2025 (11) TMI 1093 - AT - Central Excise

Excise demand based only on theoretical input-output ratio quashed for lack of corroborative evidence, no duty or penalty

M/s. Super Doors & Plywoods Private Limited Versus Commissioner of C.G.S.T. and Central Excise, Kolkata

CESTAT held that the excise demand for clandestine manufacture and removal, based solely on a theoretical, unverified input-output ratio from returns, ... Clandestine manufacture and removal - 71,692.96 sqm. of Plywood and 29,32,120.17 sqm. of Veneer - demand based on unverified input-output ration - absence of corroborative evidences - contravention of the provisions of rules 4, 10(1) and 11(1) of the Central Excise Rules, 2002 - recovery with interest and penalty - HELD THAT:- It is observed that the entire case of the Department rests solely on a theoretical and unverified input–output ratio derived from E.R.-6 returns. The Department has not brought in any corroborative evidence such as physical stock verification or independent records. It is a settled principle of law that mere assumptions or presumptions cannot be a substitute for proof, beyond reasonable doubt. The alleged clandestine production and removal of finished goods is built-up not on the basis of any document of unaccounted production and removal, but entirely on the basis of wrongly worked out unaccounted production, derived from faulty made-up input-output ratio. Reference made to the decision in the case of Punalur Paper Mills Ltd. v. Collector of C.Ex. & Customs, Cochin [2008 (8) TMI 471 - CESTAT, BANGALORE], wherein the Tribunal, following the Supreme Court’s ruling in K.P. Varghese v. ITO [1981 (9) TMI 1 - SUPREME COURT], held that the onus of proving taxability lies on the Revenue and that clandestine removal must be established through tangible, positive evidence. The Tribunal also ruled that theoretical or formula-based calculations (like input–output ratios), without concrete corroboration, cannot form the basis of duty demand. It is well settled that central excise duty cannot be demanded on the basis of assumptions and presumptions or preponderance of probabilities and clandestine clearance is a serious allegation, which requires cogent corroborative evidences to substantiate the allegations, which are absent in this case - A similar issue has also been dealt with by the Tribunal at Ahmedabad in the case of Arya Fibres Ltd. v Commissioner of C.Ex., Ahmedabad-II [2013 (11) TMI 626 - CESTAT AHMEDABAD] wherein the Bench has categorically opined that the allegation of clandestine removal is to be corroborated by supporting evidences. From a perusal of the records available, it is found that there is no corroborative evidence available on record to substantiate the allegation of manufacture and clandestine clearance of the goods in this case - the demand of central Excise duty cannot be raised and confirmed on the basis of some variations in the input: output ratios in some months. Accordingly, the allegation of clandestine clearance against the appellant-company cannot be substantiated on the basis of mere assumptions and presumptions and consequently, the demand of central excise duty confirmed against the appellant in the impugned order set aside. As the demand itself cannot be sustained, the question of demanding interest or imposing penalty does not arise. The impugned order is set aside - appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether a departmental demand for excise duty based solely on theoretical/unverified input-output ratios derived from statutory returns, without physical stock verification or other corroborative evidence, can sustain a finding of clandestine manufacture and removal. 2. Whether ancillary consequences - interest and penalty - can be sustained where the foundational duty demand is unsupported by adequate evidence. ISSUE-WISE DETAILED ANALYSIS Issue 1: Validity of a demand based solely on input-output ratio calculations Legal framework: The burden of proving taxability and clandestine removal lies on the revenue; clandestine manufacture/clearance is a serious quasi-criminal allegation that must be established by tangible, positive and corroborative evidence (e.g., excess raw material purchases/consumption, discovery of finished goods outside factory, statements or documentary evidence of purchasers, evidence of transportation or flow-back of sale proceeds, abnormal electricity/resin consumption correlated to production, physical stock verification). Precedent treatment: The Court relied on established Tribunal and higher court authorities that disapprove reliance solely on theoretical or formula-based calculations (input-output ratios) as the basis for substantial duty demands in absence of corroborative material. Those authorities require concrete proof and hold that assumptions/estimates cannot substitute for positive evidence. Interpretation and reasoning: The Tribunal examined the record and found the department's case rested exclusively on computed discrepancies in input:output ratios extracted from ER-6 returns for certain months, without any physical stock checks, independent verification of raw material procurement, transportation records, purchaser confirmations supported by documents, or other tangible indicia of clandestine clearance. The panel concluded that variations in monthly input:output ratios are explainable by legitimate manufacturing variables (timber quality, work-in-process, multiple veneer layers required per plywood sheet, process waste/scrap, sale of intermediate products, and month-to-month operational differences). The Department's reliance on higher electricity and resin consumption in selected months was not supported by established per-unit consumption norms or other corroboration linking such consumption directly to unaccounted production. Consequently, the demand was characterized as arbitrary, founded on flawed aggregation and incorrect assumptions (e.g., equating individual veneer sheets to finished plywood sheets), and devoid of positive evidence of clandestine removal. Ratio vs. Obiter: Ratio - The Tribunal's holding that a duty demand for clandestine removal cannot be sustained where it is founded solely on theoretical input-output computations without corroborative, tangible evidence is a binding principle applied to the present facts. Obiter - Observations about specific manufacturing particulars (e.g., the exact effect of timber quality or the detailed process flow) serve explanatory purposes but are ancillary to the principal legal holding. Conclusion: The demand based on alleged excess production derived from the input-output ratio was unsustainable; clandestine manufacture and removal were not established on the required standard. The Tribunal set aside the duty demand for lack of corroborative evidence. Issue 2: Sustenance of interest and penalty where foundational duty demand is unsustainable Legal framework: Statutory interest and penal consequences flow from a validated duty demand; if the underlying demand fails for want of proof, ancillary liabilities dependent on that demand generally cannot be sustained. Precedent treatment: The Court relied on established principles that penalties and interest are contingent on a legally valid demand and that absent proof of taxability or clandestine activity, punitive consequences cannot be imposed. Interpretation and reasoning: Since the Tribunal concluded that the duty demand itself was arbitrary and unsupported, there is no legal foundation for levying interest or imposing penalty. The absence of evidence of clandestine manufacture removes the predicate for penal consequences tied to short-payment or evasion. Ratio vs. Obiter: Ratio - The decision that interest and penalty must be set aside where the primary duty demand is annulled for lack of proof is applied directly to dispose of the ancillary relief. Obiter - Any commentary on hypothetical scenarios where corroborative evidence might justify penalties is not necessary to the holding. Conclusion: Interest and penalty confirmed along with the impugned duty demand were set aside as they could not survive independent of the invalidated duty determination. Cross-references and cumulative conclusion Both issues are interlinked: the invalidation of the material basis for clandestine removal (Issue 1) necessarily dictates the outcome on interest and penalty (Issue 2). The Tribunal applied settled legal principles requiring tangible corroboration for serious allegations of clandestine clearance and held that theoretical input-output discrepancies, absent independent supporting evidence, cannot sustain excise demands or consequential liabilities.