Cenvat credit and clandestine removal demands cannot rest on stock discrepancies or estimated input-output ratios alone.

A demand based solely on a minor shortage of finished goods was rejected because stock verification and weighment discrepancies were not supported by corroborative evidence of clandestine removal; the shortage was treated as inferential and the demand set aside. Cenvat credit on disputed pig iron consignments was denied only for nine admitted consignments already reversed by the assessee, while the department failed to prove non-receipt or alternative procurement for the balance. A demand built on an earlier input-output ratio was also dropped because no statutory production norm or binding ratio applied, and estimated yield alone could not establish clandestine production or clearance. Penalty relief followed, with only the limited admitted demand surviving.

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Issues: (i) whether duty demand based on shortage of finished goods was sustainable; (ii) whether Cenvat credit on disputed pig iron consignments could be denied; (iii) whether demand based on input-output ratio could be sustained; and (iv) whether penalties were imposable.

Issue (i): whether duty demand based on shortage of finished goods was sustainable

Analysis: The demand on shortage of finished goods rested only on physical stock verification and the alleged discrepancy in weighment. The shortage was held to be too minor in the context of the large plant and the manner of verification was found to be improbable. In the absence of corroborative evidence of clandestine removal, the shortage was treated as having been inferred on assumption and presumption.

Conclusion: The duty demand on shortage of finished goods was set aside in favour of the assessee.

Issue (ii): whether Cenvat credit on disputed pig iron consignments could be denied

Analysis: The denial of credit was founded on 36 invoices, but only 9 consignments bore container numbers and were supported by the material relied upon by the department. For those 9 consignments, the assessee had already reversed the credit. As to the remaining consignments, the department failed to establish by evidence that alternative raw material had been procured or that the inputs were not received and used in manufacture.

Conclusion: Cenvat credit was denied only to the extent of the 9 admitted consignments and otherwise allowed in favour of the assessee.

Issue (iii): whether demand based on input-output ratio could be sustained

Analysis: The demand was built by applying an earlier input-output ratio to later periods. It was held that the Central Excise law did not prescribe standard production norms, that no declared ratio bound the assessee for the disputed period, and that production yield could vary with raw-material characteristics and operational factors. An estimated ratio could not, by itself, establish clandestine production or clearance.

Conclusion: The demand based on input-output ratio was rightly dropped and the Revenue's challenge failed.

Issue (iv): whether penalties were imposable

Analysis: Once the major demand on shortage and the entire input-output ratio demand failed, only the admitted melting scrap demand and limited credit denial survived. In the circumstances found by the Tribunal, the case did not justify further penal consequences beyond the limited confirmed demand already accepted.

Conclusion: No penalty was held imposable in the final disposition.

Final Conclusion: The order was sustained only to the limited extent of the admitted melting scrap demand and denial of credit on the 9 admitted consignments, while the major duty demand on shortages and the entire demand based on input-output ratio were set aside, with consequential penalty relief.

Ratio Decidendi: Allegations of clandestine removal or excess production cannot be sustained on stock discrepancy or estimated input-output norms alone in the absence of corroborative evidence; a demand based purely on assumption and presumption is not legally sustainable.

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