The Kolkata Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has set aside a central excise duty demand of over ₹7.06 crore, holding that a mere discrepancy between book stock and physically verified stock cannot, by itself, establish clandestine removal of excisable goods. 

The bench of Ashok Jindal (Judicial  Member) and K. Anpazhakan (Technical  Member) observed that allegations of clandestine manufacture and removal must be supported by tangible and corroborative evidence, not assumptions based on estimated stock shortages. 

The appeal arose from an Order-in-Original passed by the Commissioner of GST & Central Excise, Bhubaneswar, confirming a demand of ₹7,06,34,526, along with interest and an equivalent penalty, against M/s. Neelachal Ispat Nigam Ltd. The department alleged that the company had clandestinely removed pig iron, mixed coke and crude tar without payment of central excise duty. 

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The dispute originated after an external agency conducted a physical stock verification as on 31 March 2013. The survey found that the physical stock of pig iron was approximately 20,327 MT lower than the quantity reflected in the Daily Stock Account (DSA). Based on this reported shortage, the Directorate General of Central Excise Intelligence (DGCEI) initiated an investigation, culminating in a show cause notice alleging clandestine clearance of excisable goods. 

The company argued that the alleged shortage was merely notional and arose because pig iron production was not recorded through actual weighment after the manufacturing process. Instead, production figures were derived using historical hot metal-to-pig iron conversion ratios, which varied significantly over the years.

According to the appellant, while dispatches were recorded on actual weighment, production entries in statutory records were based on estimated conversion ratios due to the absence of a weighing system near the pig casting machine. Consequently, differences between book stock and physical stock were inevitable and did not indicate clandestine removal. The company also highlighted that the external agency had conducted stock verification on a volumetric basis rather than actual weighment, making the figures inherently approximate. 

The appellant further submitted that immediately after detecting the discrepancy, it constituted internal committees, investigated the reasons, revised its accounting procedures, and considered installing additional weighing facilities to avoid future variations. These internal records, according to the company, demonstrated transparency rather than any intent to evade duty. 

The Tribunal found merit in the appellant’s explanation. It noted that the company did not possess a weighing system for pig iron at the relevant stage of production and that production figures were determined on the basis of yield estimates. Consequently, discrepancies between estimated production records and physical stock were possible.

The Bench further observed that even the physical verification itself had been carried out using eye estimation and volumetric calculations, rather than actual weighment. In the absence of any precise weighment report, the Revenue could not conclusively establish that goods shown in the records had actually been removed from the factory without payment of duty. 

The Tribunal also distinguished the Punjab and Haryana High Court’s decision in Martin and Harris Laboratories Ltd., relied upon by the Revenue, observing that the facts of the present case were materially different because the appellant had provided a plausible technical explanation for the discrepancy arising from its production methodology. 

A significant aspect of the decision was the Tribunal’s reiteration that clandestine removal is a serious allegation requiring positive, independent and corroborative evidence.

The Bench pointed out that the department had failed to produce any evidence regarding: Procurement of excess raw materials; Unaccounted manufacture of finished goods; Identification of buyers; Transportation of alleged clandestinely removed goods; Receipt of sale proceeds; Excess electricity consumption; or Recovery of incriminating transport or commercial documents.

Instead, the entire case rested upon an estimated stock shortage, which, according to the Tribunal, could not legally sustain a charge of clandestine removal. 

The Tribunal extensively relied upon its earlier decision in Rashtriya Ispat Nigam Ltd., where it had recognised the practical difficulties faced by large steel plants in accounting for production and stock due to estimation-based methodologies.

It also referred to the principles laid down in Arya Fibres Pvt. Ltd., reiterating that clandestine manufacture and removal cannot be inferred merely from discrepancies in stock records without independent corroborative evidence establishing actual illicit clearance of goods. 

Further, the Bench relied upon its decision in Micky Metal Ltd., where it had held that differences between statutory returns and financial records alone cannot justify allegations of clandestine removal in the absence of a comprehensive investigation. 

The Tribunal also noted that, during the relevant period, the appellant functioned as a joint venture of Central Public Sector Enterprises and Odisha Government undertakings. Considering its public sector character, the Bench observed that allegations of deliberate clandestine clearance with mala fide intent could not be readily inferred merely from accounting discrepancies. 

Holding that the department had failed to establish clandestine removal through legally admissible and corroborative evidence, the CESTAT allowed the appeal and set aside the demand of ₹7.06 crore, along with the interest and equivalent penalty imposed on the appellant. The Tribunal concluded that estimated stock shortages arising from production methodology and volumetric stock verification cannot substitute proof of clandestine manufacture and clearance. 

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