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Smart Summary

Tribunal Opinion Summary: Customs, Excise & Service Tax Appellate Tribunal (Court No. II)

Factual and Procedural Background

Source: Final Order No. 50781-50782/2015 (Coram: Hon'ble Shri D.N. Panda, Judicial Member). Appeals E/1652 & E/1653/2006 arising out of Order‑in‑Original No.37/COMMISSIONER/LKO/2006 dated 25.1.2006 (Commissioner of Central Excise, Lucknow). Reserved on 20.10.2014 and pronounced on 20.03.2015.

The case concerns re-adjudication following an earlier Tribunal order dated 17.01.2002 (reported 2004 (165) E.L.T. 74 (Tri. Del)). The earlier order had (i) found a shortage of 4,116 Harrison brand locks and directed re‑determination of assessable value (applying the Larger Bench decision in Srichakra Tyres Ltd. v. Collector of Central Excise, Madras), (ii) directed re‑examination of duty on job charges, (iii) directed re‑examination of shortage of raw material, and (iv) directed re‑examination of duty in respect of locks seized from premises of M/s. R.P. Locks. The matter was remanded for de novo adjudication with cum‑duty price benefit.

On re‑adjudication the authority made findings on four counts and imposed duty and penalty. The appellants are M/s. Key Locks (India) (manufacturer) and Shri Ravi Jain (authorized representative). The respondent is Commissioner of Central Excise, Lucknow. The Tribunal’s present decision addresses the appeals by these parties from the re‑adjudication.

Legal Issues Presented

  1. Whether the shortage of 4,116 Harrison locks established earlier warranted re‑determination of cum‑duty value and resulting duty demand (and whether that valuation was correct).
  2. Whether shortages of raw materials (37,381 kgs of C.R. strips and 4,526 kgs of MS wire) legitimately gave rise to a conclusion that 1,49,524 locks were clandestinely manufactured and cleared, thereby attracting duty.
  3. Whether amounts paid as job charges (Rs.2,01,962) gave rise to duty liability through alleged job‑work arrangements and whether the valuation method (estimation using 10% formula) was sustainable.
  4. Whether locks found at M/s. R.P. Locks’ premises belonged to appellant and, if not shown to be duty‑paid, whether duty demand on those seized goods was sustainable.
  5. Whether penalties imposed (Rs.16,40,095 on the manufacturer and Rs.2,50,000 on Shri Ravi Jain under Section 173Q of the Central Excise Rules, 1944) were justified, and whether the personal penalty on Shri Ravi Jain should be sustained.

Arguments of the Parties

Appellant's Arguments (M/s. Key Locks and Shri Ravi Jain)

  • The investigation of 29.09.2000 did not produce a genuine discrepancy; the alleged shortage of 4,116 locks was made without proper examination and is arbitrary.
  • The reported shortage of C.R. strips and MS wire was based on “eye estimation”; the materials were in cut pieces and were not weighed, and therefore could not be said to have given rise to manufacture of 1,49,524 locks; valuation at Rs.51 per lock (or other valuation) is without merit.
  • There was no actual job work performed outside the factory; payments to contract workers within the factory were mislabeled as job work; the Authorized Representative’s statement about only two machines undermines the revenue's job work theory.
  • Locks found at M/s. R.P. Locks were claimed to be duty‑paid clears, and burden to prove lawful clearance should be upon the revenue; the valuation and seizure were arbitrary.
  • The penalty levied is excessive and inappropriate where the alleged defects relate to record‑keeping or perceived accounting issues rather than proved clandestine sale; reliance was placed on case law (e.g., M/s. Continental Cement Co. and Vikram Cements) to argue relief.

