2025 (4) TMI 441 - AT - Central Excise

CESTAT sets aside Rs. 3 crore excise demand citing procedural violations under section 9D(1)(b) regarding statement recording

M/s Surya Wires Pvt. Ltd. and Shri Harsh Agrawal Versus Principal Commissoner, CGST, Raipur

CESTAT New Delhi allowed the appeal against central excise duty demand totaling Rs. 3,04,24,623/- and Rs. 1,76,650/- plus interest and penalty. The ... Clandestine removal of finished goods without payment of central excise duty and without issue of valid invoices - shortage of the finished goods and raw material found during the course of physical verification - reliability of statements without following the procedure contemplated in section 9D of the Central Excise Act relating to relevancy of statements under certain circumstances Whether such statements could have been considered as relevant and relied upon without following the procedure contemplated in section 9D of the Central Excise Act relating to relevancy of statements under certain circumstances? - HELD THAT:- In Additional Director General (Adjudication) vs. Its My Name Pvt. Ltd. [2020 (6) TMI 72 - DELHI HIGH COURT], the Delhi High Court examined the provisions of sections 108 and 138B of the Customs Act. The department placed reliance upon the statements recorded under section 108 of the Customs Act. The Delhi High Court held that the procedure contemplated under section 138B(1)(b) has to be followed before the statements recorded under section 108 of the Customs Act can be considered as relevant. In Drolia Electrosteel [2023 (11) TMI 10 - CESTAT NEW DELHI], a Division Bench of the Tribunal examined the provisions of section 9D of the Central Excise Act and after placing reliance upon the decision of the Punjab and Haryana High Court in Jindal Drugs [2016 (6) TMI 956 - PUNJAB & HARYANA HIGH COURT], observed that if the mandatory provisions of section 9D(1)(b) of the Central Excise Act are not followed, the statements cannot be used as evidence in proceedings under Central Excise Act. Thus, both section 9D(1)(b) of the Central Excise Act and section 138B(1)(b) of the Customs Act contemplate that when the provisions of clause (a) of these two sections are not applicable, then the statements made under section 14 of the Central Excise Act or under section 108 of the Customs Act during the course of an inquiry under the Acts shall be relevant for the purpose of proving the truth of the facts contained in them only when such persons are examined as witnesses before the adjudicating authority and the adjudicating authority forms an opinion that the statements should be admitted in evidence. It is thereafter that an opportunity has to be provided for cross-examination of such persons - The provisions of section 9D of the Central Excise Act and section 138B(1)(b) of the Customs Act have been held to be mandatory and failure to comply with the procedure would mean that no reliance can be placed on the statements recorded either under section 14D of the Central Excise Act or under section 108 of the Customs Act. The Courts have also explained the rationale behind the precautions contained in the two sections. It has been observed that the statements recorded during inquiry/investigation by officers has every chance of being recorded under coercion or compulsion and it is in order to neutralize this possibility that statements of the witnesses have to be recorded before the adjudicating authority, after which such statements can be admitted in evidence. The confirmation of demand of central excise duty to the extent of Rs. 3,04,24,623/- is based on the statements of persons who were not examined by the department before the adjudicating authority. This examination was absolutely necessary in terms of the provisions of section 9D of the Central Excise Act. In the absence of examination of such persons before the adjudicating authority and in the absence of admission of such statements in evidence, such statements would not be relevant. For the reasons stated above, the said demand would have to be set aside. Demand based on loose papers recovered from the factory premises of the appellant - HELD THAT:- In the present case, the alleged authors of the loose papers were not examined. The demand of Rs. 1,76,650/- based on loose papers recovered from the factory premises of the appellant, therefore, cannot be sustained and deserves to be set aside. Demand based solely on shortage of stock - absence of corroborative evidence - HELD THAT:- Reference can be made to the judgment of the Punjab and Haryana High Court in Anand Founders & Engineers [2015 (11) TMI 1166 - PUNJAB & HARYANA HIGH COURT] where it was held that 'Further, it was held by the Tribunal that mere shortages detected at the time of visit of the officers cannot ipso facto lead to the allegations and findings of clandestine removal.' What also needs to be noticed is that an inference regarding clandestine removal can be drawn only after detailed investigation and consideration of relevant incriminating material which could be based on the stock of raw material, finished product, use of consumption of electricity, employment of labour and many other relevant materials as has been noticed by the Chhattisgarh High Court in Hi Tech Abrasives [2018 (11) TMI 1514 - CHHATTISGARH HIGH COURT]. The impugned order dated 09.06.2020 passed by the Principal Commissioner in so far is it confirms the demand with interest and penalty cannot be sustained and would have to be set aside. Conclusion - i) The confirmation of demand of central excise duty to the extent