Allegation of Manufacturer 'Clandestinely' Clearing Goods To Escape Tax Must Be Based On 'Tangible Evidence': Delhi HC

A division bench of Justices Yashwant Varma and Ravinder Dudeja further observed,

“In adjudication proceedings to establish the charge of clandestine removal and under valuation, Revenue is not required to prove the case with mathematical precision. Such charges are to be established on the basis of “preponderance of probabilities.” However, the conclusions to be drawn are necessarily to be logical and not on the basis of presumptions and assumptions. Suspicion, howsoever grave, cannot replace the test of proof.”

The Assessee in the case at hand is engaged in the manufacture of copper ingots. In the pre-GST regime, its unit was searched by the officers of Directorate General of Central Excise Intelligence who detected a shortage of 3,500 Kgs of copper scrap. The authority also searched the proprietor's residential premises and recovered currency amounting to Rs. 6,20,000/-.

Thus, the Department issued a Show Cause Notice, seeking confiscation of Indian currency on the ground that the said currency was the sale proceeds of the goods cleared clandestinely.

As the case progressed, the Department ultimately approached the High Court as the CESTAT allowed Assessee's appeal and held that Revenue's case was not supported by credible evidence which may lead to an inescapable conclusion of unaccounted manufacture and clearance.

The Department contended that it is not necessary to produce the evidence from the beginning to the end that is from the stage of surreptitious procurement of raw material, its utilization in the manufacturing of unaccounted finished goods, suppressed production of finished goods and clearance thereof.

It further submitted that sufficient evidence showing surreptitious movement of raw material and clearance of unaccounted finished goods was placed on record, which is corroborated by private records recovered from the possession of the employees of the company.

The Assessee contended that the employees' statements were not voluntary and in any case, were later retracted. It further claimed that the alleged assessment of shortage was based on estimation by visual survey and not by actually weighing the copper scrap.

At the outset, the High Court remarked that if verification by eye estimation is true, it is no verification and no demand can be based on such eye estimation.

It then referred to CESTAT's finding on facts that there was no evidence regarding the excess electricity consumed and labour employed for manufacture and transport of alleged clandestine goods.

“In the absence of any tangible evidence which would indicate that there was clandestine manufacture and clearance of the goods from the premises of the respondent, we hold that the impugned order dated 08.06.2017 passed by the CESTAT does not suffer from any serious error and does not merit interference,” the Court thus held.

It cited Commissioner of Central Excise Vs. Saakeen Alloys Pvt. Ltd. (2014) where the Gujarat High Court in a case of alleged clandestine removal held that there needed to be “positive evidence” to establish evasion.

Similarly, in Arya Fibres Pvt. Ltd. v. CCE, Ahmedabad-II 2014, CESTAT discussed the entire law concerning clandestine removal and held that there should be tangible evidence of clandestine manufacture and clearance and not merely inferences or unwarranted assumptions.

In view of the above, Revenue's appeal was dismissed.

Appearance: Jatin Kumar Gaur, Advocate for Mr. Harpreet Singh, SSC

Case title: Commissioner Of Central Tax, GST Delhi East v. ASP Metal Industries

Case no.: CEAC 6/2019