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Issues: (i) whether the statement of the production manager recorded during investigation, and the statement of a third party, could be relied upon without satisfying the evidentiary requirements of cross-examination and Section 9D of the Central Excise Act, 1944; (ii) whether the evidence on record established diversion of copper cathodes by the manufacturing units to the Jammu unit so as to justify denial of credit and recovery of duty and penalty, including denial of the benefit of Notification No. 56/2002-CE dated 14.11.2002.
Issue (i): whether the statement of the production manager recorded during investigation, and the statement of a third party, could be relied upon without satisfying the evidentiary requirements of cross-examination and Section 9D of the Central Excise Act, 1944
Analysis: The later statement of the production manager, coupled with his cross-examination, supported the stand that copper cathodes were used in manufacture, while the earlier statement was alleged to have been recorded under coercion. The earlier statement was not corroborated by any reliable independent evidence. The third-party statement was also not admissible in the absence of effective cross-examination. The evidentiary use of such statements had to conform to Section 9D and the requirements of natural justice.
Conclusion: The earlier statement and the untested third-party statement were not held reliable, and no adverse finding could be based on them.
Issue (ii): whether the evidence on record established diversion of copper cathodes by the manufacturing units to the Jammu unit so as to justify denial of credit and recovery of duty and penalty, including denial of the benefit of Notification No. 56/2002-CE dated 14.11.2002
Analysis: The record showed payment for copper cathodes through banking channels, entries in statutory records, infrastructure capable of using copper scrap as well as copper cathodes, and a jurisdictional enquiry report of the Jammu Commissionerate supporting receipt and use of copper scrap and cathodes at the Jammu unit. The allegation of diversion was not supported by credible corroboration. Once diversion was not proved, the basis for denying the notification benefit and confirming duty and penalty also failed.
Conclusion: Diversion was not proved, the duty demand and penalties were not sustainable, and the benefit of the notification could not be denied.
Final Conclusion: The impugned orders were set aside and the appeals were allowed with consequential relief.
Ratio Decidendi: A demand based on alleged diversion of inputs cannot be sustained on the strength of an unreliable or untested statement alone; where statutory records, banking payments, jurisdictional enquiry reports, and technical evidence do not corroborate the allegation, denial of exemption and consequential penalties fail.
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