CESTAT Delhi Quashes Excise Demand Alleging Clandestine Production Based Solely On Electricity Consumption

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has set aside a central excise demand against a supari manufacturer, holding that alleged clandestine manufacture and removal could not be sustained in this case when the department relied only on electricity consumption.

A bench of President Justice Dilip Gupta and Technical Member P.V. Subba Rao rejected the department's approach, observing:

“We are unable to accept this submission of the department. In our view, all that the figures and calculations show is that if the production of supari in terms of electricity consumption has been as efficient during the entire period of dispute as it had been during the period 1 November 2017 to 9 November 2017, the production of supari would have been as calculated. However, the calculation does not establish that the production has, indeed, been so efficient throughout the period of dispute, and part of the supari so produced was clandestinely removed without paying duty.”

Allowing appeals filed by Marie Products Pvt. Ltd. and its director, the tribunal quashed the demand, interest, and penalties after finding that the allegation of clandestine manufacture rested only on electricity consumption, without corroborative evidence to establish actual excess production or removal.

Marie Products manufactures scented supari sold in small retail pouches. Searches were conducted in November 2017, following which a show cause notice was issued alleging that between October 2014 and June 2017, actual production exceeded the quantities disclosed in ER-3 and ER-1 excise returns.

The alleged differential quantity was treated as having been clandestinely manufactured and removed without payment of central excise duty. The demand was confirmed by the adjudicating authority and later upheld by the Commissioner (Appeals).

To compute the alleged excess production, the department adopted electricity consumption as the only determining factor. The highest production per unit of electricity recorded during a nine-day period from November 1 to 9, 2017, was treated as the correct benchmark and applied retrospectively to the entire disputed period.

The company contended that, for the period in question, the department had not produced any evidence of unaccounted raw material linked to the alleged excess production. It also pointed out the absence of proof of transportation of goods, identified buyers, cash flow, or any prescribed input-output ratio.

The Tribunal rejected the company's preliminary objection that proceedings relating to the pre-GST period could not continue after the rollout of GST, holding that such action was expressly saved by Section 174(2) of the CGST Act.

Turning to the merits, the Tribunal noted that production per unit of electricity fluctuated significantly during the relevant period and found that no parameters other than electricity consumption had been used to arrive at the alleged excess production.

In these circumstances, the Tribunal concluded that the department had failed to establish clandestine manufacture or removal on the facts of the case and allowed the appeals.

For Appellants: None

For Respondents: Shri Bhagwat Dayal, Authorized Representative