Case: GHODAVAT PAN MASALA PRODUCTS LTD VERSUS COMMISSIONER OF C. EX.

, PUNE

Citation: 2004(175) E.L.T. 182(Tri.-Mumbai) Issue: Whether appellant is liable to pay penalty under section 11AC read with rule 25 of the act and goods are confiscated under section 173Q of the act? Brief Facts: The issue relates to clandestine removal of Pan Masala Star Gutkha. Briefly stated the facts of the case are that the appellant No. 1 is the manufacturer of Gutkha under the brand name of Star Gutkha Pan Masala falling under Sub-Heading No. 2106.00 of schedule to Central Excise Tariff Act, 1985. The period involved is from 1993-94 to 15-11-1996. They have Sales Depot at Flat No. 7, Mithila Apartment, 186, Guruwar Peth, Tilakwadi, Belgaum, Karnataka State. Besides, they have their premises at Plot No. 438, A/P Chipri, Via. Jaisingpur, Tal. Shirol, Dist Kolhapur. On the basis of intelligence report, the premises of the appellant No. 1 vis-a-vis dealers were searched on 15/16 November, 1996. It is alleged that during the search operation various incriminating documents were seized. The statements of the key officials of the appellant No. 1 vis-a-vis dealers were recorded. The appellant No. 1 is selling its products viz. Star Gutkha presently in Maharashtra, Goa and Karnataka. The Star Gutkha is being marketed through various distributors. They have also set up a sales depot, in Belgaum to cater to the dealers/distributors in Karnataka State. The manufacturing process of the said product, using following raw materials, is as under :(i) Betelnut (ii) Kattha (iii) Menthol (iv) Perfumes/Flavors (v) Kimam (vi) Lime (vii) Cardamom (viii) Tobacco (ix) Glyserene (x) Spices (xi) Magnesium Carbonate The CMD of appellant No. 1 in his statement dated 16-11-96 explained that all the above raw materials are mixed in a definite proportion to manufacture the Star Gutkha . He also stated that the raw material requirement to manufacture 2500 pouches ( i.e. one carton bag in terms of which Star Gutkha is cleared in the wholesale trade in terms of carton bag containing 50 packets and each packet containing 50 pouches of 2.25 gm to 2.50 gm per pouch) varies from 5.625 Kgs to 6.250 Kgs. Raw material wise requirement for one carton as stated by him is as under :(i) (ii) (iii) (iv) (v) (vi) (vii) Supari Mg. Carbonate Tobacco Menthol Kimam Kattha Flavors : : : : : : : 5.100 Kgs to 5.200 Kgs 0.130 Kgs to 0.140 Kgs 0.430 Kgs to 0.450 Kgs. 0.030 Kgs to 0.070 Kgs 0.050 Kgs to 0.070 Kgs 0.420 Kgs to 0.440 Kgs 0.090 Kgs to 0.105 Kgs

(viii) (ix) (x) (xi)

Glyserene Spices Cardamon Lime

: : : :

0.050 Kgs to 0.060 Kgs 0.001 Kgs to 0.0012 Kgs 0.060 Kgs to 0.070 Kgs 0.070 Kgs to 0.090 Kgs

The said CMD further stated that the proportion of the raw material consumption given above is inclusive of following losses occurred during manufacturing process, which is also subject to variations due to climatic conditions :(i) Loss of weight during cutting and drawing process.

(ii) Loss while grinding Kattha (iii) Filling/handling losses (iv) Loss of finished Gutkha He also stated that the above losses put together are in the range of 14% to 19% and do not include weight of laminated films, used for packing. He further explained that the laminated film requirement for packing of one carton bag i.e. 2500 pouches is in the range of 1 Kg to 1.125 Kgs depending upon gauge of the film used. The above consumption includes wastage of the film which is removed as scrap of laminated film. Notice to show cause dated 11-8-1997 was issued. It was alleged that the appellant is accounting for only laminated film wastage and rest of the wastage is not at all accounted for, nor is there any supporting document to establish that such waste of raw materials is resulted in the manufacturing process of Star Gutkha; that the appellant is not accounting for receipt and consumption of carton bag and plastic bags separately; that they have not maintained any record for issue, consumption and waste generated for all the raw materials other than printed laminated rolls; that the losses in various raw materials other than PLR are worked out on the basis of physical stock of raw material taken at the beginning of the financial year in which raw material received during the year are added and closing stock of raw material taken at the end of the financial year are deducted to arrive at net raw material consumed and from the net raw material consumed weight of the finished gutkha is deducted to arrive at net loss of raw material; that on 292-1996 the officers of the Pune Commissionerate visited the factory of the appellant No. 1 and took two samples of 1000 pouches each were drawn from the raw material stock and their weights were ascertained as 400 gms and 520 gms respectively, which means that these samples could generate 2500 and 1923 pouches per kg respectively; that on 12-6-96 officers of Central Excise from Pune visited the appellant and ascertained 200 pouches of PLRs supplied by different suppliers, result of the same was as below :Sr. No 1. 2. 3. 4. 5. 6. 7. Name Supplier Champion Ind. -doSailam Pckg. -doFlex Inds. Ltd. -doMultiflex of No. of pouches Wt. of 200 No. of drawn as samples pouches gms. per Kg. pkg. 200 200 200 200 200 200 Lami 200 79.40 75.30 77.30 78.20 89.10 87.15 83.90 2518 2656 2587 2557 2244 2294 2383 pouches

