The Karnataka High Court has held that electricity consumption by itself cannot constitute sufficient evidence to establish clandestine production and removal of excisable goods.
The bench of Justice S.G. Pandit and Justice Rajesh Rai K dismissed the Central Excise Department’s appeal affirming the Customs, Excise and Service Tax Appellate Tribunal’s (CESTAT) decision in favour of the manufacturer. The Department failed to establish procurement of raw materials outside the books, clandestine manufacture, removal of finished goods without payment of duty, receipt of sale proceeds from alleged unaccounted sales.
The petitioner/assessee is a manufacturer of non-alloy steel ingots and rolled products, was investigated by the Directorate General of Central Excise Intelligence (DGCEI) following intelligence alleging large-scale evasion of Central Excise duty through clandestine manufacture and removal of steel products.
Searches conducted at the company’s factory, the Managing Director’s residence, and premises of dealers and suppliers resulted in seizure of documents and recording of statements from various persons. Based on the investigation, the Department alleged that the company had produced and cleared substantial quantities of CTD bars without payment of excise duty.
The Department issued multiple show cause notices covering different periods.
The principal notice sought recovery of ₹7.59 crore towards alleged clandestine removals between August 2001 and December 2005. A second notice demanded ₹1.84 crore for the period January 2006 to October 2006, while a third notice sought ₹1.17 crore for the period November 2006 to June 2007. Interest and equivalent penalties were also proposed.
The Commissioner of Central Excise confirmed duty demands, appropriated ₹50 lakh already deposited by the assessee, and imposed equivalent penalties under Section 11AC of the Central Excise Act along with additional penalties under the Central Excise Rules.
The Department’s principal allegation rested upon electricity consumption data.
It relied upon a Chartered Engineer’s opinion stating that approximately 1,000 KWH per metric tonne was required to manufacture steel ingots and 200 KWH per metric tonne for CTD bars. Based on these assumptions, the Department concluded that the company had consumed significantly higher electricity than what was necessary for its recorded production, indicating unaccounted manufacture.
The Revenue also relied upon alleged unaccounted purchases of scrap, computer printouts and invoices, statements of directors, statements of transporters and scrap dealers, alleged parallel invoices and duplicate clearances.
The company contended that the entire case rested upon assumptions rather than scientific evidence.
It argued that the Chartered Engineer had neither conducted any trial production nor considered crucial variables such as furnace size, age, capacity, raw material quality, and operational conditions while prescribing electricity consumption norms.
During cross-examination, the expert admitted that there was no universally accepted technical literature prescribing fixed electricity consumption standards and acknowledged errors in his calculations. The assessee also pointed out that statements relied upon by the Department had subsequently been retracted and that loose slips allegedly showing scrap purchases did not bear the company’s name or signatures.
After examining the material on record, the High Court found no infirmity in the Tribunal’s reasoning.
The Court observed that the Commissioner’s findings were substantially based on estimated electricity consumption norms supplied by experts whose opinions lacked scientific validation.
The Court noted that the expert himself admitted no trial production was conducted; no technical literature prescribed standard consumption norms; furnace capacities were not separately evaluated; calculations contained factual errors; estimates were based on assumptions rather than scientific analysis.
The Bench further observed that another qualified engineer had given a significantly different opinion regarding electricity consumption, while technical reports relied upon by the Department themselves disclosed widely varying power consumption ranges.
The High Court emphasized that allegations of clandestine manufacture require strong corroborative evidence.
The Court also observed that several scrap dealers had retracted their earlier statements during cross-examination and that reliance on such evidence was unsafe.
Answering the substantial questions of law largely against the Revenue, the Karnataka High Court held that the Tribunal had correctly appreciated the evidence and rightly concluded that clandestine production of steel ingots cannot be determined solely on the basis of electricity consumption analysis.
Finding no legal error in the Tribunal’s order, the Court dismissed the department’s appeal and upheld the relief granted to the assessee.
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