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M/S. Mittal Pigement Pvt. Ltd. v. Shri Ramesh Kumar Agarwal
Factual and Procedural Background
This is an appellate order (per Ashok K. Arya, Member (T)) disposing appeals by M/s. Mittal Pigment Pvt. Ltd. (appellant No.1) and Shri Ramesh Kumar Agarwal (appellant No.2, Director) against Order-in-Original No. 25/2009-C.E., dated 22-05-2009, passed by the Commissioner of Central Excise, Jaipur-I.
The impugned order had confirmed: (a) a demand of Rs. 2,30,39,602/- (with interest) alleged to arise from suppressed production / clandestine clearances of zinc oxide, and an equivalent amount of penalty on the company; and (b) an additional Central Excise duty of Rs. 1,31,898/- for short found inputs (which the assessee had deposited and which was appropriated to Government account). A personal penalty of Rs. 40 lakhs was imposed on Shri Ramesh Kumar Agarwal under Rule 26 of the Central Excise Rules, 2002.
The Revenue issued a show cause notice dated 11-02-2008 alleging suppressed clearances based on an asserted average yield of zinc oxide (shown by the Department in Annexure A) in the range of 70% to 84% and an overall average of 77.60%, and the Commissioner confirmed the duty demand by order-in-original dated 19-05-2009. Both sides were heard before the Tribunal; the appellants were represented by Shri Madhav Rao, Advocate.
Legal Issues Presented
- Whether the Revenue had satisfactorily proved suppressed production/clandestine clearance of zinc oxide by the appellants so as to sustain the duty demand of Rs. 2,30,39,602/- and the related penalties (including a personal penalty of Rs. 40 lakhs on the Director).
- Whether the Department could sustain its demand and penalties by relying on approximated input-output norms (average yield 70%–84%, overall 77.60%) and the statement of the Director without additional corroborative documentary evidence.
- Whether the part of the impugned order confirming Central Excise duty of Rs. 1,31,898/- for short found inputs (which had been deposited) warranted interference by the Tribunal.
Arguments of the Parties
Appellant's Arguments
- The Department's Annexure A used a crude averaging method (overall average yield 77.60%) to compute alleged suppressed production; for some years yields were shown to be higher (e.g., 94.41% in 2002-03, 87.96% in 2005-06) where no demand was raised.
- No formal input-output norms had ever been fixed by the Department for the manufacture of zinc oxide; such norms could not be fixed reliably because input materials varied greatly (zinc dross, scrap, ingots) and contained varying impurities affecting yield.
- The literature and technical notes (cited by counsel) indicate variable yields depending on input quality; e.g., recovery ranges quoted in the company director's statement itself: from zinc dross output 70–80%; from scrap 50–70%.
- If clandestine removal of 1,545 MT of zinc oxide (value stated in submissions) had actually taken place, corroborative evidence should exist — transport/dispatch records, buyer receipts, realization of sale proceeds, evidence of additional power consumption — none of which the Department produced.
- Reliance was placed on certain judicial decisions (including Hindustan Coca Cola Beverages Pvt. Ltd. v. CCE, Thane; Jaganath Sweets v. Deputy Commissioner of Sales Tax; and Continental Cement Company v. Union of India) to contend that approximative input-output computation without corroboration cannot sustain a charge of clandestine removal.
- The appellants prayed for setting aside of duty, interest and penalties on the company, and setting aside of the penalty on the Director.
Revenue's Case (as recorded)
- The Revenue's case was that the appellant manufactured zinc oxide and that, based on the Department's computed yields for varying raw materials, the expected output should be in the range of 70%–84% (average 77.60%).
- Using those approximations and relying on the statement of the Director (Shri Ramesh Kumar Agarwal), the Department issued a show cause notice alleging suppression and demanded Rs. 2,30,39,602/- (plus interest) for clandestine removals; the Commissioner confirmed that demand.
