2024 (12) TMI 1531 - AT - Central Excise

Clandestine manufacture and removal of sponge iron - input-output ratio - electricity consumption - case of the Revenue is that to manufacture 1 MT of Sponge Iron 1.67 MT of iron ore is required and to manufacture 1 MT of Sponge Iron 162 KW power is required - extended period of limitation. HELD THAT - In this case demand sought to be raised against the Respondent on the basis of estimated production as per input/output ratio of 1 1.67MT and electric consumption is 162 KW for manufacture of 1 MT Sponge Iron. All these basis for confirmation of demand are on estimate basis and there is no tangible evidence has been brought by the Revenue on record from where the Respondent procure other raw materials to manufacture such a huge quantity of Sponge Iron like coal and iron ore. In the case of Arya Fibres Pvt. Ltd. 2013 (11) TMI 626 - CESTAT AHMEDABAD this Tribunal has laid down law for establish clandestine removal clearance in cases of allegation made of clandestine manufacture and clearance of the goods - As none of the test has been conducted to establish clandestine manufacture and clearance of the goods by the Respondent therefore the impugned demand are not sustainable against the Respondent. Extended period of limitation - HELD THAT - The periodical audit took place and no deficiency were found no objections were raised regarding clandestine removal of goods by the Respondent therefore whole of the demand is also barred by limitation as Show Cause Notice has been issued by invoking extended period of limitation. Conclusion - i) The allegations of clandestine production and removal require tangible evidence and cannot be based solely on theoretical calculations or expert opinions. ii) As none of the test has been conducted to establish clandestine manufacture and clearance of the goods by the Respondent therefore the impugned demand are not sustainable against the Respondent. iii) The demand was barred by limitation as there was no evidence of fraud or suppression to justify the extended period. Appeal of Revenue dismissed.

Summary

The core legal questions considered by the Tribunal relate to the allegation of clandestine manufacture and removal of excisable goods without payment of duty. Specifically, the issues include: (i) whether the input-output ratio and power consumption norms can be reliably used to estimate clandestine production; (ii) the evidentiary requirements to establish clandestine manufacture and removal; (iii) the applicability of expert opinions and their variability; (iv) the necessity of corroborative evidence beyond theoretical calculations; (v) the burden of proof and standard of evidence required for quasi-criminal charges; and (vi) the limitation period for issuing show cause notices in such cases.

Regarding the input-output ratio and power consumption as indicators of clandestine manufacture, the Tribunal examined the legal framework under the Central Excise Act and Rules, including Sections 3, 11A, and 9D of the Act, and relevant judicial precedents. The Revenue relied on expert opinions from reputed technical consultants who fixed the standard iron ore to sponge iron ratio at 1.67:1 and power consumption norms at 70-100 KWH per MT of sponge iron. The Revenue contended that the Noticee's records showed a higher ratio of 2.32:1 and power consumption of 162 KWH, indicating suppression of production and clandestine removal of approximately 16,436.71 MT of sponge iron, attracting duty demand and penalties.

The adjudicating authority, however, found that the input-output ratio is not a fixed constant but varies depending on the quality of iron ore, especially the Fe content which ranged between 60-65%. Expert opinions indicated that the ratio could vary from 1.67 to as high as 4.77, and the average of 2.32 recorded by the Noticee fell within this variable range. The authority held that reliance on a fixed ratio of 1.67:1 for quantification was not foolproof and that the estimated production based on such a ratio was vague without concrete evidence. The authority further emphasized that charges of clandestine removal are quasi-criminal and require tangible, cogent, and unimpeachable evidence, which was absent in the present case.

On the evidentiary front, the Tribunal extensively reviewed precedents including decisions of this Tribunal and various High Courts. It was reiterated that mere theoretical or mathematical calculations based on input-output norms or electricity consumption cannot substitute for actual evidence of clandestine removal. The law requires corroborative evidence such as transportation documents, records of sale proceeds, discovery of unaccounted finished goods, statements of buyers, and evidence of actual movement of goods without payment of duty. The Tribunal cited the case of Arya Fibres Pvt. Ltd. and others where it was held that the Revenue must establish clandestine manufacture and clearance with tangible evidence and not merely by assumptions or inferences.

The Tribunal also noted the absence of evidence regarding procurement of other essential raw materials like coal and dolomite, which are necessary for sponge iron production, and the lack of investigation into sales or transportation of the alleged clandestine production. Statements recorded during investigation did not comply with mandatory procedural safeguards under Section 9D of the Central Excise Act, rendering them inadmissible as evidence to prove clandestine removal. The Tribunal underscored the mandatory nature of Section 9D(1) and the necessity of recording witness evidence before the adjudicating authority to ensure voluntariness and reliability.

