Calcutta High Court
Satyam Iron And Steel Company ... vs The Commissioiner on 31 March, 2023
CEXA 80 OF 2018
REPORTABLE
IN THE HIGH COURT OF JUDICATURE AT CALCUTTA
SPECIAL JURISDICTION (CENTRAL EXCISE)
ORIGINAL SIDE
RESERVED ON: 21.03.2023
DELIVERED ON:31.03.2023
CORAM:
THE HON'BLE MR. ACTING CHIEF JUSTICE T.S. SIVAGNANAM
AND
THE HON'BLE MR. JUSTICE HIRANMAY BHATTACHARYYA
CEXA NO. 80 OF 2018
SATYAM IRON AND STEEL COMPANY PRIVATE LIMITED
VERSUS
THE COMMISSIOINER, CENTRAL EXCISE AND SERVICE TAX - BOLPUR
Appearance:-
Mr. J.P Khaitan, Senior Advocate.
Mr. Ananda Sen, Advocate.
Ms. Anupa Banerjee, Advocate.
Mr. Dipak Dey, Advocate.
.....For the Appellant.
Mr. Vipul Kundalia, Senior Advocate.
Ms. Manasi Mukherjee, Advocate.
.....For the Respondent.
Page 1 of 15
CEXA 80 OF 2018
REPORTABLE
JUDGMENT
(Judgment of the Court was delivered by T.S.SIVAGNANAM, J.)
1. This appeal filed by the revenue under Section 35G of the Central
Excise Act, 1944 (the Act) is directed against the order dated 25th January,
2018 passed by the Customs, Excise and Service Tax Appellate Tribunal,
East Zonal Bench, Kolkata, (tribunal). The appeal was admitted on the
following substantial questions of law:
1) Whether on the facts and in the circumstances of the case,
the central excise duty can be demanded with reference to
the installed capacity when the finished goods are not
notified under Section 3A of the Central Excise Act, 1944
and there is no material to show any unrecorded
manufacture or clearance of the finished goods?
2) Whether on the facts and in the circumstances of the case
the impugned order of the tribunal upholding the demand
made on the above basis was perverse?
2. We have heard Mr. J.P. Khaitan, learned Senior Advocate assisted by
Mr. Ananda Sen, Ms. Anupa Banerjee and Mr. Dipak Dey appearing for the
appellant and Mr. Vipul Kundalia, learned Senior Standing Counsel assisted
by Ms. Manasi Mukherjee for the respondent department.
3. The appellant is engaged in the manufacture of excisable goods namely,
sponge iron falling under Tariff Item No. 7203-1000 of the Central Excise
Tariff Act, 1985 and holding Central Excise Registration since 2002. The
basic raw material used in the manufacture of sponge iron, iron ore, coal,
and iron ore palettes. The issue involved in this appeal is whether the
appellant assessee manufactured and clandestinely cleared goods without
payment of Central Excise duty. An audit was conducted during 2014 which
ultimately led to the issuance of show-cause notices dated 20th August,
CEXA 80 OF 2018
REPORTABLE
2014, 17th April, 2014 and 3rd February, 2016. It was stated that in the
course of verification of ER-7 (Annual Installed Capacity Statement) filed in
terms of Sub-Rule 2(A) of Rule 12 of the Central Excise Rules, 2002, it was
found that the assessee's annual production capacity is 60,000 metric
tonnes but the assessee as per the ER-1 returns during the period October
2009 to March 2014 has not reflected the production and clearance quantity
as per their production capacity. It was alleged that the assessee has shown
a substantial lesser quantity of production and clearance of the said goods
than that of their installed capacity. After noting the relevant details, the
assessee was called upon to clarify as to the deviation of the annual capacity
of production and production reflected in their ER-1 returns. The assessee
submitted their response stating that the production capacity of the plant is
60,000 metric tonnes annually (two kilns of 100 tonnes per day capacity).
