2019 (6) TMI 508 - AT - Central Excise

Clandestine removal - spring leaves - shortage of finished goods - process loss - HELD THAT - Certain amount of process loss is inevitable on account of various reasons such as loss in the process of cutting, sheering, pouring etc. as well as burning loss. Such losses can vary from unit to unit depending upon the process of manufacture and skill of the manpower and also the quality of input used. The Adjudicating Authority had reservations in accepting the certificate of Chartered Engineer who has examined the appellant s factory and opined that the loss can be upto 20%. But he has chosen not to cross examine him during the adjudication proceedings. The entire case has been built on the basis of the mathematical projection of the actual quantum of goods which could have been manufactured by the appellant by using inputs in the form of Plates. The total quantity of inputs procured and issued for manufacture has been ascertained from the appellant s record but the total quantity of goods which could have been manufactured out of such goods is nothing but mathematical projection. Clandestine clearance is required to be substantiated by means of tangible evidence placed on record by Revenue on the basis of investigation. In the present case, we note that other than mathematical projection, no further investigation has been recorded by the Revenue in the form of investigation at the end of the buyers of the allegedly clandestinely cleared goods. As such, we are not inclined to uphold the said demands raised only on the basis of projection. In the case of Ambey Laboratories Vs. Commr. of Central Excise, Delhi-I 2017 (6) TMI 374 - CESTAT NEW DELHI , one of the issues considered by the Tribunal was allegation of clandestine clearance made on the basis of production estimated based on input output ratio. The Tribunal set aside such demand where no corroborative evidence has been produced by the Revenue supporting the clandestine clearance of goods. The demand for duty arise on the allegation of clandestine removal cannot be sustained - appeal allowed - decided in favor of appellant.

Summary

Issues Involved:
1. Discrepancy in stock reporting and shortage of finished products.
2. Allegation of clandestine clearance of goods.
3. Determination of process loss and its impact on duty liability.
4. Validity of the Chartered Engineer’s certificate and expert opinions.
5. Basis for demand and penalty imposition.

Detailed Analysis:

1. Discrepancy in Stock Reporting and Shortage of Finished Products:
The Department found discrepancies between the stock reported to the Income Tax Authority and that reported to the Department. During a search on 21/4/2000, a shortage of 10.91 MT of finished products was noticed, and the appellant paid the duty on this shortage. However, no shortage of raw materials was detected. The appellant did not maintain records to substantiate the quantity of final product manufactured daily.

2. Allegation of Clandestine Clearance of Goods:
The Department estimated the total quantity of goods that could be manufactured from 1MT of MS Flats/Plates and projected the total quantity of spring leaves that could have been manufactured during the disputed period. They alleged that the appellant clandestinely manufactured and cleared 735.531 MT of spring leaves without accounting for them, leading to a proposed demand of Central Excise Duty amounting to ?22,83,382/-.

3. Determination of Process Loss and Its Impact on Duty Liability:
The Tribunal previously remanded the issue to the Adjudicating Authority to reconsider the permissibility of process loss. The Jurisdictional Commissioner, in de novo proceedings, verified the waste/loss from four different manufacturers to ascertain the process loss. The appellant claimed that the process loss in their unit could be up to 20%, supported by a Chartered Engineer’s Certificate and verification reports indicating higher losses in adjacent units.

4. Validity of the Chartered Engineer’s Certificate and Expert Opinions:
The appellant submitted a Chartered Engineer’s Certificate indicating a possible loss of up to 20%. The Adjudicating Authority, however, adopted a process loss ratio of 3.04% and a yield of 90%, reducing the demand to ?19,75,588 along with interest and penalty. The appellant argued that the Commissioner rejected the Chartered Engineer’s opinion without proper examination and cross-examination, acting as both investigator and adjudicator.

5. Basis for Demand and Penalty Imposition:
The appellant contended that the demand was based solely on mathematical calculations without collateral evidence of clandestine removal. They cited several case laws to support their argument that demand and penalty based on input/output ratio without tangible evidence are not sustainable. The Tribunal noted that the case was built on mathematical projections without corroborative evidence of clandestine clearance, such as buyer investigations.

Tribunal’s Conclusion:
The Tribunal observed that process loss is inevitable and varies depending on manufacturing processes, manpower skill, and input quality. The entire case was based on mathematical projections without tangible evidence of clandestine clearance. Citing the case of Ambey Laboratories, the Tribunal emphasized that allegations of clandestine production and clearance must be backed by tangible evidence. Consequently, the Tribunal set aside the demand and allowed the appeal, concluding that the duty demand based on allegations of clandestine removal could not be sustained.

Order:
The appeal was allowed, and the order was set aside. The Tribunal emphasized the need for tangible evidence to substantiate allegations of clandestine clearance and found the demand unsustainable based on mere projections.