The Kolkata Bench of the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) set aside an excise duty demand raised solely on input-output norms without any evidence to support allegations of clandestine manufacture or clearance.
Pooja Sponge Pvt. Ltd., the appellant, is engaged in the manufacture of sponge iron at its facility in Sundargarh, Odisha. The case arose from a departmental visit and subsequent scrutiny of the company’s production records and electricity consumption for the period April 2008 to November 2009.
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Based on a calculated input-output ratio, the department alleged that the appellant had suppressed production to the extent of 7552.740 metric tons and clandestinely removed sponge iron without payment of central excise duty, demanding Rs. 92,02,260 and proposing confiscation of 157.436 metric tons of sponge iron found in excess during the inspection.
The department’s conclusions were premised on third-party technical reports suggesting that the standard input-output ratio for sponge iron production should be 1.67 metric tons of iron ore per metric ton of sponge iron and electricity consumption should not exceed 100 KWH. In contrast, the company recorded 2.08 metric tons of iron ore and 139.38 KWH, leading the department to assume underreporting. A show cause notice was issued on June 7, 2012, more than two years after the initial inspection, invoking the extended period of limitation.
In response, the appellant denied all allegations, arguing that sponge iron manufacturing is highly dependent on factors such as raw material quality, machine efficiency, and operational conditions, none of which were considered in the department’s estimation. The appellant’s counsel argued that the demand was based purely on theoretical norms and uncorroborated assumptions without any direct or documentary evidence of clandestine activity, such as transport records, unaccounted raw material procurement, or statements from buyers.
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The department relied on the statement of the production manager and asserted that the excessive input consumption was indicative of undisclosed clearance. The statement had not been cited as a relied-upon document in the show cause notice.
The two-member bench comprising R. Muralidhar (Judicial Member) and K. Anpazhakan (Technical Member) observed that the department had not conducted any independent study of the factory’s operations, nor had it presented corroborative evidence such as movement of vehicles, buyer statements, or financial trails. Relying on precedents such as Shi Mahavir Ferro Alloys Pvt. Ltd. and Agrasen Sponge Pvt. Ltd., the tribunal explsinedthat input-output ratios, by themselves, cannot justify a duty demand without supporting evidence.
The tribunal further ruled that the extended limitation period was not justified, as there was no suppression of facts or misstatement by the appellant. Since all relevant data had been available to the department well before the show cause notice was issued, the delay was held to be fatal to the proceedings.
The tribunal allowed the appeal both on merits and limitation, setting aside the duty demand, penalties, and confiscation orders. The appellant was held entitled to consequential relief as per law.
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