Revenue's Arguments

  • The earlier Tribunal order had established the shortage of 4,116 locks, so the appellant could not re‑litigate that issue beyond re‑determination of value; no cost sheet or evidence rebutting re‑determination was produced by appellant.
  • The appellant failed to furnish stock reconciliation or cogent evidence to rebut the Panchnama and physical inventory findings; best‑judgment assessment by the Adjudicating Authority (that shortages gave rise to clandestine manufacture and clearance) was justified.
  • Ledger entries, payments to multiple outside firms and lack of muster rolls, ESI/PF or work orders supported the conclusion that job work was outsourced, and valuation by estimation was therefore appropriate.
  • Goods seized from M/s. R.P. Locks matched the appellant’s product specifications and no proof of duty payment or lawful clearance was produced; therefore seizure and levy of duty were justified.
  • Penalties were warranted because clandestine removal and evasion of duty were established on record; authorities and fact‑finding support imposing penalties on the manufacturer (although not necessarily on an individual without evidence of active involvement).

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
2004 (165) E.L.T. 74 (Tri. Del) (earlier Tribunal order) Earlier Tribunal finding that shortage of 4,116 Harrison locks was established. The Tribunal relied on this earlier finding to refuse re‑opening of the issue except for re‑determination of cum‑duty value; duty on that count was confirmed in the present appeal.
Srichakra Tyres Ltd. v. Collector of Central Excise, Madras, 1999 (108) E.L.T. 361 (Tri.) Principle for re‑determination of assessable value in accordance with Larger Bench guidance (used earlier to determine cum‑duty value). The earlier Tribunal order had directed re‑determination of value in terms of this Larger Bench decision; re‑adjudication followed that guidance when re‑determining cum‑duty price for the 4,116 locks.
Alagappa Cements Pvt. Ltd. v. CEGAT, Chennai, 2010 (260) E.L.T. 511 (Mad.) Used to support the proposition that shortage of raw material can give rise to inference of clandestine clearance with intention to evade duty. The Tribunal invoked this case to sustain the inference that the raw material shortage could reasonably be held to result in clandestine removal and consequent duty liability.
M/s. Continental Cement Co. & Ors. v. Union of India & Ors., 2014-TIOL-1527-HC-ALL-CX Authority cited by appellants to argue that non‑recording of goods need not lead to penalty where illegal sale was not established. The Tribunal distinguished this decision on facts, holding that illegal sale/clandestine removal was established in the present case and therefore the decision was not helpful to the appellant.
M/s. Vikram Cements — Central Excise Appeal No.106/2013 (dated 08.10.2013) Referenced for the principle that burden of proof on revenue must be satisfied (and where not, appellant may succeed). The Tribunal observed that in Vikram Cements the burden was not discharged by revenue, but distinguished that case because in the present matter the revenue produced evidence and the Tribunal found the revenue's case proved.

Court's Reasoning and Analysis

The Tribunal reviewed the re‑adjudication findings and proceeded issue by issue, applying factual appraisal and evidentiary standards reflected in the record:

  1. Shortage of 4,116 locks: The Tribunal accepted that the earlier Tribunal order had already established shortage. The present record lacked a cost sheet or other evidence from the appellant to rebut the valuation; the Adjudicating Authority had re‑determined the cum‑duty price (referral to Assistant Commissioner) and computed duty of Rs.28,954. In absence of cogent rebuttal, that re‑determination and demand were confirmed.
  2. Shortage of raw materials (C.R. strips and MS wire): The investigating Panchnama and inventory findings were treated as reliable in the absence of stock reconciliation or credible contrary evidence. The appellant's contention of "eye estimation" and lack of weighment was rejected because no technical data (e.g., per‑lock material consumption, scrap percentage, wages, overheads) was produced to undermine the authority’s conclusion that shortages could give rise to manufacture of 1,49,524 locks. The Tribunal relied on precedent (Alagappa Cements) to support the inference that raw material shortage can indicate clandestine clearance; the duty demand of Rs.10,51,824 was sustained.
  3. Job work valuation and demand: The Adjudicating Authority found payments to several outside firms and ledger entries for job‑work payments. The appellant failed to produce muster rolls, ESI/PF records, work orders or other documents that would show work was performed within the factory by its employees rather than outsourced. In these circumstances the authority used estimation (including application of a 10% formula) to determine taxable value; the Tribunal found the authority’s valuation and resulting demand (Rs.3,72,202) proper in the absence of contrary documentary proof.
  4. Locks seized at M/s. R.P. Locks: Goods seized from R.P. Locks matched the appellant’s product specifications and the appellant did not produce proof of lawful clearance or duty payment. Given the absence of evidence to show these goods were duty paid, and the connection between the seized goods and the appellant’s manufacturing pattern, the Tribunal accepted the inference that R.P. Locks premises were a berth for clandestinely removed goods and sustained the demand (Rs.1,87,015 as reflected in the re‑adjudication summary).
  5. Penalties: For the manufacturer (M/s. Key Locks) the Tribunal upheld the penalty of Rs.16,40,095 because clandestine removal and evasion were found on various counts and the revenue adduced evidence supporting those allegations. The Tribunal distinguished authorities cited by the appellant where revenue had failed to discharge burden. However, regarding Shri Ravi Jain, the Tribunal found no cogent and credible evidence of his active, conscious involvement or nexus to clandestine removal; the penalty of Rs.2,50,000 imposed on him was therefore waived and his appeal allowed.