Print 8. 9. 10. 11. 12. 13. -doSunrise Inds. -doLamino Prod. -do-do200 200 200 Paper 200 200 200 82.25 78.55 77.75 86.30 70.75 103.20 2431 2546 2572 2317 2826 1937

14. -do200 124.15 1610 that on the basis of the above exercise, it was further alleged that the appellant No. 1 have manufactured far more pouches than what were actually disclosed in the excise records; that the said data shows only a approximate pouches that could be generated per Kg. of PLR consumed during that year are worked out on the basis of PLR received by the appellants from major suppliers and No. of pouches that could be generated as stated by those suppliers; that the above exercise was used as on the basis of above yearly average pouches generated per kg. of PLR consumed which are compared to total pouches actually generated during the respective year, as contained in Annexure B-V to the show cause notice; that it is allegedly indicated that substantial quantity of pouches has not accounted and cleared without the payment of duty; that the appellant had manufactured and suppressed production of approximately 3443 carton bags during 1993-94, 21073 bags during 1994-95, 16853 bags during 1995-96 and 9396 bags during 1996-97 (upto 15-11-1996); that the CMD has stated in statement dated 11-7-1997 that the gutkha filled in individual pouches is in the range of 2.00 gms to 2.5 gms. In the said show cause notice the appellants were directed to show as to why (i) Central Excise duty as detailed in Annexure B-VII should not be demanded and recovered from them under the proviso to sub-section (1) of Section 11A of the Act read with Rule 9(2) of the Central Excise Rules, 1944. (ii) Why the goods seized as detailed in Annexure D to the show caus e notice should not be confiscated in terms of Rule 173Q (1). (iii) Why the bond and security ordered by the Commissioner, Central Excise and Customs, Pune under his File No. V (21)15-360/Adj.II/96, dt. 17-1-1997 & 7-2-1997 executed by the parties shown at Sr. Nos. 1, 6, 9 & 10 should not be adjusted and appropriated towards the demand. (iv) Penalty equivalent to the duty determined under Section 11A(2) of the said Act should not be recovered under the provisions of Sec. 11AB of the said Act. (v) Land, building, plant, machinery etc. used in connection with manufacture/production/storage/removal/disposal of the said goods or on such land or in such building or produced or manufactured with such plant, machinery, material or things should not be confiscated under the provisions of Rule 173Q (2) of the Rules. Further, the parties mentioned at Sr. No. 2 to 12 should not be imposed penalty under Rule 209A. The appellants filed their replies dated 9-10-97, 6-1-97, 2-2-97 and 17-2-97 to the show cause notices as on pages 122 to 203. In the replies the appellants have inter alia denied all the allegations made in the show cause notice; that there was no materials brought on record on the basis of which the authorities could form reasonable belief; that the evasion of Central excise duty was in respect of Star Gutkha manufactured by them; that the percentage of losses and wastage as stated by Shri S.D. Godhavat was not accepted in the show cause notice while that pertaining to number of pouches being manufactured per kg of PLF is taken as basis for calculation of quantum of clandestine clearance

