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 department failed to comply with Section 36B while extracting electronic evidence from seized hard disks, rendering such evidence inadmissible. Third-party documents and statements were relied upon without proper examination under Section 9D, and requested cross-examination was denied. The burden of proof was not met as seized documents from third parties lacked corroboration and proper procedural compliance. A Rs. 50 lakh penalty was also set aside as no evidence showed personal gain by the salaried appellant or active involvement in alleged violations.

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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.

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