Allegations Of Clandestine Removal Cannot Rely On Unauthenticated Evidence: CESTAT Chennai

The Chennai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that allegations of clandestine manufacture and removal cannot be sustained in the absence of legally admissible electronic evidence and a complete chain of corroborative material.

A Bench of Judicial Member P. Dinesha and Technical Member Vasa Seshagiri Rao on 4 February 4, allowed the appeals filed by the Umashankar Alloys Pvt. Ltd., its Managing Director and Manager, and quashed the duty demand of Rs. 2.79 crore, along with equal penalty and consequential personal penalties.

The Bench noted:

“The allegation of clandestine removal is a serious charge, carrying grave civil and penal consequences, and therefore the burden placed upon the Revenue is correspondingly heavy.”

The case arose from investigations conducted by the Department for the period 2009-10 to 2011-12 against the Hosur-based manufacturer of MS ingots, alleging clandestine manufacture and removal of excisable goods without payment of duty and wrongful availment of CENVAT credit amounting to Rs. 1.40 crore.

The adjudicating authority had confirmed the clandestine removal demand with equal penalty under Section 11AC of the Central Excise Act, 1994, and imposed personal penalties of Rs. 5 lakh on the Managing Director and Rs. 15 lakh on the Manager, but dropped the CENVAT credit demand. This led to cross-appeals by both the assessee and the Department.

The Department relied on electronic data recovered from seized pen drives, computer printouts, private notebooks, electricity consumption analysis, and statements of suppliers, transporters and buyers to allege suppression of production and clandestine clearance.

However, the Tribunal found that the electronic records were inadmissible due to non-compliance with the mandatory requirement of a certificate under Section 36B(4) of the Central Excise Act certifying the authenticity and manner of production of the electronic data. It observed that electronic evidence, being susceptible to tampering, can be relied upon only when statutory safeguards are strictly fulfilled.

The Bench further noted that most witnesses whose statements were relied upon by the Department retracted their earlier statements during cross-examination and denied involvement in clandestine transactions.

It also found that the Department had failed to produce corroborative evidence such as proof of procurement of excess raw materials, transportation details, buyer confirmation, cash flow-back, or seizure of unaccounted finished goods.

Rejecting the electricity consumption analysis, the Tribunal held that such calculations were speculative and could not substitute direct evidence of clandestine manufacture.

The Tribunal observed:

"The demand was founded upon inadmissible electronic printouts lacking Section 36B compliance, uncorroborated private notebooks, speculative electricity-based extrapolation, and statements which were contradicted during cross-examination. Once the substantive allegation of clandestine removal itself fails, the penalty imposed under Section 11AC cannot survive."

The Tribunal further noted:

"The Department has argued that since clandestine activity was alleged, penalties should be upheld to deter evasion. However, deterrence cannot substitute legality. Penal provisions must be applied strictly and only when statutory conditions are fulfilled. The Tribunal cannot sustain penalties merely on suspicion or on incomplete evidentiary material."

On the issue of CENVAT credit, the Tribunal upheld the adjudicating authority's decision to drop the demand, holding that the Department had failed to establish non-receipt of inputs through cogent evidence.

Holding that clandestine removal is a serious charge requiring clinching and legally admissible evidence, the Tribunal set aside the entire duty demand, interest and penalties imposed on the company and its officials.

Accordingly, it dismissed the Department's appeal.

For Appellant: Advocate, M. Karthikeyan

For Respondent: Authorised Representative, Anoop Singh