of Rs. 3,04,24,623/- is based on the statements of persons who were not examined by the department before the adjudicating authority. This examination was absolutely necessary in terms of the provisions of section 9D of the Central Excise Act. In the absence of examination of such persons before the adjudicating authority and in the absence of admission of such statements in evidence, such statements would not be relevant. ii) The demand of Rs. 1,76,650/- based on loose papers recovered from the factory premises of the appellant, cannot be sustained and deserves to be set aside, as alleged authors of loose papers were not examined. iii) Mere shortages detected at the time of visit of the officers cannot ipso facto lead to the allegations and findings of clandestine removal. iv) Demand with interest and penalty set aside. Appeal allowed. ISSUES PRESENTED and CONSIDEREDThe core legal issues considered in this judgment are:1. Whether the statements recorded under section 14 of the Central Excise Act can be relied upon without following the procedure under section 9D of the Central Excise Act.2. Whether the demand based on the shortage of finished goods and raw materials found during the investigation is sustainable in the absence of corroborative evidence.3. Whether the demand based on loose papers recovered from the factory premises is sustainable without examining the author of those papers.4. Whether the extended period of limitation under section 11A(4) of the Central Excise Act was rightly invoked.5. Whether the penalty imposed on the Director under rule 26 of the Central Excise Rules is justified.ISSUE-WISE DETAILED ANALYSIS1. Reliance on Statements under Section 14 without Section 9D Compliance- Relevant Legal Framework and Precedents: Section 9D of the Central Excise Act mandates that statements made under section 14 can only be considered relevant if the person making the statement is examined as a witness before the adjudicating authority, and the authority forms an opinion to admit the statement in evidence.- Court's Interpretation and Reasoning: The Tribunal emphasized that section 9D is mandatory. The statements recorded during the investigation cannot be relied upon unless the procedure under section 9D is followed, as established in precedents such as Ambika International and Jindal Drugs.- Key Evidence and Findings: The statements of Harsh Agrawal and other employees were not examined before the adjudicating authority, nor were they admitted in evidence following section 9D.- Application of Law to Facts: The Tribunal found that the department did not comply with section 9D, rendering the statements inadmissible.- Conclusions: The demand based on these statements was set aside.2. Demand Based on Shortage of Goods- Relevant Legal Framework and Precedents: The law requires corroborative evidence for demands based on stock shortages, as established in Anand Founders & Engineers.- Court's Interpretation and Reasoning: The Tribunal noted the absence of corroborative evidence to support the alleged clandestine removal based on stock shortages.- Key Evidence and Findings: The department failed to provide additional evidence beyond the detected shortages.- Application of Law to Facts: The Tribunal concluded that mere shortages do not prove clandestine removal without corroborative evidence.- Conclusions: The demand based on shortages was not sustainable.3. Demand Based on Loose Papers- Relevant Legal Framework and Precedents: For documents like loose papers to be considered evidence, the author must be examined, as held in Vishnu & Co. Pvt. Ltd.- Court's Interpretation and Reasoning: The Tribunal found that the loose papers' authors were not examined, violating the principles for admitting such documents as evidence.- Key Evidence and Findings: The department relied on loose papers without author examination.- Application of Law to Facts: The Tribunal held that the demand based on these papers was unsustainable.- Conclusions: The demand based on loose papers was set aside.4. Invocation of Extended Period of Limitation- Relevant Legal Framework and Precedents: Section 11A(4) allows for an extended period if there is evidence of suppression or fraud.- Court's Interpretation and Reasoning: The Tribunal found no sufficient evidence of suppression or fraud to justify the extended period.- Conclusions: The invocation of the extended period was unjustified.5. Penalty on the Director- Relevant Legal Framework and Precedents: Rule 26 of the Central Excise Rules provides for penalties on individuals involved in duty evasion.- Court's Interpretation and Reasoning: Since the main demand was set aside, the basis for the penalty on the Director was invalid.- Conclusions: The penalty imposed on the Director was set aside.SIGNIFICANT HOLDINGS- The Tribunal emphasized the mandatory nature of section 9D of the Central Excise Act, stating: 'The provisions of section 9D of the Central Excise Act have been held to be mandatory and failure to comply with the procedure would mean that no reliance can be placed on the statements recorded either under section 14D of the Central Excise Act or under section 108 of the Customs Act.'- The Tribunal reiterated that demands based solely on stock shortages require corroborative evidence: 'Mere shortages detected at the time of visit of the officers cannot ipso facto lead to the allegations and findings of clandestine removal.'- The Tribunal set aside the demands and penalties, concluding that the department failed to meet the evidentiary requirements necessary to sustain the allegations.