2025 (4) TMI 955 - AT - Central Excise

Clandestine manufacture and removal - data contained in the CDs/Pen drive and Computer print out/CD print out/pen drive printout in the instant case do not satisfy the mandatory conditions of Section 36B of CEA 1944 - reliability of evidence - cross examination of the persons - corroborative evidences or not - penalty imposed on the Director of the company under Rule 26 of the Central Excise Rules 2002 - HELD THAT - The proceedings against the present Appellant No. 1 namely M/s. Vasundhara Metaliks Pvt Ltd. has been initiated on the basis of the documents recovered from the premises of one M/s Vasundara Power and Infra Pvt. Ltd. (VPIPL) and some loose sheets/private records recovered from the factory premises of the Appellant. It is observed that from the said office premises of M/s Vasundhara Power Infra Pvt. Ltd. the Officers of DGCEI seized 16 Nos of CDs and 2 Nos Pen Drives. Scrutiny of the data recovered from the CDs pen drives and loose sheets/private records revealed that the Appellant has been clearing the goods clandestinely. Thus it is observed that the prime evidence of the Revenue is the documents retrieved from CDs Pen drives and some statements recorded from various persons associated with the manufacturing and clearing during the course of investigation. It is observed that the Appellants have raised the point about the reliability of the data recovered from the CDs/Pen drives recovered from the premises of VPIPL. A pen drive is a floating device and has no evidentiary value on its own and can be admitted as evidence only when it strictly fulfils the conditions specified in Section 36B of the Central Excise Act. Refence made to the decision of the Hon ble Apex Court in the case of Tukaram S. Dighole vs. Manikrao Shivaji Kokate 2010 (2) TMI 1130 - SUPREME COURT wherein it has been held that electronic devices such as Pen Drive with fast development in the electronic techniques are more susceptible to tampering and alterations by transposition excision etc which may be difficult to detect and therefore such evidence has to be received with caution. In the present case it is observed that the officers had not obtained any certificate as required under Section 36B(4) of the said Act. It is also noted that none of the conditions stipulated under Section 36B(2) of the Act 1944 have been followed. In such situation it is difficult to accept the printouts retrieved from the sixteen CDs and two pen drives as evidence to support the clandestine removal of the goods. It is pertinent to note that the requirement of certificate under Section 36B(4) is also to substantiate the veracity of truth in the operation of electronic media - the data recovered from the sixteen CDs and two pen drives cannot be relied upon in the proceedings in the absence of Certificate as mandated under Section 36(4) of the Central excise Act 1944. In the present case therefore the only other evidence is the data retrieved from the sixteen CDs and two pen drives which is also not as per the procedure prescribed under Section 36B of the Act. The entire case has been built with no corroborative evidence brought in whatsoever there are no hesitation to apply the ratio of the case laws cited supra in respect of reliability of data recovered from Compact Disks / Pen drives non-allowing of cross-examination of the persons recording the statements non-production of corroborative evidence and consequently set aside the impugned order on these counts in respect of the confirmed demands. Penalty imposed on Shri Kamalpat Dalmia Director of the Appellant-company / Appellant No. 2 - HELD THAT - The Department has not brought in any evidence against him warranting imposition of penalty under Rule 26 of the Central Excise Rules 2002. Accordingly the penalty imposed on him set aside. Conclusion - i) Without a certificate as mandated under Section 36-B (4) of the Central Excise Act the computer print-out Compact Discs and pen drives cannot be relied upon by the Department in the adjudication proceedings. ii) The denial of cross-examination of persons whose statements are sought to be relied upon under Section 9D of the Central Excise Rules results in such statements losing their evidentiary value and renders them irrelevant for adjudication. iii) In the absence of compliance with mandatory provisions of Sections 36B and 9D and without any corroborative evidence the confirmed demands of duty interest and penalties cannot be sustained. iv) Penalty imposed on a Director under Rule 26 of the Central Excise Rules without evidence implicating him is unsustainable and liable to be set aside. The impugned order is set aside - appeal allowed.

Summary

The core legal questions considered by the Tribunal in this matter include:

(i) Whether the data contained in CDs and pen drives seized during search operations can be admitted as evidence without compliance with the mandatory conditions of Section 36B of the Central Excise Act, 1944;

(ii) Whether the statements recorded during investigation, particularly those of key witnesses, can be relied upon without adherence to the procedure prescribed under Section 9D of the Central Excise Rules, 2002, including the right to cross-examination;

(iii) Whether the charge of clandestine removal of goods can be substantiated solely on electronic records and loose/private sheets without corroborative evidence such as raw material consumption, production records, transportation, and receipt of sale proceeds;

(iv) Whether the demand for duty and imposition of penalties are sustainable in light of the above evidentiary deficiencies;

(v) Whether the penalty imposed on the Director of the company under Rule 26 of the Central Excise Rules, 2002, is justified in the absence of evidence against him;

(vi) Whether the demand raised is barred by limitation, considering the period of alleged clandestine removal and the date of issuance of the Show Cause Notice.

Issue-wise Detailed Analysis:

1. Admissibility of Electronic Evidence under Section 36B of the Central Excise Act, 1944

The legal framework mandates that computer printouts and electronic records, such as those derived from CDs and pen drives, are admissible only if they satisfy the conditions enumerated in Section 36B(2) and are accompanied by a certificate as per Section 36B(4). These conditions require proof that the computer was regularly used for the relevant activities, that it was operating properly, and that the data was supplied in the ordinary course of business. The certificate must identify the document, describe the manner of production, give particulars of the device, and be signed by a responsible official.

