Clandestine Removal Cannot Be Proved Solely on Power Consumption: Karnataka HC Dismisses Rs 9.4 Crore Excise Demand [Read Order]

The Karnataka High Court, in a big relief to a steel manufacturing firm, dismissed an appeal filed by the Commissioner of Central Excise and upheld a CESTAT ruling setting aside a huge excise duty claim of Rs. 9.43 Crore. The court held that the demand of excise duty of several crores based largely on the expert's analysis of power consumption cannot be sustained in law especially when the expert has conceded that there is no scientific basis for it.

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The revenue had contended that M/s. Saravana Alloy Steel Private Limited (SAPL) had been clandestinely manufacturing and clearing steel ingots and CTD bars on a massive scale without payment of proper Central Excise duty throughout the period 2001 to 2007.

Following searches by the Directorate General of Central Excise Intelligence (DGCEI) in 2004, the department issued a couple of show cause notices and the matter was finally decided by the Commissioner. The Commissioner confirmed a demand of Rs. 9.4 Crores in two separate orders, along with equal penalties under Section 11AC of the Central Excise Act.

The case at the High Court for the income was based largely on the point that the real power consumption of SAPL was far greater than that which was required for the production for which it had formally accounted.

The Revenue also pointed to alleged unaccounted scrap transactions based on loose slips obtained from dealers, computer data and voluntary testimonies of the company’s Managing Director and transport drivers.

But the division bench of Justice S.G. Pandit and Justice Rajesh Rai K discovered grave defects in the evidentiary basis of the department. The department seized loose slips (called ‘kaccha slips’) of scrap merchants, who later withdrew their statements during the process of adjudication, some of them not even appearing before the Commissioner. The Managing Director of SAPL likewise repudiated his earlier testimony through an affidavit.

The Court observed that another technical report of the Nucleus Group had mentioned that the energy consumed for steel ingots was between 500 to 1026 KWH per tonne, which was in full variance with any defined standard norm.

The bench said clandestine manufacturing cannot be determined only on the basis of electricity usage, more so if the analysis is invalid.

The appeal was denied on jurisdictional grounds by a coordinating bench of the High Court ruling that valuation problems lay under Section 35L and not 35G of the Act.

The High Court while answering the major questions of law in favour of the assessee did not find any fault in the well-reasoned evaluation of evidence by the CESTAT and dismissed the appeal filed by the revenue.

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