Clandestine manufacture and removal to avoid excise duty

Revenue Department has always found it very difficult to establish that certain goods were manufactured and removed clandestinely. This is to establish an act where the manufacturers have not been caught red handed.

Usually it happens that during stock taking certain shortages are discovered compared to the book entries in the factory documents. The manufacturer tries to explain it away as loss due to some reasons or other.

In the case of tea or oil it is well explained by dryness in the weather. But some cases are more difficult than that. These are cases where the goods in the factory warehouse tally with the balance in the account books but there is larking suspicion that the goods were manufactured and cleared from the factory clandestinely keeping the goods of accounts perfect. Usually the suspicion arises due to getting intelligence reports and certain inconsistencies found in figures maintained in various departments of the factory which do not tally with the production figure.

 

In some cases circumstantial evidence show such indications of manufacturing more than what the books of account show.

While in most of the cases the marshalling of evidence acquired from the investigation does not prove enough for the tribunal or the courts to uphold the allegation of clandestine removal, in a few cases the allegations have survived due to systematic investigation by some very hard working officers of the department.

We find from the judgement of the tribunal in a bunch of cases of Shridhar Casting Pvt. Ltd. & others vs. Commissioner of Central Excise, Nagpur, Nasik & Aurangabad that the clandestine manufacture of mild steel ingots manufactured by induction furnaces were properly proved by circumstantial evidence . This sector is traditionally known for evasion of final product. The inputs are mild steel scraps and sponge iron which they buy from the market. They remain in huge dumps which are not amenable to weighing and therefore the only way to check if the manufactured goods have been entered properly is to check the consumption of inputs and related materials and accounts to verify if they match with the production figures.

In the present case very laborious investigation was done by the offices of the department, which established that the manufactures in this case clandestinely manufactured and cleared the final products namely mild steel ingots. The department relied upon data relating to energy consumption which were either recovered from the parties or retrieved from Maharashtra State Electricity Board. According to the department electricity in the range of 555 KWH – 1026 KWH would be consumed for production of 1 MT of mild steels ingots. This finding was based on a scientific studies conducted by IIT, Kanpur. Reliance was also placed on opinion given by All India Induction Furnace Association who opined that 820 KWH of electrical energy would be required for manufacture of 1 MT mild steel ingots.

On that basis the actual production was calculated to be much higher than what was shown in the books of accounts.

There were other circumstantial proof also like the following:

(i) 'NIL' production shown on a number of days while electricity consumption was very high.

(ii) Non-accountal of receipts of ferro alloys.

(iii) Balance Sheets for some years showed cost of inputs consumed to be higher than sale proceeds of finished goods.

(iv) Cost of electricity and raw material shown to be 125% of selling price of ingots.

(v) Fictitious entries of large amounts as “Other Income”

(vi) Very high burning loss shown to accommodate unaccounted production.

The tribunal observed that when a person indulges in clandestine manufacture and removal of goods, he will not keep any records whereof,in which circumstances, the evidence collected by Revenue as discussed above would be sufficient evidence to prove suppression of production.

So the Tribunal concluded that Revenue had made out a prima facie case on merits and the manufactures should deposit the duty demanded before the final hearing take place.

The Revenue's cae is further supported by judgement in Alagappa Cements vs. CEGAT, (2010- TOIL-770-HC-MAD-CX) where the High Court held that the evidence that clinker used would have led to more manufacture of cement was sufficient to prove clandestine removal of cement.

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