2024 (2) TMI 956 - AT - Central Excise

Revenue fails to prove clandestine steel manufacture allegation, duty demand of 1,48,942 MT set aside

CESTAT Kolkata dismissed Revenue's appeal challenging order that set aside demand for duty on allegedly clandestine manufacture of 1,48,942 MT consumable ... Clandestine manufacture and removal - allegation proceeds on the assumption that the differential consumption between ER-4 and ER-6 Returns has resulted in manufacturer of 1,48,942 MT of consumable steel, which has not been accounted for by the Appellant - time limitation - HELD THAT:- No corroborative evidence whatsoever has been produced by the Revenue to fortify the allegation. On going through the OIO, it is seen that the Adjudicating Authority has held Considering the practical difficulties, in estimating the actual stock and in view of the submissions made by the appellants, we find that the demand of duty made by the adjudicating authority cannot be sustained - there are no reason to interfere with such detailed findings. Accordingly, we dismiss the Appeal filed by the Revenue on merits. Time Limitation - HELD THAT:- Coming to the issue of limitation raised by the Respondent, it is found that neither have they filed any appeal against the impugned OIO on this specific issue nor have they filed any Cross Objection against the Appeal filed by the Revenue on the issue of time bar. Therefore, this issue need no further discussion. The Revenue’s Appeal is dismissed on merits. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether a discrepancy between monthly ER-6 returns (volumetric/estimated consumption) and the annual ER-4 return (audited/physical consumption) can, by itself, sustain a demand for central excise duty on alleged clandestine manufacture and clearance. 2. Whether the Revenue discharged the burden of proof to establish clandestine removal and consequent duty liability by relying on presumptions/estimates without corroborative direct or circumstantial evidence. 3. Whether the invocation of extended period of limitation for issuing the show cause notice is tenable on the facts before the Tribunal (not decided on merit due to procedural posture). 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Whether discrepancy between ER-6 and ER-4 alone can sustain excise demand for clandestine manufacture/clearance. Legal framework: Statutory returns (monthly ER-6 based on volumetric estimates; annual ER-4 based on audited/physical stock) form the accounting basis for material consumption; demands for duty on alleged clandestine manufacture/clearance require proof of actual production and removal not accounted for. Precedent Treatment: Tribunal and appellate authorities have held that shortages or apparent discrepancies based on estimates are inherently unreliable; when stock/consumption figures are arrived at by different estimation methods, such differences cannot automatically be equated with clandestine removal (citing jurisprudence recognizing inaccuracy of estimates and practical accounting problems in steel plants). Interpretation and reasoning: The Court accepted the factual explanation that monthly ER-6 returns reflect volumetric/estimated consumption pending physical stock verification, whereas ER-4 reflects audited/physical consumption finalized after stock-taking. The Department's method of equating the entire differential to manufacture of saleable steel was rejected: iron ore is used in multiple processes (as substitute for scrap, coolant at steel-making stage), conversion is first to hot metal (not directly to saleable steel), losses occur in handling and due to moisture, and input-output ratios vary with Fe content and operational factors. Therefore, a direct mathematical translation of differential iron ore consumption into clandestine production of saleable steel is flawed. Ratio vs. Obiter: Ratio - The Court's core holding is that a discrepancy between ER-6 and ER-4, standing alone, does not constitute sufficient basis to infer clandestine manufacture/clearance and cannot sustain a duty demand. Conclusions: The demand premised solely on differential figures between ER-6 and ER-4 is unsustainable; practical realities of steel production and differences in estimation methods negate the assumption that the entire differential represents illicit manufacture and sale. Issue 2: Whether the Revenue proved clandestine removal with adequate corroborative evidence and met the required standard of proof. Legal framework: Clandestine removal is a serious allegation; burden lies on the Revenue to prove it by affirmative, tangible evidence. Demands cannot be founded on mere presumption or conjecture; standard requires solid corroboration rather than estimates or inferences. Precedent Treatment: The Court followed established authorities that clandestine removal demands positive proof; demands based on estimates/assumptions must be set aside where absence of substantive supporting evidence is shown. Prior rulings emphasize requirement of absolute/affirmative proof and caution against reliance on raw estimates. Interpretation and reasoning: The Adjudicating Authority's finding, endorsed by the Court, observed no direct or circumstantial evidence of production and clearance corresponding to the alleged differential (no movement documents, no evidence of cash receipts, no corroborative material). The Department's calculations were not supplemented by tangible proof of manufacturing and clandestine sale of 1,48,942 MT of saleable steel. Given the absence of corroborative evidence, the Tribunal held that the allegation could not meet the threshold required to sustain the high-charge of clandestine removal. Ratio vs. Obiter: Ratio - The Tribunal's decisive conclusion that the Revenue failed to discharge the burden of proof is binding for the factual matrix before it; Obiter - any generalized observations about the range of permissible evidentiary approaches in other factual contexts. Conclusions: Demand based on the Department's hypothetical computation, unsupported by corroborative evidence of manufacture or clandestine clearance, is not sustainable. The burden to prove clandestine removal rested on the Revenue and remained unfulfilled. Issue 3: Applicability of limitation/extended period for issuing the show cause notice. Legal framework: Statutory limitation rules govern issuance of show cause notices; where earlier departmental knowledge exists (e.g., audit findings), the one-year period for action ordinarily applies unless conditions for extended period are met. Precedent Treatment: Authorities recognize that extended period cannot be invoked where Revenue had timely knowledge and yet delayed action without justification; however, limitation determinations require contest and cross-challenge on appeal for proper adjudication. Interpretation and reasoning: The Respondent argued that the CERA audit (Nov-Dec 2009) furnished the Department sufficient knowledge and that the show cause notice issued in 2013 invoked extended period improperly. The Court did not decide this issue on merits because the Respondent neither appealed the impugned order specifically on limitation nor filed cross-objections addressing the Revenue's invocation of extended period in the appeal. Consequently, the Tribunal declined to adjudicate the limitation point. Ratio vs. Obiter: Obiter/unresolved - The Court explicitly did not determine the limitation question on its merits due to procedural posture; therefore no substantive ratio on limitation was laid down. Conclusions: The limitation issue was not decided; the Tribunal refused to examine time-bar arguments in absence of appropriate pleadings/appeal or cross-objection by the Respondent. Overall Disposition and Reasoning Summary The Court upheld the Adjudicating Authority's detailed findings that (a) differences between estimated monthly returns and audited annual returns are explicable by accounting methodology and operational realities in steel production, (b) conversion ratios and losses mean differential iron ore consumption cannot be mechanically equated with production of saleable steel, and (c) the Revenue failed to produce corroborative direct or circumstantial evidence to prove clandestine manufacture and clearance. On these grounds the Revenue's demand for central excise duty was dismissed on merits; the limitation contention was not entertained for adjudication due to the parties' procedural choices.