Holding and Implications

Holding: The Tribunal dismissed the appeal of M/s. Key Locks (India) and allowed the appeal of Shri Ravi Jain. The duty demands on the four counts (re‑determination of value of 4,116 locks: Rs.28,954; shortage of raw material: Rs.10,51,824; job‑worked value: Rs.3,72,202; locks seized at M/s. R.P. Locks: Rs.1,87,015) were sustained, and the penalty of Rs.16,40,095 on M/s. Key Locks was sustained; the penalty of Rs.2,50,000 on Shri Ravi Jain was waived.

Implications:

  • Direct effect on the parties: The manufacturer remains liable for the duty demands and corporate penalty determined by the re‑adjudicating authority and confirmed by the Tribunal. Shri Ravi Jain, the authorized representative, was relieved of personal penalty liability in the absence of evidence of his personal involvement.
  • Evidence and record‑keeping emphasis: The decision underscores the Tribunal’s reliance on inventory Panchnama, ledger entries, and absence of affirmative reconciliation or technical data from the appellant; lack of such documentation can support best‑judgment assessment and inference of clandestine clearance.
  • Precedential posture: The opinion applies and distinguishes existing authorities but does not announce a new legal principle beyond those established precedents; the Tribunal principally affirmed factual findings and valuation methodology in the circumstances of this case.

Signed: D.N. Panda, Judicial Member. Final order dated 20.03.2015.

Show full summary ...