and duty evasion. The production of pouches for one kg of PLF is substantially lower than 2500 or 2200 pouches per kg as stated by CMD. The PLF used upto June 95 was of much thicker variety and larger in size giving only around 1600 pouches per kg; that laminated film is the only raw material apart from perfume on which modvat credit is available and on which at the time of clearance as scrap and waste excise duty is payable, hence only these were accounted for and in respect of other raw materials like Supari, Kattha etc., no modvat is available; that manufacture of Gutkha is a continuous process industry. It is well established principle of accounting in such industries (both in cost accounting & financial accounting) to treat normal process loss as the normal cost of the process and not to account for such normal loss separately. Only the abnormal loss or gain is counted, valued and brought to the accounts; that the raw material particularly Kattha, Supari, Tobacco, the accounting is not done in the manner of Industrial inputs. The receipt, issues, consumption, wastage, opening and closing stocks are all accounted for on a gross basis; that the allegations are based on assumptions and presumptions; that the losses of physical stock of raw material at the beginning of the financial year and closing stock of the same at the financial year, after adjusting raw material received during the year; that this gives the net raw material consumed during the year, from which the weight of the finished Gutkha is deducted to determine the net loss of raw material. This long practice is dictated by the fact that raw materials like Supari and Tobacco (which are brought from Adatiya farms) dealing with agricultural produce of Betelnut and Tobacco Farms, come in bulk quantities which are not amenable to systematic handling, storage, issue and other forms of physical material control. The industry is labour intensive rural industry. The stock measurement procedures and the systems of inventory control such as Bincard system, storage ledger control, perpetual inventory and continuous stock taking are not possible; therefore, the raw material consumed and in process losses of Supari, Tobacco and Kattha etc. are worked out by the rule-of-thumb method as explained by the CMD in his statement; that they have worked out consumption ratio or year to year which gives the gross consumption of different raw materials used in Gutkha production in the years ended 31-3-95, 31-396 and 31-3-97; the gross consumption includes the raw materials contained in the final gutkha as well as wastages that occur after receipt in the factory; the fact that the ratio of consumption of each type of raw material from year to year has remained stable and consistent indicates that the consumption of raw material worked out even by the normal rule-of-thumb method is indisputable and reliable; the consumption ratio as well as percentages of wastages and losses have also been accepted in Income-tax assessment orders for the years 1993-94, 1994-95 and 1995-96 (photo copies filed on the record); the percentage of wastage of Supari is of about 22%; Supari comes in raw condition with lots of soil, dust, small pieces as also substantial moisture, there is bound to be weight loss during the processing of Supari - in cutting, cleaning, sieving, drying and mixing processes; the said percentage of loss should have been accepted by the department who had opportunity to inspect the nature of raw materials and physical production process during their visit; that the clandestine production and clearance are alleged without producing even single documentary proof establishing beyond doubt or even prima facie that the said Gutkha was manufactured or cleared to a given person or for a given consideration received in the hands of a given person. The appellant has relied on the following case laws :(a) (b) (c) (d) (e) (f) (g) Leather Chemical Industries - 1984 (15) E.L.T. 451 Indian Metals & Ferro Alloys - 1994 (69) E.L.T. 390 (T). Kashmir Vanaspati - 1989 (39) E.L.T. 655 (T) Prabhavati Sahakari Soot Girni - 1990 (48) E.L.T. 522 (T) Ashwin Vanaspati - 1992 (59) E.L.T. 175 (T) Roy Biri Factory - 1992 (59) E.L.T. 584 Hindustan Fertiliser Corpn. - 1993 (63) E.L.T. 83

In the decision reported in 1997 (62) ITD 179, the ITAT has held that no addition of income can be made merely on the basis of alleged excess consumption of aluminium foil i.e. printed laminated rolls unless concrete proof of suppressed production and sale is available. The appellant No. 1 has declared such scrap of PLR in classification declaration, it has maintained RG-1 record of such scrap manufactured and also has paid duty on the scrap so generated; the total scrap of PLR manufactured

on which duty has been paid during the period relevant from 1993-94 upto 15-11-96 is 6247.800 kgs and the duty paid thereon is Rs. 2387.70. The appellant has obtained the permission in the year 1994 for destroying PLR scrap. Therefore, the statistics of number of pouches per kg worked out in the show cause notice is not correct and valid and also that the duty amount worked out is wrong and does not arise in their case at all. The allegations that the appellant No. 1 manufactured and suppressed production of approximately 3443 carton bags during 1993-94, 21073 carton bags during 1994-95, 16853 carton bags during 1995-96 and 9396 bags during 96-97 (upto 15-11-96) cannot be upheld on account of absence of evidence and also because they had discharged their duties of accounting and payment of duty on all the Gutkha manufactured and cleared by them during the relevant period. The so-called unaccounted production is alleged only on the basis of presumptions; show cause notice has ignored physical realities of manufacture of Gutkha and the wastage of the various materials and in particular of PLR that arise in substantial quantities during the process of manufacture of Gutkha. It is factually incorrect that no records have been maintained in respect of wastages and that wastages have not been declared at any stage; in this regard the appellants relied on the following documents:1. 2. 3. 4. 5. 6. 7. 8. 9. Letter to Supdt. C.Ex. Jaysingpur dt. 18-1-94 Letter of Supdt. C.Ex., Jaysingpur dt. 18-1-94 Central Excise letter No. JSP/GPMP Misc./91 dt 18-1-94 JSP/GPMP Misc./94/976, dt. 18-1-94 Letter to Supdt., C.Ex., Jaysingpur dt. 21-2-94 GPMPIPL Scrap Bill No. 270, dt. 31-8-94 - 743.860 kgs. Scrap Bill No. 843 dt. 20-12-94 - 1198.990 kgs. Bill No. 410 dt. 14-3-95 - 736.770 kgs. Bill No. 317 dt. 583.200 kgs.

