2024 (11) TMI 1442 - AT - Central Excise

Cenvat credit demand and penalties set aside due to natural justice violation and lack of reliable evidence

N.D. Metal Industries Ltd. & Shri Ajay F. Garg Versus Commissioner of CGST & Central Excise-CGST & Central Excise Daman, Gujarat

CESTAT Ahmedabad set aside the Commissioner's order confirming Cenvat credit demand and penalties against the appellant. The Tribunal found violation of ... Clandestine removal - failure to provide the copy of relied upon documents to the appellant, despite the direction of this tribunal - availment of irregulat CENVAT Credit - Admissibility of statements - Violation of principles of natural justice - extended period of limitation - penalties - HELD THAT:- The Ld. Commissioner by relying the letter dated 05.01.2018 of DGGI, MZU held that relied upon documents have been provided to the appellant alongwith SCN on 07.01.2009 and the same were duly acknowledged by the authorized signatory of appellant. The said disputed acknowledgement of relied upon documents with SCN has already been disputed by the appellant before this Tribunal in first round of litigation and after that considering all the facts and correspondences, this tribunal has remanded the matter to adjudicating authority with the specific direction to supply the relied upon documents to the appellant. It is undisputed that the said dispute related to acknowledgment of relied upon document on 07.01.2019 was considered by the AJAY F GARG AND ND METAL INDUSTRIES LTD VERSUS C.C.E. & S.T. -DAMAN [2021 (10) TMI 584 - CESTAT AHMEDABAD], whereby this Tribunal remanded the matter to the Ld. Adjudicating Authority with specific directions to provide the copies of relied upon documents to the appellant and which was accepted by the department and thus became final. Therefore, it was not open for the Ld. Commissioner to pass the order ignoring the remand direction of their higher authorities and confirming the demand on the same grounds as taken in the first round which was set aside by the Tribunal. On perusal of the adjudication order and correspondences on various dates between appellant and department, it is found that in the present matter appellant have made several correspondences with department and adjudicating authority even then the documents were not supplied to them. Even the direction of this tribunal to adjudicating authority to provide the copy of relied upon documents, who has not supplied the documents to Appellant. But the Ld. Commissioner observed that the documents were supplied with the show cause notice, which is totally misconceived, inconsistent and contradicting. The entire Cenvat demand without supply of relied upon documents is against the principles of natural justice and hence the show cause notice stands vitiated. For this reason itself, the Cenvat demand and penalty cannot sustain. In Tribhuvandas Bhimji Javeri v. Collector of Central Excise, [1997 (1) TMI 86 - SUPREME COURT], the Hon’ble Apex Court held that non-return of the documents by the authorities may severely prejudice the right of the party to offer the proper explanation and to that extent the principles of natural justice may stand violated. In absence of supply of the copies of the documents a party may be deprived of from leading proper evidence and he may not be able to give proper answer of the case against him by adducing positive evidence in support of his own case together with the right to contradict all other allegations. The entries made in the DLR/MLR do not prove that the container/ imported inputs were transported only up to the destination given in such DLR/MLR. It is not the entry in the DLR/MLR but the transportation charges which are relevant as these indicate the actual transportation. As observed the above, the veracity of the said documents recovered from the premises of the third party i.e. M/s PSTC, is not known. Hence, it cannot be the sole basis for alleging diversion of imported inputs by Appellant. Additionally, it is important to note that the basis of preparation of said documents has not been made available to the Appellant, therefore, it would be a miscarriage of justice if such unsubstantiated documents are used as evidence against the Appellant - Merely because the drivers have not accurately maintained the MLRs, no adverse inference can be drawn on against the Appellant on the basis of such third-party records. If the allegation of department accepted and appellant has availed the Cenvat credit without receipts of the goods, than the duty payment on finished goods during the disputed period by the appellant could not be made from the PLA/cash. In such cases where the Cenvat credit was availed without receipt of the goods the Cenvat Credit should be accumulated in Cenvat credit ledger. However in the present case this is not a situation. Copy of PLA, Excise duty payment ledger submitted by the Appellant clearly show the duty payment by cash during the disputed period. In such circumstances huge Cenvat credit demand only on the basis of third party documents and statement of persons without corroborative evidence is clearly not sustainable. It is clear that in adjudication, the adjudicating authority is required to first examine the witness in chief and also to form an opinion that having regard to the facts and circumstances of the case, the statements of the witness are admissible in evidence. Thereafter, the witness is offered to be cross-examined. In the present matter Ld. Adjudicating Authority failed to do such exercise. Therefore, none of the statements were admissible evidence in the present case and no Cenvat demand is sustainable on the basis of statements of