2025 (7) TMI 279 - AT - Central Excise

Revenue fails to prove duty evasion allegations against GAC manufacturer despite clandestine removal claims

The CESTAT Chennai dismissed the Revenue's appeal challenging duty evasion allegations against a manufacturer. The case involved clandestine removal ... Clandestine removal - failure to maintain stock accounts/ register to find correlation between the input--output ratio i.e. actual raw materials consumed, GAC produced, wastages / loss generated in the production process etc - evasion of duty - HELD THAT:- The Hon’ble High Court in M/S. ADSORBENT CARBONS PRIVATE LTD. [2021 (4) TMI 72 - MADRAS HIGH COURT] has clearly directed the Commissioner to verify the records and levy duty based on actual production / removal of the goods in question i.e. GAC. There is no deviation to the above order when the Adjudicating Authority has called for the verification report, perhaps for administrative convenience. Moreover, Revenue for alleging that the Commissioner has not carried out the verification in person, has not pointed out any discrepancy in the verification report since the verification report is submitted by the Departmental officer who perhaps was having jurisdiction over the Assessee’s unit. This apart, from the independent analysis of the assessee’s records, the Commissioner has observed the GAC accounted by the Assessee at 38.36% which is much more than the estimated benchmark of the Coconut Development Board which was also much more than the estimation of the Deputy Commissioner and on this analysis, surprisingly, the Revenue is silent. In any case, it is not the case of the Revenue that on the declared output ratio, the Assessee has not paid the Central Excise duty. Further, having alleged about impropriety, the Revenue has not bothered to place on record if anything amiss noticed from the Assessee’s records which was not considered by the Adjudicating Authority. The appeal filed by Revenue lacks merit - Appeal dismissed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Tribunal in these consolidated appeals are:Whether the Assessee complied with the statutory requirement under Rule 10 of the Central Excise Rules, 2002, by maintaining month-wise daily stock accounts reflecting absorption capacity, wastages, and losses for Granulated Activated Carbon (GAC) production;Whether the absence of absorption capacity details in invoices raised for Domestic Tariff Area (DTA) clearances and exports justified invocation of Section 11A(1) of the Central Excise Act, 1944, demanding duty along with interest and penalty under Rule 25 of the Central Excise Rules, 2002;Whether the Revenue's allegation of clandestine removal of excisable goods without payment of duty was substantiated by evidence and proper verification of production and stock records;Whether the Adjudicating Authority and Commissioner complied with the directions of the Hon'ble High Court to verify records and levy duty based on actual production/removal of GAC;Whether the verification report submitted by the Assistant Commissioner, Tuticorin, was adequate and reliable to conclude no clandestine removal occurred;Whether the Adjudicating Authority's decision to drop proceedings against the Assessee was legally sustainable;Whether the Revenue's appeal challenging the dropping of proceedings and the Assessee's appeals against confirmed demands were maintainable and justified.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Compliance with Rule 10 of the Central Excise Rules, 2002 and maintenance of stock accounts based on absorption capacityThe Central Excise Rules, 2002, specifically Rule 10, mandates maintenance of detailed stock accounts to monitor input-output ratios, wastages, and losses in the production of excisable goods. The Revenue contended that the Assessee failed to maintain month-wise daily stock accounts reflecting absorption capacity, which is critical for GAC quality assessment.The Tribunal noted that the Assessee procured granulated carbonized coconut shell charcoal both indigenously and duty-free imported and subjected it to heating to produce GAC, which was sold. The Assessee's records were challenged for lack of absorption capacity details in invoices and stock registers.However, the Adjudicating Authority and Commissioner, upon detailed verification including field studies and reports from the Deputy Commissioner and Coconut Development Board, found that the Assessee maintained records consistent with actual production and removal. The Assistant Commissioner's verification report affirmed that closing stock balances matched daily stock accounts as on 01.07.2017, with no evidence of clandestine removal.The Tribunal observed that the Assessee's output ratio of 38.36% exceeded the Coconut Development Board's benchmark of 33.33%, and was also higher than the Deputy Commissioner's field study range of 26.43% to 29.19%. This indicated that the Assessee's records were not only maintained but also reflected a higher yield than official benchmarks, undermining the Revenue's contention of evasion.Thus, the Tribunal concluded that the Assessee complied with the record-keeping requirements under Rule 10, and the absence of absorption capacity details in invoices did not, per se, justify duty demands without corroborative evidence of evasion.Issue 2: Invocation of Section 11A(1) of the Central Excise Act, 1944 and imposition of interest and penalty under Rule 25 of CER, 2002The Revenue invoked Section 11A(1) for demanding duty on alleged clandestine removal and levied interest and penalty under Rule 25. The basis was the absence of proper stock records and invoices lacking absorption capacity details.The Tribunal examined the procedural history, including the Adjudicating Authority's initial confirmation of duty, subsequent reduction based on verification, and remand by the Tribunal for fresh adjudication. The Hon'ble High Court's direction to verify records and levy duty based on actual production/removal was pivotal.Post remand, the Commissioner accepted the verification report negating clandestine removal and dropped proceedings. The Tribunal found that the Revenue failed to produce any material evidence contradicting the verification report or indicating revenue leakage.The Tribunal held that mere