10. Bill No. 1700 dt. - 792.450 kgs. 11. Bill No. 2915 dt. 12-3-96 - 885.000 kgs 12. Bill No. 621 dt. 2-6-96 - 400.000 kgs. 13. Bill No. 1472/7-9-96 - 1210.000 kgs. 14. Bill No. 1698 dt., 30 - 1854/9.96 - 185.000 kgs 15. Bill No. 1800 dt., 10-10-96 - 465.000 kgs 16. Bill No. 1854 dt., 16-10-96-200.000 kgs. 17. Bill No. 2034 dt., 2-11-96 - 300.000 kgs Thus from the above, it may be seen that wastage had been declared from time to time to Central Excise authorities. The total raw material consumed by the appellant No. 1 in the production of Star Gutkha is worked out in Annexure B-VI to the show cause notice which was confirmed by them in their letter dated 28-6-97. It appears from the said annexure that the appellant consumed raw material of 26,701.000 kgs during 93-94, 3,21,141,925 kgs during 1994-95, 10,31,582.500 kgs during 1995-96 and 8,85,165 kgs during 1996-97 (upto 15-11-96). Thus between the period from 1993-94 to 199697 they have consumed 22,64,590.425 kgs of raw material in the manufacture of Star Gutkha. In respect of PLR consumed between the period from 1993-94 to 1996-97 it has been already shown in Annexure B-V that out of PLR consumed 96,81,90,709 pouches were generated as packing material i.e. 3,87,274 carton bags were generated. Now Gutkha required to fill in these carton bags @ 5 kgs. Per carton bag (i.e. carton bag of 2500 pouches, each pouch of 2 gms. Weight) is worked out to 5x3,87,274 = 19,36,370 kgs. This weight is compared with the total raw material consumed it appears that 22,64,590.425 - 19,36,370 = 3,28,220.425 kgs. of raw material is waste which accounts for 14.49% for which no recorded evidence is available and out of the principal raw material by weight viz. Supari, PLR etc. 19% to 20% weight is lost due to various natural and normal reasons.

Appellant Contention: The appellants contended that there is no evidence supporting the case of the department that an excess quantity of Star Gutkha were removed clandestinely without payment of Central Excise duty. He contended that the case of the department is based totally on presumption. The department has totally gone by the theoretical calculation of PLR and on that basis the department has presumed clandestine removal. Main contention of the department is that out of 1 kg of PLR so much number of pouches would have been produced. The department has roughly taken the physical 2400 pouches out of 1 kg PLR and has multiplied the same by the total number of Kgs PLR to arrive at the estimated figure of pouches. As already mentioned, the theoretical calculation arrived at by the department is mentioned in Annexure B-V to the show cause notice. His contention is that the raw material used in the preparation of Star Gutkha i.e. Supari, Tobacco, Kattha and the wastage and scrap in manufacturing the said star gutkha have not been taken into account by the department to arrive at the actual figure. Had the department gone by the actual raw material used in the preparation of Star Gutkha and the wastage and scrap as claimed by the appellants, the question of clandestine removal as alleged by the department would not have arisen. He submitted that the wastage which normally occurs in preparation of the Star Gutkha out of the said raw material as mentioned above is over 22%. He also submitted that though the appellants do not maintain the records of wastage and scrap as it was not incumbent upon them being non dutiable goods, wastage could be ascertained from the appellants balance sheets itself as the consumption all raw material is mentioned therein, raw materials over and above the said star gutkha have not specified laid along quantities, mode of receipt, disposal. He further contended that the investigating official never shown any interest in undertaking any experiment with regard to the wastage and scrap although the management of the appellants has managed to do so. Input/output of all major raw materials was available to the department in terms of the balance sheet. No attempt has been made by the department to establish that much short quantities of inputs were brought in by the appellants as compared to the quantity of received finished products, the declared value was much less. The investigation was hampering upon the PLR as though the appellant was engaged in the manufacture of PLR only. He, therefore, submitted that the theory of suppression alleged and clandestine removal of Star Gutkha is merely based on assumed arithmetical calculation of the department and the department neither has any direct nor indirect evidence in this regard. With regard to the confessional statements given by Shri Raju Bardiya dated 12-7-1997 and 16-11-1996, before the Excise Officer he submitted that in letter dated 18-11-1996 addressed to the Superintendent with a copy to the Asst. Commissioner, Central Excise, Pune, he has categorically stated that he was interrogated upto 3.30 AM on 17-11-97. His two sons aged 7 years and two years who had high temperature and he wanted with the children. In order to avoid tension he ultimately stated that some of the entries related to the Star Gutkha which were sent to him without bill and without payment of excise duty. He stated that all these as per the directions of the investigation officer. He denied that these statement and stated that Star Gutkha pouches were received accounted properly. As regards R.K. Transport, the main transporter, who admitted in his statement that they delivered 4/5 gunny bags per consignment free of cost said to have been containing advertisement material received from the Appellant No. 1 which were not recorded in the lorry Receipt and no charges were recovered for the said 4/5 gunny bags as a matter of goodwill from the appellant No. 1. However when he was confronted as to whether they ever checked such gunny bags to confirm the contents that they were advertisement material only and not Star Gutkha, Shri. V.M. Ranjane, Manager of the R.K. Transport said that they never checked the contents therein. Other transporters also never checked the contents and few extra gunny bags which were definitely containing star gutkha. Advertisement was required to be given to the distributor of the retailers. He also contended that the loss of raw material during cutting, cleaning, sieving, drying and mixing process as also during grinding Kattha and filling and handling of finished products were not taken into account which accounted to over 22% as claimed by Shri Sanjay Ghodavat in his statement. He also contended that the input/output receipt of the finished viz. Star Gutkha was never seriously studied by the Investigating Officer or else they could have easily allowed the wastage of 22% and thereby there was no need for issue of show cause notice. The gauge of plastic film was little thicker and therefore only 1600 pouches were produced per kgs. Suppliers of PLR were questioned as to the capability of production of pouches per kg. The figures given are between 2400 to 1600 pouches per kg. Normally on the assumption of such quantity should have been manufactured which was much higher than the initially declared quantity. The Commissioner has confirmed the huge demand merely on presumption. He also submitted that the appellant referred to

