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Clandestine manufacture/ removal of goods can t be held as established on the basis of few parallel invoices recovered from third party -Tri

M/s Zircon Plastics Pvt Ltd, Shri Manan K Shah Versus Commissioner of Central Excise-Ahmedabad-II

Appeal No. E/126-127/2009

Order No. - ORDER No. 10910-10911/2015

Dated - 30 June 2015

Judgment / Order

Mr. H.K. Thakur, Hon’ble Member (Technical),J. i

For the Petitioner : Shri Deven Parikh, Sr. Advocate, Shri P P Jadeja, Consultant

For the Respondent : Shri Govind Jha, Authorised Representative


Per : Mr. H K Thakur;

These appeals have been filed by the main Appellant M/s Zircon Plastics (P) Ltd, Ahmedabad and its Director against Order-in Appeal No OIA-6-7-2009-AHD-II-CE-ID-COMMR-A AHD dated 6.1.2009 passed by Commissioner (Appeals), Central Excise, Ahmedabad, wherein duty demands of ₹ 25,96,596/- and ₹ 24,909/- were confirmed u/s 11A of Central Excise Act 1944 and equal amount of penalty was imposed upon the main appellant. A penalty of ₹ 5,00,000/- was imposed upon Shri Manan K shah, Director under Rule 26 of Central Excise Rules 2002.

2. Revenue s case in brief against the main appellant is clandestine Manufacture and Removal of HGPE/LLDPE bags of Chapter 39 during the period of 1999 to 2000. During visit of the Central Excise officers on 3.7.2001 to the factory of the main appellant, 23 sets of blank invoices (out of a book of 50) were found which were treated as parallel invoices . After investigation of the case and recording of statement of customers; who were all Limited Companies situated outside Gujarat, department issued a show cause notice dt. 5.12.2003 alleging clandestine removals under parallel invoices. The said notice dt. 5.12.2003 proposed recovery of duty amounting to ₹ 25,96,596/- ₹ 24,909/- alongwith interest, and imposition of penalties on the main appellant the Director Shri Manan K Shah. Order-in original No 11/Addl.Commnr/ 2004/AKM/dted 27.12.2004 confirmed duty demands of ₹ 25,96,596/- and ₹ 24,909/- with equivalent penalties against the main appellant and imposed separate penalty of ₹ 5,00,000/- on Shri Mann K Shah. In the first round of litigation, Commissioner (appeals), Ahmedabad passed OIA NO 184 to 185/2006 on 20.6.2006 and allowed benefit of cum-duty price which reduced demand of Central Excise duty to ₹ 22,10,997/- from ₹ 25,96,596/- and also reduced penalty under Section 11AC to ₹ 22,10,997/-. This Tribunal Bench in the first round of litigation under Order No. S/89&90/WZB/Ah bad/07 and A/126&127/WZB/ Ahbad/07 dated 2.1.2007 directed original authority to decide the issue afresh after providing all the relied upon documents sought by the appellant. Additional Commissioner passed OIO No 37/ADC/200S/SK dated 28.3.2008 wherein he again confirmed total duty demand of ₹ 25,96,596/- and ₹ 24,909/- u/s 11A of Central Excise Act, with equal penalty on the main appellant and imposed penalty of ₹ 5,00,000/- on Shri Manan K Shah, Director of the main appellant under Rule 26 of Central Excise Rules 2002 and on appeal the same has been upheld vide OIA No 6 to 7/2009 dated 6.1.2009, which is challenged here by the appellants in these two appeals.

3. Shri Deven Parikh, Senior Advocate, appeared alongwith Shri PP Jadeja, Consultant on behalf of the Appellants and submitted that the revenue has not provided copies of the relied upon parallel invoices, despite Hon ble CESTAT s order dt 27.1.2007. That after this Bench s Order No I/128-129/2015dated 27.3.2015 some documents (pages 1 to 100) were provided, which are also not sufficient to establish the serious charge of clandestine manufacture and removal of goods by the appellants.

