2025 (5) TMI 402 - AT - Central Excise

CESTAT remands penalty case for fresh hearings after finding procedural violations in Rule 209A proceedings

CESTAT Hyderabad remanded the case back to the Adjudicating Authority after finding procedural irregularities in penalty proceedings under Rule 209A of ... Penalty under Rule 209A of Central Excise Rules, 1944 - floating dummy companies and were availing Small Scale Industry (SSI) benefit under N/N. 175/1986- CE dt.01.03.1986 in respect of clearances made by the said 8 companies - whether in the given facts of the case and evidence on record, the 8 companies who have claimed SSI benefit were dummy units of the appellant and therefore, their clearances were required to be clubbed together for denial of the benefit under SSI scheme under N/N. 175/1986-CE dt.01.03.1986 or otherwise? - HELD THAT:- Some of the grounds taken by the learned Advocate have some merit inasmuch as the demand against the co-noticees, which was dropped, did not participate in the denovo proceedings on the assumption that they were not party to the remand proceedings but then evidence in relation to the said parties was taken into account while coming to the conclusion in respect of the present appellant as well as penalty was also imposed. It is obvious that the Adjudicating Authority, on the grounds that they did not participate despite notice of hearing, took into consideration the evidence on record and proceeded to decide the matter ex parte qua the co-noticees, which ultimately resulted in demand of duty from the appellant as well as imposition of penalty on appellant and other co-noticees including the Managing Director - there are no force in the submission of the learned Advocate that the Adjudicating Authority cannot involve the remaining 8 companies in the denovo adjudication proceedings and also in their submission that without reliance placed on their evidence the case cannot be made out against the appellant. It is pertinent to note that if it is taken as if these companies were not covered by the remand proceedings, the order concerning dropping the charges against them would stand confirmed and therefore, those evidences cannot be again applied against the appellant in this round of adjudication. In this case, though the co-noticees have had their own reasons for not joining the adjudication proceedings, despite having received the notice for personal hearing, the Adjudicating Authority was left with no other choice but to proceed based on the evidence on record - the matter needs to be remanded back to the Adjudicating Authority, who shall now give fresh notice of hearing to appellant as well as all the co-noticees as covered in the original SCNs and original Adjudication Order. Both the appeals are disposed of by way of remand. The core legal questions considered in this judgment revolve around the legitimacy of the Small Scale Industry (SSI) benefit claimed by the appellant and eight other companies under Notification No. 175/1986-CE dated 01.03.1986. Specifically, the issues are whether these eight companies were dummy units floated by the appellant to illegitimately avail SSI benefits, thereby necessitating the clubbing of their clearances for denial of such benefits, and whether the adjudicating authority was competent to proceed against all these companies in the remand proceedings despite the appellant's contention that the department's appeal was directed only against the appellant.The first issue concerns the interpretation and application of the SSI benefit scheme under the relevant notification and the principles governing the clubbing of clearances of related or dummy units to prevent misuse of such benefits. The second issue relates to procedural propriety and the scope of adjudication in remand proceedings, particularly whether the adjudicating authority could consider evidence and impose penalties on co-noticees who did not actively participate in the second round of adjudication.Regarding the first issue, the legal framework involves the Central Excise Rules, 1944, specifically Rule 209A, and the SSI exemption Notification No. 175/1986-CE. The principles of clubbing clearances to prevent abuse of SSI benefits are well-established, requiring a holistic assessment of the relationship between units, including financial involvement, control, and operational independence. Precedents emphasize that dummy or sham units cannot claim independent SSI benefits and that clearances must be clubbed to assess the aggregate turnover correctly.The Court examined the evidence on record, including financial assistance extended by the appellant's Managing Director to the eight companies, the nature of their operations, and prior cross-examinations from earlier adjudication rounds. The Tribunal had earlier observed that the stitching units were set up at the instance of the Managing Director, who also provided financial assistance to partners in those firms. However, it was also noted that such factors alone could not justify clubbing clearances or denying SSI benefits without a comprehensive evaluation.The adjudicating authority, upon remand, considered multiple factors beyond mere financial assistance, including operational control and the nature of activities conducted by these companies. It