the investigation carried out by them with the help of some officers of Central Excise, Pune Commissionerate on 13-8-1998. The officers consist of Shri R.N. Medhekar, Inspector, Shri D.D. Kadam, Inspector, Shri Y.P. Gaikwad, Preventive Supdt. All from the said divisions and also different witnesses and in their own hand writing Shri Medhekar had shown of ranging between 1.85 gm to 2.25 gm. These figures and the comparative chart (page 182 of the Paper Book) falsify the revenue case based on the assumption, average weight and arithmetic calculation. He also contended that it was necessary on the part of the department to have brought some strict, direct, positive and corroborative evidence particularly when the statements which should have been relied on by the department had been retracted immediately by the persons who made such statements. The department neither brought any primary evidence nor any other proof in the form of sale proceeds; cash etc. to support their contention of clandestine removal. He contended that the impugned order is against the evidence if any available on record and as such the same is not sustainable. To support his contention he relied on the following case laws:(1) (2) (3) (4) (5) (6) Carona Cosmetics & Chemicals P. Ltd. - 1993 (48) E.L.T. 223 (sic) Prabhavati Sahakari Soot Girni Ltd. - 1990 (48) E.L.T. 522 (T) Oundh Sugar Mills Ltd. - 1978 (2) E.L.T. (J-172) M/s Ebnezer Rubber Ltd. - 1986 (26) E.L.T. 997 Ambica Metal Works - 1990 (29) ECR 549 Ganga Rubber Ind. - 1989 (39) E.L.T. 650.

9.He also submitted that no demand can be raised on assumed sale value of the PLR as the same is totally not supported by any corroborative evidence or any tangible evidence at all. In support of his contention he relied on the following decisions :(1) (2) (3) (4) M/s. Jagan Nath Dalip Singh - 1990 (47) E.L.T. 369 (T) - No clandestine removal unless borne by any tangible evidence. CCE. v. Pawar Trading Co. 1988 (37) E.L.T. 603 (T) - Contravention. Burden of establishing clandestine removal is on the department. K. Harinath Gupta - 1994 (71) E.L.T. 980 (T) - Contravention. Burden of establishing clandestine removal is on the department.

(5)

Hindustan Lever Ltd. v. - 1990 (49) E.L.T. 408 (T) - (This case has been affirmed by the Honble Supreme Court in 1996 (84) E.L.T. (A-162) (S.C.). Bajaj Auto Ltd. - 1995 (75) E.L.T. 382 (T) - (Affirmed by the Supreme Court in 1996 (83) E.L.T. A41 (S.C.).