3.1 Learned Senior Advocate argued that as per the law established by now, in cases of clandestine manufacture and clearance, certain fundamental criteria have to be established by Revenue which mainly are the following:

i) There should be tangible evidence of clandestine manufacture and clearance and no merely interference or unwarranted assumption;

ii) Evidence in support thereof should be of :

a) Raw materials, in excess of that contained as per statutory records;

b) Instances of actual removal of unaccounted finished goods (not inferential or assumed) from the factory without payment of duty.

c) Discovery of such finished goods outside the factory

d) Instances of sales of such goods to identified parties.

e) Receipt of sales proceeds, whether by cheque or by cash, of such goods by the manufacturers or persons authorised by him.

f) Use of electricity for in excess of what is necessary for manufacture of goods otherwise manufactured and validly cleared on duty.

g) Statement of buyers with details of illicit clearance/purchases;

h) Proof of transportation of goods, cleared without payment of duty;

i) Links between documents recovered during search and activities being carried on in the factory of production; etc.

Sr Advocate, drew the attention of the Bench to paragraphs 5.1 to 5.2 of the SCN and argued that entire demand is based on alleged parallel invoices as mentioned in the Annexure A-1, B-1 and C-1 to Show Cause Notice. That the alleged clandestine clearances cannot be confirmed as there is no tangible evidence to prove receipt of excess raw material, clandestine manufacture of goods, removal of goods from factory, documents to support transportation of such clandestinely cleared goods from the factory or receipt of cash payments for such goods. No such parallel invoices, forming the basis of demand, have been found from the factory of appellant. That transporters have not accepted having transported goods covered under those parallel invoices; that the invoices as mentioned in annexure A-1 have been produced by M/s Jalgaon Jilha Sahakari Dudh Utpad Sangh, Maharashtra, but such invoices, as mentioned in Annexure B-1 and C-1 of the SCN have not been produced M/s Dodia diary and M/s Tirumala Milk Products respectively; that the unsigned correspondence found from appellant s premises, heavily relied upon for duty demand, have not been found from the buyers and there is no confirmation from the buyers on the same and hence such documents cannot support the duty demand; that the most important aspect could be the receipt of payments for such alleged clandestinely removed goods which according to department was made by the said 3 buyers by demand drafts but the investigation has not found any such payments received in the two accounts of the main appellant which is reflected in Para 5.5 of the SCN; that although appellant has accepted only shortage of finished goods found and paid duty thereon, appellant has not accepted any details of manufacture and clearance of goods clandestinely made under alleged parallel invoices. Therefore, the evidences relied upon by the revenue to confirm the duty demand, are not sufficient to prove the case of clandestine manufacture and removal of goods. They also pleaded that evidence available on record have not been properly appreciated by the adjudicating authority. Appellants relied upon the following judgements, providing proposition of law applicable in cases of clandestine manufacture and clearance of goods based upon insufficient evidences, recovery of documents from their party, corroborative evidence, confessional statements etc :

i) 2008(226)ELT.701(P&H) CCE Vs Nand Mangal Steels Ltd

ii) 2012(278)ELT.641(Tri.Ahd.) Pet Metals Pvt Ltd Vs CCE

iii) 2014(308)ELT.655 (Guj) CCE vs Saakeen Alloys Pvt Ltd

iv) 2011(274)ELT.94 (Tri.Del.) CCE vs Renny Steel Castings Pvt Ltd

v) 2011(274)ELT.271.(Tri.Del.) CCE Vs L B & Sons

vi) 2013(297)ELT.63 (Tri.Del) CCE Vs Rajasthan Synthetics Ltd

vii) 2010(261)ELT.803 (Tri.Ahd) Shree Industries Ltd Vs CCE

viii) 2009(245)ELT.613(Tri.Mum) Bhandary Industrial Metals Pvt Ltd vs CCE

ix) 2012(278)ELT.362(Tri.Ahd) Vishwa Traders Pvt Ltd vs CCE, Vadodara which is upheld by Guj High Court and Supreme Court [ 2013(287)ELT.243(Guj)]

