2019 (8) TMI 127 - AT - Central Excise

Clandestine manufacture and removal - Zarda - entire case of the Revenue is based upon the third party records and the statements of their representatives recorded by the officers during the course of investigations - denial of cross-examination of various deponents - HELD THAT - It is well settled that the findings of clandestine removal are required to be upheld on the basis of positive, tangible and affirmative evidences and the same cannot be made on the basis of flimsy grounds leading to doubts - The Hon ble Allahabad High Court in the case of M/S. CONTINENTAL CEMENT COMPANY VERSUS UNION OF INDIA OTHERS 2014 (9) TMI 243 - ALLAHABAD HIGH COURT observed that clinching evidence of purchase of raw materials, consumption of electricity, sale of final products, clandestine removal and transportation, realization of sale proceeds, mode and flow back of funds are required to be established before the findings of clandestine removal can be upheld. It is a serious charge and required to be proved beyond doubt by the Revenue and cannot be upheld merely on the basis of statements which are based on memories. In the present case, as already observed the Revenue s entire case is based upon statements which in turn are as regards explanation of various entries in the records maintained by such deponent. In case of clandestine removal, the goods are first required to be manufactured for which purpose a manufacturer needs lot of raw materials - There is no evidence of procurement of excess raw materials. Admittedly the manufacture of Zarda requires a number of raw materials, the main being raw Zarda. Apart from that Glycerin and other chemicals like Benzyl Burate, Methyl Phenyl Acetate compounds, fragrances and packing materials in dibbies. Apart from alleging the procurement of excess raw tobacco, M/s.Niranjan Tobacco Company, which is also based upon the records maintained by the said raw material saler, Revenue has not made out any efforts to identify the supply of the other materials required for manufacture of such a huge quantity of Zarda. There is neither any allegation to the effect of unaccounted procurement of other raw materials. We really fail to understand as to how the appellant could have manufactured such huge quantity of Zarda without procurement of the said raw material. Further, no investigations stand made from the persons associated with the actual manufacture or the labourers appointed by the appellant so as to establish that such excess Zarda was manufactured by them. Further no incriminating documents stand recovered from the appellants factory or possession - Revenue having failed to discharge its onus as regards the manufacture of such a huge quantity of Zarda by the appellant, cannot allege clearance of the same. As such we find no merits in the Revenue s stand. Appeal dismissed - decided against appellant.

Issues Involved:
1. Confirmation of duty and imposition of penalties on M/s. Kishore Zarda Factory and associated individuals.
2. Allegations of clandestine manufacture and removal of goods.
3. Reliance on third-party records and statements.
4. Denial of cross-examination of witnesses.
5. Evidentiary requirements for proving clandestine removal.
6. Revenue's appeal against the dropping of a part of the demand.

Issue-wise Detailed Analysis:

1. Confirmation of Duty and Imposition of Penalties:
The Commissioner confirmed a duty of around ?5.54 Crores against M/s. Kishore Zarda Factory, along with interest and a penalty of an identical amount under Section 11AC of the Central Excise Act, 1944. Additional penalties were imposed on associated individuals: ?5.00 Lakhs on Shri Chandra Kishore, Partner; ?2.00 Lakhs each on Shri Ramesh Chandra Khandelwal, Authorized Representative, and Shri Uma Shankar Prasad, Proprietor of M/s. J.P. & Sons.

2. Allegations of Clandestine Manufacture and Removal of Goods:
The case against M/s. Kishore Zarda Factory was based on allegations of clandestine manufacture and removal of "Halchal" brand Zarda. The factory was inspected, and no discrepancies in stock or incriminating materials were found. However, goods were seized from the Sealdah railway station and the premises of M/s. Khandelwal Surti House, leading to the issuance of a show cause notice alleging clandestine clearance without payment of duty.

3. Reliance on Third-Party Records and Statements:
The Revenue's case heavily relied on third-party records and statements obtained during investigations. Statements from various individuals, including transporters and raw material suppliers, were used to allege unaccounted procurement and clandestine clearance of Zarda. The Commissioner (Appeals) had previously set aside similar allegations due to insufficient affirmative evidence, which was not challenged by the Revenue and thus attained finality.

4. Denial of Cross-Examination of Witnesses:
The appellants requested cross-examination of the deponents of the statements relied upon by the Revenue, which was denied by the adjudicating authority. The Tribunal noted that the denial of cross-examination led to a violation of the principles of natural justice, as the statements could not be considered conclusive proof without being tested through cross-examination.

5. Evidentiary Requirements for Proving Clandestine Removal:
The Tribunal emphasized that findings of clandestine removal must be based on positive, tangible, and affirmative evidence. The reliance on third-party documents and uncorroborated statements was insufficient to establish clandestine activities. The Tribunal referred to several precedents, including the Hon'ble Supreme Court's decision in Andaman Timber Industries, which highlighted the necessity of cross-examination to validate statements used as evidence.

6. Revenue's Appeal Against Dropping of Part of the Demand:
The Adjudicating authority had dropped a demand of around ?61.00 Lakhs based on unaccounted purchase of Zarda from M/s. Niranjan Tobacco Company, which the Revenue appealed. However, the Tribunal found that the evidentiary basis for the dropped demand was also reliant on third-party records and untested statements, leading to the conclusion that the Revenue's appeal was infructuous.

Conclusion:
The Tribunal set aside the impugned orders confirming demands and penalties against M/s. Kishore Zarda Factory and associated individuals, citing the lack of admissible evidence and violation of natural justice principles. The reliance on untested third-party statements and documents was deemed insufficient to uphold the allegations of clandestine removal. Consequently, the appeals were allowed with consequential relief to the appellants, and the Revenue's appeal against the dropped demand was rejected.

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