2025 (4) TMI 1182 - AT - Central Excise

Method of valuation - assorted leaf springs and assemblies - to be classified u/s 4 of the Central Excise Act 1944 or u/s 4A? - Clandestine removal - demand worked out on the basis of the comparison of the figures in the order sheets with invoices issued during the same month - HELD THAT - Taking note of the fact that the Revenue authorities have accepted the order in appeal dated 17.11.2017 holding that the value of the assorted leaf springs seized and confiscated in the same proceedings initiated during the search of the Appellant premises on 04.08.2015 there are no merits in the appeal filed by Revenue in the present proceedings. Revenue authorities do not have discretion to pick and chose the proceedings for filing the appeal when they have accepted the order on the same issue earlier. Even otherwise the both the authorities have concluded that the goods in the form in which they cleared do not qualify to be cleared in the packaged form for which the provisions of Standard of Weight and Measures Act and Rules made thereunder will be applicable. That being so in view of the decision of the Hon ble Supreme Court in case of Jayanti Food Processing (P) Ltd. 2007 (8) TMI 3 - SUPREME COURT valuation will have to be done as per Section 4 of the Central Excise Act 1944 and not under Section 4A ibid. The finding of fact and the application of the case law in terms of the referred decision of Hon ble Apex Court do not call for any interference and the appeal filed by the Revenue is without any merits. The demand has been worked out on the basis of the comparison of the figures in the order sheets with invoices issued during the same month. In some months where the figures as per the invoices is higher than the figure indicated in the order sheet the differential figure of number of assorted leaf springs cleared clandestinely is shown as 0 (Zero). In the months where figure of number of leaf springs as per order sheet is higher than the number in the invoice the differential is alleged to be cleared clandestinely. No explanation is given for adopting such an approach. It is possible that the number of assorted leaf spring which are found in excess in one month get cleared in subsequent month or vice versa. The assessable value of the assorted leaf springs have been calculated on the basis of the presumption in terms of the formula which has been adopted by the adjudicating authority which do not have any basis in law. During search of the premises of the Appellant certain excesses of the finished goods were found which were seized by the officers. In respect of these excess finished the value of the seized goods was determined as per Section 4A and show cause notice dated 29.01.2016 was issued to the Appellant. This show cause notice was adjudicated by the original authority determining the seizure value in line with the proposal made in the show cause notice on the basis of Section 4A of the Central Excise Act 1944. Interestingly on the basis of the statement of the Shri Ashu Pandey Authorized Signatory of the Appellant recorded on 23.01.2018 and accepted by the proprietor in his statement on 04.04.2018 the present show cause notice dated 20.04.2018 was issued to Appellant seeking to value the alleged clandestinely cleared goods again in terms of Section 4A of Central Excise Act 1944 - The formula adopted by the adjudicating authority for valuation under Section 4 which is only a mathematical exercise has no basis in law. Thus computation of the assessable value on such basis cannot be anything other than presumption for computing the demand. Appellant was never put to notice about any such presumption in the show cause notice. The demand made on the basis of such erroneous computations and presumptions do not satisfy the test of pre-ponderance of probability enunciated by the Hon ble Supreme Court in case of D Bhoormull 1974 (4) TMI 33 - SUPREME COURT and relied in the impugned order. The demand thus made in respect of alleged clandestinely cleared goods on the basis such erroneous computations and presumptions need to be set aside. It is evident that the panchnama is totally silent about the manner in which stock verification was undertaken. From the annexure to Panchnama it is transpires that Appellant had stock of about 93.6 Tons of Assorted spring leafs and 960 pcs of Spring leaf assembly. Even the in the statement of Shri Ashu Pandey recorded on that date nothing is forthcoming to say how this stock was verified and excesses and shortages determined. In absence of any thing with regards to the manner of stock verification in the panchnama there are no merits in the confirmation of the demand made in respect of shortages determined. There are no merits in the impugned order to the extent it uphold the order in original to the extent of demanding duty in respect of allegedly clandestinely cleared assorted spring leafs and the shortages of spring leaf assembly detected at the time of visit of officers on 04.08.2015. As there are no merits in the demand the penalties imposed also need to be set aside. Conclusion - Assorted leaf springs cleared loose without any packaging do not qualify as retail packages under the Legal Metrology (Packaged Commodities) Rules 2011 and hence valuation under Section 4A of the Central Excise Act 1944 is not applicable. Valuation must be done under Section 4 of the Act. Appeal allowed.

