2017 (7) TMI 1369 - HC - Central Excise

Clandestine removal - M.S. Ingots - demand based on presumption and surmises - unrealistic electricity consumption, high cost of production vis- -vis income from sale, unrealistically low amount of expenditure towards salary of employees and though manufacturing activity incurs losses - HELD THAT - This Court is remanding the matter to the Commissioner, Central Excise Service Tax, Ranchi. This Court is not much going into detail of further arbitrariness in the Order-in-Original about the lower remuneration to the employees of the petitioner-unit as well as the manufacturing unit is running in loss and the profit is made from non-core activities etc. There appears to be very high sounding reasons, but, if they are viewed with zoom lens camera, it appears that nothing is proved by the respondents. Low remuneration is a relative word and therefore, statement of the employees of the noticee, ought to have been reduced to writing by the respondents-department. If the employees are stating that they are getting more remuneration than what is shown in the books of account by the noticee, then these statements ought to have been reduced in writing and they must be referred in the show cause notice. Copies of the gist of the statements should be given to the noticee and those employees must be kept to have been followed by the respondents department. Instead of doing this exercise, allegation has been levelled that there is low remuneration paid by the noticee, is not sufficient at all. The Order-in-Original is based upon mere presumptions and possibilities, and, nothing has been proved at all by the respondents, especially unaccounted manufacturing of M.S. Ingots and the clandestine removal thereof. The documents which are referred to in the show cause notice and relied upon, should have been supplied to the petitioners. These documents are - Nucleus Group report. The document has been referred in the show cause notice dated 7-2-2014 (Annexure-1). Imaginary is the basis of the show cause notice and without proof, the Order-in-Original has been passed in the same breath. The matter is remanded for adjudication of the show cause notice dated 7-2-2014 and the matter will be decided afresh - Petition allowed by way of remand.

Issues Involved:
1. Validity of the show cause notice and Order-in-Original based on presumptions and surmises.
2. Violation of principles of natural justice.
3. Reliance on Dr. N.K. Batra’s report for electricity consumption.
4. Requirement of substantive evidence for proving clandestine removal of goods.

Detailed Analysis:

1. Validity of the Show Cause Notice and Order-in-Original:
The petitioner challenged the show cause notice dated 7-2-2014 and the Order-in-Original dated 27-2-2015/13-3-2015 issued by the Commissioner, Central Excise and Service Tax, Jamshedpur, on the grounds that they were based on presumptions and surmises. The department's case was primarily based on the possibility of clandestine removal of M.S. Ingots, citing unrealistic electricity consumption and other financial anomalies. The court noted that the electricity consumption pattern could only serve as a corroborative ground and not as substantive proof of clandestine removal. The court emphasized that the burden of proof lay on the department to provide concrete evidence of unaccounted manufacturing and clandestine removal, which was not adequately discharged.

2. Violation of Principles of Natural Justice:
The petitioner argued that there was a gross violation of the principles of natural justice as the documents referred to in the show cause notice, such as the Nucleus Group report and the All India Induction Furnace Association report, were not supplied to them. The court highlighted that the principles of natural justice require that the affected party be given notice and an opportunity to be heard, and that the orders should provide reasons for the conclusions reached. The court found that the adjudicating authority failed to address the main contentions of the petitioner and did not provide reasons for differing from the decisions in similar cases, thereby violating the principles of natural justice.

3. Reliance on Dr. N.K. Batra’s Report:
The court critically examined the reliance on Dr. N.K. Batra’s report, which was used to establish a pattern of electricity consumption. The court noted that the report had been used since 2003 without any cross-examination of Dr. N.K. Batra, and its authenticity was questionable. The court emphasized that the report could not be treated as conclusive evidence under the Indian Evidence Act and should only serve as a guideline. The court directed that the department must conduct experiments at the factory premises of the noticee to determine the actual electricity consumption pattern before issuing any show cause notice based on such reports.

4. Requirement of Substantive Evidence:
The court outlined the necessity of substantive evidence to prove clandestine removal, such as:
- Details of raw material purchase and its unaccounted use.
- Manufacturing records and packing material usage.
- Employee statements regarding additional remuneration.
- Discrepancies in stock records.
- Proof of goods removal, such as truck entries, weighbridge records, and transporter documents.

The court found that the department had not collected such substantive evidence and had relied solely on the electricity consumption pattern, which was insufficient. The court referred to several decisions where it was held that electricity consumption alone could not be the basis for determining duty liability.

Conclusion:
The court quashed the Order-in-Original dated 27-2-2015/13-3-2015 and remanded the matter to the Commissioner, Central Excise & Service Tax, Ranchi, for fresh adjudication. The court directed that any reliance on Dr. N.K. Batra’s report must be accompanied by experiments conducted at the noticee’s premises and that substantive evidence must be collected to prove clandestine removal. The writ petition was allowed, and the matter was to be decided afresh, keeping in mind the principles outlined by the court.

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