2025 (1) TMI 786 - AT - Central Excise

Clandestine removal - evasion of huge amount of tax by suppressing the amount of royalty paid by the franchisee units - suppression of production of finished product - admissible and corroborative evidences or not - Levy of penalties. HELD THAT - The fact that the Appellant ever paid a higher amount of royalty to M/s KIL is not factually correct and established, the fact that the Appellant manufactured and cleared the higher quantity of goods corresponding to such alleged higher payment of royalty is not established or proved. Further, there is neither any evidence of any excess consumption of electricity nor any evidence whatsoever and howsoever with regard to any clandestine procurement of raw materials or of production of any excess TMT Bars, use of labour, transporter, etc. No evidence regarding buyers of such alleged clandestine manufactured goods or any receipt of consideration against such alleged clandestinely manufactured goods. Thus, without adducing any evidence in support of such facts, a charge of clandestine removal cannot be sustained merely on assumption and presumption due to such alleged higher amount of royalty recorded by M/s KIL, where even correctness and truthfulness of such recording itself is not established. Reliance in this regard is placed upon the following judgment of the Hon ble Allahabad High Court in M/S. CONTINENTAL CEMENT COMPANY VERSUS UNION OF INDIA OTHERS 2014 (9) TMI 243 - ALLAHABAD HIGH COURT , wherein the Court categorically stated ' no case is made out for extra so-called clandestine sale of the Portland Cement to the said parties. We are satisfied that the first appellate authority has rightly deleted the addition and cancel the penalties.' The above-mentioned judgment of the Hon ble High Court has been relied by the Tribunal in the matter of M/S GIRIRAJ IROSTEEL COMPANY PVT. LTD., SHRI SUNIL KUMAR AGARWAL, SHRI PURUSHOTTAM RATHI VERSUS COMMISSIONER OF CENTRAL EXCISE 2019 (12) TMI 542 - CESTAT ALLAHABAD , wherein the facts were similar to the present case framed based on the same facts of alleged recording of higher royalty by M/s KIL and the Tribunal set aside the demand by holding ' manufacture of such quantity of goods on which Central Excise duty of around Rs. 5.5 crores was demanded is not established. Since Central Excise duty is on manufacture and manufacture is not established, therefore, there is no basis for demand of Central Excise duty to the tune of Rs. 5,58,89,762/-. Since the demand is not sustainable the penalty is on the appellants are not sustainable.' It is a well settled law that resumption of loose slips or private records resumed from the third party, or statements recorded behind the back of the Appellant cannot be made the basis of confirming demand on the Appellants unless the same are proved to be linked to the Appellant. Further, even it is assumed such entries existed, but that does not prove that the Appellant in fact made any such higher amount of payment in absence of any corroborative evidence - once such printout is not admissible in evidence then nothing survived in this case to hold clandestine clearance of the goods by the Appellant. In absence of cross examination of witnesses, the documents recovered as well as their statements cannot be relied upon against the Appellant in view of decision of Hon'ble Allahabad High Court in the case of COMMISSIONER OF CENTRAL EXCISE, MEERUT-I, MEERUT ANOTHER VERSUS M/S PARMARTH IRON PVT. LTD., BIJNOR. 2010 (11) TMI 109 - ALLAHABAD HIGH COURT , wherein it has been held that ' there is no requirement in the Act or Rules, nor do the principles of natural justice and fair play require that the witnesses whose statements were recorded and relied upon to issue the show cause notice, are liable to be examined at that stage. If the Revenue choose not to examine any witnesses in adjudication, their statements cannot be considered as evidence. However, if the Revenue choose to rely on the statements, then in that event, the persons whose statements are relied upon have to be made available for cross-examination for the evidence or statement to be considered.' Penalty on Director - HELD THAT - The Appellant has simply appeared as a proxy of Mr. Navin Jain to submit documents. He has neither any authorization by the Company to tender a statement nor any summons were issued to the Appellant under Section 14 of the Central Excise Act, 1944. The DGCEI, Kanpur in most cryptic manner simply to fulfil their formalities, recorded a statement of the person, who did not even have any authority letter even from Mr. Navin Jain, who was main director looking after overall work. Penalty on Appellant No.3 - HELD THAT - The clinching evidence of the nature of purchase of raw material, use of electricity, sale of final products, clandestine removal and the more flowback of funds are required to be established in the case of clandestine removal. Such aspects have not been investigated into and therefore, the judgement of Hon ble Allahabad High Court in the case of M/S. CONTINENTAL CEMENT COMPANY VERSUS UNION OF INDIA OTHERS 2014 (9) TMI 243 - ALLAHABAD HIGH COURT is applicable to the facts of the present case. The penalty imposed is set aside. Conclusion - Clandestine removal is a serious charge against the manufacturer, which is required to be discharged by the Revenue by production of sufficient and tangible evidence. The demands and penalties cannot be based on assumptions or insufficient evidence. The entire demand alleging clandestine removal is not sustainable and accordingly the entire demand confirmed against the Appellant is set aside. As the demand of duty is not sustainable, therefore, no penalty can be imposed. Appeal allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment are:

