2024 (1) TMI 82 - AT - Central Excise

CESTAT sets aside duty demands and penalties after department violates natural justice in clandestine removal case

The CESTAT Chennai set aside duty demands and penalties in a clandestine removal case due to complete violation of natural justice principles. The ... Non-compliance of Section 36B and admissibility of electronic evidence - Failure to comply with Section 9D - admissibility of statements recorded during investigation - Violation of Rule 24A - return of non-relied documents and breach of principles of natural justice - Presumption under Section 36A not available for documents seized from third parties - Penalty under Rule 26 Central Excise Rules - requirement of knowledge of confiscation and culpabilityNon-compliance of Section 36B and admissibility of electronic evidence - Computer printouts and electronic data relied upon by the Department could not be admitted in evidence due to failure to comply with the mandatory procedure under Section 36B. - HELD THAT: - The Tribunal found that the foundational printouts taken from the seized hard disk were relied on for quantification of duty but the mandatory safeguards under Section 36B were not shown to have been complied with. The Department itself extracted the printouts and later sent the disk for forensic examination; there is no satisfactory contemporaneous compliance demonstrating regular use of the computer or preservation/imaging in the manner required. In view of binding precedents and the statutory conditions in Section 36B, electronic evidence thus produced could not be accepted, and the reliance on such printouts for confirming duty was therefore unsustainable. [Paras 39, 43]Electronic evidence (computer printouts) was inadmissible due to non-compliance of Section 36B; reliance on such material to confirm duty was set aside.Failure to comply with Section 9D - admissibility of statements recorded during investigation - Presumption under Section 36A not available for documents seized from third parties - Statements recorded during investigation and documents seized from third parties could not be admitted as evidence without following the procedures of Section 9D and without making those third parties parties to the proceedings so as to invoke Section 36A presumptions. - HELD THAT: - The Tribunal held that statements recorded during investigation cannot be straightaway relied upon unless admitted in evidence in accordance with Section 9D(1)(b), which requires summoning and examination of the declarant in adjudication proceedings (except where clause (a) applies). Further, documents seized from third parties do not attract the presumption under Section 36A unless produced by or seized from the person against whom they are tendered; since the third-party custodians were not made co-noticees and were not examined, their documents and statements lack the necessary corroborative admissibility. Consequently, the Department failed to discharge the burden of proof in relying on such material. [Paras 40, 41, 42, 43]Third-party documents and investigation statements were inadmissible for want of compliance with Section 9D and for absence of conditions to invoke Section 36A; such material could not sustain the duty demand.Violation of Rule 24A - return of non-relied documents and breach of principles of natural justice - Department's delay and failure effectively to return non-relied documents and to provide imaged copies of relied-upon electronic records amounted to a breach of Rule 24A and principles of natural justice, prejudicing the appellants' ability to defend. - HELD THAT: - The appellants repeatedly requested return of non-relied documents and production of imaged versions of hard disks from the date of the show cause notice; the Department's substantive response came only after long delay and only after intervention by the Tribunal. Rule 24A mandates return of non-relied seized records within prescribed time unless retained with reasons recorded; the prolonged non-supply and equivocal responses meant the appellants were denied materials essential for reconciliation, cross-examination and preparation of defence. The Tribunal held that this procedural failure and resultant prejudice vitiate the adjudicatory process. [Paras 31, 33, 36, 38]Breach of Rule 24A and principles of natural justice established; denial of documents and imaged electronic records prejudiced the appellants' defence.Penalty under Rule 26 Central Excise Rules - requirement of knowledge of confiscation and culpability - The personal penalty imposed on Shri P. Ganesh under Rule 26 was unsustainable and was set aside for want of evidence of his culpability or of any knowledge that goods were liable to confiscation. - HELD THAT: - The Tribunal noted that Shri P. Ganesh was a salaried Commercial Director with nominal shareholding, there was no evidence that he derived personal gain or that he was 'at the helm' as alleged; the adjudicating authority's finding that he was managing affairs went beyond the allegations in the SCN without supporting evidence. Rule 26 contemplates imposition of penalty where a person dealt with excisable goods knowing them to be liable for confiscation; absent proof of such knowledge or active involvement, imposition of the significant personal penalty was unjustified. [Paras 15, 44]Penalty on Shri P. Ganesh under Rule 26 quashed for lack of evidence of culpability and requisite knowledge.Final Conclusion: The Tribunal allowed the appeals, set aside the adjudicating authority's confirmation of duty and the penalties imposed (including the personal penalty on Shri P. Ganesh), holding that critical evidentiary material could not be relied upon due to non-compliance with Sections 36B and 9D and that procedural failures under Rule 24A and principles of natural justice prejudiced the appellants' defence; consequential reliefs, if any, to follow. Issues Involved:1. Alleged Evasion of Central Excise Duty.2. Non-supply of Relied and Non-relied Documents.3. Compliance with Section 36B of Central Excise Act, 1944.4. Admissibility of Evidence from Third Parties.5. Imposition of Personal Penalty on the Commercial Director.Summary of Judgment:1. Alleged Evasion of Central Excise Duty:The main appellant, M/s. Hi-Tech Minerals (Covai) Pvt. Ltd., was accused of evading Central Excise duty by suppressing production and clandestine removal of sponge iron and MS ingots/billets. The Directorate General of Central Excise Intelligence (DGCEI) conducted search operations and seized incriminating documents and computer hard disks, revealing unaccounted transactions. The department issued a show cause notice (SCN) alleging clandestine removal of goods without payment of duty and proposed to demand Central Excise duty along with interest and penalties.2. Non-supply of Relied and Non-relied Documents:The appellants repeatedly requested the department to return non-relied documents and provide an imaged version of the hard disk seized. Despite multiple requests, the department delayed responding and failed to provide the necessary documents and imaged version of the hard disk, which hindered the appellants' ability to prepare their defense. The Tribunal found a violation of principles of natural justice due to non-supply of complete relied upon documents and not returning the non-relied documents.3. Compliance with Section 36B of Central Excise Act, 1944:The Tribunal noted that the department failed to establish compliance with Section 36B while taking printouts from the hard disk. The printouts were taken by the department and filed as a 'Made-up file' with 293 pages, forming the basis of the investigation. The Tribunal cited the case of U.P. Bone Mills (P) Ltd. Vs CGST, Dehradun, emphasizing that electronic evidence cannot be accepted without following the mandatory procedure under Section 36B.4. Admissibility of Evidence from Third Parties:The evidence relied on by the department included documents seized from third parties like buyers, transporters, and suppliers. The Tribunal held that these documents could not be used without corroboration and compliance with Section 9D of the Central Excise Act, 1944. The Tribunal cited the case of Reynolds Petro Chem Ltd. Vs CCE & ST, Surat-I, stating that the burden of proof lies on the department, and third-party documents cannot be admitted without examining the persons from whose custody they were seized.5. Imposition of Personal Penalty on the Commercial Director:The Tribunal found that the penalty of Rs. 50 lakhs imposed on the Commercial Director, Shri P. Ganesh, was too high and without basis. The department failed to produce evidence showing that Shri P. Ganesh made any personal gain from the alleged activities. The Tribunal concluded that the penalty imposed on Shri P. Ganesh was not justified and required to be set aside.Conclusion:The Tribunal set aside the impugned order, allowing the appeals with consequential reliefs, if any, due to the violation of principles of natural justice, non-compliance with mandatory legal provisions, and lack of evidence to support the allegations and penalties.