Non-Compliance Fatal to Clandestine Removal Charge: CESTAT Quashes ₹9.26 Cr Excise Duty Demand for Lack of Evidence and Procedural Lapses [Read Order]

The Kolkata Bench of Customs, Excise & Service Tax Appellate Tribunal (CESTAT) quashed a ₹9.26 crore excise duty demand against a 100% EOU, holding that the Revenue failed to follow the mandatory procedure under Section 9D before relying on statements to allege clandestine removal and found no corroborative evidence such as transport records, buyers, excess raw materials, or flow of funds to support the charge.

CESTAT Kolkata set aside a total demand of ₹9.26 crore against the appellant, in an appeal arising from Order-in-Original dated 18.03.2013 passed by the Commissioner of Central Excise, Customs and Service Tax, Bhubaneswar-I.

The Section 9D of Central Excise Act, 1944 explained that: Relevancy of statements under certain circumstances

“(1) A statement made and signed by a person before any Central Excise Officer of a gazetted rank during the course of any inquiry or proceeding under this Act shall be relevant, for the purpose of proving, in any prosecution for an offence under this Act, the truth of the facts which it contains,—

(a) when the person who made the statement is dead or cannot be found, or is incapable of giving evidence, or is kept out of the way by the adverse party, or whose presence cannot be obtained without an amount of delay or expense which, under the circumstances of the case, the Court considers unreasonable; “

The Appellant, M/s. Mideast Integrated Steels Limited, a 100% Export Oriented Unit (EOU), engaged in the manufacture of Sponge Iron, faced a search by the Directorate General of Central Excise Intelligence (DGCEI). This led to the issuance of a Show Cause Notice (SCN) dated 31.03.2012 by the Additional Director General, DGCEI, Kolkata, covering the period from 2005-06 to May 2009.

The SCN raised two primary allegations, firstly, Demand of Rs. 3,66,93,067/- on account of alleged clandestine removal of Pig Iron, including 2661.600 MT from the Appellant’s yard at Paradip Port, and adjustments of 4000 MT of Pig Iron, 1000 MT of Pig Iron scrap, and 2000 MT of Pig Iron scrap from the Appellant’s Daily stock as reported in ER-2 of December 2008 and February 2009.

Secondly, Demand of Rs. 5,59,84,382/- attributable to allegedly inadmissible CENVAT Credit availed by the Appellant on invoices issued by its Head Office (an Input Service Distributor - ISD) before it was registered as an ISD, and due to an allegedly improper method of apportionment. Further, the Adjudicating Authority confirmed both demands, prompting the Appellant to file the present appeal before the Customs, Excise and Service Tax Appellate Tribunal (CESTAT).

The Counsel for the Appellant, Kishor K. Acharya and Narendra Kr. Dash, submitted allegations on two grounds, firstly, regarding clandestine removal, they stated that during 2005-06 to May 2009, their plant was under the control of an Official Liquidator and expert committee appointed by the Delhi High Court, with the Appellant's role limited to financing.

The Counsel also submitted detailed reconciliation statements (dated 12.04.2010 and 23.03.2011) explaining discrepancies in Bond Registers due to improper maintenance, cancelled ARE-1s, and goods returned for reprocessing, which were ignored by the Adjudicating Authority. Critically, Revenue failed to produce corroborative evidence of clandestine removal such as excess raw material purchases, excess production, dispatch records, or fund flow-back.

Secondly, concerning inadmissible CENVAT Credit, the Counsel argues that settled law permitted credit distribution by Head Office before formal Input Service Distributor registration, treating non-registration as a procedural irregularity. During the relevant period, Rule 7 of CENVAT Credit Rules prescribed no specific apportionment formula, and the Appellant's method aligned with later amendments and Board Circular No. 178/4/2014-S.T. dated 11.07.2014.

On the other hand, Authorized Representative for the Respondent, S.K. Jha, counters the Appellant's contentions on two principal grounds, regarding clandestine removal, the finished goods reflected in the Daily Stock Register and recorded at Paradip Port were found to be physically non-existent upon verification, evidencing clandestine clearance without proper documentation.

Further, the Counsel submitted concerns about inadmissible CENVAT Credit, wherein the Appellant distributed credit from its Head Office to the manufacturing unit prior to obtaining formal Input Service Distributor registration in 2008, thereby rendering the invoices used for such distribution as improper documents under Rule 9 of the CENVAT Credit Rules, 2004, making the credit availed inadmissible.

The Tribunal consisted of Judicial Member, R. Muralidhar and Technical Member, K. Anpazhakan, reviewed and after considering the submissions made, ruled in the favour of the Appellant and found employee statements contradictory and noted the Appellant's reconciliation statements explaining discrepancies were plausible but inadequately rebutted.

The Tribunal relied on G. Tech Industries Vs. UOI [2016 (339) E.L.T. 209 (P&H)], Hi Tech Abrasives versus Commissioner of C. Excise & Customs, Raipur [2018 (362) E.L.T. 961 (Chhattisgarh)], and Continental Cement Company Vs Union Of India [2014 (309) E.L.T. 411 (All.)], stating that Revenue failed to discharge its burden of proof and set aside the demand of Rs. 3,66,93,067/-.

Further, on inadmissible CENVAT Credit, the Tribunal held that availment prior to ISD registration is merely a procedural irregularity that cannot deny substantial credit benefits when proper records are maintained. Relying on Commissioner of C. Ex., S.T. & Cus., Bengaluru Versus Hinduja Global Solutions Ltd. [2022 (61) G.S.T.L. 417 (Kar.)], and CBEC Circular dated 16.02.2018, and noting the Appellant had only one manufacturing unit with credit duly recorded in ER-2 Returns, the Tribunal set aside the demand of Rs. 5,59,84,382/-.

Accordingly, the Tribunal set aside the impugned Order-in-Original and allowed the appeal for consequential relief as per law. The Order was pronounced in the open court on 04.11.2025.

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