That during the period of dispute they operated only one kiln on an average
and achieved production as reflected in the ER-1 returns and they were
constrained to curtail the production due to non-availability of raw material,
shut down of kiln for maintenance purposes, high cost of raw materials and
increase of overall expenses and adverse market conditions and low demand
of finished goods. The Commissioner, Central Excise and Service Tax,
Bolpur (the adjudicating authority) did not accept the explanation given by
the assessee and alleged that the assessee has suppressed the production
and cleared goods clandestinely with an intent to evade payment of excise
duty. Accordingly, the assessee was called upon to show cause as to why
Central Excise Duty should not by demanded and recovered in terms of
Section 11(A) of the Act; why interest at proper rate should not be charged
CEXA 80 OF 2018
REPORTABLE
under Section 11AA of the Act and why penalty should not be imposed
under Section 11AC of the Act. The show-cause notice also proposed as to
why the extended period of limitation of 5 years under the proviso to Section
11 A(1) cannot be invoked. The assessee submitted their reply dated 28th
December, 2014 along with copies of the statement of intimation addressed
to the respondent department informing shut down of Kiln1 and Kiln 2
during the period 2009-10 to 2013-14 along with the acknowledged copies
of the letters/ intimation. Copies of the statement showing the due dates of
filing each return and the date of filing such returns by the assessee were
also furnished. The reply submitted by the assessee was divided under
various sub-headings, the first with regard to submissions on facts, nextly
dealing with the allegations of clandestine removal, the correctness of
invoking the extended period of limitation, as to why the proposal for levy of
penalty is arbitrary and without authority of law. The adjudicating authority
by order dated 13th February, 2017 confirmed the proposal in the show-
cause notices. Aggrieved by the same, the assessee preferred appeal before
the Tribunal which has been dismissed by the impugned order.
4. The reason for issuing show-cause notice to the assessee was based on
the quantity of production difference between the annual installed
production capacity statement as declared in the ER-7 statement and the
ER-1 return. The annual installed capacity of the assessee's unit is 60,000
metric tonnes which has been mentioned in the ER-7 statement.
5. The department alleged that the assessee suppressed their production
by showing lesser production in the ER-1 return and removed the products
clandestinely by intentionally evading the payment of Central Excise duty.
CEXA 80 OF 2018
REPORTABLE
Before we examine the facts of the case and test the correctness of the order
passed by the tribunal, it would be beneficial to take note of a few decisions
as to how the allegation of clandestine production or removal has to be
viewed and on whom does the burden lied to establish the case of
clandestine production or removal. One of the earliest decisions of the
Constitution Bench of the Hon'ble Supreme Court in the case of Oudh
Sugar Mills Limited Versus Union of India 1 would guide us as to how
such matters have to be viewed and considered. In the said case, the
appellant was manufacturing sugar from sugarcane. There was a report
submitted that the quantity of sugar has been short accounted for on the
basis of which the show cause notice was issued, which ultimately was
adjudicated against the appellant therein and penalty was imposed. An
appeal was preferred before the Central Board of Revenue which was
dismissed after which leave was sought for from the Hon'ble Supreme Court
to file appeal under Article 136 of the Constitution which was granted. It
was contended by the appellant before the Hon'ble Supreme Court that the
order of the Collector holding certain quantity of sugar were short accounted
for and that the accounts had not been properly kept was based on
assumptions for which there is no basis. It was further contended that the
appellant therein cannot be held guilty of short accounting of sugar unless it
is established that any part of the sugar manufactured in the factory has
been removed from factory or there were some loopholes in the working of
the factory which provide opportunities for clandestine removal of
sugarcane. The only basis for the findings arrived at by the Collector was
1978 (2) ELT (J 172) (SC)
CEXA 80 OF 2018
REPORTABLE
based on the calculations made by the Assistant Chemical Examiner which
was challenged contenting that they were not based on factual data but on
certain assumption. The Hon'ble Supreme Court examined the report of the
Assistant Chemical Examiner and held that if any one of the assumptions,
as assumed in the report, breaks down then the ultimate conclusion will
have to be rejected as incorrect. It was further pointed out that it has to be
borne in mind that human element is involved on certain stages of the
operations such as time of commencement of the days working, rapidity or
slowness in feeding cut sugarcane into the crusher and mills, accurately
adding the same quantity of water in the crusher and mills etc. Thus, it was
pointed out that the recovery of sugar must necessarily depend upon the
performance, it cannot be assumed that even in an ordinary well run factory
performance would be uniformly good or uniformly the same. Similarly, the
value of the fibre percentage in the cane as mentioned in the report was also
considered. Ultimately, it was held that the findings arrived at by the
Collector that certain quantity of sugar were not accounted for by the
appellant therein has been arrived at without any tangible evidence and is
based only on inferences involving unwarranted assumptions and the
findings is thus vitiated by error of law.