Summary

The core legal issues considered by the Appellate Tribunal in this matter include:

(i) Whether the valuation of the goods in question-specifically assorted leaf springs and assemblies-was correctly done under Section 4 of the Central Excise Act, 1944, or whether Section 4A should have applied;

(ii) Whether the demand of Central Excise duty on clandestine removals of finished goods and shortages of stock (both raw material and finished goods) was sustainable under the provisions of Section 11A(4) of the Central Excise Act, 1944 read with Section 174 of the CGST Act, 2017;

(iii) Whether interest on delayed payment of duty was correctly imposed under Section 11AA of the Central Excise Act, 1944;

(iv) Whether penalty under Section 11AC of the Central Excise Act, 1944 read with Rule 25 of the Central Excise Rules, 2002 was justified;

(v) The evidentiary value of statements recorded under Section 14 of the Central Excise Act, 1944, especially when retracted, and the sufficiency of documentary evidence to prove clandestine removal;

(vi) The correctness of the method and basis of computation of the differential duty demand;

(vii) The validity of demand on shortages of raw material and finished goods found during physical stock verification;

(viii) The applicability of the Legal Metrology Act and the Legal Metrology (Packaged Commodities) Rules, 2011 to the goods in question;

(ix) The principles governing the acceptance or rejection of retracted statements and the standard of proof required for establishing clandestine removals and duty evasion.

Issue-wise Detailed Analysis

1. Valuation of Goods: Applicability of Section 4 vs Section 4A of the Central Excise Act, 1944

The legal framework involves Section 4 and Section 4A of the Central Excise Act, 1944. Section 4 governs valuation based on transaction value or prescribed methods where goods are not sold, while Section 4A mandates valuation with reference to retail sale price for goods specified by the Central Government, particularly those required to declare retail sale price on packaging under the Legal Metrology Act or its rules.

The Tribunal examined the nature of the goods-assorted leaf springs and assemblies-and whether they qualified as "retail packages" under Rule 2(k) of the Legal Metrology (Packaged Commodities) Rules, 2011. The goods were sold in loose, unpackaged form, not intended for retail sale to ultimate consumers but rather for industrial use. The Tribunal relied on the Apex Court precedent in Jayanti Food Processing (P) Ltd. vs. CCE Rajasthan, which sets out four pre-requisites for applying Section 4A:

• Goods must be excisable;
• Goods must be sold in packaged form;
• There must be a legal requirement to declare retail sale price on the package;
• The Central Government must have notified such goods.

Since the goods were not packaged and no retail sale price was declared on packaging, Section 4A was held inapplicable. The valuation under Section 4 was upheld as correct. The Tribunal also noted that the Revenue had earlier accepted this position in related proceedings involving seized excess stock of the same goods, reinforcing the consistency of this interpretation.

2. Demand of Duty on Clandestine Removals and Shortages

The demand arose from two sources: clandestine removal of finished goods without payment of duty and shortages found during physical stock verification of raw materials and finished goods.

The Tribunal analyzed the evidentiary basis for clandestine removals, which primarily rested on order slips recovered during a search, statements recorded under Section 14 of the Act, and the absence of corresponding invoices for certain clearances. The authorized signatory admitted in his statement that some goods were cleared without payment of duty and that payments were received in cash without accounting entries. Although this statement was later retracted, the Tribunal applied Supreme Court precedents (K.T.M.S. Mohd v. Union of India; Jethmal Pithaii v Assistant Collector of Customs) to hold that mere retraction without proof of coercion or duress does not diminish the evidentiary value of the original statement. The Tribunal concluded that the retraction was a calculated afterthought to avoid liability and rejected it.

Regarding shortages found during physical stock verification, the Tribunal distinguished between shortages of raw material and finished goods. It relied on a Tribunal precedent (Frontline Metal Pvt Ltd) holding that mere shortage of raw material does not conclusively prove clandestine removal. Consequently, the demand for duty on shortage of raw material was set aside. However, for shortages of finished goods (spring leaf assemblies), the Tribunal found the evidence-signed panchnama and inability of the appellant to explain shortages-sufficient to uphold the duty demand.