    M S Continental Cement Company Ors v. Union Of India

    IN THE CUSTOMS, EXCISE AND SERVICE TAX APPELLATE TRIBUNAL WEST BLOCK NO. II, R.K. PURAM, NEW DELHI 11066 COURT NO. II Appeal Nos. E/1652 & 1653/2006 EX [SM] (Arising out of Order-in-Original No.37/COMMISSIONER/LKO/2006 dated 25.1.2006 passed by the Commissioner of Central Excise, Lucknow) M/s. Key Locks (India) Shri Ravi Jain Appellant C.C.E. Lucknow Respondent Appearance Shri Hemant Bajaj, Advocate, for the Appellant Mrs. Rajana Jha, Commissioner (AR) for the Respondent CORAM Honble Shri D.N. Panda, Judicial Member Reserved on: 20.10.2014 Pronounced on:20.03.2015 Final Order No. 50781-50782/2015 PER D.N. Panda Both the appellants are in second round of litigation before the Tribunal. Tribunal in the earlier occasion by final order dated 17.01.2002 reported in 2004 (165) E.L.T.74 (Tri. Del) ordered that there was shortage of 4,116 locks of Harrison Brand but assessable value thereof re-determined in terms of the decision of the Larger Bench in the case of Srichakra Tyres Ltd. Vs Collector of Central Excise, Madras reported in 1999 (108) E.L.T. 361 (Tri.). Secondly, it was ordered that the issue of duty on the basis of job charges paid by the appellant was to be re-examined. Thirdly, there shall be re-examination of the issue of shortage of raw material and fourthly the duty demand of Rs.2,16,938/- on account of locks seized from the premises of M/s. R.P. Locks is to be re-examined for passing fresh order. Matter was remanded accordingly for denovo adjudication granting cum-duty benefit. 1.2 Learned Adjudicating authority in the re-adjudication proceeding found that the shortage of 4,116 locks detected on 29.9.2000 by investigation during physical inventory was established and only re-determination of value thereof allowing cum-duty benefit was to be made. That was done. Appellants plea that the value of each lock is to be considered at Rs.24.32/- was not accepted by him. Referring the matter to the jurisdictional Assistant Commissioner, he re-determined cum-duty price of 4,116 locks and arrived duty liability of Rs.28,954/-. 1.3 So far as shortage of raw material is concerned, learned Adjudicating authority found clandestine removal of 1,49,524 key locks evading Central Excise Duty of Rs.10,51,824/-. He noticed that 250 gms of CR Strips were used for manufacture of 1,49,524 of number of locks valued at Rs.76,75,725/- out of shortage of 37,381 kgs of C.R. strips and 4526 kgs of MS wires detected during investigation. Those were unaccounted and removed clandestinely. Appellants plea that the raw materials found short during inventory was due to eye estimation and did not give rise to manufacture of 1,49,524 locks was found to be baseless. The authority granting cum-duty price benefit, duty demand of Rs.10,51,824/- was determined in re-adjudication. 1.4. So far as demand on job work charges is concerned, the authority observed that during period 1996-97 to 1998-99, job charges to the tune of Rs.2,01,962/- were paid. Considering 10% of the value of the lock to be job charges duty demand of Rs.3,72,202/- was determined. Appellants plea that 10% formula adopted was arbitrary was found to be baseless. Learned authority examined statement of Shri Ravi Jain, the authorized signatory who in his statement under Section 14 of the Central Excise Act, 1944 categorically stated that the appellant had two machines and those were power press and hard press. Various other activities were carried out by job workers. Value of the job worked goods was estimated fairly for loss of duty. 1.5 Fourthly, the locks seized from M/s. R.P Locks were held to be clandestinely removed without payment of duty. Value thereof was determined by the authority granting cum-duty benefit and demand of Rs.1,80,715/- was raised on such count. 1.6 In view of above observations and findings on readjudication, demand arose on four counts:-

    1. Re-determination of duty on 4116 locks detected short 28,954 2. Shortage of raw material alleged to be used in manufacture of clandestinely cleared goods 10,51,824

    3. Job worked value of goods escaped duty 3,72,202 4. Key locks found in the premises of M/s. R.P. Locks 1,87,015 1.7 In addition to the above duty demand, penalty of Rs.16,40,095/- was imposed under Section 173 Q of the Central Excise Rules, 1944 on the appellant manufacturer M/s. Keylocks (India) and penalty of Rs.2,50,000/- was imposed on the appellant Shri Ravi Jain holding him guilty for not maintaining proper account of raw materials as well as finished goods and abeted in clandestine removal.