- The Department therefore relied on the Annexure-based approximation and the director's statement as the primary bases for its findings of suppressed production and for imposing penalties.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Continental Cement Company v. Union of India (Allahabad High Court) | Principle that to prove clandestine sale further corroborative evidence is required; one should not rely solely on approximations and the Department's internal calculations. | The Tribunal relied on this decision to support the conclusion that the Department's approximation and lack of corroborative investigation/evidence were insufficient to prove clandestine removal. |
| Oudh Sugar Mills Ltd. v. Union of India - 1978 (2) E.L.T. (J172) (S.C.) | This Supreme Court decision was cited by the Tribunal as supporting authority (specific principle from the text is not detailed beyond being cited for support). | The Tribunal sought support from this Supreme Court decision in concluding that the Department had not discharged its burden to prove suppressed production; it treated the decision as an authority reinforcing its view. |
| Punalur Paper Mills Ltd. v. CCE - Final Order Nos. 996-997/2008 (CESTAT) | Cited as a Tribunal decision in support of the proposition relied upon by the appellants/Tribunal (the opinion does not elaborate the precise proposition beyond being cited for support). | The Tribunal referred to this CESTAT decision as part of its supporting authorities to hold that approximation alone did not satisfactorily prove clandestine removals. |
| Hindustan Coca Cola Beverages Pvt. Ltd. v. CCE, Thane | Cited by the appellants to contend that input-output norms so grossly fixed cannot sustain an allegation of clandestine removal (the opinion reports the appellant's reliance but does not detail the principle beyond that context). | Noted by the Tribunal as one of the precedents relied upon by the appellants in arguing against the Department's method of fixation of yield norms. |
| Jaganath Sweets v. Deputy Commissioner of Sales Tax, Cuttack-I | Cited by the appellants (as above) to support the contention that departmental fixation of input-output norms in a gross manner is unsustainable. | The Tribunal recorded that the appellants relied on this decision in support of their submission that approximative norms alone were not sufficient to prove clandestine clearances. |
Court's Reasoning and Analysis
The Tribunal examined the record and submissions and summarized the Department's approach as being based "solely on the basis of approximation production" — i.e., the Department used average yield figures (shown in Annexure-A: 70%–84% range; overall average 77.60%) and relied also on the statement of the Director.
The Tribunal noted the appellants' submissions (including technical literature and the director's own statement) showing variability in yields depending on the type and purity of inputs (zinc dross, scrap, ingots, etc.) and the presence of impurities that affect zinc recovery. The Tribunal emphasized that the Department did not produce corroborative documentary evidence beyond the approximation and the director's statement. The Tribunal listed examples of the corroborative evidence that would ordinarily be expected if such large clandestine removals had occurred: dispatch/transportation records, receipts from buyers, evidence of realization of sale proceeds, records evidencing additional power consumption or extra raw material purchases.
The Tribunal held that a prudent conclusion of extra production and clandestine removal could not be reached merely on the basis of averaging and one statement. It found that the Department had not gone beyond the approximation used to compute yield and had therefore not discharged the burden of proving suppressed production and clandestine clearances. The Tribunal expressly sought and found support in the Continental Cement Company (Allahabad High Court) decision (which requires further corroborative evidence to prove clandestine sale) and also cited Oudh Sugar Mills (Supreme Court) and Punalur Paper Mills (CESTAT) as supportive authorities.
On that basis the Tribunal concluded that the Department's conclusion lacked reasonable evidentiary foundation and could not sustain the confirmed demand and penalties relating to alleged suppressed production.
Separately, with respect to the confirmed duty of Rs. 1,31,898/- for short found inputs (which had been deposited by the assessee and appropriated to Government account), the Tribunal recorded that there were no submissions from the appellants contesting that part and therefore found no ground to interfere; that part of the impugned order was sustained.
Holding and Implications
Holding: The Tribunal set aside the impugned order insofar as it confirmed duty and imposed penalties for alleged suppressed production and clandestine clearance. The Tribunal also set aside the personal penalty of Rs. 40 lakhs imposed on Shri Ramesh Kumar Agarwal. The Tribunal, however, sustained the impugned order to the extent that it confirmed Central Excise duty of Rs. 1,31,898/- on short found inputs (as there were no submissions by the appellants on this point).
Implications:
- The demand of Rs. 2,30,39,602/- (and related interest) and the equivalent penalty imposed on the company in respect of alleged suppressed production/clandestine clearances have been set aside; the appellants obtain relief on that count.
- The personal penalty of Rs. 40 lakhs on the Director, Shri Ramesh Kumar Agarwal, has been quashed.
- The confirmed duty of Rs. 1,31,898/- for short found inputs (already deposited and appropriated) stands; the Tribunal declined to intervene on that point.