Suspicion, howsoever grave cannot take place of the proof,

(6)

(7)

Prabhavati Sahakari Soot Girni Ltd. - 1990 (48) E.L.T. 522 (T) - It has been held in this case, admittedly no corroborative evidence is available either in the form of seizure of unaccounted goods lying in the factory or seizure of yarn having been removed without gate passes. There is no evidence in the form of sale records to show that the quantities other than those removed have been sold by the appellant. There is no allegation of the receipt and consumption of excess raw material. In short, there are no other evidences to support the allegation of excess production and their clandestine removal. Merely because of the entries in the Daily Production Register, especially when that is not the basis of recording production in the RG-1 Register, no firm conclusion can be arrived at without any, if not all on the above said types of corroborative evidences. In view of this we hold that the charges of the suppression of production and clandestine removal have not been established beyond reasonable doubt. It, therefore, discharged the appellants and dropped the demand confirmed against them. The ld. Consultant contended that this is a very similar case wherein the facts and circumstances of the instant case match with those cited in the said decision. Therefore the result has to be the same as there is no evidence against the appellants in the entire proceedings initiated by the department through the impugned show cause notice and the order.

(8)

Sayaji Iron & Co. - 1990 (45) E.L.T. 104 (T) - There is no positive evidence to prove the alleged clandestine removal which is based merely on assumption. The impugned order set aside. Kashmir Vanaspati (P) Ltd. - 1989 (39) E.L.T. 655 (T) - Clandestine removal should be established by evidence such as raw material consumed goods actually manufactured and packed.

(9)

(10) Bi-Metal Bearing Ltd. - 1990 (45) E.L.T. 285 (T) - In the absence of any evidence of sale of the goods in the open market the charge of clandestine removal cannot be sustained. (11) Lilli Foam Indi. P. Ltd - 1990 (46) E.L.T. 462 (T) (12) Samatha Metal Ind. - 1991 (53) E.L.T. 341 (T) (13) Ashwin Vanaspathi Industries Pvt. Ltd. - 1992 (59) E.L.T. 175 (T) (14) R.G. Electronics - 1992 (60) E.L.T. 121 (T) - No fact or evidence has been brought on record to show that any goods in excess of the production had in fact been removed. No analysis has been done of the raw materials used by the respondents in the past. No evidence has been produced for the supply of blank cassettes and other raw materials of the record. For this background charge of clandestine removal is not established. (15) T.M. Industries - 1993 (68) E.L.T. 807 (T) - It is held that the charge of evasion of Central Excise duty has to be based on the (tangible evidence) as observed by the Honble Supreme Court in the case of Oudh Sugar Mills Ltd. v. Union of India, 1978 (2) E.L.T. (J-172). The Honble Apex Court has held that the findings based only on inferences inviting unwarranted assumptions were vitiated by an error of law. The Apex Court further added that it would not be right to base calculations on the surmises. Keeping all the above considerations, the Honble Apex Court set aside the impugned order and allowed the appeal with consequential relief, if any, due to the appellants. (16) Icy Cold Commercial Enterprises - 1994 (69) E.L.T. 337 (T) - The clandestine removal is based merely on the conjectures and presumption. Further supported by the Supreme Court as per AIR 1971 SC 746, the Honble Apex Court held that the findings of the Revenue authorities based on pure assumptions and conjectures and no evidence, should be quashed.

Respondent Contention: The ld. Consultant submitted that though the said case relates to Bihar Land Revenue Act, however, the principle propounded by the Apex Court are fully applicable in the present case. The learned consultant also filed a copy of Tribunal order dated 12-11-2002 in the case