3. Interest and Penalty

Interest under Section 11AA was confirmed on delayed payment of duty. Penalty under Section 11AC read with Rule 25 of the Central Excise Rules was imposed for deliberate suppression and evasion of duty. While the penalty was upheld, the quantum was reduced by the Tribunal. The Tribunal reasoned that the appellant deliberately suppressed material facts and engaged in clandestine removals, warranting penalty.

4. Computation of Duty Demand and Evidentiary Issues

The Tribunal scrutinized the method of computation of the differential duty demand based on discrepancies between order slips and invoices. It observed inherent contradictions, such as ignoring months where invoice figures exceeded order slip figures and treating only positive discrepancies as clandestine removals without explanation. The Tribunal noted that such an approach lacked legal basis and did not satisfy the standard of preponderance of probability as enunciated by the Supreme Court in CC vs I. Bhoormull.

Further, the assessable value per piece was computed on a pro-rata basis using a formula not disclosed in the show cause notice, amounting to a presumption rather than a legally grounded valuation method. The Tribunal held that such presumptive computation without prior notice and legal basis was impermissible and set aside the demand based on it.

5. Validity of Show Cause Notice and Consistency of Revenue's Position

The Tribunal noted inconsistency in the Revenue's approach: a show cause notice issued after a prior appellate order had rejected the application of Section 4A valuation and accepted Section 4 valuation. The Tribunal emphasized that the Revenue cannot selectively appeal or take contradictory positions in related proceedings, especially after accepting an appellate order. This undermined the Revenue's valuation demand under Section 4A in the present case.

6. Applicability of Legal Metrology Act and Rules

The Tribunal analyzed the Legal Metrology (Packaged Commodities) Rules, 2011, defining "retail package" and "retail sale." It concluded that the goods in question were not retail packages as they were sold loose and not intended for ultimate consumer consumption. Therefore, the statutory requirement to declare retail sale price on packaging did not apply, negating the applicability of Section 4A valuation.

7. Treatment of Statements and Evidence

The Tribunal extensively reviewed legal precedents on the evidentiary value of statements recorded under Section 14 of the Central Excise Act, 1944, especially when retracted. It held that retraction alone does not invalidate a statement unless coercion, inducement, or threat is established. The Tribunal found the appellant's retraction to be an afterthought and accorded primacy to the original admissions corroborated by other evidence such as order slips and stock verification reports.

8. Demand on Shortages of Raw Material vs Finished Goods

While the Tribunal upheld the demand on shortages of finished goods due to lack of plausible explanation and signed panchnama, it set aside the demand on shortages of raw materials citing authoritative precedent that mere shortage does not prove clandestine removal. This distinction reflects a nuanced application of evidentiary standards.

9. Penalty Imposition

The Tribunal found penalty justified due to deliberate suppression and evasion of duty. However, it reduced the penalty amount, reflecting a balanced approach considering the facts and mitigating factors.

Significant Holdings

"Assorted leaf springs" cleared loose without any packaging do not qualify as retail packages under the Legal Metrology (Packaged Commodities) Rules, 2011, and hence valuation under Section 4A of the Central Excise Act, 1944 is not applicable. Valuation must be done under Section 4 of the Act.

"The Department is not required to prove its case with mathematical precision, but what is required is the establishment of such a degree of probability that a prudent man may on its basis believe in the existence of the facts in issue."

"Retraction of a statement recorded under Section 14 of the Central Excise Act, 1944, without evidence of coercion, inducement, or threat, does not diminish its evidentiary value, especially when corroborated by other evidence."

"Mere shortage of raw material cannot lead to the conclusion that it was due to clandestine removal of raw or finished product."

"Revenue authorities do not have discretion to pick and choose proceedings for filing appeals when they have accepted the order on the same issue earlier."

"Computation of assessable value on a presumption or formula not disclosed in the show cause notice lacks legal basis and cannot sustain demand."

Final determinations included confirmation of valuation under Section 4, dismissal of Revenue's appeal on valuation, setting aside of demand and penalty related to raw material shortages, rejection of demand based on flawed computation of clandestine removals, and allowance of appellant's appeal on these grounds. The demand and penalty relating to clandestine removals and shortages of finished goods were set aside due to lack of sufficient evidence and flawed computation methods.