2011 (4) TMI 426 - AT - Central Excise

Demand - Clandestine production and removal - Circular No.854/12/2007-CX, dt.7.9.07 - Rule 31 of Central Excise Rules, 2002 - Show Cause Notice dt.3.10.08 was issued to the appellant raising demand of duty of Rs.7,89,58,670 along with confirmation of interest and imposition of penalty - in the absence of such evidence or the proof reflecting upon the clearance of the final product and in the absence of any identity of the buyer, mode of transport or receipt of consideration etc, the Revenue has miserably failed in establishing its case - Our attention was drawn to the correspondence exchanged between the appellant and their jurisdictional authority, in the month of December, 2007, wherein it was mentioned that there was difference in day to day production as they generally take production as per market demand and all machines do not run all the time of the day - Held that apart from the input-output ratio, which has been made the basis, there is no other evidences on record to show that the appellant either did not receive the raw materials, on which they have taken the credit or after receiving the same and availing the credit, the same stand removed by them in the open market - If there was no willful suppression, the clandestine activities which are nothing but malafide activities on the part of the assessee, cannot be upheld - Appeal is allowed

Issues Involved:
1. Allegation of less production and payment of less duty.
2. Validity of the demand raised based on the declaration of average production.
3. Evidence of clandestine manufacture and clearance.
4. Applicability of extended period of limitation.
5. Imposition of penalty under Rule 25 of Central Excise Rules, 2002.

Detailed Analysis:

1. Allegation of Less Production and Payment of Less Duty:
The appellant, engaged in the manufacture of Gutkha, declared the average production as 3300 pouches per machine per hour. The Revenue alleged that the actual production, as reflected in the ER-1 returns, did not match this declaration, leading to the conclusion that the appellant had not accounted for the full production and had paid less duty. Investigations were initiated, and a Show Cause Notice was issued demanding duty of Rs.7,89,58,670/- along with interest and penalty.

2. Validity of the Demand Raised Based on the Declaration of Average Production:
The appellant contended that the duty was payable on an ad-valorem basis on actual production, not on the declared average production. They argued that the Show Cause Notice was based on assumptions and presumptions without supporting evidence. The declaration of 3300 pouches per machine per hour was an ideal condition and not practically achievable due to various operational issues like old machines, maintenance, power failures, and market demand fluctuations. The Compounded Levy Scheme, which fixed duty based on the number of machines, was introduced only from 1.7.08, and thus, the duty for the period prior could not be based on the number of machines.

3. Evidence of Clandestine Manufacture and Clearance:
The appellant argued that there was no evidence of clandestine manufacture and clearance. They highlighted the lack of evidence of procurement of raw materials required for manufacturing the alleged excess quantity of Gutkha. They relied on various judicial decisions emphasizing that the burden of proving clandestine removal lies with the Revenue, which must be supported by tangible evidence. The Commissioner's order was based solely on the declaration without corroborative evidence of clandestine activities.

4. Applicability of Extended Period of Limitation:
The appellant challenged the demand on the ground of limitation, stating that they had been regularly filing ER-1 returns showing the quantity of Gutkha manufactured, and thus, all facts were within the knowledge of the Revenue. Consequently, the extended period of limitation could not be invoked.

5. Imposition of Penalty under Rule 25 of Central Excise Rules, 2002:
The Commissioner imposed a penalty of Rs.1 Crore under Rule 25 (1) of Central Excise Rules, 2002, despite acknowledging that the provisions of Section 11AC of the Central Excise Act, 1944, were not attracted. The appellant argued that if there was no willful suppression of facts, the allegations of clandestine manufacture and removal could not be upheld, and thus, the penalty was unwarranted.

Conclusion:
The Tribunal found that the demand was based solely on the declaration made by the appellant without any corroborative evidence. The charges of clandestine removal, being quasi-criminal, required positive and tangible evidence, which was lacking. The Tribunal referred to various judicial precedents to support its conclusion that theoretical calculations could not form the basis for alleging clandestine removal. The absence of evidence of procurement of raw materials and the lack of any proof of actual manufacture and clearance further weakened the Revenue's case. Consequently, the Tribunal set aside the impugned order, allowing the appeal with consequential relief to the appellant.

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