2023 (7) TMI 255 - AT - Central Excise

Court Rules Against Retrospective Penalties in Excise Cases

Goodluck Empire Versus C.C.E. & S.T. -Ahmedabad-iii And Jenil Empire Versus C.C.E. & S.T. -Ahmedabad-iii

The court held that the penalty under Rule 26(2) of Central Excise Rules, 2002 could not be applied retrospectively to transactions before 01-04-2007. M/s ... Levy of penalty u/r 26 of Central Excise Rules, 2002 - issuing Cenvat Credit invoices without supplying the goods for fraudulent passing of Cenvat credit - no proper cross examination was conducted by the Adjudicating Authority - principles of natural justice - HELD THAT:- Both the appellant have given inculpatory statements. The Adjudicating authority has conducted the cross-examination though some discrepancy was raised by the Learned Chartered Accountant during the hearing before the Adjudication authority but the fact that the cross examination has been conducted and nothing contrary to the statement given under Section 14 of the Central Excise Act, 1994 by the present appellants have come on record. Therefore, both the present appellants have direct involvement in passing of fraudulent Cenvat credit to M/s Nakoda Alloys Pvt. Ltd. The penalty was imposed under Rule 26(2) of Central Excise Rules, 2002 which has come into force with effect from 01.04.2007. Therefore, for all the transactions made prior to 01.04.2007 the Penal Provision Rule 26(2) cannot be applied retrospectively. Therefore, in respect of the transactions only made after 01.04.2007 the penalty under Rule 26(2) of Central Excise Rules, 2002 shall be applicable. In this case no penalty can be imposed under Rule 26(2) of Central Excise Rules, 2002. As regard the appeal of M/s Goodluck Empire some of the transactions were made after 01.04.2007, in respect of these transactions the appellants are liable to penalty under Rule 26(2) of Central Excise Rules, 2002. The penalty of M/s. Goodluck Empire is reduced from Rs. 8,20,000/- to Rs. 2,00,000/- - Appeal allowed in part. 1. ISSUES PRESENTED AND CONSIDERED Whether statements recorded under Section 14 of the Central Excise Act can be relied upon for imposition of penalty where cross-examination was alleged to be improper or incomplete. Whether Rule 26(2) of the Central Excise Rules, 2002 is applicable to transactions that took place prior to its commencement (01.04.2007) and, if not, whether penalty under that Rule can be imposed retrospectively. Whether issuers of invoices who did not supply goods but furnished invoices enabling fraudulent passing of Cenvat credit are directly liable to penalty under the relevant penal provision for transactions falling within the Rule's temporal scope. 2. ISSUE-WISE DETAILED ANALYSIS Issue A - Admissibility and evidentiary value of statements under Section 14 where cross-examination is challenged Legal framework: Statements recorded under Section 14 of the Central Excise Act are admissible and may form the basis for adjudication, subject to proper procedure including opportunity for cross-examination of the declarant. Precedent treatment: The adjudicating authority conducted cross-examination; the Tribunal considered that where cross-examination occurs and nothing material contradicts the recorded statement, those statements may be relied upon. Interpretation and reasoning: Although the appellant contended that no proper cross-examination was conducted, the record showed that cross-examination took place and no contradictions material to the statements emerged. The Tribunal held that mere procedural objections about adequacy of cross-examination, unsupported by evidence of prejudice or contradiction, do not render inculpatory statements inadmissible. Ratio vs. Obiter: Ratio - where cross-examination is conducted and no contradictory material is produced, statements under Section 14 can be treated as reliable evidence for adjudication and penalty imposition. Obiter - criticism of manner/quality of cross-examination absent specific examples of prejudice. Conclusions: The Court accepted the statements as evidence of direct involvement in issuing invoices facilitating fraudulent Cenvat credit, because cross-examination was on record and no contrary material came forward. Issue B - Temporal applicability of Rule 26(2) of the Central Excise Rules, 2002 Legal framework: Rule 26(2) of the Central Excise Rules, 2002 (penal provision) came into force on 01.04.2007; penal provisions are