persons. Conclusion - i) The failure to provide relied upon documents constituted a violation of natural justice, rendering the adjudication order unsustainable. ii) The Cenvat credit demand was not supported by reliable evidence, as the department failed to prove the alleged diversion of inputs. iii) Third-party records, without corroboration, cannot be relied upon to substantiate claims of diversion or clandestine removal. iv) Statements not admitted as evidence under Section 9D cannot be used to confirm demands. v) The extended period for demand was inapplicable due to the absence of fraud or willful misstatement. vi) Penalties were unjustified due to the lack of cogent findings. The impugned order is set aside - appeal allowed. ISSUES PRESENTED and CONSIDEREDThe core legal issues considered in this judgment include:1. Whether the adjudicating authority violated the principles of natural justice by failing to provide the appellant with all the relied upon documents as directed by the Tribunal in the remand order.2. Whether the Cenvat credit availed by the appellant was irregular and ineligible due to alleged diversion of imported inputs to the open market instead of being used in manufacturing.3. Whether the reliance on third-party evidence and records, such as DLRs and MLRs, without corroboration, was justified in denying the Cenvat credit.4. Whether the statements relied upon by the adjudicating authority, which were retracted and not admitted as evidence under Section 9D of the Central Excise Act, could be used to confirm the demand.5. Whether the extended period for demand of duty was applicable given the alleged lack of fraud, collusion, or willful misstatement by the appellant.6. Whether the imposition of penalties on the appellant and its director was justified without cogent findings.ISSUE-WISE DETAILED ANALYSIS1. Violation of Principles of Natural JusticeThe Tribunal had previously remanded the case with specific directions to supply all relied upon documents to the appellant. Despite these directions, the adjudicating authority failed to provide the necessary documents, which constituted a violation of the principles of natural justice. The Tribunal emphasized that compliance with natural justice is essential before passing an adjudication order. The failure to provide these documents prejudiced the appellant's ability to present an adequate defense.2. Alleged Diversion of Imported InputsThe appellant was accused of diverting imported inputs to the open market, thereby making the availed Cenvat credit irregular. However, the appellant maintained that all imported inputs were duly received at their factory, used in manufacturing, and cleared upon payment of duty. The Tribunal found that the department failed to provide reliable evidence to substantiate the allegations of diversion. The appellant's records showed receipt and use of inputs, and there was no evidence of alternative raw materials being used.3. Reliance on Third-Party EvidenceThe adjudicating authority relied on third-party documents, such as DLRs and MLRs, which were not provided to the appellant. These documents were considered rough records and lacked corroboration from tangible evidence. The Tribunal held that such third-party records, without corroboration, cannot be used to draw adverse inferences against the appellant. The Tribunal referenced several judgments supporting the view that third-party records alone cannot substantiate claims of clandestine removal or diversion.4. Statements as EvidenceThe adjudicating authority relied on statements that were retracted and not admitted as evidence under Section 9D of the Central Excise Act. The Tribunal noted that for statements to be admissible, cross-examination is mandatory, and the adjudicating authority must form an opinion on their admissibility. The failure to follow this procedure rendered the statements inadmissible, and the demand based on these statements was unsustainable.5. Applicability of Extended Period for DemandThe appellant argued that the extended period for demand was not applicable as there was no fraud, collusion, or willful misstatement. The Tribunal agreed, noting the absence of evidence supporting such allegations. The show cause notice was deemed unsustainable on the grounds of time limitation, as the conditions for invoking the extended period were not met.6. Imposition of PenaltiesThe imposition of penalties on the appellant and its director was challenged due to the lack of justifiable findings. The Tribunal found that the adjudicating authority's findings were mere reiterations of the allegations in the show cause notice, without valid evidence. Consequently, the penalties imposed were unjustified and were set aside.SIGNIFICANT HOLDINGSThe Tribunal's significant holdings include:- The failure to provide relied upon documents constituted a violation of natural justice, rendering the adjudication order unsustainable.- The Cenvat credit demand was not supported by reliable evidence, as the department failed to prove the alleged diversion of inputs.- Third-party records, without corroboration, cannot be relied upon to substantiate claims of diversion or clandestine removal.- Statements not admitted as evidence under Section 9D cannot be used to confirm demands.- The extended period for demand was inapplicable due to the absence of fraud or willful misstatement.- Penalties were unjustified due to the lack of cogent findings.In conclusion, the Tribunal set aside the impugned order and allowed the appeals with consequential reliefs to the appellant, emphasizing the importance of adhering to principles of natural justice and the need for reliable evidence in adjudication proceedings.