CESTAT Delhi Says Goods Found In Godown Alone Cannot Prove Clandestine Removal, Quashes ₹50 Lakh Excise Demand

The Principal Bench of the Customs, Excise & Service Tax Appellate Tribunal (CESTAT), New Delhi has set aside a central excise duty demand of over Rs. 50 lakh raised against Sharp Mint Limited, holding that the department failed to prove its allegation that the company had clandestinely removed excisable goods found in its godown.

A bench of Judicial Member Ashok Jindal and Technical Member K. Anpazhakan allowed the appeal filed by Sharp Mint Limited against a de novo adjudication order passed by the Principal Commissioner, CGST & CX, Delhi North.

The dispute arose from investigations initiated after a fire incident at the appellant's factory premises in June 1998. During searches conducted in July 2006 at the company's godown, officers found large quantities of goods stored in drums without proper identification or documentation. Samples drawn by the department tested positive for Menthol, Peppermint Oil and Terpenoidal Rejects.

Based on the investigation, the department alleged clandestine manufacture and removal of excisable goods. The de novo adjudication proceedings culminated in confirmation of a central excise duty demand of Rs. 50.28 lakh, along with interest and penalty.

Sharp Mint contended that the goods found in the godown had been shifted there after the 1998 fire incident. It said the goods pertained to a period prior to obtaining central excise registration in May 2005. The company also argued that the department had failed to produce evidence of clandestine manufacture or removal.

The Tribunal found merit in the company's submissions. It observed that the adjudicating authority had failed to follow directions issued in the earlier remand order requiring adherence to the Delhi High Court's ruling in Flevel International v. Commissioner of Central Excise.

The Bench held, “Clandestine removal is a serious allegation which needs to be corroborated by tangible evidence. Some goods found in a godown could not automatically lead to the conclusion that they were manufactured and cleared clandestinely.”

The tribunal noted that the department had failed to produce evidence regarding procurement or use of raw materials for the alleged clandestine manufacture.

It also noted that the department had failed to produce the kind of corroborative evidence required in clandestine removal cases, such as proof of actual removals, transportation, identified buyers, receipt of sale proceeds, or abnormal electricity consumption.

Relying on the Delhi High Court's decision in Flevel International and the Tribunal's ruling in Arya Fibers Pvt. Ltd. v. CCE, Ahmedabad-II, the bench reproduced:

“There should be tangible evidence of clandestine manufacture and clearance and not merely inferences or unwarranted assumptions.”

The tribunal further held that the adjudicating authority had wrongly presumed the existence of unaccounted raw materials merely because goods were found in the godown.

It said there was no corroborative evidence to support that conclusion.

Holding that the allegation of clandestine removal had not been established, the tribunal set aside the excise duty demand, interest and penalty in their entirety.