CESTAT Quashes ₹1.14 Crore Excise Demand Against Gutka Manufacturer, Says Receipt of One Raw Material Alone Cannot Prove Clandestine Production

May 8, 2026 : The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), New Delhi, has set aside an excise duty demand of ₹1.14 crore and related penalties imposed on M/s R.S. Company and its partner Natwar Lal Sharda in an alleged clandestine gutka manufacturing case, holding that mere receipt of one raw material could not conclusively establish clandestine manufacture and removal of finished goods.

A Bench comprising President Justice Dilip Gupta and Technical Member P. Anjani Kumar allowed the appeals filed by M/s R.S. Company and Natwar Lal Sharda against the Order-in-Original dated 26 September 2024 passed by the Commissioner of CGST and Central Excise, Indore.

The dispute traces back to investigations initiated by the Directorate General of Central Excise Intelligence (DGCEI) in February 2000 into alleged clandestine manufacture and removal of scented tobacco by Pune-based Suresh Enterprises. During the investigation, officials recovered a pocket diary from an employee of Suresh Enterprises, which allegedly indicated transportation of scented tobacco through transporters including Sarita Roadways, Vijayant Travels and Hari Roadways Corporation.

According to the department, lorry receipts recovered from Sarita Roadways showed transportation of scented tobacco from Suresh Enterprises to M/s R.S. Company. The department further alleged clandestine procurement of laminated packing material from Laminar Industries and issued a show cause notice on 23 April 2003 demanding excise duty of ₹39.44 crore on alleged clandestine manufacture and clearance of more than 39 lakh kilograms of gutka during April 1998 to February 2000.

The Commissioner had initially dropped the proceedings in 2004, observing that the pocket diary was unreliable and that the transporter documents were merely third-party records. The adjudicating authority had also noted absence of evidence regarding procurement of other essential raw materials necessary for manufacturing such huge quantities of gutka.

The matter later underwent multiple rounds of litigation before the Tribunal. In 2012, the Tribunal directed the adjudicating authority to re-examine the lorry receipts recovered from Sarita Roadways and determine clandestine removal only with reference to those receipts. In a subsequent remand order dated 26 March 2018, the Tribunal specifically directed that only lorry receipts standing in the name of M/s R.S. Company could be considered for raising the duty demand.

Following the remand, the Commissioner confirmed a reduced excise duty demand of ₹1.14 crore along with interest and equal penalty under Section 11AC of the Central Excise Act. A separate penalty was also imposed on Natwar Lal Sharda under Rule 26 of the Central Excise Rules. The revised demand was calculated by applying a formula that 5.7 kilograms of scented tobacco would produce 100 kilograms of gutka and by relying on six lorry receipts allegedly linked to the appellant.

Before the Tribunal, the appellants argued that only photocopies of the lorry receipts had been supplied and inspection of the originals was denied despite repeated requests. They further contended that clandestine manufacture could not be established solely on the basis of alleged receipt of scented tobacco without proof regarding procurement of other essential raw materials such as lime, katha, menthol, supari, kimam and packing material.

The Tribunal found that the adjudicating authority failed to comply with the earlier remand directions requiring independent verification of the lorry receipts. Instead, the Commissioner merely sought re-quantification from DGGI and mechanically relied on the figures supplied by the investigating agency.

“The adjudicating authority, thereafter, has simply relied on the information supplied by DGGI and determined the demand of duty without examining the evidence,” the Bench observed.

The Tribunal also held that denial of inspection of original lorry receipts was unjustified, especially since the documents were not recovered from the premises of the appellant.

“The adjudicating authority was not justified in rejecting the request of the appellant for inspection of the six Lorry Receipts for this reason. Inspection would hardly take any time,” the Bench stated.

Relying on the Patna High Court judgment in Commissioner of Central Excise v. Brims Products, the Tribunal reiterated that receipt of one raw material alone cannot conclusively prove clandestine manufacture and surreptitious removal of finished products. The Bench noted that the department had failed to produce evidence regarding receipt or consumption of other essential raw materials required for manufacture of gutka.

The Tribunal further held that quantification of duty demand based on a theoretical or mathematical formula linked only to scented tobacco consumption was legally unsustainable. Holding that clandestine manufacture and removal of gutka had not been established, the Bench concluded that the excise duty demand itself could not survive. Consequently, the penalties imposed on both the company and its partner were also quashed.

Case Title: M/s R.S. Company v. Commissioner of CGST & Central Excise, Indore connected with Shri Natwar Lal Sharda v. Commissioner of CGST & Central Excise, Indore
Case Nos.: Excise Appeal Nos. 51496 and 51497 of 2025
Coram: Justice Dilip Gupta (President) and P. Anjani Kumar (Member Technical)