Regarding power consumption, the adjudicating authority and the Tribunal concurred that excess electricity consumption alone cannot be the basis for confirming clandestine manufacture or removal. The Tribunal relied on earlier rulings which held that electricity consumption is only one factor and cannot be determinative without supporting evidence.

The Tribunal further addressed the issue of consistency in judicial orders, referencing a High Court judgment that judicial discipline demands consistency in decisions on similar facts. It criticized the adjudicating authority for taking divergent stands in two similar cases involving the same technical parameters and urged adherence to consistent reasoning.

The limitation aspect was also considered. The Tribunal held that the Show Cause Notice was issued after a delay exceeding one year from the date of receipt of the investigation report, with no evidence of any obstruction or non-cooperation by the appellant. Hence, the demand was barred by limitation.

Applying these legal principles to the facts, the Tribunal found that the Revenue's case was premised solely on theoretical estimates derived from input-output ratios and electricity consumption without any corroborative evidence of clandestine clearance. The absence of process logs, drop test registers, lab reports, transportation records, sale proceeds, or statements from buyers weakened the Revenue's case. The variability in input-output ratios and Fe content further undermined the reliability of the estimated clandestine production. The Tribunal emphasized that the burden lies on the Revenue to prove clandestine removal beyond reasonable doubt with tangible evidence, which was not discharged here.

The Tribunal also relied on precedents where similar demands based on approximations and statements without corroboration were set aside. It noted that the adjudicating authority's observation that the goods were "manufactured theoretically and clandestinely removed theoretically" was casual and insufficient to sustain the demand. The Tribunal held that the Revenue failed to establish the charges with the required degree of certainty and that the demand was thus unsustainable both on merits and limitation grounds.

In conclusion, the Tribunal upheld the impugned order dismissing the Revenue's appeal and confirmed that the demand for duty on estimated clandestine production and removal was not sustainable in the absence of concrete and corroborative evidence. The cross-objections filed by the respondent were also disposed of accordingly.

Significant holdings from the judgment include the following verbatim excerpts that encapsulate the core legal reasoning:

"Charges of clandestine removal are quasi criminal in nature and are a serious charge and must be proved with tangible, cogent, affirmative and unimpeachable evidences."

"The department has to prove that firstly, there was clandestine manufacture and secondly, there was clandestine clearance to establish the demand of the duty for such an activity. Even one of these two are not established with certain degree of certainty, the demand on clandestine clearance will not withstand legal scrutiny."

"Electricity consumption could not be the only factor for determination of duty liability. Clandestine manufacture and removal on the basis of excess electricity consumption cannot be fastened."

"In cases of clandestine manufacture and clearances, certain fundamental criteria have to be established by Revenue which mainly are the following: (i) There should be tangible evidence of clandestine manufacture and clearance and not merely inferences or unwarranted assumptions; (ii) Evidence in support thereof should be of raw materials in excess of that contained as per the statutory records; instances of actual removal of unaccounted finished goods; discovery of such finished goods outside the factory; instances of sale of such goods to identified parties; receipt of sale proceeds; use of electricity far in excess of what is necessary; statements of buyers; proof of actual transportation; links between documents recovered during search and activities in factory."

"The entire demand of clandestine removal... has been made based on assumption and theoretical calculations by arriving taking notional quantity... Accordingly, we hold that the demand is not sustainable and entire demand is liable to be set aside."

"The Show Cause Notice has been issued after 1 year 4 months from the date of receipt of the officials to the Appellant's factory... no documentary evidence placed that such delay was caused by any non-cooperative attitude of the Appellant. Therefore, we hold that the confirmed demand is required to be set aside even on account of limitation also."

"Judicial discipline demands consistency in rendering judgments... inconsistent orders passed by a judicial Officer almost in the same fact situation... would give rise to complaint of discriminatory treatment."

These principles affirm that in excise matters involving allegations of clandestine manufacture and removal, reliance on theoretical input-output ratios or electricity consumption without corroborative evidence is insufficient. The Revenue must establish clandestine activity with tangible, unimpeachable evidence such as records of actual removal, transportation, sales, and receipt of sale proceeds. The burden of proof is stringent due to the quasi-criminal nature of the charges. Further, procedural safeguards regarding admissibility of statements under Section 9D must be strictly observed. Finally, limitation periods must be respected unless delay is attributable to the assessee.