Clandestine Removal of goods

[CA Akash Phophalia]

Stock verification is a tedious task and normally leads to some differences when compared physically with that maintained in the books of account due to various reasons. Department normally allegate such differences as due to clandestine removal of goods by assessee. This article aims at enlightening readers about the validity of such presumption in the light of a decided case.

While going through the dictionary meaning of “clandestine”, it means to do something secretly. Thus when anything done secretly it tantamount to clandestine. In excise department maintenance of stock in terms of quantity is essential to control input and output. This record keeping is beneficial for both the manufacturer as well as revenue authorities. But many a times, considering the nature of the product, there arises differences in the quantity of stock as maintained in the books and as available physically. Since excise duty is largely based on quantity of stock it is normally allegated by the department that whenever there is difference in the stock the assessee might have cleared it secretly to evade excise duty.

In one recent case assessee is a manufacturer of MS angles, flats etc. and the raw material is MS ingots. During an inspection conducted by the department in the factory premises, a huge stock of MS angles and MS flats of different length and breadth was lying in a haphazard way and it was very diffi­cult to count or identify the value of the same. In such situations the technique of sampling is normally applied by carrying testing on a small portion of the overall stock and forming an opinion about the whole stock. The officers with the consent of the Partner pre­sent, picked up some pieces of MS Ingots at random and recorded the weight and accordingly picked some pieces of MS Bars also. The total weight so record­ed was divided by the quantity taken as sample and the same was multiplied by the total number of Ingots and Bars available. Accordingly stock verification statement was drawn. There came the difference or shortage of ingots and bars.

The assessee present was satisfied with the method of stock-taking but for the difference it stated that it had forgotten to count certain pieces of inputs which were charged in the fur­nace but were not been recorded in the stock records and the average rate of the same was almost equal to the difference in the stock of raw materials. Accordingly assessee urged that there is no shortage in the stock of raw material.

It is further urged that the manner in which the stock was taken gives only some approximate figure and there is bound to be variation and as such no adverse inference can be drawn for the var­iation which is normal. In the case of finished goods the variation is less than 5% and in the case of raw material although the variation is adequately explained the same is not more than 10%. But the departmental authorities did not agree to it and confirmed demand and imposed equal amount of penalty contending the shortage due to clandestine removal of goods.

Assessee emphasized that there is bound to be variation in the method of stock taking adopted by the physical verification. It is admitted fact that small sample pieces of finished goods or raw material were weighed and their average weight was multiplied with the number of pieces. In such method of valuation of stock, some variation is bound to be and the variation found in the case of the appellant is normal and no adverse inference could have been drawn. It further states that without verification of the fact asserted by the assessee the departmental authorities were erred in re­jecting the cogent explanation without actual verification of the same. Assessee re­lied on the ruling of Hon'ble Allahabad High Court in the case of CCE v. Meenak­shi castings [ 2011 (8) TMI 896 - ALLAHABAD HIGH COURT ] wherein the Hon'ble High Court held that in absence of any evidence of clandestine removal, only on the apparent shortage of stock the Tribunal have found that there is no material or evidence to support findings, adverse inference is not attracted, deleted the penalty imposed under section 11 AC of the Act. In R.A. Casting Private Ltd. v. Commis­sioner of Central Excise and Service Tax Meerut-I 2015 (7) TMI 29 - CESTAT NEW DELHI it was held that there was not any case of shortage of finished goods and inputs, without there being any evidence of clandestine removal, it was held that penalty is not imposable.

Revenue relied on the impugned order further relied on the ruling of the Hon'ble Allahabad High Court in the case of Bajrang Petro Chemicals (P) Ltd. v. Commissioner of Central Excise 2014 (12) TMI 738 - ALLAHABAD HIGH COURT  wherein the case of huge shortage of finished goods found during stock taking and the assessee could not offer any explanation and admitted the shortage and paid the duty, the Hon'ble High Court held that in view of the fact that no explanation was offered of the shortage found at the time of stocktaking and further duty was paid on the same, amounts to admission on the part of the appellant and such admission of goods found short, inference can be drawn that the same have been removed without payment of duty. In another ruling of Madras High Court in the case of Goyal Ispat Ltd. 2015 (3) TMI 866 - MADRAS HIGH COURT wherein the case of stock taking conducted on the basis of eye estimation, the question being considered was, whether stock taking done on the basis of eye estimation was proper. The High Court did not accept the findings of the Com­missioner (Appeals) that the shortage could not be ascertained in the manner done by the Department. Further the assessee has been unable to establish that recording of shortage was erroneous. Further it is a finding of fact that the Tribu­nal on the statement drawn in the Mahazar/Panchnama and other records on which the High Court did not dwell further to come to a different conclusion. Further held that non-production of the Panchnama witness was not fatal to the case. It was further observed that finding of the Tribunal are based on Panchna­ma records, recording the shortage of goods which had been done in presence of an independent witness and such shortage was supported by the unretracted statement of the manager. It was held that the Tribunal was correct in confirming the order of penalty. Under similar facts and circumstances of stock valuation done on eye estimation and the assessee had not protested and paid the duty, this Tribunal in the case of Shivkripa Ispat Pvt. Ltd. v. Commissioner of Central Ex­cise- 2009 (10) TMI 791 - CESTAT MUMBAI held the duty can be demanded on such shortage for clandestine removal. Department relied on another ruling in the case of Karori Engg. Works v. Commissioner of Central Excise 2004 (1) TMI 457 - CESTAT, NEW DELHI wherein it was held that the mere fact that the signature of the officers of Central Excise was not there on the statement, the same is immaterial especially when the maker of the statement (Partner) have not denied of having made the same and had not even retracted the same at any stage. The learned AR also relies on Zaki Ishrati v. Commissioner of Central Excise -- 2010 (4) TMI 325 - CESTAT, NEW DELHI wherein also in the statement recorded, the con­cerned officer had not appended his signature in the statement it was held that the statement made in own handwriting and delivered to the investigating of­ficer, the same may not be treated as a statement under Section 108 of the Cus­toms Act, but the same is to be treated as a report to investigating officers and the evidentiary value of the same cannot be underestimated.

Considered the overall contentions and the facts of the whole issue it was found that in the method of stock verification adopted there is bound to be variation. Further the variation found is about 10% in the case of raw material and less than 5% in the stock of finished goods which is normal variation in such method of calculation. Secondly the assessee had given cogent explanation regarding the shortage of raw material within 5 days of inspection, by stating that the raw ma­terial charged in the furnace had escaped to be noticed in the stock verification and the same was not entered in the stock records/RGl, and accordingly there is no discrepancy in the stock of raw material. This claim of the assessee was re­jected on assumption & presumption without verification. Accordingly, the variation found is a normal variation and no adverse inference could be drawn.

Thus where the method of stock verification adopted was based on sampling technique normal variation is bound to be there and when assessee had given cogent explanation regarding the shortage of raw material it could not be presumed that there is clandestine removal of goods. To confirm clandestine removal of goods department needs to give corroborative evidences in addition to the shortage in stock to confirm the demand.

CA Akash Phophalia

9799569294

ca.akashphophalia@gmail.com