• Whether the demand for Central Excise duty and penalties imposed on the appellants, based on alleged clandestine removal of goods, is justified.
• Whether the evidentiary value of the GEQD report and other electronic evidence is sufficient to establish clandestine activities.
• Whether the penalties imposed under Rule 25 and Rule 26 of the Central Excise Rules, 2002, and Section 11AC of the Central Excise Act, 1944, are sustainable.
• Whether the extended period of limitation for issuing the Show Cause Notice is applicable in this case.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Justification of Demand and Penalties

• Relevant Legal Framework and Precedents: The demand was made under the erstwhile Section 11A(1) and penalties under Rule 25 and Rule 26 of the Central Excise Rules, 2002, read with Section 11AC of the Central Excise Act, 1944.
• Court's Interpretation and Reasoning: The court emphasized that for a charge of clandestine removal, there must be concrete evidence of excess production, raw material procurement, and sales. Mere assumptions based on higher royalty figures are insufficient.
• Key Evidence and Findings: The GEQD report and electronic evidence were the primary basis for the demand. However, the court found no corroborative evidence such as excess electricity consumption, raw material procurement, or sales records.
• Application of Law to Facts: The court applied the principles from the Continental Cement Company case, requiring substantial evidence for clandestine removal charges, which was lacking here.
• Treatment of Competing Arguments: The appellants argued that the GEQD report lacked evidentiary value and that no concrete evidence supported the allegations. The court agreed, noting the absence of corroborative evidence.
• Conclusions: The demand and penalties were not justified due to the lack of substantive evidence supporting the allegations of clandestine removal.

Issue 2: Evidentiary Value of GEQD Report

• Relevant Legal Framework and Precedents: Section 36B of the Central Excise Act and Section 65B of the Indian Evidence Act govern the admissibility of computer-generated evidence.
• Court's Interpretation and Reasoning: The court found that the GEQD report did not meet the criteria for admissibility under Section 36B, as the appellants did not have lawful control over the computers from which data was retrieved.
• Key Evidence and Findings: The GEQD report showed discrepancies in royalty payments, but there was no evidence linking these to actual clandestine activities.
• Application of Law to Facts: The court held that without meeting the conditions of Section 36B, the GEQD report could not be used as evidence against the appellants.
• Treatment of Competing Arguments: The appellants contested the admissibility of the GEQD report, and the court upheld their position, citing a lack of compliance with legal requirements for electronic evidence.
• Conclusions: The GEQD report was deemed inadmissible, undermining the basis for the demand and penalties.

Issue 3: Sustainability of Penalties

• Relevant Legal Framework and Precedents: Penalties were imposed under Rule 25 and Rule 26 of the Central Excise Rules, 2002, and Section 11AC of the Central Excise Act, 1944.
• Court's Interpretation and Reasoning: The court found no evidence of deliberate intent or mens rea on the part of the appellants to justify penalties.
• Key Evidence and Findings: The court noted the lack of evidence showing the appellants' involvement in any clandestine activities or knowledge of such activities.
• Application of Law to Facts: The court applied the principle that penalties require evidence of intentional wrongdoing, which was absent in this case.
• Treatment of Competing Arguments: The appellants argued against the penalties, citing a lack of evidence and intent. The court agreed, finding no basis for imposing penalties.
• Conclusions: The penalties were not sustainable due to the absence of evidence of intentional wrongdoing by the appellants.

Issue 4: Extended Period of Limitation

• Relevant Legal Framework and Precedents: The extended period of limitation under Section 11A of the Central Excise Act, 1944, was invoked.
• Court's Interpretation and Reasoning: The court found that the extended period was not applicable as the department had prior knowledge of the facts, and no new evidence justified the delay.
• Key Evidence and Findings: The court noted that similar Show Cause Notices were issued to M/s KIL earlier, indicating departmental awareness.
• Application of Law to Facts: The court held that the extended period could not be invoked without evidence of suppression or fraud, which was not present.
• Treatment of Competing Arguments: The appellants argued that the extended period was unjustified, and the court concurred, citing the lack of new evidence or suppression.
• Conclusions: The invocation of the extended period of limitation was not justified, rendering the Show Cause Notice time-barred.

3. SIGNIFICANT HOLDINGS

• Preserve Verbatim Quotes of Crucial Legal Reasoning: "Clandestine removal is a serious charge against the manufacturer, which is required to be discharged by the Revenue by production of sufficient and tangible evidence."
• Core Principles Established: The court reinforced the principle that demands and penalties cannot be based on assumptions or insufficient evidence. It emphasized the need for concrete evidence in cases of alleged clandestine removal.
• Final Determinations on Each Issue: The court set aside the demand and penalties, finding them unsustainable due to lack of evidence and improper invocation of the extended period of limitation.