    2. Against the aforesaid demand of duty and penalty, the manufacturer-appellant M/s. Key Lock (India) and its Authorized Representative Shri Ravi Jain came in appeal before the Tribunal. 3.1 Learned counsel for the appellants arguing on their behalf submitted that the investigation made on 29.09.2000 really did not result in any discrepancy but whimsically the investigating authority made allegation of shortage of 4,116 locks without proper examination. Therefore, there shall be no demand on that count by arbitrary valuation of goods. 3.2 Revenue, on the other hand, submitted that the Tribunal in first round of litigation has held that the shortage of 4,116 locks of Harrison brand was established. Therefore, appellant has no scope to re-agitating on this issue except re-determination of the value of the locks granting cum-duty price and work out duty liability thereon with consequence of evasion. 3.3 Revenue is correct to say that shortage of 4116 locks established in the reported decision aforesaid. Appellant did not place any material to suggest that the determination of cum-duty value of such locks was erroneous. When no cost sheet was placed by appellant to show the material component in each lock, labour and overhead charges incurred as well as financial expenses made, it is difficult to discard the finding on valuation made by learned Adjudicating authority. Therefore duty demand of Rs.28,954/- on such count is confirmed. 4.1 On the second issue of shortage of 37,381 kgs. of CR Strips and 4,526 kgs. of MS Wire detected during investigation, appellants submission was that entire finding of the Adjudicating authority in para 5.1 to 5.11.3 is baseless since the shortage was reported on eye estimation. The CR Strips and MS Wire were in cut pieces for use in the manufacture of locks. The authority did not make weighment thereof. He whimsically suggested shortage. Adjudicating authoritys notion that shortage of 37,381 kgs. of CR Strips and 4,256 kgs. of MS Wire shall give rise to manufacture 1,49,524 locks is baseless. Similarly, valuation of the locks at the rate of Rs.51/- per lock is also without any merit. Accordingly, the demand of Rs.10,51,824/- is not called for. The authority no doubt granted cum-duty benefit but that is not the solace to the appellant. 4.2 Revenue on the other hand submitted that when the appellant failed to defend on unfound stock and no stock reconciliation submitted, the best judgment assessment made by the Adjudicating Authority holding that CR Strips of 37,381 kgs. and MS Wire of 4,526 kgs. gave rise to clandestinely removed key locks of 1,49,524 numbers cannot be faulted. The authority rightly determined duty liability of Rs.10,51,824/- on such count. 4.3 Even in second round, appellant failed to provide reconciliation statement of the goods of the above description found short during investigation. Once Panchnama was drawn in the presence of the witnesses, inventory found during investigation and recorded therein remain unquestionable in absence of any cogent and credible evidence to find fault in recording thereof. Plea of eye estimation fails to stand. Appellant did not provide any material to establish impossibility of manufacture of 1,49,524 locks. In absence of any technical or scientific data, it is not possible to discard the conclusion of arise of 1,49,524 locks out of shortage of goods found by investigation. Appellants should have come out with clean hands to show approximate weight of CR Strip and MS Wire used in manufacture of a lock of each specification, arise of scrap if any, wage incurred for manufacture as well as the overhead charges required in that regard. In absence of any such data, determination of value of the locks of 1,49,524 numbers cannot be found to be faulty. Shortage of raw material gives rise to the conclusion of clandestine clearance with the intention to cause evasion of duty. This can be said following the decision of the Honble High Court of Madras in the case of Alagappa Cements Pvt. Ltd. Vs. CEGAT, Chennai reported in 2010 (260) E.L.T.511 (Mad.). Therefore, appellant fails on this count of demand also. 5.1 The third count of demand of Rs.3,72,202/- arose on account of job worked value of the goods. This is opposed by appellant on the ground that locks were manufactured in the premises of the appellant without availing services of many concerns. There was no job working done. The Authorized Representatives evidence as to installation of only two machines by the appellants for manufacture of locks is of no relevance. Appellant further pleaded that they were not issuing material outside for job working but they employed contract workers within factory and making payment for manufacture of locks inside factory. Such payments were called job work charges. Revenues presumption that the goods were job worked is therefore incorrect. Similarly, valuation of the alleged job worked goods is also erroneous. 