6. In Continental Cement Company Versus Union of India 2, it was
held that to prove clandestine removal, evidence is required on purchase of
raw materials, use of extra electricity, sale of final products, clandestine
removal, transportation, payment, realization of sale proceeds, modes and
flow-back of funds etc. It being a serious charge, it is required to be proved
2014 (309) ELT 411 (All)
CEXA 80 OF 2018
REPORTABLE
by the revenue by tangible and sufficient evidence and mere statements of
buyer based on their memory was insufficient without support of any
documentary evidence.
7. In Commissioner of Central Excise, Kolkata - III Versus Sai
Sulphonate Private Limited 3, it was held that the onus to prove
clandestine removal is on the department and in the absence of any material
on record establishing the charge of clandestine removal and trying to
establish the charge by way of inference taking note of the ratio as adopted
in the manufacturing process cannot be made.
8. As could be seen from the show cause notices issued to the appellant,
the allegation of clandestine removal is solely based upon the annual
installed capacity of the unit of the assessee as mentioned in the ER-7
return compared with the ER-1 statements.
9. The appellant in their reply to the show-cause notice after mentioning
about their installed capacity, specifically pointed out that they were audited
by the Audit Wing of the Department for the year 2009-10, 2011-12 and
2012-13 and at no point of time any objection was raised as regards under-
statement of production or alleged clandestine removal of Sponge Iron.
Further, for the very same period, the appellant was audited by the
CAG/CERA and nothing adverse was pointed out. Therefore, it was
contended except for the year 2012-13 no objection of any under-statement
of production was ever raised. It was pointed out that the audit objection for
the year 2011-13 is made the basis of the demand as mentioned in the
show-cause notice. Nextly, the appellant mentioned about the period during
2022 (380) ELT 441 (Cal)
CEXA 80 OF 2018
REPORTABLE
which the Kiln 1 and Kiln 2 were shut down during the years 2009-10 to
2013-14 and relevant details were mentioned in an tabulated format and
also specifically mentioning that the department was intimated periodically
about the shutdown of the Kiln and those intimations were duly
acknowledged by the department. Further for the period from October, 2009
to March, 2014, the appellant had furnished the quantity of Sponge Iron
which was produced from their factory and they had disclosed the same in
their statutory returns along with installed capacity. Furthermore, the
manufacture/ clearance of Sponge Iron and particulars of payment of
central excise duty was disclosed by the appellant in the statutory return
prescribed by the Rule 12 of the Central Excise Rules, 2004 read with Rule
9/ 9A of the Cenvat Credit Rules and those returns were accepted by the
Department without any demur or objection. With regard to the ER-1
return, it was submitted that it is a monthly return prescribed under Rule
12 of the Central Excise Rules and Rule 9(7) of the Cenvat Credit Rules and
the return is to be filed within the 10th day from the close of the month to
which it relates. In the said returns, the particulars of all the monthly
production, clearance of excisable goods, rate of duty, value of excisable
goods cleared and duty payable and payment particulars of such duty in
cash and from Cenvat Credit account and claim/utilization of Cenvat Credit
were disclosed. It was further stated that ER-4 return is prescribed under
Rule 12(2)(a) of the Central Excise Rules and it is an annual financial
information statement wherein the assessee discloses the value of raw
material and other inputs, quantity/ value of manufactured excisable goods
and details of the direct/indirect expenses incurred by the assessee during
CEXA 80 OF 2018
REPORTABLE
the year. Similarly, ER-5 returns is an annual return of information relating
to principal inputs wherein the assessee discloses similar information on
monthly basis as disclosed in ER-5 return on yearly basis. With regard to
the ER-7 return, the assessee pointed out the same is as prescribed under
Rule 12(2)(A) of the Central Excise Rules, 2002 and it is the annual installed
capacity statement wherein an assessee is obliged to disclose the installed
capacity of the factory. The assessee thereafter set out in detail about the
audit conducted in the factory of the assessee on various dates. With regard
to the audit para alleging that the assessee has either short-utilized their
production capacity or has suppressed the production of Sponge Iron and
cleared the same with the intent to evade the payment of duty, the assessee
pointed out that the audit officers were not sure whether it is a case of
