2025 (5) TMI 479 - AT - Central Excise

Demand of duty raised on the basis of input output ratio and without having any evidence towards clandestine manufacture and removal of goods without payment of duty - confiscation of quantity of 157.436 M.T. of Sponge Iron found in excess under Rule 25 of the Central Excise Rules - HELD THAT - There are force in the appellant s argument that the entire proceedings have been built on the assumptions of the input/output ratio of Sponge Iron vis- -vis end product. The Revenue has considered the input / output ratio of 1 1.67 as sacrosanct based on the expert opinion of Institute of Mineral Technology Govt of India and another opinion of Popuri Engineering Consultancy Services Hyderabad. Revenue has not brought in any corroborative evidence to the effect that the manufactured goods have been cleared clandestinely and cash transactions have taken place. No statements have been recorded from any of the purported buyers vehicle owners. No private records with reference to the cash transactions have been seized. All these make to conclude that the Department has proceeded purely based on the assumptions and presumptions basis without verifying their allegations. The facts of the present case are similar with the Revenue mainly relying on the input / output ratio relied on source which are not tested independently by them and hence these case laws are squarely applicable in the present case. It is also found that the alleged shortage is also not properly corroborated by the Revenue. Hence the Redemption Fine and penalty imposed are not legally sustainable. Accordingly the impugned order set aside and the appeal allowed on merits. Time limitation - HELD THAT - In cases of allegation of clandestine removals it requires detailed investigation verification of various documents so as to finalize the Show Cause Notice. Since no specific facts have been brought in the SCN about the suppression on the part of the appellant the delay in issuing of the SCN after having all the facts on record does not come to the rescue of the Department. Hence the impugned order is set aside even on account of limitation. Conclusion - i) The demands for excise duty based solely on input-output ratio estimates without independent verification and corroborative evidence of clandestine manufacture and removal cannot be sustained. ii) The alleged shortage is also not properly corroborated by the Revenue. Hence the Redemption Fine and penalty imposed are not legally sustainable. iii) Since no specific facts have been brought in the SCN about the suppression on the part of the appellant the delay in issuing of the SCN after having all the facts on record does not come to the rescue of the Department. Hence the impugned order is set aside even on account of limitation. Appeal allowed.

Summary

The core legal questions considered by the Tribunal are whether a demand for duty can be raised solely on the basis of input-output ratio estimates without concrete evidence of clandestine manufacture and removal of goods without payment of duty, and whether the excess quantity of Sponge Iron found in the factory is liable to confiscation under Rule 25 of the Central Excise Rules.

Regarding the first issue, the legal framework involves the principles governing the imposition of excise duty, the evidentiary requirements for establishing clandestine manufacture and clearance, and the reliance on input-output ratios as a basis for demand. Precedents emphasize that demands cannot be based merely on assumptions or presumptions without corroborative evidence such as records of clandestine sales, transport details, or statements from buyers.

The Tribunal examined the Department's reliance on expert opinions from technical consultants who opined that the standard input-output ratio for Sponge Iron manufacture is approximately 1.67 MT of iron ore per 1 MT of Sponge Iron, with power consumption between 70 to 100 KWH per MT. The Department used these ratios to estimate production significantly higher than the appellant's recorded figures, thereby alleging clandestine manufacture and clearance of the difference without payment of duty.

The appellant contested this approach, arguing that Sponge Iron manufacture is sensitive to various factors including raw material characteristics (notably the Fe content of iron ore, which was about 50% in this case), machinery conditions, and operational efficiencies. The appellant contended that the Department failed to consider these factors and relied solely on generalized expert opinions, without conducting any independent study or experiment at the appellant's factory. The appellant further argued that there was no direct evidence of clandestine clearance such as statements from buyers, transport records, or cash transaction evidence.

The Tribunal's reasoning aligned with the appellant's submissions. It held that the Department's demand was based on assumptions and presumptions derived from input-output ratios without tangible evidence of clandestine removal. The Tribunal noted the absence of any independent verification by the Department of the appellant's plant operations or corroborative evidence such as seized private records, statements of buyers, or transport details. It emphasized that the reliance on an uncorroborated statement of the Production Manager was insufficient to establish clandestine manufacture.