of M/s. Kamanwalla Industries Ltd. v. CCE, Aurangabad - 2003 (152) E.L.T. 126 (Tri.) wherein the principal bench has set aside the demand based on theoretical calculation. The learned consultant also drew our attention towards the order dated 21-1-1999 passed in the appellants own case wherein ITAT inter alia held that no material or evidence whatsoever was found at the time of search which could show that the assessee had spent any amount outside the books of accounts. Therefore ITAT has deleted the impugned additions for the purposes of assessment. The point the ld. Consultant wanted to prove is that when the ITAT had not made any additions in respect of the case in question, it would not be justified for the department to have adopted contrary decisions for the purposes of raising the demand in question, when they are not in a possession of any direct, positive, corroborative or tangible evidence against the appellant. He forcefully emphasizes that in the case of clandestine removal the strict, positive, direct and corroborative evidence is necessary before raising the demand. He also contended that it is well settled that no demand can be raised on account of clandestine removal in the absence of any such evidence and when the demand is not sustainable, the question of imposition of penalty also does not arise. Finally the learned consultant contended that in view of the legal position as brought out by the afore-said decisions and the facts of the present case, it is crystal clear that the burden of establishing clandestine removal wholly and solely lies on the department which the department has miserably failed to prove. It was for the department to prove that so much quantity was manufactured by the appellants, tallying with the figures given to the Deptt., with the corroborative evidence. In the absence of proof for having manufactured so much qty. reliance only on the figures furnished to department at the best lead to the inference, but no substantial proof is available on records. In the facts and circumstances of the case, the department is not justified in arriving at the conclusion that the appellants have clandestinely removed the goods in question based upon assumptions/presumptions and conjectures. The demand for differential duty is not justified and the impugned order is liable to be set aside. The ld. DR appearing on behalf of the Revenue at the outset fairly conceded that there is no direct, positive or corroborative evidence available in the case. The whole case of the department is based on circumstantial evidence, statements and conduct of the appellant. The ld. DR contended that the statement of CMD, raw material suppliers and buyers statement (wastage claim of 14.69% as already allowed) clearly establishes the clandestine removal on the part of the appellants. He further submitted that no record of wastage has been maintained by the appellant and the balance sheet shows that the sizes of pouches are reducing every year. Machine not working, whereas party claiming machine is working during the period. He further contended that Honble Apex Court in the case of D. Bhoormull - 1983 (13) E.L.T. 1546 held that the department is not expected to prove their case with mathematical precision. He contended that the conduct of the appellant and the attending circumstances clearly go to show that the appellant has not discharged the burden and, therefore, the only conclusion is that the non-duty paid goods were proved to have been used in the manufacture of further excisable goods. In this regard, he drew our attention to Para 54 of the impugned order. He further contended that the Oudh Sugar Mills case is not applicable to the facts of the present case and the facts of both the cases are different. He also contended that in order to avail the exemption, the burden is on them to prove, that they are entitled for the exemption and they cannot take shelter under the lapses, if any, committed by the departmental officers in not taking the actual stock verification. He also contended that the appellant has not said anything about the statement of Shri Raju Bardia. In support of his contention he relied on the decision in the case of C. Aboo Backer Haji 2002 (147) E.L.T. 150 (Tri.) and Rajasthan Synthetic Industries Ltd. v. Collector of C. Ex., Jaipur 2001 (131) E.L.T. 424 (Tri.). The ld. Consultant in his rejoinder submitted that the Apex Court case of D. Bhoormull as relied by the Revenue is clearly not applicable to the facts of the present case. The case of D. Bhoormull related to smuggled goods, which are clearly distinguishable from the case in hand. Besides that, the principle of mathematical accuracy does not absolve the department to bring sufficient evidence on record to

prove their case beyond reasonable doubt, particularly when the appellant has produced adequate documents to mitigate/demolish the department case, Shri Raju Bardiya has filed retraction letters dated 18-11-96 and 30-11-96 and the department failed to bring on record any documentary or oral evidence to substantiate their allegation. The whole case of the Department is based on presumption. The presumption cannot take the place of proof which is a well settled legal position. The statutory records maintained by the appellant cannot be belied by presumption or oral evidence. He also contended that since there is no suppression, the demand is time-barred. Reasoning judgment: After hearing rival submission, perusal of the records and the case laws relied on by both the sides, we find that the demand of the department is based only on theoretical calculation of PLR which is not the main input of the appellants. The main product of appellant is Star Gutkha and as mentioned in the preceding paragraphs for preparation of Gutkha the main raw materials such as Supari, Katha, Tobacco, Menthol, Cardamom, lime etc. are needed. As contended by the ld. Consultant of the appellant, the wastage was claimed around 22% as against 14.69% allowed by the department. Though there is no statutory permissible limit fixed under the law, however, the ld. Consultant has contended that as per the trade practice the wastage of 22% is easily allowed in the manufacture of Pan Masala which is neither unreasonable nor illogical. The practice itself has assumed the force of law by its usage in the trade for a long time and as such we do not find any justification on the part of the department not to have allowed wastage of 22%. Besides, we find that when the department has based his case on the statement of certain parties and when the statements were retracted in writing by them, it was imperative on the department to have brought corroborative evidence to substantiate the allegation of clandestine removal. The department having not done so, has lost their right to raise the demand merely on presumption/assumption. In a case of its kind the department was duty bound to have brought direct, tangible, corroborative and strict evidence to prove the clandestine removal beyond reasonable doubt. We do agree with the contention of the ld. SDR that mathematical accuracy cannot be expected in such a matter. However, it does not mean that the Department is absolved of its responsibility to bring on record the tangible, strict, positive, direct and corroborative evidence to prove clandestine removal beyond reasonable doubt as there is no evidence of actual excess production, removal of such excess production, transport of such excess production, confirmation from buyers and receipt of unaccounted cash towards sale of such unaccounted clearances. We find that the department has not done so. Few more cases in this regard are as under :(i) 2001 (130) E.L.T. 228 (T), Commissioner of C. Ex., Patna v. Universal Polyethylene Industries Clandestine removal and clearance is a serious charge against manufacturer, which is required to be discharged by the Revenue by production of sufficient and tangible evidence. Clandestine removal Evidence Standard of - No positive evidence to establish clandestine removal adduced by department - Quantity alleged removal calculated on basis of transport companys records based on presumptions and assumptions not sustainable. Clandestine production and removal not proved by any evidence such as installed capacity purchase & utilization of raw materials labour employed, power consumed, etc., demand set aside.