x) 2005(182)ELT.64 (Tri.Del) Opel Alloys Pvt Ltd Vs CCE Gaziabad

xi) 2015(317)ELT.499(Tri.Chen) CCE vs Rawf Re Rollers

xii) 2013(290)ELT.545 (Tri.Del.) Kuber Tobacco Products Ltd Vs CCE

xiii) 2014(302)ELT.435 (Tri.Ahd) CCE Vs Gopi Synthetics Pvt Ltd

xiv) 2014(310)ELT.299 (Guj) Jai Bhavani Metal company

xv) 2014(309)ELT.698 (Tri.Ahd) Centurian Laboratories Vs CCE

3.2 Sr Advocate also relied upon the following decisions to argue that unsigned documents cannot be relied upon.

i) 2007(216)ELT.659(SC) CC vs Bussa Overseas Properties Ltd

ii) 2007(217)ELT.561(Tri.Mum) Sunder Brothers

The Sr Advocate further relied upon the following decisions regarding non-applicability of extended period of time limitation.

i) 2006(197)ELT.555 (Tri Mumbai) Rivva Textiles Inds. Ltd

ii) 2006(195)ELT.90 (Tri Bang) Lovely Food Industries

iii) 2009(238)ELT.125 (Tri Ahd) R A Shaikh Paper Mills Pvt Ltd

iv) 2009(238)ELT.21 (SC) Kushal Fertilizer P Ltd

v) 2011(264)ELT.555 (Tri Mumbai) Orissa Bridge and Construction Corpn Ltd

It is his submission that the case of clasdestine removal cannot be upheld merely on the basis of unsigned documents and the documents found from third party etc. or uncorroborated statement unless there is tangible, independent, proof like financial flow back, actual manufacture and clearance, excess purchase of raw material, electricity consumption, statements of workers, actual transportation of goods, statement of purchasers. That as per basic Rule of Evidence, unsigned copies of documents or documents recovered from third party cannot be considered as evidence at all. Learned Senior Advocate also argued that the case against the appellant is not proved; therefore there is no question of imposing penalty on the appellants.

4. Shri Govind Jha, Authorised Representative, appearing on behalf of the Revenue argued that the case of clandestine manufacture and removal of goods is proved by evidences relied upon. It was strongly argued by the Learned Authorised Representative that the confessional statements have not been retracted by the appellants and also the statements of the consignment recipient that parallel invoices and other complementary invoices recovered from the factory of main appellant corroborating clandestine manufacture and removal of finished goods.

5. Heard both sides and perused the case records. The Revenue s case of clandestine manufacture and removal of HDPE/LLDPE bags of Chapter 39, without payment of duty, by the Appellant is based mainly on the account of a search. Panchnama dt 3.7.2001 at appellants factory show the following discrepancies:

* Shortage of 1946 kgs Finished Goods involving duty of ₹ 24,909/-

* Shortage of raw materials 4050 and 4170 kgs of LDPE & LLDPE,

* Blank Invoice Book containing 23 sets of invoices and statements of Shri Naman K Shah, Shri Jignesh K and Shri Dhiraj and statements of the buyers the main appellant.

It is observed that during search on 3.7.2001 a shortage of 946 kgs finished goods, involving excise duty of ₹ 24,909/- was found on which Shri Manan K Shah has stated before Panchas that he was not in a position to explain the reasons for the shortage. However, he agreed with the said shortage and agreed to pay the Central Excise duty leviable thereon within 2 days. When shortage of finished goods manufactured is not satisfactorily clarified, adverse presumption of its clandestine removal can be taken. As regards shortage of raw material, he has stated that the same has been used for manufacture of goods in appellant s factory. Thus, I find that the appellant has paid duty on alleged shortages but has not accepted clandestine removals. It is also observed that none of the relied upon documents prove receipt of excess inputs and actual manufacture of goods, said to have been manufactured and cleared clandestinely.