5.2 Learned Authorized Representative for Revenue argued that Adjudicating authority found that five firms M/s. Good Luck Painting works, M/s. Raju Polish Wala, M/s. Pramod Job Worker, M/s. Azam Electro Platers and M/s. Aligarh Dye Castings, were different job workers engaged by the appellant for job working. The ledger of the appellant showed payment of job work charges. Learned Authority decided valuation issue properly. It was further submitted by Revenue that appellants did not manufacture locks by its employed workers without muster roll of labourers and their labour record, ESI and PF record. Respective works were assigned to different parties. They worked for the appellant in different stages of manufacturing locks. Such outsourcing of work was nothing but job work and the appellant not maintaining appropriate records for such purpose was bound to suffer duty. 5.3 Appellant did not come forward to show which were the records maintained to identify the work done by above agencies if they were working in the factory of the appellant. The very work that is carried out by each of them was not explained. So also the work order if any placed with them was not produced. Appellant also failed to show the consideration paid to them for the respective nature of activity carried out by them. Therefore, Adjudicating authority has no alternative than to determine the value of the lock on estimation on such count. He did not find any permission or intimation of the department in respect of job working. Appellant also failed to challenge the manner of determination of the job worked goods. The payment made to job workers and cost of raw materials as well as cost incurred for manufacture became basis for estimation of the value of the goods and without evidence being shown as to clearances of the job worked goods on payment of duty, there was demand of Rs.3,72,202/- rightly made on such count. For no good reason stated by the appellant assailing that demand, that remain untouched. 6.1 So far as the fourth count of demand of Rs.1,87,015/- is concerned, when the department found goods of the appellant were lying with M/s. R.P. Locks and duty demand character of such goods remain unexplained, those were seized and demand of Rs.1,87,015/- arose. The appellant has two alternative pleas. One is that the locks were cleared to M/s. R.P. Locks on payment of duty but no proof thereof produced. Alternatively, if those were clandestinely removed value thereof should be objectively determined with benefit of cum-duty price. Appellant made plea that the locks found in M/s. R.P. Locks were duty paid and it was left open to M/s. R.P. Locks to defend. So also the determination of the value of the goods was arbitrary for which demand of Rs.1,87,015/- was not sustainable. But learned investigating authority found different sizes of locks in that premises and seized the same in absence of evidence of duty payment 6.2 Revenue on the other hand submits that the goods found with M/s. R.P. Locks were the goods of the appellant. That remained undisputed. Appellant failed to substantiate lawful clearance thereof. Therefore, in absence of evidence of payment of duty the demand of Rs.1,87,015/- should not be interfered. 6.3 When there was seizure of the locks of different description from the premises of M/s. R.P. Locks, appellant did not disclaim clearance thereof from its factory. The specification of locks seized proved that those were the manufactured goods of the appellant. When the appellant failed to produce evidence of lawful clearance of the specified description of the goods and duty payment evidence, the only inference that can be drawn is that premise of M/s. R.P. Locks was berthing place for clandestinely removed goods of the appellant. Accordingly, the demand of Rs.1,87,015 also sustains. 7.1 Appellant manufacturer challenged the penalty on the count that the arbitrary adjudication gave rise to penalty of equal amount to duty. There is no doubt that clandestine removal of the goods was proved fact on record. Appellants plea that mere not recording of the goods does not call for penalty as well as duty relying on the decision of the Honble High Court of Allahabad in the case of M/s. Continental Cement Company & Ors. Vs. Union of India & Ors. 2014-TIOL-1527-HC-ALL-CX is misplaced in absence of cogent and credible evidence by the appellants to discard the specific allegations of Revenue. The decision cited by the appellant is not therefore profitable to it due to distinguished facts therein. In that case of illegal sale of cement evading duty was not established. But in the present case, duty demand arose on specific allegations on different counts in different circumstances of the case. Therefore, appellants fail to get benefit thereof. 7.2 The second decision cited by the appellant in the case of M/s. Vikram Cements in Central Excise Appeal No.106/2013, dated 08.10.2013 was on the fact finding of the Tribunal. Burden of proof was not discharged by Revenue in that case. But, in the present case, Revenue brought out its case clearly with evidence recorded. No doubt, there may be certain amount of arbitrariness in best judgment assessment. But the estimation itself when sustained in the first round of litigation and shortage of stock was found by Tribunal, appellants questionable conduct came to record. The appellant therefore miserably fails to get any benefit in respect of penalty. Accordingly, even on account of penalty, the appellant fails to succeed.

    8. So far as penalty of Rs.2,50,000/- imposed on Shri Ravi Jain is concerned, the Adjudicating Authority has not found his active involvement in the clandestine removal. It was only a presumption by Adjudicating Authority as to his no accounting made as abettor. In absence of any cogent and credible evidence of his conscious involvement and nexus, the penalty levied on him is waived. His appeal is accordingly allowed.

    9. In the result, the appeal of M/s. Key Locks (India) is dismissed and appeal of Shri Ravi Jain is allowed. (D.N. PANDA) JUDICIAL MEMBER DRAFT Remarks I II III Date of dictation 11203.2015 Draft Order - Date of typing 12.03.2015 Fair Order Typing .03.2015 Date of number and date of dispatch E/1652 & 1653/2006

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    M S Continental Cement Company Ors v. Union Of India
    (Mar 20, 2015)