non-maintenance of certain invoice details or procedural lapses without evidence of clandestine removal does not justify invoking Section 11A(1) or imposing penalties. The burden to prove evasion lies on the Revenue, which was not discharged.Issue 3: Allegation of clandestine removal and sufficiency of verification by the DepartmentThe Revenue alleged that the Assessee clandestinely removed GAC without paying duty, based on suspicion arising from stock discrepancies and invoice deficiencies.The Hon'ble High Court had directed verification based on actual production/removal records. The Commissioner obtained a detailed verification report from the Assistant Commissioner, who had jurisdiction over the Assessee's unit. The report confirmed that the closing stock matched daily stock accounts and found no possibility of clandestine removal.The Revenue criticized that the Commissioner delegated verification to the Range Officer and did not personally verify records. However, the Tribunal found no legal infirmity in delegation, especially as the verification officer was competent and the Revenue did not point to any discrepancies or omissions in the report.The Tribunal emphasized that the Revenue's failure to identify any material irregularity in the records or the verification process weakened the allegation of clandestine removal. Furthermore, the Assessee's declared output ratio exceeding official benchmarks supported the conclusion of no evasion.Issue 4: Compliance with Hon'ble High Court's directions and scope of adjudicationThe Hon'ble High Court's order emphasized that duty should be levied based on actual production/removal verified from records. The Revenue argued that the Commissioner did not personally verify records and that the verification report lacked examination of production details.The Tribunal observed that the Commissioner's reliance on the Assistant Commissioner's report was consistent with administrative practice and did not contravene the High Court's directions. The report explicitly confirmed matching closing stock and absence of clandestine removal.The Tribunal further noted the Revenue's silence on any specific discrepancies or irregularities in the verification report, which indicated acceptance of the report's findings. The Adjudicating Authority's academic exercise comparing output ratios further reinforced the conclusion that the Revenue's suspicion was unfounded.Issue 5: Legality and propriety of dropping proceedings against the AssesseeFollowing the verification and analysis, the Commissioner dropped the proceedings initiated against the Assessee for the relevant periods, concluding that the allegations of clandestine removal were without evidence.The Revenue challenged this order, contending that the Assessee failed to maintain proper records and did not prove correctness of production details.The Tribunal held that the burden of proof lies on the Revenue to establish evasion or non-compliance warranting duty demand and penalty. Since the Revenue failed to produce any evidence contradicting the verification report or demonstrating revenue leakage, the Commissioner's order dropping proceedings was justified.The Tribunal also noted that the Revenue's reliance on extraneous reasons such as output ratio exceeding benchmarks was misplaced, as this did not constitute evidence of evasion or non-payment of duty.Issue 6: Validity of confirmed demands in earlier orders and scope for reassessmentThe Assessee challenged earlier Orders-in-Original confirming duty demands based on alleged clandestine removal and non-maintenance of records. The Tribunal, considering the entire factual matrix and the absence of evidence of clandestine removal, set aside these earlier orders with consequential benefits.The Tribunal emphasized that since both parties accepted the Tribunal's earlier order without filing appeals, the Department's scope was limited to revisiting the case based on Coconut Development Board's report and actual production/removal records. The assumption of clandestine removal was thus unwarranted.3. SIGNIFICANT HOLDINGSThe Tribunal's crucial legal reasoning includes the following verbatim and core principles:'...the Hon'ble High Court in the W.P.(MD) No.3378 of 2020... has clearly directed the Commissioner to verify the records and levy duty based on actual production / removal of the goods in question i.e. GAC. We do not find any deviation to the above order when the Adjudicating Authority has called for the verification report... Moreover, Revenue... has not pointed out any discrepancy in the verification report... from the independent analysis of the assessee's records, the Commissioner has observed the GAC accounted by the Assessee at 38.36% which is much more than the estimated benchmark of the Coconut Development Board... and on this analysis, surprisingly, the Revenue is silent.''...it is not the case of the Revenue that on the declared output ratio, the Assessee has not paid the Central Excise duty... Having alleged about impropriety, the Revenue has not bothered to place on record if anything amiss noticed from the Assessee's records which was not considered by the Adjudicating Authority.''...the burden was always on the Assessee to prove that they have assessed the goods correctly before removal and paid duty according to law... Without evidence of clandestine removal or revenue leakage, the invocation of Section 11A(1) and penalty provisions cannot be sustained.'The Tribunal's final determinations on each issue are:The Assessee complied with statutory record-keeping requirements and maintained stock accounts consistent with actual production and removal of GAC;There was no evidence of clandestine removal or evasion of duty warranting demands under Section 11A(1) or penalties under Rule 25;The verification report by the Assistant Commissioner was adequate and reliable, and delegation of verification did not violate the Hon'ble High Court's directions;The Adjudicating Authority's order dropping proceedings was legally sustainable and justified;The Revenue's appeal challenging the dropping of proceedings lacked merit and was dismissed;The Assessee's appeals against earlier confirmed demands were allowed by setting aside the impugned Orders-in-Original with consequential benefits.