2025 (11) TMI 1542 - AT - Central Excise

Excise demand for alleged clandestine clearance quashed as computation flawed, no corroborative evidence, notice time-barred under Section 11A

CESTAT Kolkata allowed the appeal, setting aside the demand of central excise duty, interest, and penalty for alleged clandestine manufacture and ... Clandestine manufacture and clearance - demand confirmed solely on the basis of the input-output ratio, in the absence of any corroborative evidence - Department has failed to discharge this burden - no investigation whatsoever has been carried out to ascertain as to how the appellant could have suppressed production - Time limitation - HELD THAT:- It is a settled legal principle that a demand based on the allegation of clandestine removal cannot be sustained solely on the basis of input–output ratios, in the absence of any corroborative or direct evidence. In the present case, it is seen from the records that the Department has failed to bring in any evidence to substantiate the allegation of clandestine clearances. The entire demand has been raised on the basis of mere assumptions and presumptions, without any corroborative evidence to substantiate the allegations of suppression or clandestine removal. It is trite law that demand of clandestine manufacture and clearance cannot be sustained purely on conjectures, surmises, assumptions or presumptions, in the absence of any positive, tangible, and cogent evidence linking the alleged goods to clandestine activity. Reliance placed upon the decision of the Hon'ble Calcutta High Court in the case of Commissioner of C.Ex., Kolkata-III vs. Sai Sulphonate Pvt. Ltd. [2022 (2) TMI 359 - CALCUTTA HIGH COURT], wherein it has been held that the onus to establish clandestine removal with cogent evidence is on the Department and demand of central excise duty cannot be upheld merely on the basis of inference of input-output ratio - thus, the allegation of clandestine clearance made in the impugned order, which is on the basis of the input: output ratio declared by the appellant in the ER-5 returns, is not sustainable. Regarding the demand confirmed in the impugned order on the allegation of clandestine clearance, it is found that the Ld. adjudicating authority has taken the figure of consumption of iron ore from ER-4 return, while he has ignored the corresponding figure of production of finished goods declared therein, i.e., 79626 MT which includes both 76550.42 MT of pig iron and 3075.30 MT of pig iron skull - the Ld. adjudicating authority has also failed to appreciate that the total consumption of 1,75,218 MT of iron ore included consumption of iron ore fines as well, which were utilized for manufacture of sinter in the newly installed sinter plant, which in turn was captively consumed for the production of pig iron. The details of production of such sinter using the iron ore fines is not disputed and were also disclosed in the ER-1 returns as well as the tax audit and VAT audit report of the appellant. Further, in support of its contention, the appellant has also produced invoice wise details of purchase of iron ore fines along with a certificate from a qualified Chartered Accountant certifying that the consumption of 1,75,218 MT of iron ore declared in ER-4 return includes consumption of 73271.19 MT of iron ore fines. Since, all the inputs did not comprise standard iron ore, the input output ratio of the Financial Year 2011-12 cannot be directly applied to compute the production of finished goods for the relevant period. The entire computation forming the basis of the impugned demand is factually erroneous, legally untenable, and mechanically arrived at without proper application of mind. Accordingly, the demand of central excise duty confirmed in the impugned order is not sustainable and hence the same is liable to be set aside - Since none of the ingredients required for alleging clandestine manufacture and clearance are satisfied in this case, such an allegation against the appellants cannot be sustained, merely on the basis of assumptions and presumptions. The demand of central excise duty confirmed in the impugned order set aside - As the demand itself does not survive, the question of demanding interest or imposing penalty against the appellant does not arise and hence the same is set aside. Time limitation - HELD THAT:- In the present case, the Notice in the instant case was issued on 09.05.2017 while the spot audit memo was issued on 13.03.2014. It is a settled position in law that extended period of limitation cannot be invoked when the entire demand is based on the audit observations. Since, in the instant case the Notice has been served after more than three years from the date of audit, the entire proceedings are barred by limitation. The demand of central excise duty, along with interest and penalty, confirmed by way of the impugned order, is not sustainable on the ground of limitation also - Appeal allowed. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether a demand for central excise duty for alleged clandestine manufacture and clearance can be sustained solely on the basis of input-output ratios declared in statutory returns, in the absence of corroborative or direct evidence. 2. Whether the adjudicating authority's computation of alleged suppressed production is factually and legally sustainable where it ignored production of/by-products (sinter and pig iron skull) and where input consumption included iron ore fines used for captive sinter production. 3. Whether invocation of the extended period of limitation is permissible where the demand is premised on audit observations and statutory returns, and the show cause notice was issued more than three years after the audit/spot-memo. 4. Consequential issue: Whether interest and penalty survive when the underlying duty demand is held unsustainable. