CASE STUDY

BRIEF FACTS OF THE CASE:

The audit of the records of M/s Angel Pipes and Tubes Private Limited (hereinafter referred as appellant) was conducted by Departmental officers. It was observed that the appellant has shown revenue from operations as per Balance Sheet for the F.Y. 2016-17, however, such sale figures didn’t match with the ER-1 returns figures. The appellant gave a detailed reply against the same to rebut the allegations raised by SCN. However, the submissions made in the reply were not considered by the adjudicating authority and the allegations raised by SCN were confirmed. Being aggrieved by the order, appellant preferred an appeal before Hon’ble Commissioner (Appeals). However, appellate authority upheld the order-in-original in its order-in-appeal. Later, an appeal against the same was preferred by the appellant before Hon’ble Custom, Excise and State Goods Tribunal.
CA Pradeep Jain, Authorised representative of the Appellant appeared for the personal hearing to present the submissions and relevant explanations on behalf of the Appellant.

Key issues covered in the case:

Whether proceedings can be initiated and concluded merely based on the difference between information contained in Financial Statements/Balance Sheet and Returns furnished by the Taxpayer/Registered person?

Submissions by Appellant:

CA. Pradeep Jainsubmitted the following contentions: -

That the impugned order has been passed solely on basis of difference between the figures of Balance sheet and ER-1 which is not valid in view of CBIC instructions dated 26.10.2021. Hence, it is clarified that the demand should not be raised solely on the basis of Balance sheet figures without further investigation and without ascertaining the nature of receipts.
Further it is submitted that the instructions issued by the Board are binding on the Revenue Department in view of Section 37B of the Central Excise Act 1944.
That the impugned order confirmed demand without conducting any investigation.
The appellant submitted that the appellant has two units, factory at Sanchor and other one at Mumbai. The financial statements of both the units are prepared in a consolidated manner. As the figures shown in ER-1 return pertains only to Sanchor unit whereas the figures shown in Balance sheet pertains to both Sanchor and Mumbai unit. The inter-branch transactions i.e. transactions between Sanchor and Mumbai unit are not reported in the financial statements of the company. The consignment sales were not reported in Financial statements but the appellant had paid central excise duty on the consignment sales made to Mumbai office. The invoices relating Mumbai unit to independent buyers as well as to Sanchor unit were also produced. Similarly, the invoices by Sanchor factory to independent buyers as well as to Mumbai unit were also produced.
That the show cause notice pertains to their Sanchor unit so the sales made by Mumbai office was not to be considered while comparing the turnover reported in excise returns. Hence, reconciliation was required to be made of the turnover as reported in excise returns with that of the sales as reported in ER-1 returns filed for Sanchor unit.
With respect to the contention of the adjudicating authority that no bifurcation of sales made between the Mumbai office and Sanchor unit was found. It was argued that the balance sheet was prepared on consolidated basis containing the details of both Sanchor and Mumbai Unit and therefore as it is a settled principle that such transactions which occur between Sanchor and Mumbai Unit are not required to be reported in Financial Statements.
It is pertinent to note that appellant has furnished complete details in Financial Statements and ER-1 returns.
The allegation of under-reporting was not at all tenable and the impugned show cause notice should have been dropped. However, this Balance sheet furnished by the appellant does not contain the details of the intra-co. transactions which is totally baseless.
Further, the impugned order in original rejecting the reconciliation submitted by the appellant on the futile grounds is not at all sustainable and deserves to be set aside.
In continuation it is contended that, consignment sales are not reported in financial statements but appellant has paid excise duty on consignment sales made Sanchor to Mumbai. The figures were substantiated by figures reported.
Further, it was argued that huge central excise duty has been confirmed merely on the basis of difference in the sales reflected in balance sheet and the sales reported by them in ER-1 return.
In continuation, it was argued that impugned order held that the appellant itself admitted that the sales of Sanchor unit as reported in the balance sheet whereas the sales reported in the ER-1 returns were different. In this regard, it was argued that there are various amounts that needs to be included in the assessable value for the purpose of discharging excise duty. One of them being inclusion of freight if the sales are on FOR basis. Further, valuation of excisable goods under Central Excise Act 1944 is governed by provisions of Section 4 of Central Excise Act 1944 read with Valuation Rules which includes certain amounts which are not otherwise considered as part of sales. Consequently, the reason for higher value being reported in ER-1 returns is due to the inclusion of various elements such as freight which do not form part of revenue from operations in the financial statements.

Submissions by Department:

Revenue Department officials submitted the following contentions:

It was argued that self-assessment system has been introduced which casts the onus on the Assessee. In the instant case, had the records of the assessee not been scrutinized by the audit officers, the said facts would never had brought into notice.
That the appellant miserably failed to reconcile the difference between the amount of sale as per balance sheet and figures as reported in the excise returns.
Further, there is no such bifurcation provided in the balance sheet of sales made between Mumbai office and Sanchor Unit.
The assessee had miserably failed to reconcile the difference between amount of sales shown in their balance sheet for the F.Y. 2016-17 and the assessable value shown in ER-1 return during the same period. In absence of any verifiable data, it appears that the value of the goods cleared from the factory gate and actually sold at a higher price from the Mumbai office and the Appellant.
Based on the above made contention, it was contended that Rule 7 read with clause (b) of Sub-section (1) of Section 4 of Central Excise Act 1944. Valuation is applicable for determination of price of excisable goods.
Further, Rule 9 of Central Excise Rules shall be applicable read with subsection (3) of Section 4 of Central Excise Rules.
Thus, the appellant failed to pay correct Central Excise Duty by resorting to suppression of material facts, wilful misstatement and contravention of the provision of the law with the intent to evade payment of Central Excise Duty.
Therefore, it was contended that Central Excise Duty is liable to be recovered from them by invoking extended period of limitation under Section 11A(4).

Judgement & Findings:

Based on the submissions given by legal counsel of both the parties, the Appellate Authority observed the following findings: -

It was observed that on going through the reconciliation statement produced by the appellant, that the appellant have two units one at Sanchor and other one at Mumbai. Sometimes goods are sent from Sanchor to Mumbai on consignment sales basis and vice versa. Further, such consignment sales matches with the reconciliation presented/produced by the appellant.
Hence, it was held that the demand on account of figure shown short in ER-1 return is not sustainable. Thus, demand raised by impugned order was set aside.

AUTHOR’s COMMENT:

The above laid judgement reinforces the settled principle as laid down by various courts in their judgements given in the past that the department cannot raise allegations merely on the basis that there is difference between information contained in the financial statements and returns filed by the registered person. For raising allegations, departmental officials are required to substantiate those allegations with corroborative and cogent evidence. Merely differences noticed does not prove the allegations to be correct. Moreover, this judgement sets aside any such proceedings initiated and concluded by Department officials which are based merely on the basis of difference and such difference has not been verified by conducting a detailed investigation. The judgement ensures that the department officials are required to understand facts of the case individually and not to mechanically issue show cause notices.

CA Pradeep Jain_

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PJ case law/2026-27/08