- The Tribunal's decision rests on the factual conclusion that the Department failed to furnish corroborative documentary evidence beyond approximate input-output calculations and a statement; the opinion does not purport to lay down broader legal principles beyond the application of cited authorities to the facts. No new precedent is stated to have been created by this order; the Tribunal relied upon existing decisions for support.
Order pronounced in open Court on 26-08-2016. Order per: Ashok K. Arya, Member (T).
[Order per : Ashok K. Arya, Member (T)]. - Both the sides have been heard in detail.
2. The appellants M/s. Mittal Pigment Pvt. Ltd. and Shri Ramesh Kumar Agarwal, Director are is in appeal against the Order-in-Original No. 25/2009-C.E., dated 22-5-2009 passed by Commissioner of Central Excise, Jaipur-I whereunder a demand of Rs. 2,30,39,602/- along with interest has been confirmed and equivalent amount of penalty has also been imposed. The impugned order also confirms Central Excise duty of Rs. 1,31,898/- for short found inputs which had been deposited by the assessee-appellant and was appropriated to the Government account by the impugned order. A penalty of Rs. 40 lakhs has also been imposed on Shri Ramesh Kumar Agarwal, Director of the appellant company under Rule 26 of the Central Excise Rules, 2002.
3. The respondent is Commissioner, Central Excise, Jaipur-I. The case of the Revenue is that as the appellant No. 1 is a manufacturer of Zinc Oxide, who during different periods depending upon the form of raw material have had different yields of the product viz. Zinc Oxide, but the yield has to be in the range of 70% to 84%, which comes to an average of 77.60%. The statement of Shri Ramesh Kumar Agarwal, Director of the appellant company was recorded. The Revenue came out with the data indicating suppression of product on the part of the appellant to the show cause notice in this regard indicated that for the subject “suppressed goods (zinc oxide)” total duty of Rs. 2,30,39,602/- was not paid. In this regard, a show cause notice dated 11-2-2008 was issued by Commissioner, Central Excise, Jaipur-I. Commissioner, Central Excise, Jaipur-I vide his order-in-original (O-I-O) dated 19-5-2009 confirmed the duty demand of Rs. 2,30,39,602/- along with interest.
4. The appellants have been represented by Ld. Advocate Shri Madhav Rao, who has inter alia submitted as under :
(i) Annexure A to the show cause notice (at page 20 of the appeal) shows that on an average the output for all the periods under consideration has to the extent of 77.60%. For the year 2002-03 the yield has been 94.41% and there is no demand, similarly for 2005-06 where the yield has been 87.96% there is no demand. Applying this extremely gross manner of arriving at the output, for the year 2003-04 the production has been hiked to 84% where the percentage output was 80.04% achieved, for 2004-05 from 67.06% achieved to 84% and lastly for 2006-07 from 65.41% achieved to 84% of the inputs basket in quintals.
(ii) It is pertinent that no input output norms have ever been fixed by the Department for this type of manufacture of zinc oxide, and indeed they cannot be fixed considering that any number of impurities are present in the input also varying from batch to batch, and there is no standard input with standard predetermined quantity of zinc. In the statement itself which is relied upon, extracted at page 35 (of Paper Book) it has clearly come out that from zinc dross the output would be 70 to 80% and from scrap 50 to 70% for the recovery of zinc oxide. A perusal of pages 49/50 (of appeal) shows that the input basket will have materials like iron, aluminium, lead and so on. Even assuming for a minute all the inputs had 70% of zinc, one cannot fix the output based on the ratio of output of zinc oxide from pure ingot of 99.95% purity. The impurities in the inputs themselves take away the zinc metal and hence the yield of zinc oxide goes down.
(iii) If indeed a quantity of 1545 metric ton zinc oxide with the concomitant duty implication of Rs. 2.30 crores had been removed, with a value of over 14 crores, then evidence as to dispatch particulars from transporters, realisation of such level of sale proceeds, finished products received details from the buyers, excess power consumption required for such a volume of manufacture would surely be available. However, the Department has not led in any evidence whatsoever in this regard. The allegation of clandestine removal has to fail on the strength of the decision of the Hon’ble Allahabad High Court in the case of Continental Cement Company v. Union of India - .
(iv) That the input output norms so grossly fixed and arrived at by the Department in the show cause notice cannot sustain an allegation of clandestine removal and reliance is placed on the following decisions :
(a) Hindustan Coca Cola Beverages Pvt. Ltd. v. CCE, Thane - .
