CESTAT sets aside demands for clandestine removal and Cenvat credit denial citing improper stock verification procedures

CESTAT Ahmedabad allowed the appeal, setting aside demands for clandestine removal and denial of Cenvat credit. The tribunal held that allegations of duty evasion based solely on stock shortages during officer visits were unsustainable without proper stock verification procedures. Revenue's reliance on third-party statements without allowing cross-examination was deemed legally improper. The appellant successfully established receipt of inputs through documentary evidence and CCTV footage, which authorities failed to consider. The tribunal ruled that Cenvat credit cannot be denied when duty payment on outputs is accepted, and the appellant complied with statutory requirements for claiming input tax credit.

---

---

Issues Involved:

1. Alleged evasion of Central Excise Duty through diversion of duty-paid inputs and availing Cenvat credit without actual receipt of goods.
2. Alleged clandestine removal of finished goods and corresponding duty evasion.
3. Denial of cross-examination of witnesses relied upon by the department.
4. Reliance on third-party statements without corroborative evidence.
5. Retraction of statements by the appellant's partner and its evidentiary value.

Detailed Analysis:

1. Alleged Evasion of Central Excise Duty:

The core issue revolves around the allegation that the appellant diverted duty-paid plastic granules and availed Cenvat credit without actual receipt of these inputs. The department's case was primarily based on the shortage of raw materials and finished goods found during a search operation. However, the appellant contested this by arguing that there was no concrete evidence to support the claim that the inputs were not received at their factory premises. The appellant emphasized that the department's allegations were based on assumptions and lacked corroborative evidence. The tribunal noted that mere shortages detected during the search, without additional evidence of clandestine activities, could not substantiate the charges of evasion. The tribunal referenced previous judgments which established that shortages alone do not justify the confirmation of demands for clandestine removal.

2. Alleged Clandestine Removal of Finished Goods:

The department confirmed a demand of Rs. 9,93,922/- for shortages in finished goods, which was allegedly admitted by the appellant's partner. The appellant argued that there was no proper documentation or panchnama to verify the physical availability of goods, and the CCTV footage was not considered. The tribunal found that the department failed to provide additional evidence beyond the shortages to support the claim of clandestine removal. The tribunal highlighted that the retraction of statements by the appellant's partner and the absence of a thorough investigation into the goods' availability undermined the department's case. Consequently, the tribunal set aside the demand related to the alleged clandestine removal.

3. Denial of Cross-Examination:

A significant procedural issue was the denial of cross-examination of witnesses whose statements were relied upon by the department. The appellant's request for cross-examination was only partially granted, with several key witnesses not appearing. The tribunal emphasized the principle of natural justice, stating that reliance on third-party statements without allowing cross-examination is unsustainable. The tribunal cited previous cases where the absence of cross-examination led to the exclusion of such statements as evidence. The tribunal concluded that the statements of witnesses who were not cross-examined could not be relied upon to confirm the demand.

4. Reliance on Third-Party Statements:

The appellant argued that the department's reliance on statements from transporters and other third parties was not supported by corroborative evidence. The tribunal agreed, noting that the statements lacked evidentiary value without cross-examination and additional supporting evidence. The tribunal reiterated that demands based solely on third-party statements, without corroboration, are not sustainable.

5. Retraction of Statements:

The appellant's partner had retracted his statements made during the investigation, arguing that they lacked evidentiary value. The tribunal acknowledged the retraction and noted that retracted statements, especially when not corroborated by other evidence, hold little weight. The tribunal found that the department failed to provide substantial evidence to counter the retraction and support their allegations.

Conclusion:

The tribunal set aside the impugned order, concluding that the department failed to provide sufficient evidence to substantiate the allegations of evasion and clandestine removal. The appeal was allowed, with consequential relief granted to the appellant.

---