5.1 In the impugned OIA first appellate authority has referred to the statement of Shri Jigneshkumar Dhirajlal (the Excise Clerk) and found that the main appellant has cleared goods on parallel invoices as per directions of Shri Manan K Shah, Director of the main appellant. However, I find that Excise Clerk has simply stated to have prepared only 7 invoices during his one year working. It is not forthcoming from his statement as to which were those 7 invoices referred by him when there is nothing to show that goods were actually cleared against those alleged parallel invoices.

5.2 It is also observed that demand of duty is worked out on the basis of parallel invoices referred to in Annexure A-1, B-1, and C-1to in SCN, but none of these parallel invoices have been found from the factory of the main appellant during search or follow up investigation. Out of 27 invoices, only 11 invoices referred to in Annexure A-1 and 3 invoices referred to in Annexure C-1 appear to be produced, which are recovered from the buyers. The three receipts of the packing materials were regular buyers, who were accounting for all their goods into their Books of Account. However, these documents recovered from third party does not have evidential value unless fully supported by other independent corroborative evidences. I also find that 3 buyers have stated to have purchased the goods in question against payments made by demand drafts. Investigation shows that there were two bank accounts of the main appellant (one in Corporation Bank and the other in ICICI Bank), but it is not coming out as to how and where the appellant has received the sale proceeds of such goods in question. The evidence of flow back of money from the buyers to appellant ought to have been a crucial evidence to establish link of goods cleared by the appellant to buyers. However, there is no evidence that the main appellant has received any amount with respect to clandestinely cleared goods. In the absence of clear evidences to the flow back of money from buyer to appellant clandestine removals are not conclusively established.

5.3 I find that contents of the said parallel invoice have not been admitted by the appellant. Statement of Shri Manan K Shah, Director of the main appellant is relied upon by Revenue. Under this statement it has only been admitted that there were shortages of finished goods involving total duty of ₹ 24,905/- in these proceedings. I also find that huge quantities of finished goods are alleged to have been manufactured and removed clandestinely during the period in question, but in the absence of no corroborative evidence of excess receipt and consumption of inputs, electricity, manpower requirement, transportation etc.

5.4 I also find that demands are also based on unsigned documents found from the premises of the main appellant, but such documents are neither recovered from the buyers not recipients have been questioned there on. The demands are based on the documents recovered from the third party, which are not accepted by the appellant. Accordingly, a serious charge of clandestine production and illicit removal of the goods cannot be proved beyond reasonable doubt. Principle that suspicion however grave cannot take the place of an evidence, needs to be applied in the case in view of the case law relied upon by the appellant.

6. Main appellant, inter alia, has relied upon the case law Vishwa Traders Pvt Ltd Vs CCE reported in 2012(278)ELT.368 (Tri.Ahd) where it was held that in the absence of any tangible evidence, which would indicate that there was clandestine manufacture and clearance of the goods from the factory premises, charges of clandestine manufacture and clearance cannot be upheld. This order passed by Larger Bench is upheld by Gujarat High Court and supreme Court in 2013(287)ELT.43 (Guj) and 2014(303)ELT.A24(SC) respectively. Similar views have been expressed in other case laws also as mentioned in Para 3.1 above cited in support of the contentions of the appellant. In case of CCE vs Nand Mangal Steels Ltd [2008(226)ELT.702 (P&H)] the Hon ble High Court has held that department has failed to produce any material corroborating the parallel invoices etc and hence the demand of duty on the basis of the parallel invoices in that case was held not sustainable. On the issue of clandestine removal based on parallel invoices it has been held by courts that demands so raised are not sustainable. Few other such case laws relied upon by the appellant are CCE Ludhiana vs Nand Mangal Steels Ltd (supra). Pet Metal Pvt Ltd vs CCE, Vadodara (supra), Shree Industries Ltd vs CCE, Ahmedabad (supra). In the present proceedings no evidence has been brought forward from the transporters that such clandestinely cleared goods were sent through any transporting agency. In the case of Vishwa Traders Pvt Ltd vs CCE Vadodara (supra), inter-alia, also the facts involved recovery of 179 parallel invoices from the residential premises of the Manager of the appellant in that case. In paras 13 and 14 of this case law following was held :