(ii)

2001 (130) E.L.T. 334 (T), Chennai M.T.K. Gurusamy v. CCE, Madurai

(iii)

Gurpreet Rubber Industries, 1996 (82) E.L.T. 347 (T) = 1996(63) ECR 68 (T)

(iv) (v)

Ambica Metal Works - ECR Vol. 29 page 549 D.S. Screen Pvt. Ltd. - 1990 (50) E.L.T. 475 (Tri.) V.K. Thampy - 1994 (69) E.L.T. 300

Evasion of duty must be based on solid and acceptable evidence In the absence of any corroborative of circumstantial evidence fraudulent removal not inferable. Investigation not done to ascertain whether the parameters like electricity consumed - Raw materials used. Clandestine removal burden on dept Sources of raw materials not contacted buyers not contacted Receipt of sale proceeds not established. Clandestine removal a positive act not provable on mere assumptions and presumptions. No evidence of actual removal from factory without payment of duty. Clandestine removal cannot be proved by office memo - Not a direct evidence nits evidentiary value extremely limited. Inflated figures submitted to bank are not sufficient grounds to allege clandestine production & removal should be co-related - Raw materials & power consumed. Allegation based on octroi records showing movement of respondents truck. No other evidence brought on record. Allegation not established. Evidence note book showing production of steel ingots receipt and consumption of raw materials/scrap no investigation done with person who made the entries. No investigation with traders who returned the scrap. Clandestine removal not established. Difference in RG 1 closing stock and monthly statement alone is not sufficient to a duty demand on alleged clandestine removal in the absence of any corroborating evidence. Circumstantial evidence not sufficient to establish clandestine removal More positive evidence is necessary to sustain charge. No cogent reasons given for figures of production - Co-relation between various other documents - Gap in

(vi)

(vii)

K. Harinath Gupta - 1994 (71) E.L.T. 980

(viii)

Icy Cold - 1994 (69) E.L.T. 337 Madhu Food Products - 1995 (76) E.L.T. 197 LML Ltd. - 1997 (94) E.L.T. 519

(ix) (x)

(xi)

Swarna Polymers (P) Ltd. 2000 (120) E.L.T. 148 (T) 2000 (92) ECR 325

(xii)

2000 (40) RLT 1077 (T) Commissioner of C.E. v Dashmesh Casting (P) Ltd. 2000 (121) E.L.T. 46 (T) = RLT 41 P. 348 - CCE, Meerut v. Raman Ispat

(xiii)

(xiv)

2000 (120) E.L.T. 505 (T) K.J. Diesels (P) Ltd. v. CCE., Kanpur

(xv)

2000 (116) E.L.T. 618 (T) = 1999 (34) RLT 662 (CEGAT) Grauer & Weil (India) Ltd. v. CCE, Meerut. 1999 (114) E.L.T. 537 (T) = RLT 35 p. 162 (T) - Arti Steels Ltd. v. CCE

(xvi)

Chandigarh

power consumption No sufficient materials for establishing clandestine removal. All other parameters as laid down in Rule 173E should also have been taken into consideration.

(xvii)

2000 (117) E.L.T. 659 (T) RLT 35 p. 654 (T) Pepsico India Holding v. CCE Meerut

The legal position as brought out in the cases mentioned above leaves no doubt that the demand cannot be sustained on the ground of presumption. From the replies to the show cause notice dated 9-10-97, 6-1-97, 2-2-97, 17-2-97 on pages 120 to 211, it is crystal clear that the appellants have submitted specific replies to the points raised by the department and as such it was incumbent on the department to prove their case beyond reasonable doubt. In the absence of any strict, tangible, direct, positive and corroborative evidence, we do not find any justification to sustain the demand raised in this case. We, therefore, set aside the impugned order and allow the appeals filed by the appellants with consequential relief, if any.

Decision: Appeal Allowed Comment: The essence of this case is that there is no supporting evidence for excess quantity of Star Gutkha were removed clandestinely without payment of Central Excise duty. Due to sufficient evidence and there is not natural injustice in Impugned case, hence appeal is allowed. Therefore, the rule 25 of the said Act stated that section 11AC subject to producer, manufacturer, registered person of a warehouse or registered dealer does not account for any excisable goods produced or manufactured or stored by him, then he shall be levialbe to a penalty not exceeding the duty on excisable goods or 2000 whichever is greater has applicable in case of clandestine removal of goods without payment of duty and it is not recorded in account and also imposed appropriate penalty under these act.