Clandestine removal of goods allegations rejected due to inadequate corroborative evidence, resulting in set aside of duty demand.

The text addresses standards for establishing clandestine removal of goods, identifying four essential ingredients: procurement of raw materials, manufacture of final products, clandestine removal, and receipt of consideration; each must be proved with tangible corroboration and cannot rest solely on third-party diaries or witnesses. Statements recorded during investigation were discredited by cross-examination and alleged coercion, transport documents and consignment notes did not link the appellant, no cash trail or stock evidence was found, and manufacturing capacity was unproven. For these reasons the departmental demand based on third-party evidence was unsustainable and the impugned order was set aside.

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Issues: (i) Whether the demand for central excise duty, interest and penalty based on alleged clandestine manufacture and clandestine removal of Pan Masala and Zafrani Zarda can be sustained where the department primarily relies on diaries and registers seized from third parties and statements recorded during investigation.

Analysis: The Tribunal examined the essential ingredients required to establish clandestine removal, namely procurement of raw materials, manufacture of finished products, clandestine removal, and receipt of consideration. It reviewed the evidence relied upon by the Principal Commissioner — diaries/registers seized from transporters and distributors, statements recorded under section 14 of the Central Excise Act (including statements later retracted), and material seized from various third parties. The Tribunal applied established legal principles that private/internal records or third-party loose sheets cannot be the sole basis for a demand without independent corroboration such as discovery of finished goods outside the factory, parallel records at the manufacturer's premises, evidence of procurement of requisite raw materials, proof of receipt of sale proceeds, or demonstration of manufacturing capacity (including electricity consumption). The Tribunal considered cross-examination answers that undermined the reliability of many prosecution witnesses and noted absence of incriminating or parallel records at the appellant's premises, lack of proof of receipt of consideration, inconsistencies within seized diaries, failure to record statements of purported diary authors, and absence of consignment notes/bilties naming the appellant. On these facts, the Tribunal found the four essential ingredients were not satisfied and that the departmental material lacked the required corroboration.

Conclusion: The Tribunal concluded that the department failed to establish clandestine manufacture and clandestine removal against the appellant; the impugned order confirming duty, interest and penalty is set aside and the appeal is allowed in favour of the assessee.

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