not to be applied retrospectively unless clearly intended by legislature. Precedent treatment: The Tribunal noted that earlier decisions considered by the appellant support the principle that Rule 26(2) cannot be applied to transactions prior to its effective date; the Tribunal found these authorities persuasive and consistent with the non-retroactivity principle. Interpretation and reasoning: The Court applied the clear temporal boundary of the Rule's commencement date. Transactions occurring prior to 01.04.2007 fall outside the statutory scope of Rule 26(2), and hence penal consequences under that Rule cannot be imposed for pre-commencement transactions. The reasoning follows the settled statutory interpretive approach that penal rules should not be given retrospective effect. Ratio vs. Obiter: Ratio - Rule 26(2) is inapplicable to transactions before 01.04.2007; penalty under that Rule cannot be imposed retrospectively. Obiter - none regarding alternative penal provisions or other remedial measures for pre-Rule transactions. Conclusions: For transactions prior to 01.04.2007, penalty under Rule 26(2) could not be imposed; for transactions on or after 01.04.2007, Rule 26(2) applies and penalties may be levied. Issue C - Liability for issuing invoices enabling fraudulent Cenvat credit where principal settled liability under an amnesty scheme Legal framework: Liability for issuance of invoices that facilitate fraudulent availment of Cenvat credit rests on the supplier/issuer if they participated in or facilitated the passing of credit, independent of settlement by the recipient under a scheme; adjudicatory findings and evidentiary record govern culpability. Precedent treatment: The Court observed that the principal recipient's settlement under an amnesty or settlement scheme does not absolve alleged invoice issuers of liability if independent evidence (including their own statements) establishes involvement. Interpretation and reasoning: The Tribunal examined the fact that the main recipient settled its demand under a legacy dispute resolution scheme. That settlement did not negate the recorded inculpatory statements of the invoice issuers nor the evidence of non-supply. Given admitted or unrebutted statements and lack of contrary evidence, the Tribunal concluded that the appellants had direct involvement in passing fraudulent credit for applicable transactions. Ratio vs. Obiter: Ratio - settlement of the recipient's liability under a statutory scheme does not per se extinguish or preclude adjudication of penalty against other participants whose involvement is independently established. Obiter - the Court did not explore effect of settlement on quantum/assessment beyond noting it had been affirmed by the Tribunal. Conclusions: Where issuers' statements and record establish participation in passing fraudulent Cenvat credit, they remain liable to penalty for transactions within the temporal ambit of the penal Rule, notwithstanding settlement by the recipient under a separate scheme. Issue D - Quantum and relief where partial temporal applicability exists Legal framework: Penalty imposition and quantum are subject to adjudicatory discretion, statutory limits and temporal applicability of the penal provision; when only some transactions fall within the operative period of a penal Rule, penalty can be imposed only in respect of those transactions. Precedent treatment: The Tribunal applied the temporal limitation to segregate transactions pre- and post-Rule commencement and adjusted penalty accordingly. Interpretation and reasoning: Having found all transactions of one appellant pre-date the Rule, the Tribunal set aside penalty for that appellant. For the appellant with mixed transactions, the Tribunal upheld liability only for post-01.04.2007 transactions and reduced the penalty amount to reflect this limited applicability and discretionary mitigation. Ratio vs. Obiter: Ratio - when a penal provision applies only to certain transactions by date, penalty must be imposed only for those transactions; quantum may be moderated in exercise of discretion. Obiter - none on precise methodology for apportioning liability beyond the facts before the Tribunal. Conclusions: Penalty was entirely set aside for the appellant whose transactions were all prior to 01.04.2007; for the appellant with post-commencement transactions, penalty was upheld but reduced in amount in exercise of Tribunal's discretion.