“13. On careful perusal of the entire records of the case, we find that there is nothing on record as to unrecorded purchases or consumption of various other raw material in the manufacture of Frit, there is also nothing on record to indicate that the appellant had purchased the Quartz, Feldspar, Zinc, Borax Powder, Calcium and Dolomite and without accounting them used for the manufacture of Frit for clandestine removal. There is also nothing on record nor there is any statement of the suppliers of other raw materials, which would indicate that the appellant had received unaccounted raw material from the suppliers of these raw materials. There is a solitary evidence in the form of statement of supplier of one of the raw material i.e. Borax Powder, who indicated that the appellant had procured Borax Powder and not accounted the same in his record; and the said entries and information were deduced from the documents of the premises of Shri Anil Jadav and whose evidence has been discarded for having not been produced for cross examination; in the absence of any other tangible evidence to show that the appellant had been procuring the other major raw materials required for manufacture of Frit without recording in books of accounts, we are unable to accept the contentions of the ld. AR appearing for the Revenue and the findings of the adjudicating authority, that there was clandestine manufacture and clearance of the finished goods. The investigation has not proceeded further to bring on record unaccounted purchases of all the raw materials required for manufacturing of Frit .

14. In the case of Dhanavilas (Madras) Snuff Co. - 2003 (153) E.L.T. 437 (Tri-Chennai), we find that in Para 6, the Tribunal has recorded as under :

“6..Revenue ought to have produced the evidence of purchase of raw material, manufacture and clearance of goods clandestinely by examining the workers and also those who have received the goods without payment of duty. In view of lack of evidence, the Commissioner has rightly dropped the proceedings with regard to the charge pertaining to clandestine removal. However, he has upheld the charge pertaining to certain other charges and has confirmed duty and penalties

In yet another case in the case of S.T. Texturisers - 2006 (200) E.L.T. 234, this Bench, in respect of clandestine removal, very clearly held as under :

“6. Considering the above arguments of the appellant in the light of the various decisions of the Tribunal, it is seen that it has been consistently held by the Tribunal that entries in rough register cannot be made the sole basis for arriving at finding of clandestine manufacture. Reference in this regard be made to the Tribunal decision in the case of Essvee Polymers (P) Ltd. [2004 (165) E.L.T. 291 (Tri. - Chennai)], Krishna Bottlers (Vijayawada) Pvt. Ltd. v. Commissioner of Central Excise, Gantur [1999 (32) RLT 845 (CEGAT)], Ganga Rubber Industries v. Collector of Central Excise [1989 (39) E.L.T. 650 (Tribunal)]. The ratio of all the above decisions is that the allegations of clandestine manufacture and removal being quasi criminal in nature are required to established beyond doubt by producing evidence in the shape of procurement of raw materials, shortage, excess use of electricity, flow back of funds and purchase of final products by customers etc. Admittedly no such evidence has been produced on record by the Revenue, the evidentiary value of the statements relied upon by the Revenue already stands discussed by me in the proceedings paragraph. The said statements having been made under Section 108 of the Customs Act, 1962 are not comparable to the confession recorded under Section 164 of CRPC before Magistrate, and as such are required to be corroborated, by evidence of removal without payment of duty. As already discussed the said statements are devoid of probative value and cannot be considered to be supportive of charges of clandestine removal.”

