The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Kolkata Bench, has set aside central excise duty demands exceeding ₹85 lakh against a manufacturer, holding that serious allegations of clandestine removal or excise duty evasion cannot be sustained merely on presumptions, accounting discrepancies, or procedural lapses without independent corroborative evidence.
The appeal arose from an Order-in-Original passed by the Commissioner of Customs, Central Excise and Service Tax, Siliguri, which had confirmed a demand of ₹84.73 lakh on allegations of clandestine manufacture and clearance of finished goods and an additional demand of ₹76,051 on alleged undervaluation of goods supplied to a purportedly related concern. Equivalent penalties and interest had also been imposed.
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The proceedings originated from investigations conducted by the Directorate General of Central Excise Intelligence (DGCEI), Guwahati and Kolkata units, covering the financial years 2012-13 and 2013-14. Searches were conducted at the company’s factory, office premises, and the residence of its Chief Executive Officer, during which various documents and records were seized. Based on these records, the department alleged that the company had clandestinely manufactured and cleared finished goods without payment of central excise duty and had undervalued goods supplied to a related entity.
According to the department, the manufacturer had received wire rods under 33 invoices during the relevant period but had failed to record these inputs in the RG-23A Part-I register. The authorities concluded that the unaccounted inputs must have been consumed in the manufacture of finished goods that were subsequently cleared without payment of duty. Based on assumptions regarding manufacturing losses and production patterns, the department calculated alleged clandestine clearances of more than 15 lakh kilograms of finished goods and quantified excise duty liability at ₹84.73 lakh.
The department further relied upon variations in electricity consumption and freight expenses between the two financial years as corroborative indicators of suppressed production and clandestine removals.
The company strongly contested the allegations, arguing that the wire rods in question had not been used in manufacturing at all but had instead been traded as such under its dealer registration after payment of applicable VAT. It maintained that no CENVAT credit had been availed on these goods and furnished invoices, challans, trading statements, and supporting records to substantiate the claim.
The assessee also challenged the allegation that a buyer, M/s Akash Enterprise, was a related person. It argued that the mere fact that the proprietor of the buying concern was related to one director of the company and also functioned as its CEO could not automatically establish a “related person” relationship under Section 4 of the Central Excise Act.
The Tribunal observed that the department’s entire case substantially rested on the non-entry of inputs in statutory records and assumptions flowing from that omission. The Bench noted that the department had not produced any evidence showing that CENVAT credit had been availed on the disputed inputs.
It held that mere failure to enter goods in RG-23A records could not automatically lead to the conclusion that such goods were consumed in manufacturing and subsequently removed clandestinely.
The Tribunal further accepted that the appellant possessed a valid dealer registration and had produced extensive documentation demonstrating that the disputed wire rods were sold as such in the course of trading activity after payment of VAT.
The Bench found that although certain discrepancies existed in the documents, those discrepancies were not sufficient to reject the entire explanation offered by the company.
The Tribunal emphasized that the department had failed to establish crucial links ordinarily required in clandestine removal cases, including evidence of excess production; unaccounted procurement of raw materials; deployment of additional labour; identification of buyers; transportation records; unaccounted financial transactions; and proof of actual clandestine clearance.
The Bench reiterated that clandestine manufacture and removal is a serious allegation carrying substantial civil and penal consequences and therefore must be established through tangible and credible evidence rather than assumptions or isolated discrepancies.
The department had also relied heavily on variations in electricity consumption and freight expenses to support its allegations. However, the Tribunal rejected this approach, observing that actual industrial production depends upon numerous operational factors and that no universal correlation can be drawn between electricity expenditure and production levels. Similarly, freight expenses can fluctuate due to commercial and logistical reasons unrelated to production volumes.
The Bench held that such variations may at best create suspicion but cannot substitute legal proof of clandestine manufacture and removal. In the absence of evidence regarding transporters, vehicle movements, buyers, or actual excess production, the electricity and freight data were insufficient to sustain the demand.
Consequently, the Tribunal concluded that the entire demand of ₹84.73 lakh based on alleged clandestine manufacture and clearance was unsustainable and liable to be set aside.
The Tribunal held that the department had failed to establish that the buyer and seller were related persons within the meaning of Section 4(3)(b) of the Central Excise Act. The Bench observed that one entity was a proprietorship concern while the other was a private limited company, and there was no evidence of ownership interest, financial participation, mutuality of interest, flow-back of funds, or commercial interdependence between them.
The Tribunal ruled that a familial relationship between individuals associated with the two entities could not, by itself, satisfy the statutory test for treating the entities as related persons. It held that the department had failed to establish the foundational requirement necessary for invoking related-party valuation provisions.
As a result, the demand of ₹76,051 based on alleged undervaluation was also quashed.
The CESTAT set aside both the clandestine removal demand of ₹84.73 lakh and the undervaluation demand of ₹76,051. Since the principal demands themselves were held unsustainable, the Tribunal also ordered that the penalties imposed under Section 11AC of the Central Excise Act would not survive and were liable to be dropped.
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