2025 (2) TMI 477 - AT - Central Excise

Clandestine production and removal of sponge iron - shortage of stock - undervaluation - input / output ratio - it is alleged that by consuming 160198 MT of Iron Ore Fe of 63% the Appellant should have manufactured estimated production of 95927 MT of Sponge Iron whereas the Appellant has produced 84385 MT of Sponge Iron which is short by 11542 MT - Penalty on Managing Director. HELD THAT - There is nothing to indicate that the Revenue has made independent study of the working of the appellant s plant to take some sample outputs to study the pattern of input / output ratio. As per the data of Purchase of Iron Ore Fe Content Grade-wise Coal purchased Input / output ratio declared by the appellant in their Annual Returns reproduced in the previous paragraphs by way Table the year-wise details show that the input / output ratio ranges between 1 1.92 in 2008-09 to 1 1.87 during the period April 2009 to February 2010. The contents of the Table are all declared figures and are verifiable. There is nothing to indicate that due consideration was given for these submissions by the Adjudicating authority before coming to his conclusions. His conclusions seem to be flowing directly from the input/output ratio adopted by the Dept at the time of issuing the Show Cause Notice. The appellant has filed the Annual Returns showing their input / output ratio for the years 2008-09 and 2009-10 which has not been rebutted by the Revenue by taking up sample production lots. The Revenue has relied solely on the so called expert opinion alone. It is observed from the above decisions as well as the decisions relied within these cases mere expert opinion on its own without any cogent corroborative evidence has no value and does not carry the Revenue further. Whether the clandestine clearance stands proved by the Revenue? - HELD THAT - The entire focus of the Revenue in this case has been on proving the clandestine manufacture based on the input/output ratio as given by expert third party. There are no effort has been made by the Revenue on this front - Removal of 11542 MT of sponge iron would require movement hundreds of vehicles. No private records have been seized showing any cash transactions. No statements have been recorded from the purported buyers of the sponge iron. Thus there are no iota of evidence being gathered by the Revenue to fortify their allegation towards clandestine removal. The Revenue has not brought in any evidence to show as to how this undervaluation would have resulted in any commercial benefit to the appellant. Since the both units share a common balance sheet at the end of the Financial Year and the Excise Duty paid by the appellant is available as eligible Cenvat Credit at the end of the receiving unit the situation is that of Revenue neutral. Hence the confirmed demand of Rs.1, 42, 845/- set aside. Time limitation - HELD THAT - The Revenue has not brought in any evidene to the effect that the appellants have indulged in suppression with an intent to evade. Therefore the confirmed demand in respect of extended period is hit by time bar provisions. Accordingly the order to this extent set aside even on account of time bar. Penalty on Managing Director - HELD THAT - Since the confirmed demand is not sustainable on merits and on account of limitations the penalty imposed on the Managing Director also does not sustain. Hence the penalty imposed on him do not sustain. Conclusion - i) The demands based on theoretical input/output ratios without corroborative evidence are unsustainable. ii) The lack of evidence for clandestine manufacture and removal led to the dismissal of the demand. iii) The demand was also barred by the limitation period as there was no suppression of facts by the appellant. iv) The penalty on the Managing Director was set aside due to the unsustainability of the primary demand. The Appeals stand allowed on merits and on account of time bar.

Summary

The judgment from the Appellate Tribunal at CESTAT Kolkata involves an appeal concerning allegations of clandestine production and removal of sponge iron by the appellant, a manufacturer of sponge iron and M.S. ingots. The core issues revolve around the alleged clandestine manufacture and removal of 11,542 MT of sponge iron and the under-valuation of 991.885 MT of sponge iron, resulting in a demand for unpaid duty.

Issues Presented and Considered:

The Tribunal considered the following core legal issues:

• Whether the demand for duty based on "estimated production" using theoretical input/output norms is justified.
• Whether there is sufficient evidence to support the allegations of clandestine manufacture and removal of sponge iron.
• Whether the demand is barred by the limitation period under Section 11A(1) of the Central Excise Act.
• Whether the penalty imposed on the Managing Director under Rule 26 of the Central Excise Rules, 2002, is sustainable.

Issue-wise Detailed Analysis:

1. Demand Based on Estimated Production:

• The Revenue's demand was based on an input/output ratio of 1:1.67, derived from expert opinions, which suggested that with 1.67 MT of iron ore, 1 MT of sponge iron should be produced. The appellant contended that their actual input/output ratio was between 1:1.87 and 1:1.92 due to the inferior quality of raw materials used.
• The Tribunal noted that the Revenue did not conduct an independent study of the appellant's manufacturing process, relying solely on expert opinions without considering the actual conditions at the appellant's plant.
• Previous case law, such as CCE vs. Agrasen Sponge Pvt. Ltd. and Aryan Ispat and Power Pvt. Ltd., was cited, where similar demands based on theoretical input/output ratios were dismissed due to lack of corroborative evidence.
• The Tribunal concluded that the demand based solely on theoretical norms without tangible evidence of clandestine production was unsustainable.

2. Evidence of Clandestine Manufacture and Removal:

• The Tribunal emphasized that for a charge of clandestine manufacture and removal to be upheld, there must be evidence of both the manufacture and the removal of goods.
• The appellant argued that there was no evidence of actual production, removal, or acceptance of goods by buyers, nor any evidence of financial transactions or transportation related to the alleged clandestine activities.
• The Tribunal found that the Revenue failed to provide any corroborative evidence, such as records of raw material procurement, transportation, or sale of the alleged clandestinely removed goods.
• Based on the lack of evidence, the Tribunal concluded that the allegations of clandestine manufacture and removal were not substantiated.

3. Limitation Period:

• The appellant contended that the demand was time-barred as the Show Cause Notice was issued beyond the normal limitation period of one year.
• The Tribunal noted that the appellant had disclosed all relevant information, including input/output ratios and production details, in their statutory returns, which were available to the Revenue.
• Citing the Supreme Court's decision in Anand Nishikawa Co. Ltd. vs. CCE, the Tribunal held that when facts are known to both parties, there is no suppression of facts warranting the invocation of the extended limitation period.
• The Tribunal concluded that the demand was barred by the limitation period.

4. Penalty on Managing Director:

• The penalty on the Managing Director was based on the alleged abetment of the company's offenses.
• Since the Tribunal found the demand unsustainable on merits and time-barred, the penalty imposed on the Managing Director was also set aside.

Significant Holdings:

• The Tribunal held that demands based on theoretical input/output ratios without corroborative evidence are unsustainable.
• The lack of evidence for clandestine manufacture and removal led to the dismissal of the demand.
• The demand was also barred by the limitation period as there was no suppression of facts by the appellant.
• The penalty on the Managing Director was set aside due to the unsustainability of the primary demand.
• The Tribunal allowed the appeals on both merits and limitation grounds, granting consequential relief to the appellants.

The judgment emphasizes the necessity of tangible evidence in cases of alleged clandestine manufacture and removal and reinforces the importance of adhering to statutory limitation periods. The Tribunal's decision aligns with established legal principles and precedents, ensuring that demands are based on concrete evidence rather than theoretical calculations.