In yet another case in the case of T.G.L. Poshak Corporation - 2002 (140) E.L.T. 187, the co-ordinate Bench of the Tribunal held as under.

“6. We have carefully considered the submission and perused the impugned order. Insofar as the assessee s appeal is concerned, we notice from the extracted portion of the Commissioner s order that Revenue is solely relying on the exercise note books mainly balance sheets. The Tribunal in large number of cases which have already been noted above in the tabulated list of citations furnished by the Counsel has held that unless there is clinching evidence on the nature of purchase of raw materials, use of electricity, sale, clandestine removals, the mode and flow back of funds, demands cannot be confirmed solely on the basis of note books maintained by some workers. The facts in the case of Aswin Vanaspati Industries would be identical to the facts herein as in that case also the allegation was with regard to removal of Vanaspati based on the inputs maintained. The Tribunal went in great detail and have clearly laid down that unless department produces evidence, which should be clinching, in the nature of purchase of inputs and sale of the final product demands cannot be confirmed based on some note books. A similar view was expressed by the Tribunal in the other judgments noted supra. The citations placed would directly apply to the facts of this case. Hence, following the ratio of the cited Judgments, the assessee s appeal is allowed.

All the above reproduced ratio would lead to a conclusion that the charge of clandestine manufacture and removal has to be proved beyond doubt and in the case before us, as already discussed, there is nothing on record that instils confidence in our mind that the appellant had clandestinely manufactured and cleared the final product.

Further, it is settled law that for the purpose of clandestine removal, there has to be clandestine manufacture. We find on perusal of the record, that the Revenue authority, despite having engaged themselves in massive investigation, has not brought on record a single evidence of procurement of other major raw materials required for manufacture of Frit, either in the form of entries in the books of accounts or in the form of statements of supplier of the other major raw materials. It is undisputed that for manufacturing of Frit (the final product) major raw material is Quartz which is approximately 45% of the total inputs going in the manufacturing of Frit . We find from the records that Revenue has not produced a shred of evidence, to indicate that the appellant had been procuring Quartz without accounting them in books of account nor is there any evidence to indicate that other raw materials were also procured without recording them in books of accounts. In the absence of any such evidence, we are unable to persuade ourselves that the appellant M/s. VTPL had clandestinely manufactured the quantity of Frit during the period 1998-1999 to January 2002. If there is no clandestine manufacture, there cannot be any clandestine clearance. Further, we also find from the records that there is no investigation which has been carried out to indicate that there has been unusual consumption of electricity or any other evidence in the form of receipt of raw material into the factory premises of the appellant M/s. VTPL or that the production figures were so manipulated that the clandestine removal could take place without receipt of other raw materials. The investigating authorities, during the course of raid, had even seized the records of security at the factory gate, but from these records, Revenue was not able to show that there was illicit receipt of the raw materials in the manufacture of final product in the factory premises.

6.1 In the present proceedings also it is observed that there has to be an illicit manufacture of goods to indulge in clandestine removals for which extra raw-material, extra manpower, transportation of finished goods, cash payments etc are required to be established with a reasonable degree. In the absence of any corroboration on above factual details, the case of clandestine removals cannot be held as established on the basis of few parallel invoices recovered from a third party.

7. In view of the above observations and settled proportion of law, impugned orders demanding duty as alleged clandestine removal with equal penalty deserves to be set aside. However, duty demand of ₹ 24,905/- in respect of shortage of finished goods found at the time of search of factory on 3.7.2001 is required be confirmed with equal penalty. Penalty imposed on Shri Manan K Shan, Director of the main appellant, is also set aside as on merit appeal has been predominantly decided in favour of the main appellant.

8. In view of the above observations, appeals filed by appellants are allowed only to the extent indicated herein above, with consequential relief, if any.

(Pronounced in the Court 30.6.2015)



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