In applying the law to the facts, the Tribunal referred to recent precedents where similar demands based on input-output ratios were set aside. In particular, it cited decisions where the Tribunal held that the manufacture of Sponge Iron depends on multiple factors beyond iron ore consumption, such as Fe content, coal and dolomite usage, and power consumption. The Tribunal underscored that the Department had not brought evidence of corresponding procurement or consumption of other key raw materials like coal and dolomite, nor evidence of transportation or cash transactions for the alleged clandestine quantity.

The Tribunal also considered the issue of confiscation of the excess quantity of Sponge Iron found in the factory. It found that the alleged excess was based on eye estimation without actual weighment and there was no evidence that the goods were intended for removal without payment of duty. Consequently, the confiscation order was not substantiated under Rule 25 of the Central Excise Rules.

On the limitation point, the Tribunal observed that the Show Cause Notice was issued more than two and a half years after the search and investigation were completed. It held that in the absence of specific facts indicating suppression by the appellant, the delay in issuance of the Show Cause Notice was not justified. Therefore, the demand was also barred by limitation.

The Tribunal treated competing arguments by the Department, which relied on seized documents and statements to justify the demand, as insufficient in the absence of corroborative evidence. The Tribunal emphasized that demands based on mere estimates and expert opinions without verification or tangible proof do not meet the legal threshold for confirmation.

In conclusion, the Tribunal set aside the demand for duty, the confiscation order, and the penalties imposed. It held that the Department failed to reasonably prove clandestine manufacture and clearance, and that the demand was both legally unsustainable on merits and barred by limitation.

Significant holdings include the following verbatim excerpts:

"We find force in the appellant's argument that the entire proceedings have been built on the assumptions of the input/output ratio of Sponge Iron vis-`a-vis end product... No statements have been recorded from any of the purported buyers, vehicle owners. No private records with reference to the cash transactions have been seized. All these make us to conclude that the Department has proceeded purely based on the assumptions and presumptions basis without verifying their allegations."

"The output is dependent on several factors other than the input / output of the main raw material, iron ore. Even within Iron ore, the Fe content would play an important role. Other than this, we have to consider the usage of the quality of coal, dolomite, the capacity of kiln etc. Thus a simple formula of input / output purely based on the iron ore usage, would not fit all the manufacturers of Sponge Iron."

"The Department has not brought out any evidence towards excess procurement of coal and dolomites... There is also no evidence towards deployment and movement of hundreds of vehicles to transport such huge quantity of coal and dolomite."

"The demand sought to be raised against the Respondent on the basis of estimated production as per input/output ratio... While the purchase quantity of iron ore has been taken into account and the electricity consumption has been considered... the manufacture of sponge iron also requires two other important raw materials/consumable viz., Coal & dolomite. In the entire investigation, the Department has not brought out any evidence towards excess procurement of coal and dolomites."

"The demand is also barred limitation... Since no specific facts have been brought in the SCN about the suppression on the part of the appellant, the delay in issuing of the SCN after having all the facts on record does not come to the rescue of the Department."

The core principles established are that demands for excise duty based solely on input-output ratio estimates without independent verification and corroborative evidence of clandestine manufacture and removal cannot be sustained. The manufacture of Sponge Iron is subject to variability due to raw material quality and operational factors, making rigid input-output norms inapplicable across all manufacturers. Confiscation of goods requires proof of intent to remove without payment of duty and proper quantification. Additionally, demands must be raised within the prescribed limitation period, and unexplained delays render such demands invalid.

The final determinations are that the demand for Rs. 92,02,260/- as Central Excise duty based on estimated clandestine manufacture is not sustainable; the confiscation of 157.436 M.T. of Sponge Iron is not justified; penalties and interest imposed are set aside; and the appeal is allowed both on merits and limitation grounds, entitling the appellant to consequential relief as per law.