Clandestine Removal of goods- establishment of

PJ/Case Laws/2010-11/1044

Case: M/s Alagappa Cements P Ltd v/s CEGAT, Chennai

Citation: 2010 (260) ELT 511 (Mad.)

Issue:- The shortages in all basic raw materials lead to conclusion of clandestine removal. Challenge to stock verification after three days is not acceptable.

Brief Facts:- Appellant is engaged in the manufacture of Portland cement and possessed a valid central excise registration certificate. Appellant availed the SSI exemption under Notification No. 175/ 1986-CE dated 1.3.86 and were paying the duty at the concessional rate as they used clinkers.

An inspection was conducted of appellant's unit by the Central Excise Headquarters Preventive Officers on 20.7.93. Based on the said verification, the officers concluded that the physical stock of clinkers available was only 123.500 metric tons, as against the book stock of 1214.579 metric tons. The statements of the staff present at the unit were recorded on 20.7.93. Subsequently on 23.7.93, the Vice-Chairman of the appellant informed the Superintendent of Central Excise Headquarters Preventive that the stock was not properly taken and wanted the Superintendent to visit the factory for verification of the actual stock of clinkers. However, the said request of the appellant was not acceded to.

Show cause notice was issued to the appellant demanding duty with interest as well as penalty. It was alleged that the appellant was not entitled for the benefit of Notification No. 24/1991 for its wrong availment, that the shortage of clinkers must have resulted in the production of cement clandestinely removed without payment of duty, that suppression of receipt of limestone and used in the manufacture of cement resulted in clandestine removal apart from clandestine manufacture of hollow blocks and its removal without payment of duty.

Thereafter, the Order-in-Original was passed demanding duty and penalty of equal amount was imposed. Appellant preferred an appeal before the Tribunal (first respondent herein). The first respondent partly allowed the appeal holding that the appellant was entitled for the benefit of the Notification No. 24/1991 and the hollow blocks manufactured were not dutiable and were exempted. The first respondent also deleted the penalty imposed under Section 11-AC of the Central Excise Tariff Act. The duty leviable was therefore restricted to Rs.13,04,994/-.

Aggrieved by the impugned order of the first respondent, appellant has filed Civil Miscellaneous Appeal before the High Court. The only issue to be examined was the abnormal shortage of clinkers which, according to the respondents, resulted in the excess quantity of cement manufactured, not brought into accounts, but were clandestinely removed without payment of duty.

Appellant’s Contention:- Appellant contended that they in their letter dated 23.7.93 had brought to the notice of the Superintendent of Central Excise that the actual stock available was not noted by the inspecting officials, that even assuming there were shortage of clinkers, in the absence of positive proof that the excess cement was manufactured and was clandestinely removed, the imposition of duty by the respondents was not justified.

Respondent’s Contention:- Respondents contended that the shortage of clinkers at the time of inspection was noted based on the stock register, that such inspection was carried on in the presence of the senior officials, who did not raise any protest at the time of stock taking and that the subsequent letter after three days after the inspection by the appellant was rightly rejected by the respondents. Respondent further contended that apart from the shortage of clinkers, the shortage of coke breeze as well as the difference in the quantity of limestone as per the records supported the conclusion of the respondents about the clandestine removal of excess quantity of cement manufactured by the appellant without payment of duty.

Reasoning of the Judgment:- The High Court found force in the contentions of the Respondents. It was noted that in the Order-in-Original, the names of the officers who were present at the time of inspection have been specifically noted. The officers whose statements were recorded and who pleaded their ignorance for the shortage in clinkers have also been noted. The original authority had made a specific reference to the appellant's letter dated 23.07.93, wherein the appellant disputed the manner in which the stock of clinkers was taken, but there was no explanation for its silence between 20th July, 1993 and 23rd July, 1993.

The High Court noted that the said observation of the Original Authority is quite convincing and acceptable. If really the inspecting officials did not make proper verification of the stock at the time of inspection, it is quite normal that the aggrieved assessee would have immediately objected to any such improper method of verification of stock then and there. When two of the officials gave their statements expressing their ignorance about the shortage of clinkers, it was for the appellant to satisfactorily explain the said defect in the maintenance of records or the actual availability of stock. Moreover, the stock verification disclosed a book stock of 1214.579 metric tons when the physical stock available was only 123.500 metric tons of clinkers. That apart, the unloading of coke breeze to the extent of 1445.325 metric tons during the period from 8.4.93 to 13.4.93, as against the quantity of 232.2 metric tons disclosed in Form IV register, only shows that such irregular maintenance of stock in the appellant's manufacturing premises was a usual phenomenon. That apart, when the difference in the quantity of limestone was noted, it also showed the excess quantity of removal of limestone by the appellant. The only explanation was that such excess removal of limestone was shown to satisfy the State Government authorities or otherwise, there was every likelihood of cancellation of their permission. Again, when the said defect was noted with reference to the entries found in the daily despatch sheet supported by the statement of the accountant of the factory, the appellant had no answer at all. Admittedly, the manufacture of Portland cement is made by using limestone, clay, coke breeze and gypsum.

It is stated that the limestone and clay are mixed in appropriate proportion, which is the raw material, and the raw material is charged with coke breeze and fired in a vertical shaft kiln and the clinker is manufactured. Thereafter, the clinker is mixed with gypsum and the resultant product is called Portland cement. Therefore, when the limestone is the basic raw material which is used for the manufacture of clinker and thereafter for the manufacture of Portland cement, it was incumbent upon the appellant to have satisfactorily explained the missing quantity of clinkers to an extent of 1214.579 metric tons. It is quite apparent that large quantity of limestone quarried, as reflected by the records of the appellant, and the shortage of 1214.579 metric tons of clinkers both put together, the conclusion drawn by the inspecting officials to the effect that it resulted in clandestine manufacture of cement not brought into accounts was justified and consequently the escapement of duty in that process as assessed cannot be faulted.

The High Court failed to understand as to how the appellant is justified in contending that in the absence of positive proof as regards the actual manufacture of cement not brought into accounts, then alone the conclusion of the original authority as well as the first respondent can be justified cannot be accepted. The inference drawn by the second respondent based on shortage of clinkers and the excess quantity of limestone quarried during the relevant period was sufficient enough for the authorities to conclude as to the ultimate quantity of Portland cement which could have been produced from such excess quantity, which were not noted in the stock register, was well justified. The High Court did not find any illegality or irregularity in such a conclusion drawn by the Authorities for the levy of duty and the demand of duty imposed. Inasmuch as the first respondent has chosen to delete the penalty, that itself was a grace shown to the appellant while passing the order impugned in this appeal.

Judgment:- Appeal dismissed.

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PJ/Case Laws/2010-11/1044

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