concluded that these eight companies were dummy firms, thereby justifying the clubbing of their clearances and denial of SSI benefits. The Court found this conclusion to be supported by a holistic appraisal of the evidence, including the failure of the co-noticees to participate in the proceedings, which led to an ex parte decision against them.On the second issue, the appellant contended that since the department's appeal was directed only against it and not against the eight co-noticees, the adjudicating authority was barred from adjudicating upon or imposing penalties on the co-noticees in the remand proceedings. The Court analyzed the appeal memorandum and the Tribunal's remand order and found that the appeal and remand encompassed the entire original adjudication order, which included all eight companies. The Tribunal's direction for fresh adjudication was comprehensive, allowing all parties to raise grounds and present evidence. Therefore, the adjudicating authority was within its jurisdiction to proceed against all co-noticees, notwithstanding their non-participation.The Court also addressed the procedural fairness aspect, noting that the co-noticees had received notices but failed to appear or submit defenses during the remand adjudication. Consequently, the authority was compelled to decide the matter on the evidence available. However, the Court emphasized the importance of allowing these co-noticees an opportunity to participate and present evidence to rebut the claim of being dummy units. It directed the adjudicating authority to issue fresh notices to all parties and consider any defense or cross-examination they wish to submit, including reliance on prior cross-examination records, given the case's age.In applying the law to the facts, the Court underscored that the determination of whether the eight companies were dummy units is a factual question requiring comprehensive evidence and fair hearing. The adjudicating authority's reliance on multiple factors to conclude dummy status was appropriate, but the absence of participation by the co-noticees warranted a fresh opportunity for them to be heard. The Court balanced the need to prevent abuse of SSI benefits with the principles of natural justice, ensuring that all parties have a fair chance to contest the allegations.Competing arguments were treated with due consideration. The appellant's reliance on the Tribunal's observation that financial assistance alone cannot justify clubbing was acknowledged, but it was clarified that the adjudicating authority considered a broader spectrum of evidence. The department's stance that the appeal and remand covered all parties was upheld, rejecting the appellant's procedural objection. The Court's approach reflects a nuanced understanding that procedural technicalities cannot override substantive justice, especially in complex multi-party adjudications.The Court concluded that the matter requires remand for fresh adjudication, allowing all parties, including the co-noticees, to participate fully. It directed the adjudicating authority to decide the matter within three months, with parties submitting their defenses within 45 days. The Court expressly refrained from expressing any opinion on the merits, focusing solely on ensuring procedural fairness and comprehensive adjudication.Significant holdings from the judgment include the following verbatim excerpt from the adjudicating authority's order, which was upheld by the Court: 'The present denovo proceedings are the outcome of department's appeal No.E/966/2006 filed in respect of OIO No.19/2005-Commr. Dt.29.08.2005. All the said units were party to said OIO. The assesses contentions are not tenable inasmuch as the Hon'ble CESTAT, vide Final Order No. 1168/2010 dt.8.9.2010, has remanded the issues for denovo adjudication by following the principles of natural justice. It is clear from the Hon'ble CESTAT Final Order that the issues are remanded for decision after following principles of natural justice with the matter being open to all parties to raise all grounds.'This establishes the core principle that remand proceedings encompass all parties involved in the original adjudication, and the adjudicating authority must ensure adherence to natural justice by allowing all affected parties to present their case. The judgment also affirms that clubbing of clearances is a fact-intensive inquiry requiring a holistic evaluation of financial and operational control to prevent misuse of SSI benefits.In final determinations, the Court held that:The adjudicating authority was competent to proceed against all eight co-noticees despite their non-participation in the remand proceedings.The evidence on record justifies the inquiry into whether the eight companies were dummy units, and the adjudicating authority's conclusion on clubbing was based on a comprehensive assessment.Procedural fairness necessitates that all co-noticees be given fresh opportunity to participate and present evidence, including cross-examination, before final adjudication.The matter is remanded for fresh adjudication within a stipulated timeframe, with clear directions for parties to submit defenses.No observations were made on the substantive merits of the case, preserving the adjudicating authority's role in fact-finding.