2026 (1) TMI 642 - AT - Central Excise

Clandestine removal of excisable goods found unproven due to lack of corroborative documents and evidence; demand set aside

Dominant issue: whether clandestine removal of excisable goods by the appellant was established. The tribunal applied the four essential ... Demand of central excise duty u/s 11A with interest u/s 11AA and penalty - documents show illicit clearance of the goods manufactured by the appellant and cleared clandestinely - Relevance of statements recorded during investigation under section 14 - cross-examination of the witnesses - burden of proof - essential ingredients that required to be established for establishing clandestine removal of goods - Evidentiary value - third party documents and statements in the absence of any tangible or corroborative evidence - HELD THAT:- It is seen that the four essential ingredients that required to be established for establishing clandestine removal of goods are: (a) Procurement of raw materials; (b) Manufacture of final products; (c) Clandestine removal of goods; and (d) Receipt of consideration against such removal. In the present case, findings have been recorded against the appellant on the basis of Diaries recovered from the premises of the third parties and the oral statements of the witnesses. The demand cannot be sustained merely on the basis of third-party documents and statements, in the absence of any tangible or corroborative evidence. There is nothing on the record which may establish procurement of raw materials for the manufacture of goods in the factory of the appellant. There is also no proof of receipt of consideration against the alleged illicit clearance by the appellant. Even in respect of transportation, no incriminating evidence was found in the premises of the appellant. The documents recovered from transporters do not establish any case of clandestine removal of goods by the appellant. Thus, neither of the four conditions enumerated above are satisfied. It would be pertinent to state that the appellant cross-examined persons whose statements were recorded under section 14D of the Central Excise Act. Such persons, in their cross-examination, stated that their statements were recorded under duress and coercion. It needs to be noted that none of the alleged dealers or buyers were questioned regarding receipt of goods from Data Goods Carrier or Sarco Roadlines nor were they shown any of the Diaries allegedly recovered from the premises of the transporters. The names of the alleged dealers or buyers also do not appear in any of the said Diaries. The Diaries and the entries therein do not pertain to the appellant. Thus, the statements made under section 14D of the Central Excise Act cannot be considered as reliable. Neither consignment notes/bilties mentioning the names of the alleged buyers/dealers as consignees were recovered either from the premises of the appellant or from the alleged premises of the transporters. The name of the appellant or that of any of the alleged buyers/dealers does not appear in any of the entries of the Diaries recovered from the premises of the transporters, which form the sole basis of the impugned demand. Parallel invoices, vouchers, or challans for purchase of raw materials were not found, nor has the department explained the alleged source of procurement of raw materials necessary for such voluminous production. There is, therefore, substance in the submission advanced by the learned counsel for the appellant that the allegations levelled in the show cause notice and the findings recorded in the impugned order are factually incorrect. The demand has been confirmed on the basis that the appellant supplied total 17,346 green jhal of Zafrani Zarda and 61,234 white jhal of Pan Masala during the period from September, 2019 to November, 2020. The average of the above comes to around 200 jhals per day during the disputed period. If stock of at least 4-5 days is to be kept, there would be a requirement of around 800-1000 jhals but there was no stock of such empty jhals at the premises of the appellant. The entries in the Diaries recovered from the premises of the transporters have been incorrectly attributed to the appellant. Neither any cash was found or recovered nor has any trail been established by the department. The impugned order has failed to appreciate this vital fact and has merely brushed it aside by observing that it is an “ongoing process”. It was for the department to have ascertained how the goods were transported to the particular place as mentioned in the Diaries and recorded statements of the consignees to whom the goods were transported as per the entries. There is also no evidence of transfer of funds to the appellant against the said clandestine removal of goods. It needs to be noted that during the search of the premises of the appellant, no incriminating material was found. The search at the premises of sub-distributors does not show that any incriminating material against the appellant was recovered. The Principal Commissioner relied upon statements recorded under section 14 of the Central Excise Act but correct facts were stated in the cross-examination. According to the appellant, the machines installed in the factory as recorded in the Panchnama, lacked the capacity to manufacture the quantities, more particularly when they are compared with the actual electricity consumption. No evidence has been adduced regarding use of generators, additional premises or other machines that may have been used to achieve the excess production. In the absence of proof of manufacturing capacity, the unaccounted production cannot be established and, therefore, the allegation of clandestine approval cannot be sustained. It, therefore, clearly transpires from the aforesaid discussion that the charge of clandestine removal of goods by the appellant has not been substantiated by the department. The Principal Commissioner, therefore, committed an error in holding that the charge of clandestine removal of goods by the appellant stood proved. The inevitable conclusion, therefore, that follow is that the impugned order dated 28.06.2024 passed by the Principal Commissioner in so far as it concerns the appellant deserves to be set aside and is set aside. The appeal is, accordingly, allowed. 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.