2015 (11) TMI 1032 - AT - Central Excise

Duty demand - Clandestine removal of goods - whether on the basis of the recovery of a private ledger book from the factory premises of SSSRM which contain entries regarding receipt of MS Ingots by SSSRM from the appellant company during the period from April 2005 to August 2005 allegation of clandestine removal can be made against the appellant - Held that - In terms of the Apex Court judgment in the case of Kishin Chand Chella Ram vs. Commissioner of Income Tax reported in 1980 (9) TMI 3 - SUPREME Court allegation of duty evasion cannot be made against an assessee on the basis of the entries in the records being maintained by some other person unless an opportunity for cross examination of that person had been allowed. In this case no such opportunity for cross examination of the writer of the private ledger book of SSSRM or their supervising officer had been given. Moreover, the entries in the private ledger book of SSSRM showing receipt of MS Ingots from the appellant during the period from April 2005 to August 2005 are not supported by any other independent evidence on record. Therefore, we hold that merely on the basis of the entries in the private ledger book of SSSRM, the allegation of duty evasion against the appellant company cannot be sustained. Merely because during 2003-2004 the appellant sold their finished goods on a small profit margin of ₹ 15 per MT and during 2005-2006 the appellant sold their products at the loss of 1278 per MT, no adverse conclusion can be drawn and merely on profit and loss data it cannot be concluded that the appellant were indulging in duty evasion by clandestine removal during this period. Though the Department alleges that during 2004-2005 and 2005-2006 the appellant had received the commission income of ₹ 1,16,25,916/- from commission agent certificate from parties which is an unrelated activity and thereby implying that the appellant were under reporting their production and showing their income from manufacturing activity as the income from commission agent service, no adverse conclusion can be drawn from this, as the appellant s claim that they had paid service tax on the commission income and also the income tax had been deducted at the source on the payments being received is not disputed. Moreover, no inquiry has been conducted to prove that these service transactions are bogus. When the Department does not dispute that till August 2004 the furnace installed in the appellant unit was 3 M.T. capacity and only in September 2004 this furnace was replaced by the furnace with 6 M.T. capacity and thus still August 2004 the capacity of production of the unit was only 6300 M.T. per annum and only w.e.f. September 2004 the installed capacity was enhanced to 12600 MT per annum and on this basis the maximum production during the period from April 2002 to September 2006 would be 40950 M.T. against which the production recorded in the statutory recorded during this period on which duty has been paid is 37478.94 M.T., merely based on the assumed power consumption norm of 689 units per MT for which there is no basis, the appellant unit cannot be alleged to have manufactured and cleared 64511 MT of MS Ingots during the same period. - Impugned order is unsustainable - Decided in favour of assessee.

Issues Involved:
1. Allegation of clandestine removal of MS Ingots without payment of duty.
2. Validity of evidence based on private ledger book entries of a third party (SSSRM).
3. Determination of production capacity and power consumption norms.
4. Basis for the duty demand and penalties imposed.

Issue-wise Detailed Analysis:

1. Allegation of Clandestine Removal of MS Ingots:
The appellant, a manufacturer of MS Ingots, was accused of clandestinely removing MS Ingots without paying the required Central Excise duty. The Department's investigation revealed discrepancies in the records of MS Ingots received by SSSRM from the appellant. The Department alleged that during July and August 2005, 927.57 MT of MS Ingots were clandestinely cleared without payment of duty, resulting in a duty evasion of Rs. 25,39,575/-. Additionally, it was alleged that from April 2005 to July 2005, MS Ingots worth Rs. 5,25,33,509/- and runners and risers worth Rs. 2,01,000/- were supplied without invoices, leading to a total duty evasion of Rs. 1,11,45,944/-.

2. Validity of Evidence Based on Private Ledger Book Entries:
The Department relied on entries in the private ledger book of SSSRM to substantiate the allegations of clandestine removal. However, the Tribunal noted that these entries alone could not be the basis for such allegations without corroborating evidence. The Tribunal referenced the Apex Court judgment in Kishin Chand Chella Ram vs. Commissioner of Income Tax, emphasizing that allegations based on third-party records require an opportunity for cross-examination of the person maintaining those records. Since no such opportunity was provided, and there was no independent evidence supporting the ledger entries, the Tribunal held that the allegations of duty evasion could not be sustained solely on this basis.

3. Determination of Production Capacity and Power Consumption Norms:
The Department conducted a special audit and determined that the appellant's production capacity was 12,600 MT per annum. They estimated the actual production during April 2002 to September 2006 as 64,511.25 MT based on a power consumption norm of 689 units per MT. However, the appellant contended that their power consumption varied between 972 to 1486 units per MT, and the norm of 689 units per MT was arbitrary and without basis. The Tribunal agreed with the appellant, noting that no actual study or experiment was conducted to determine the power consumption norm for the appellant's unit. The Tribunal cited several judgments, including R.A. Castings Pvt. Ltd. vs. CCE, Meerut I, where it was held that duty demand based on power consumption norms without tangible evidence is not sustainable.

4. Basis for the Duty Demand and Penalties Imposed:
The Department issued a show cause notice demanding duty of Rs. 5,37,28,971/- for the alleged clandestine removal of MS Ingots, along with interest and penalties. The Commissioner confirmed the duty demand and imposed penalties on the appellant company and its director. However, the Tribunal found that the duty demand was based on arbitrary power consumption norms and unsupported allegations of clandestine removal. The Tribunal emphasized that the Department did not dispute the installed capacity of the appellant's unit and that the maximum production based on this capacity was 40,950 MT, against which the recorded production was 37,478.94 MT. Thus, the Tribunal concluded that the allegations of clandestine production and clearance were without basis and set aside the impugned order.

Conclusion:
The Tribunal allowed the appeals, holding that the allegations of clandestine removal and the consequent duty demand were not sustainable due to the lack of corroborating evidence and the arbitrary basis for determining power consumption norms. The penalties imposed on the appellant company and its director were also set aside.

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