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Reliance solely on input-output ratio to sustain clandestine manufacture/clearance demand Legal framework: Allegations of clandestine manufacture and clearance are serious and demand proof on preponderance of probability; Revenue bears the initial onus to establish clandestine activity by cogent, affirmative evidence rather than mere inference from returns. Precedent treatment: The Court follows a consistent line of authority holding that demands based only on input-output ratios or internal records, without corroborative evidence (e.g., evidence of excess raw material purchases, transportation/dispatch particulars, discovery outside factory, statements of buyers/transporters, unusual electricity consumption, receipt of sale proceeds), are unsustainable. The Tribunal and High Court decisions cited were applied to support this principle. Interpretation and reasoning: The adjudicating authority in the present matter derived estimated excess production by applying a previous year's input-output ratio to current year consumption figures. The Tribunal found no independent investigation or corroborative evidence (no statements of buyers/transporters, no examination of electricity consumption, no proof of extra raw material procurements or transportation) to substantiate clandestine removal. The Court emphasised that inferences drawn purely from statutory returns and averaging formulas do not meet the evidentiary threshold required to prove clandestine operations. Ratio vs. Obiter: Ratio - the holding that clandestine removal cannot be established solely by input-output ratios without corroborative evidence is a central, dispositive principle applied to the facts. Conclusion: Demand premised solely on input-output ratio is unsustainable; the allegation of clandestine manufacture/clearance must be supported by tangible corroborative evidence which was absent here. Issue 2: Factual and computational infirmities - exclusion of sinter and pig iron skull, and application of prior year ratio Legal framework: Estimation of production for duty demands must correctly account for all declared finished products and the nature/usage of raw materials; mechanical application of historical ratios ignores manufacturing changes and can produce erroneous estimates. Precedent treatment: The Tribunal's prior decisions were followed to the effect that parameters other than main raw material quantity (quality of raw material, captive intermediate products, power consumption, other inputs, plant/process changes) must be considered before arriving at estimated production and demand. Interpretation and reasoning: The adjudicating authority omitted production of pig iron skull (3,075.30 MT) and sinter (56,223.37 MT) from its comparative computation, despite these figures being disclosed in ER-1 returns, tax audit and VAT audit reports. The total iron ore consumption reported included substantial iron ore fines (certified as 73,271.19 MT) consumed in a newly commissioned sinter plant, altering the consumption pattern and rendering the prior year's ratio inapplicable. The Tribunal held the computation to be factually erroneous and mechanically arrived at without proper application of mind. Ratio vs. Obiter: Ratio - the finding that the specific computation underpinning the demand is factually and legally untenable and thus invalidating the demand. Conclusion: The impugned computation is flawed for ignoring declared intermediate and by-products and for misapplying an earlier input-output ratio; accordingly the demand based on that computation is unsustainable. Issue 3: Limitation - invocation of extended period where demand arises from audit observations/statutory returns Legal framework: Extended period of limitation is subject to statutory conditions; when a demand is founded on audit observations and statutory returns disclosed to the Department earlier, extended limitation cannot be invoked merely due to departmental delay in issuing a notice years later. Precedent treatment: The Tribunal applied authorities holding that extended limitation cannot be invoked when the demand is based on audit observations and returns already before Revenue and where no fresh incriminating material was discovered after the statutory period. Interpretation and reasoning: The spot audit memo was dated 13.03.2014 and the show cause notice was issued on 09.05.2017 - more than three years later. The Tribunal found the extended period inapplicable since the demand arose from audit/statutory returns and no additional independent evidence was gathered to justify extension. Reliance on recent Tribunal decisions holding similarly was expressly adopted. Ratio vs. Obiter: Ratio - the holding that the proceedings are barred by limitation in these circumstances and that the extended period could not be validly invoked. Conclusion: Proceedings are time-barred; the demand is unsustainable on limitation grounds as well. Issue 4: Consequence for interest and penalty when principal demand fails Legal framework: Interest and penalty flow from a valid duty demand; if the principal demand is set aside, consequential interest and penalty cannot survive absent independent justification. Precedent treatment: The Tribunal followed settled practice that once duty demand is quashed for want of proof and/or limitation, interest and penalty imposed on that premise must also be set aside. Interpretation and reasoning: Having held the duty demand unsustainable on evidentiary and limitation grounds, the Tribunal reasoned that interest and penalty, being consequential, have no independent foundation to be sustained. Ratio vs. Obiter: Ratio - the dismissal of interest and penalty as consequential to setting aside the duty demand. Conclusion: Interest and penalty confirmed in the impugned order are set aside along with the principal demand. Overall Conclusion The Court set aside the adjudicating authority's order confirming duty, interest and penalty: (a) clandestine removal could not be established by input-output ratio alone without corroborative evidence; (b) the computation was factually and legally flawed for ignoring declared by-products and changed manufacturing inputs; and (c) the proceedings were barred by limitation. Consequently, the demand, interest and penalty were quashed.