The Court noted that the Department failed to produce any certificate as mandated under Section 36B(4) to authenticate the seized CDs and pen drives. Furthermore, the data was seized from premises of a third party (M/s Vasundhara Power & Infra Pvt. Ltd.) and not from the appellant's own computer system, raising questions about lawful control and ownership required under Section 36B(2). The Court emphasized the susceptibility of electronic evidence to tampering and cited authoritative precedents, including the Supreme Court's ruling in Anvar P.V. v. P.K. Basheer, and the Orissa High Court's decision in Commissioner of C.Ex. & Cus. Vs. Shivam Steel Corporation, which reiterated the necessity of strict compliance with Section 36B for admissibility.

Accordingly, the Court held that the electronic data recovered from the CDs and pen drives could not be relied upon in the absence of the statutory certificate and compliance with the prescribed conditions, thereby rendering such evidence inadmissible.

2. Reliance on Statements Recorded During Investigation and the Mandate of Section 9D of the Central Excise Rules, 2002

Section 9D governs the relevancy of oral statements recorded during inquiry or investigation. It mandates that such statements can be admitted as evidence only if the person making the statement is examined as a witness before the adjudicating authority and is subject to cross-examination, unless certain exceptions apply.

The appellants sought cross-examination of key witnesses, namely the Data Entry Operator and the Manager (Accounts), whose statements were relied upon by the Department. However, the adjudicating authority denied this request. The Tribunal observed that this denial violated the statutory procedure under Section 9D, thereby rendering the statements inadmissible and irrelevant for the purpose of adjudication.

The Court cited the Punjab and Haryana High Court's judgment in G.Tech Industries vs. UOI, which underscored the necessity of following the procedure under Section 9D to prevent reliance on potentially coerced or unreliable statements recorded during investigation.

Thus, the Tribunal concluded that the statements of these witnesses could not be considered as evidence due to the failure to allow cross-examination and proper examination in chief.

3. Requirement of Corroborative Evidence for Allegations of Clandestine Removal

The Tribunal examined whether the Department had produced tangible and cogent corroborative evidence to substantiate the charge of clandestine removal of Sponge Iron amounting to over 20,000 MT. The Court noted the absence of critical corroborative factors such as:

• Evidence of excess consumption of raw materials (Iron Ore, Coal, Dolomite) commensurate with the alleged clandestine production;
• Proof of extra labor, electricity consumption, or payments indicative of increased production;
• Documentation or evidence of transportation, acceptance by buyers, and realization of sale proceeds;
• Identification and examination of makers of loose sheets/private records relied upon by the Department;
• Any independent enquiry or affirmative evidence supporting the clandestine removal charge.

The Court referenced several precedents, including the Allahabad High Court's decision in Continental Cement Co. Vs. UOI, which mandates the presence of corroborative evidence beyond mere assumptions or inferences to prove clandestine removal. The Tribunal also relied on the Nova Petrochemicals case, which enumerates fundamental criteria for establishing clandestine manufacture and clearance, emphasizing tangible evidence of raw material consumption, actual removal of goods, discovery of goods outside the factory, statements of buyers, and proof of receipt of sale proceeds.

Given the absence of such corroborative evidence, the Tribunal held that the Department's case was legally unsustainable.

4. Limitation and Penalty Issues

The appellants contended that the Show Cause Notice was issued beyond the normal period of limitation of one year, rendering the demand barred by limitation. The Tribunal did not explicitly elaborate on this point in the reasoning but considered it in the context of the overall findings.

Regarding penalties, the Tribunal found no evidence implicating the Director warranting imposition of penalty under Rule 26 of the Central Excise Rules, 2002. Consequently, the penalty imposed on the Director was set aside.

Similarly, since the demand for duty was set aside due to lack of admissible evidence, the associated interest and penalties under Section 11AC were also quashed.

5. Treatment of Competing Arguments

The Revenue relied heavily on the electronic data recovered from CDs and pen drives and statements recorded during investigation to establish clandestine removal. It argued that the appellant accounted for only part of the clearances in statutory records and concealed the balance, thus evading duty.

The Tribunal rejected the Revenue's reliance on electronic evidence due to non-compliance with Section 36B and dismissed the statements due to non-adherence to Section 9D procedural safeguards. The absence of corroborative evidence further weakened the Revenue's case. The Tribunal emphasized the serious nature of the clandestine removal charge and the necessity for tangible proof, which was lacking.

Conclusions:

The Tribunal concluded that the primary evidence relied upon by the Department-the electronic data and statements-was inadmissible due to procedural and statutory non-compliance. The absence of corroborative evidence further rendered the demand for duty unsustainable. Consequently, all demands, interest, and penalties were set aside. The penalty on the Director was also quashed for lack of evidence.

Significant Holdings:

"Without a certificate as mandated under Section 36-B (4) of the Central Excise Act, the computer print-out, Compact Discs, and pen drives cannot be relied upon by the Department in the adjudication proceedings."

"The denial of cross-examination of persons whose statements are sought to be relied upon under Section 9D of the Central Excise Rules results in such statements losing their evidentiary value and renders them irrelevant for adjudication."

"Clandestine removal is a serious charge which must be proved by tangible, cogent, and affirmative evidence including corroborative factors such as raw material consumption, production, transportation, receipt of sale proceeds, and electricity consumption. Mere assumptions or inferences based on electronic records without corroboration are insufficient."

"In the absence of compliance with mandatory provisions of Sections 36B and 9D, and without any corroborative evidence, the confirmed demands of duty, interest, and penalties cannot be sustained."

"Penalty imposed on a Director under Rule 26 of the Central Excise Rules without evidence implicating him is unsustainable and liable to be set aside."