Clandestine Removal Cannot Be Alleged on Assumptions Alone: CESTAT Quashes Rs. 50 Lakh Excise Demand

The Principal Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), New Delhi has set aside a Central Excise duty demand of over Rs. 50 lakh raised against menthol manufacturer holding that allegations of clandestine manufacture and removal cannot be sustained merely on presumptions without tangible evidence. The Bench comprising Justice Ashok Jindal (Judicial Member) and K. Anpazhakan (Technical Member) observed that clandestine removal is a serious allegation requiring strict proof supported by concrete evidence such as procurement of excess raw materials, proof of transportation, identified buyers, receipt of sale proceeds, or evidence of unaccounted manufacture. The dispute arose from a fire incident that allegedly occurred at the factory premises of the company on 16 June 1998, after which certain stocks were claimed to have been destroyed while unaffected goods were shifted to a godown. Subsequently, during searches conducted by the Department on 18 July 2006, large quantities of goods stored in drums were found in the godown without proper identification or supporting documents. Samples drawn by the officers reportedly revealed the presence of Menthol, Peppermint Oil and Terpenoidal Rejects. Based on the investigation, a show cause notice dated 17 July 2007 was issued proposing confiscation of goods and recovery of Central Excise duty amounting to ₹61.28 lakh along with interest and penalty. The original adjudication order confirmed the demand and also imposed a redemption fine and penalties. In the earlier round of litigation, the Tribunal had remanded the matter back to the adjudicating authority with a specific direction to examine the insurance documents and decide the matter in accordance with the principles laid down by the Delhi High Court in Flevel International. However, during the de novo proceedings, the Principal Commissioner again confirmed a duty demand of ₹50.28 lakh along with interest and penalty of ₹16 lakh. Before the Tribunal, the appellant contended that the seized goods belonged to the pre-registration period and had been shifted after the 1998 fire incident, much before the company obtained Central Excise registration in May 2005. The company argued that the Department had failed to establish any nexus between the seized goods and any clandestine manufacturing activity after registration. The assessee also challenged the methodology adopted by the investigating officers in segregating and sampling the drums, arguing that the grouping of drums was arbitrary and illogical. It was pointed out that in an earlier order the Tribunal itself had criticised the segregation and sampling process as being “totally illogical.” On the other hand, the department argued that while the insurance survey had referred to only 628 unaffected drums after the fire incident, the Department had recovered 1,629 drums from the godown in 2006. According to the Department, the appellant failed to explain the increase in the number of drums and could not produce documentary evidence linking the seized goods to the stock salvaged after the fire. The Tribunal held that the adjudicating authority had failed to comply with the Tribunal’s earlier directions requiring application of the principles laid down in Flevel International. The Bench observed that merely finding goods in a godown cannot automatically lead to the conclusion that the goods were clandestinely manufactured and removed. The Tribunal further noted that the Department had failed to produce any evidence regarding procurement or use of excess raw materials, transportation of alleged clandestinely removed goods, details of buyers, or receipt of sale proceeds. It also found that there was no corroborative evidence to substantiate the allegations of clandestine manufacture and clearance. Relying upon the Delhi High Court’s judgment in Flevel International and the Tribunal’s ruling in Arya Fibers Pvt. Ltd., the Bench reiterated that clandestine manufacture and removal cannot be alleged merely on the basis of assumptions and presumptions. The Tribunal reproduced the settled legal principles requiring tangible evidence such as excess raw material consumption, proof of actual removals, identified purchasers, transportation details and evidence of illicit sale proceeds. The Bench also criticised the adjudicating authority for presuming the existence of unaccounted raw materials merely because finished goods were found in the godown. According to the Tribunal, such presumptions could not substitute strict proof required in clandestine removal cases. Holding that the Department failed to establish clandestine manufacture or clearance, the Tribunal set aside the excise duty demand, along with interest and penalty, and allowed the appeal with consequential relief. Case Details Case Title: Sharp Mint Limited Versus The Commissioner, CGST & CX Citation: JURISHOUR-1242-CES-2026(DEL) Case No.: EXCISE APPEAL NO. 51692 OF 2025 Date: 13/05/2026 Counsel For Appellant: Mihir Mehta, Advocate Counsel For Respondent: R.K.Mishra, Authorised Representative Click Here To Read Order Read More: AO Must Examine Allocation of Head Office Expenses Before Granting S. 80-IA Deduction: Calcutta High Court Upholds S. 263 Revision

Clandestine Removal Cannot Be Alleged on Assumptions Alone: CESTAT Quashes Rs. 50 Lakh Excise Demand

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