Clandestine manufacture allegations in excise demand rejected where revenue failed to produce corroborative material; order set aside

Burden of proof for allegations of clandestine manufacture and removal requires corroborative material such as excess raw-material procurement, labour deployment, power consumption, bank transactions or inculpatory statements; absent such evidence, an allegation based on purported fictitious suppliers is unsustainable. The adjudicating authority's treatment of non-traceable suppliers as belonging to the appellant was not supported by proof of procurement, manufacturing capacity, or enquiry with identified job workers and bank beneficiaries; accordingly the impugned demand and penalties were set aside and the appeal allowed.

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Issues: Whether the adjudication confirming excise duty, interest and penalties on the basis that the appellant manufactured and cleared school bags without payment of duty (including invocation of extended period by treating certain supplier entities as fictitious) is sustainable in the absence of direct and corroborative evidence of manufacture, inputs procurement, production capacity and benefit to the appellant.

Analysis: The appeal record shows allegations of large-scale manufacture and clearance of school bags and that payments for supplies were routed to two supplier entities. Key factual elements relevant to proving clandestine manufacture or clearance include evidence of procurement and receipt of raw materials, investment/financial capacity to procure inputs, deployment and payment of labour, number of shifts, power consumption, transport and use of raw materials in manufacture, evidence of clearances without accountal and realization of sale proceeds. Where clandestine removal or production is alleged, Revenue must produce corroborative material such as excess raw material purchases, input consumption records, electricity consumption, transport/receipt records and other independent evidence to connect the assessee to manufacture and clandestine clearances. Allegations of fictitious supplier entities require investigation directed to bank records, introducers and addresses to establish non-existence or connection to the assessee. In the present matter there is no evidence establishing that the appellant had the raw materials, infrastructure, labour capacity or other corroborative indicia to produce the alleged quantities; no proper investigation was made of job-workers or of the beneficiary/operators of the supplier bank accounts; and the show cause notice/impugned order lacks findings on procurement, payments, power usage, labour deployment and other corroborative facts necessary to sustain a duty demand or to justify extending limitation by invoking fictitious unit allegations.

Conclusion: The adjudication confirming duty, interest and penalties and invoking extended period on the basis that the appellant manufactured and cleared the goods is unsustainable for want of required corroborative evidence and inadequate investigation; the impugned order is set aside and the appeal is allowed in favour of the appellant.

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