(b) Jaganath Sweets v. Deputy Commissioner of Sales Tax, Cuttack-I.
(v) The imposition of penalty, duty and interest, it is humbly prayed may kindly be set aside on the company and in the case of the Director the penalty may kindly be set aside.
5. We have carefully considered the facts on record and the submissions of both sides along with the case laws cited.
6. Revenue has made out its case of suppressed production of clandestine clearances of goods without payment of duty solely on the basis of approximation production considering average yield of the product viz. zinc oxide out of the raw material issued, which has been in the nature of different varieties like zinc dross, zinc ingots, etc. and which are of different purities. During the hearing, Ld. Advocate for the appellants further referred to literature - “Zinc - The Science and Technology of the Metal, Its Alloys and Compounds authored by CH Methewson, Professor, Yale University, prepared with cooperation of the American Zinc Institute; and the Scrap Specifications Circular issued by Institute of Scrap Recycling Industries, Inc. saying that the conclusions mentioned in the show cause notice and in the order-in-original confirming the suppressed production and duty is not correct, considering the varieties of zinc scrap like “Saves, Scabs, Scribe” and so on used by the appellant.
6.1 Further the department has not gone beyond the approximation of yield which they have shown as 70 to 84% in col. 3 of Annexure-A attached to the show cause notice and average yield overall had been shown as 77.60% which has been made the basis for issuance of the show cause notice (SCN) as well as for confirming the duty of Central Excise by the impugned order dated 19-5-2009. The department confirmed the duty demand along with interest for the period of five years alleging suppression of clandestine removal of the final product and also imposed penalty mainly based on the production approximation and on the statement of Director of the unit, Shri Agarwal, who is one of the appellants in this case.
6.2 The department has not gone beyond the approximation and the statement of Shri Agarwal. Any prudent person would not so conclude on extra production by approximation and by a mere statement of the Director of the company. Unless there are further corroborations in the form of documentary evidences, which could be like despatch details for the production, receipt details of the said material, transactions of the sale money, transportation details of such goods, details of additional consumption of electricity for such suppressed production a prudent individual would not agree with the present conclusions of the Revenue. There is nothing on record from the Revenue side to come to a reasonable conclusion to say that there has been preponderance of probability of such suppressed production on the part of the appellant. The evidences in the form of approximation and averaging production as 77.6% and one statement of Shri Agarwal, Director of the appellant company cannot be called a prudent conclusion of the production estimate.
6.3 Consequently, we are of the considered view that the department has not discharged its burden of conclusively proving the case of suppressed production and clandestine clearance by the appellants. In this regard we seek support from Hon’ble Allahabad High Court’s decision in the case of Continental Cement Company v. Union of India - (All.) and Supreme Court’s decision in the case of Oudh Sugar Mills Ltd. v. Union of India - 1978 (2) E.L.T. (J172) (S.C.) and CESTAT’s in the case of Punalur Paper Mills Ltd. v. CCE - Vide Final Order Nos. 996-997/2008, dated 26-8-2008 [ (Tribunal)]. The Hon’ble High Court in the case of Continental Cement Company (supra) has inter alia observed as under :
13. .......to prove the allegation of clandestine sale, further corroborative evidence is also required. For this purpose no investigation was conducted by the Department.......
14. …….
15. ........When there is no extra consumption of electricity, purchase of raw materials and transportation payment, then manufacturing of extra goods is not possible…”
7. Considering above discussions and the case laws cited above, we conclude that the Revenue has failed to reasonably prove suppressed production and clandestine clearance on the part of the appellants. Consequently, the impugned order in respect of confirmation of duty for alleged suppressed production, and imposition of fine and penalty on the appellant No. 1 and imposition of personal penalty of Rs. 40 lakhs on Shri Agarwal who is appellant No. 2 are hereby set aside. The appellants will get the relief accordingly.
8. The impugned order has confirmed another Central Excise duty of Rs. 1,31,898/- on short found inputs which was deposited by the assessee and was appropriated to the Government account. In this regard, there has not been any submissions by the appellants. Therefore, this part of the order confirming the said duty of Rs. 1,31,898/- does not warrant any intervention from this Tribunal. It is hereby sustained.
9. Both the appeals are disposed of in above terms.
(Pronounced in open Court on 26-8-2016)
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