short-utilization of production capacity or it is a case of clandestine removal
which could have been ascertained in the investigation. Furthermore, the
assessee pointed out that copy of the audit objection is never handed over to
the noticee at any point of time. Further, based on the audit para, the
Superintendent, Central Excise issued letter dated 30th December, 2013
without conducting any investigation and without collecting any adverse
material against the assessee and pre-decided the matter and directed the
assessee to clarify as to why they have suppressed the actual production in
the ER-1 return and why they should not be directed to pay the duty on the
clearance of 29320 MT of Sponge Iron. The assessee by their reply dated 6 th
January, 2014 contended that during the material period, the Kilns were
shut down for 679 days and 661 days respectively and submitted the
necessary details in support of such contention. In spite of having furnished
CEXA 80 OF 2018
REPORTABLE
such material, without conducting any enquiry or investigation, show-cause
notice was issued merely based upon the audit objection. The assessee
pointed out that the show-cause notice is wholly without jurisdiction as no
duty can be demanded on deemed production of Sponge Iron on the basis of
annual installed capacity of the Kilns in respect of excisable goods not
notified under Section 3A of the Act. Further, there was no adverse material
against the appellant revealing any clandestine production or clearance of
Sponge Iron without payment of duty. It was further pointed out that
Section 3 of the Central Excise Act provides that levy of central excise duty
on actual production/ manufacture of excisable goods irrespective of the
annual capacity of production whereas Section 3A of the Act provides for
levy of duty of deemed production of notified excisable goods determined on
the basis of capacity of production of the factory irrespective of the actual
quantity of excisable goods manufactured/ produced. After pointing out this
distinction, the assessee stated that Sponge Iron manufactured by the
assessee is not notified goods under Section 3A and hence, no duty thereon
can be demanded on the basis of annual capacity of production/ installed
capacity. With regard to the charge of clandestine removal, the assessee
pointed out that it is a very serious charge and must be proved with
tangible, cogent and affirmative evidence, however, in the case of the
assessee the entire demand is based on an audit objection without
conducting any investigation, or enquiry, nor having any evidence on record.
Thus, in the absence of any enquiry it has to be held that the allegation of
clandestine production and removal is based on assumption, presumption,
hypothesis and speculation.
CEXA 80 OF 2018
REPORTABLE
10. The assessee referred to various decisions of the courts and that of the
tribunal for the proposition that the charge of clandestine removal being a
serious charge, the department must prove the same with tangible evidence
and the standard of proof in such cases absolute proof and not pre-
ponderance of probabilities as the charge is quasi-criminal in nature.
11. Nextly, the assessee submitted that the major part of the demand is
barred by the normal period of limitation. It is submitted that the disputed
period is from October 2009 to March 2014 whereas show cause notice
issued on 28.08.2014 and hence the major part of the demand is barred by
period of limitation under Section 11A(1) of the Central Excise Act, 1944.
Further it was submitted that the entire facts which led to the issuance of
the show cause notice were those facts which are well within the knowledge
of department and culled out from the return filed by the assessee and there
is absolutely no material to allege any suppression of facts and consequently
the extended period of limitation of five years could not have been invoked in
the assessee's case. To support such proposition several decisions of the
Hon'ble Supreme Court were referred to. With regard to the levy of penalty,
it was submitted that the assessee has not contravened any of the rules,
they had paid duty on excisable goods in accordance with the Rule 4 and
Rule 8 upon assessment of duty under Rule 6 and they have maintained the
detailed stock account in accordance with Rule 10, they have filed all their
statutory returns in terms of Rule 12 read with Rule 9/9A of the CCR and in
the absence of any contravention, there can be no case of suppression of
facts, willful mis-statement, fraud, collision or contravention of any
provisions of the Act/Rules with an intent to evade payment of duty and
CEXA 80 OF 2018
REPORTABLE
therefore penalty cannot be imposed. With the above submissions, the
assessee prayed for dropping the proceedings.
