2019 (5) TMI 369 - AT - Central Excise

Clandestine manufacture and removal - tangible evidence or not - demand based on mere inferences or unwarranted assumptions - HELD THAT - Needless to say, a precise enumeration of all situations in which one could hold with certainty that there have been clandestine manufacture and clearances, would not be possible. As held by this Tribunal and Superior Courts, it would depend on the facts of each case. What one could, however, say with some certainty is that inferences cannot be drawn about such clearances merely on the basis of note books or diaries privately maintained or on mere statements of some persons, may even be responsible officials of the manufacturer or even of its Directors/partners who are not even permitted to be cross-examined, as in the present case, without one or more of the evidences referred to above being present. In the absence of any linkage of the factory of appellants, with the alleged Railway Receipts or third party private records or with third party statements, there are no grounds to presume any manufacture and clandestine removal of such huge quantities of cigarettes, especially when appellants operated under physical control of the department. The impugned order is liable to be set-aside on this ground alone. The demanded duty has been quantified by considering each Bag/ package/ bundle mentioned under an RR to be containing 2 cartons, each carton containing 48 Outers of 25 Packs of 10 cigarettes each. The duty which is levied on the concept of manufacture cannot be demanded on any presumptions and assumptions. It is on record that certain RRs, otherwise similar, were discarded as the same pertained to a period prior to commencement of production in LTCPL. This indicates to a vague criteria adopted for selection of evidences on the basis of which whole case is constructed. While going through the extracts of the diary recovered from the railway parcel agents, it can be seen that such diaries are not containing the name of LTCPL or any of its employee. There is no co-relation of the entries made in the diary with the RRs and allegedly manufactured quantities of Cigarettes. The RRs received from railways (LTCPL is not the consignor) was made the main basis to demand duty. The contents of consignments mentioned in RRs are PVC Bundles, Packaging Material, etc. It is alleged to be incorrect but the actual contents of the said parcel were not proved to be cigarettes through any direct evidence of seizure of parcels. Therefore, the Railway receipts cannot be the basis to make the case of clandestine removal of goods. Therefore, the said evidence is not admissible. Apart from lack of specific instances, dates, and quantifications, etc. the said statement(s) referring the managers of the factory is not corroborated with other cognate and admissible evidences. We note that there is a lack of investigation for tracing the managers of the factory -Shri Mohammed Hashmi or Shri Rijwan Khan for recording of their evidences though they have been made a noticee in the matter. There is no evidence to corroborate purchase or consumption of raw materials and there are no investigations of the other factory staff to corroborate the facts of alleged manufacture of goods and clearance - such statement cannot be made a sole basis to confirm charge of clandestine manufacture and clearance of alleged huge quantities of cigarettes, calculated on a presumptive basis. There is no evidence to establish manufacture and clandestine removal of alleged quantities by LTCPL on the basis of which demand of ₹ 657,50,888/- could sustain - demand set aside - appeal allowed - decided in favor of appellant.

Issues Involved:
1. Alleged clandestine manufacture and clearance of cigarettes by LTCPL.
2. Penalties imposed on LTCPL's directors and employees for alleged violations.
3. Validity of evidence and investigation procedures.
4. Reconciliation of stock differences and duty quantification.
5. Role of physical supervision by the department.

Issue-wise Detailed Analysis:

1. Alleged Clandestine Manufacture and Clearance of Cigarettes by LTCPL:
The revenue alleged that LTCPL clandestinely manufactured and cleared cigarettes without payment of duty, based on searches and investigations conducted at various locations, including LTCPL's factory in Bhopal and other premises. The searches led to the seizure of documents and statements from various individuals, which the revenue used to support its claims of clandestine activities. However, the tribunal noted that the evidence provided, such as railway receipts (RRs), private records, and third-party statements, lacked direct correlation with LTCPL's factory operations. The tribunal emphasized the need for tangible evidence of raw material procurement, actual manufacture, and transportation of finished goods, which the revenue failed to provide.

2. Penalties Imposed on LTCPL's Directors and Employees for Alleged Violations:
Penalties were imposed on LTCPL's directors and employees for their alleged involvement in the clandestine activities. The tribunal scrutinized the evidence against each individual and found that the statements and documents relied upon by the revenue were insufficient to establish their involvement beyond reasonable doubt. The tribunal highlighted the importance of corroborative evidence and the need for cross-examination of witnesses, which was denied in this case. Consequently, the tribunal set aside the penalties imposed on the directors and employees.

3. Validity of Evidence and Investigation Procedures:
The tribunal critically examined the evidence and investigation procedures followed by the revenue. It noted several discrepancies and procedural lapses, such as the absence of LTCPL representatives during stock verification, reliance on uncorroborated third-party statements, and lack of investigation into the procurement and consumption of raw materials. The tribunal emphasized that mere entries in notebooks or diaries, without corroborative evidence, cannot establish clandestine manufacture and clearance. The tribunal also pointed out the denial of cross-examination of key witnesses, which undermined the credibility of the evidence presented by the revenue.

4. Reconciliation of Stock Differences and Duty Quantification:
The tribunal addressed the issue of stock differences and the quantification of duty. It noted that the reconciliation charts used by the revenue were erroneous and lacked proper verification. The tribunal highlighted the absence of adverse remarks or immediate action on the alleged stock discrepancies during the initial stock verification. It also pointed out the inconsistencies in the reconciliation process, such as the inclusion of loose cigarettes in the stock count, which were not reflected in the RG-1 register. The tribunal concluded that the duty demand based on these flawed reconciliations could not be sustained.

5. Role of Physical Supervision by the Department:
The tribunal considered the role of physical supervision by the department in LTCPL's factory. It noted that the factory was under the physical control of the department, with officers supervising the manufacture and clearance of goods. The tribunal found it implausible that LTCPL could have clandestinely removed such large quantities of cigarettes under departmental supervision. It emphasized that the presence of departmental officers and the lack of evidence of unauthorized removals further weakened the revenue's case.

Conclusion:
The tribunal concluded that the revenue failed to provide sufficient and tangible evidence to establish the alleged clandestine manufacture and clearance of cigarettes by LTCPL. The evidence presented, including RRs, private records, and third-party statements, lacked direct correlation with LTCPL's factory operations and did not meet the required standard of proof. The tribunal set aside the duty demand and penalties imposed on LTCPL and its directors and employees, allowing the appeals with consequential benefits.

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