probe. The Court found that absence of prompt, thorough investigation undermines the Department's allegations. Ratio vs. Obiter: Ratio - Where an assessee has furnished contemporaneous intimations acknowledged by the Range and the Department fails to verify or contradict those entries, such failure weakens the Department's burden to prove clandestine manufacture. Obiter - Delay in preparing a Preventive report and non-supply to the assessee is criticized as prejudicial to fair adjudication. Conclusion: Appellant's intimations and Department's lack of follow-up materially support setting aside the demand. Issue 4: Validity of imposition of duty, interest and penalty on the material on record Legal framework: Confirmation of duty, interest and penalty requires establishment of the taxable event (manufacture and clearance without payment); penalty requires mens rea or culpability established by evidence. Precedent Treatment: The Tribunal treated the authorities confirming demand as inapposite where foundational facts were not proved; reliance on presumptions alone cannot sustain penalty or duty. Interpretation and reasoning: Because the primary allegation of clandestine manufacture and removal was not proven on record, the consequential confirmation of duty, interest and penalty could not be sustained. The Court observed that invoices issued for clearances and the seeking of permission to trade indicate no deliberate concealment established on evidence. The Tribunal set aside the impugned order and allowed the appeal. Ratio vs. Obiter: Ratio - Absent proof of clandestine manufacture and removal, consequential demand of duty, interest and penalty cannot be sustained. Obiter - If further investigation produces cogent evidence, revenue may revisit the matter in accordance with law subject to limitation and procedural safeguards. Conclusion: Demand, interest and penalty quashed for want of evidence; appeal allowed.