12. The Commissioner who adjudicated the show cause notices confirmed
the demand by order dated 13.02.2017. The discussion and findings are
from page 17 of the order. After setting out the facts, the adjudicating
authority opines that the appellant has fully utilized the production capacity
and produced 3,65,000 metric tons of sponge iron but intentionally showed
lesser production in the ER-1 return. What is conspicuously missing as to
how the adjudicating authority came to such a conclusion. The allegation is
one of the suppression of the production and clandestine removal of
excisable goods without payment of excisable duty. Therefore the burden of
proof is on the department to establish that the charge of clandestine
removal for which there should be cogent and relevant material to pen down
the assessee on a charge of clandestine removal. In the instant case, we find
there was no material which was available with the Commissioner to come
to such a conclusion. As pointed out earlier, the genesis of the entire matter
is the audit objection. There are two known ways of dealing with an audit
objection. Firstly, the respondent department will examine the objection and
answer the audit para by giving an explanation. In the event, the same is
found to be not acceptable and the findings are reiterated, then the
department will have to conduct an enquiry into the aspect and satisfy itself
that there are materials to proceed against the assessee and then issue the
show cause notice clearly disclosing the case the assessee has to meet.
Unfortunately the observation made in the audit objection was taken by the
department as gospel truth and without conducting any enquiry or
CEXA 80 OF 2018
REPORTABLE
investigation as the authority straight away proceeded to issue the show
cause notice. In fact, the reply given by the assessee to the Superintendent,
Central Excise department at the first instance was not even taken note of
and mechanically the show cause notice was issued. When the assessee
carried the matter on appeal to the tribunal, they reiterated the contention
which was raised by them in reply to the show cause notice. In paragraph 8
of the impugned order, the tribunal noticed very briefly the contention
raised by the assessee and then proceeded to decide the case against the
assessee in one paragraphs, paragraph 9. The conclusion arrived at by the
learned tribunal is solely based upon the annual production capacity. In the
preceding paragraph, we had elaborately set out the stand taken by the
assessee in their reply to the show cause notice, the documents which were
annexed along with the show cause notice, unfortunately neither the
adjudicating authority nor the tribunal adverted into any of these facts. The
learned tribunal failed to see that the charge of clandestine removal is very
serious charge and to establish the same there should be cogent and
relevant materials. The learned tribunal has also not gone to into the aspect
as to whether the extended period of limitation could have been invoked.
Admittedly, the audit objection was based upon the information culled out
from the return filed by the assessee and therefore there can be no charge of
suppression or willful mis-statement and consequently the extended period
of limitation could not have been invoked. The learned tribunal did not take
enough effort to examine the facts of the case which are very crucial in the
case on hand qua the allegations set out in the show cause notice. Thus, we
are fully convinced that the adjudicating authority as well as the learned
CEXA 80 OF 2018
REPORTABLE
tribunal committed a serious error in not accepting the case of the assessee.
We reiterate that the department has not been able to establish the charge
of clandestine removal by any tangible or cogent evidence. The show cause
notice was mechanically issued without conducting any enquiry solely based
upon audit objection. The documents filed by the assessee along with their
reply were ignored. That apart, major part of the demand made in the show
cause notice is barred by normal period of limitation. For invoking extended
period of limitation, the revenue ought to have established willful mis-
statement or suppression on the part of the assessee which has not been
brought on record. Thus, the extended period of limitation could not have
been invoked as well as the penalty could not have been imposed since there
is no charge of willful mis-statement or suppression made against the
assessee. The entire show cause notice has been built up on theory of
assumption and presumption solely based upon the installed capacity of the
two kilns in the assessee's factory without noting the factual details placed
by the assessee, more particularly the period during which the kilns were
shut down and as to how the department was fully aware of the shut down
as the intimation given by the assessee were all acknowledged by the
department. That apart, in the earlier audit inspections which were
conducted no adverse report was drawn against the assessee even though
they had not adopted the very same process. Thus, we hold that the
department has failed to discharge the onus cast upon him to prove the
charge of clandestine removal.
CEXA 80 OF 2018
REPORTABLE
13. In the result, the appeal is allowed and the order passed by the
tribunal as well as the adjudicating authority are set aside and the
substantial questions of law are answered in favour of the appellant
assessee.
(T.S. SIVAGNANAM
ACTING CHIEF JUSTICE)
I Agree.
(HIRANMAY BHATTACHARYYA
JUSTICE)
(P.A.- PRAMITA/SACHIN)
