By TIOL News Service

AHMEDABAD, JAN 03, 2014: THESE appeals relate to demand of duty on account of clandestine clearance of goods and goods purportedly cleared to EOUs without payment of duty, but diverted in local market. There are four demands as under:

(i) Rs.56,25,945/- leviable on 2,75,197.31 kgs of POY of 115/68 Denier, clandestinely manufactured and cleared by Nova Petrochemicals Ltd to Gupta Synthetics Ltd, who in turn had processed the said POY on their Draw Twisting Machine, liable to be recovered from Nova under the first proviso to sub-section (1) of Section 11A of the Central Excise Act, 1944.

(ii) Rs.3,93,20,685/-, leviable on 19,10,587.5 kgs of POY, during the period from March 2002 to August 2002, manufactured and clandestinely cleared by Nova, is liable to be recovered under the first proviso to sub-section (1) of Section 11A of the Act;

(iii) Rs.2,82,64,613/- leviable on 13,96,923 kgs of POY during the period from March 2002 to August 2002, manufactured and clandestinely cleared by Nova, liable to be recovered under the first proviso to sub-section (1) of Section 11A of the Act; and

(iv) Rs.9,77,62,573/- leviable on POY, purportedly cleared by Nova to various EOUs under CT-3 certificates, but in fact diverted in local market and not put to the intended use, liable to be recovered from Nova.

Perhaps, considering the amount of duty involved, Revenue had engaged a special counsel to represent the case. The appellant and various EOUs which are co-appellants were represented by different advocates and consultants.

The Preliminary ground taken by the appellant was that they were not allowed cross examination of the witnesses on whose statements/documents reliance had been placed in the Show Cause Notice. After considering the submissions by the appellant, the Tribunal held that the matter should be remanded for providing an opportunity to cross examine the witnesses, but with the consent of both sides, proceeded to decide the case on merits.

Since the demands mainly involve clandestine clearances, the appellants argued that the order passed by the Adjudicating Authority is contrary to a long line of decisions of Courts and of the Tribunal in the matter of how clandestine manufacture and clearance of goods has to be established by Revenue. The law, in this regard, has been repeatedly laid down by the Tribunal in a long line of cases, some which have also been affirmed by different High Courts, and one of them, by the Supreme Court. The issue of clandestine manufacture and clearance of goods arises in the case of first three demands confirmed in the impugned order and has some relevance to the fourth demand as well.

On behalf of the revenue, it was pleaded that the cases of clandestine removals have to be decided on the principle of preponderance of probability. It was not necessary for the revenue, nor possible, to establish the cases of clandestine manufacture and clearance with mathematical precision as has been observed by the Supreme Court in CC v D. Bhoormull, (2002-TIOL-253-SC-CUS) .

After hearing both sides at length, the Tribunal passed a detailed order in respect of the four demands, holding that the demands are not sustainable. The Tribunal formulated the following requirements to sustain the demand of clandestine removals:

(i) There should be tangible evidence of clandestine manufacture and clearance and not merely inferences or unwarranted assumptions;

(ii) Evidence in support thereof should be of:

(a) raw materials, in excess of that contained as per the statutory records;

(b) instances of actual removal of unaccounted finished goods (not inferential or assumed) from the factory without payment of duty;

(c) discovery of such finished goods outside the factory;

(d) instances of sale of such goods to identified parties;

(e) receipt of sale proceeds, whether by cheque or by cash, of such goods by the manufacturers or persons authorized by him;

(f) use of electricity for in excess of what is necessary for manufacture of goods otherwise manufactured and validly cleared on payment of duty;

(g) statements of buyers with some details of illicit manufacture and clearance;

( h ) proof of actual transportation of goods, cleared without payment of duty;

(i) links between the documents recovered during the search and activities being carried on in the factory of production; etc.

The Tribunal further held:

Clandestine manufacture and clearance cannot be readily inferred from documents and statements, they have to be established on evidence, relatable to or linked with actual manufacturing operations. As far as the present demand is concerned, there is no such evidence forthcoming in the record before us. Mere reliance on note books/diaries or statements cannot justify a finding of clandestine manufacture and/or clearance. The probative value of the entries needs to be established by independent corroboration, which is lacking in the present case. The long line of decisions referred to and relied upon by the ld. Senior advocate for Nova have laid down the parameters for a charge of clandestine manufacture and clearance to be established, which have not been satisfied in the present case. We need to say nothing more. The present demand of Rs.3 ,93,20,685 /- is, therefore, unjustified and deserves to be set aside. Accordingly, we do so.

With regard to demand of Rs. 2 ,82,64,613 /- , the Tribunal held

We have no hesitation in holding that this demand has been made without any concrete or tangible evidence, and for the sole reason that no goods were sent out because the vehicle no. indicated was wrong. No attempt was made to find out from the parties to whom 130 consignments had been sent as to whether or not they received the goods. We accordingly, set aside the duty demand of Rs. 2 ,82,64,613 /- confirmed against Nova, as being not substantiated.

In respect of the demand of Rs.9 ,77,62,573 /- , being duty on the goods cleared to EOUs, but diverted in the local market, the Tribunal held:

The textile industry being one of the predominant industries in Surat , it is difficult for us to conceive that clandestine activities of sales of such large magnitude could have taken place without coming to the notice of the Central Excise authorities. This is not a case where goods sent to an EOU were found being sold in the domestic market. There is no evidence of any sale and there has been no identification of even a single buyer.

There being a conspicuous absence of evidence of actual diversion of the goods into the domestic market, transactions in such goods by named persons, and flow-back of funds, a demand as in the present case cannot be sustained on the basis of mere statements made by transporters of goods and that too, not of the drivers who transported the goods but of the owners of such company, who were not involved in the physical transport of the goods. To say the least, the impugned order is solely based on the statements which have no precise content.

From our discussion above, it would be clear that none of these grounds is substantiated by concrete or credible evidence. Mere reliance on the statements not corroborated by tangible evidence cannot be the basis for confirmation of a demand of high demand as in the present case, On the basis of the aforesaid findings, we are constrained to set aside the demand of Rs.9,77,62,573/-.

(See 2014-TIOL-15-CESTAT-AHM)