2025 (5) TMI 639 - AT - Central Excise

Manufacturing company wins appeal as third party evidence ruled inadmissible without corroboration under Section 9D

M/s SHRI PARASNATH ALLOYS PVT LTD Versus ADDITIONAL DIRECTOR GENERAL (ADJUDICATION), DGGSTI-NEW DELHI

CESTAT New Delhi ruled in favor of the appellant in a clandestine removal case involving manufacturing company. The tribunal held that third party ... Clandestine removal - print outs taken from the hard disks found in the residential premises of director of M/s Trikoot Iron & Steel Casting Ltd. - admissible evidence or not - statements recorded during the course of investigations which were subsequently retracted by the appellants are admissible in terms of section 9D of the Central Excise Act, 1944 or not. Whether the third party evidence is admissible or not? - HELD THAT:- The said issue has been examined by the Hon’ble Apex Court in the case of L.K Adwani [1997 (4) TMI 524 - DELHI HIGH COURT], wherein the Hon’ble Apex Court held documents recovered from third party to allege appellants clandestine removal should be corroborated by some positive evidence recovered from the appellant which Revenue has failed. In that circumstances, it is held that third party evidence is not admissible evidence in the absence of any corroboration. Statements recorded during the course of investigations which were subsequently retracted by the appellants are admissible in terms of section 9D of the Central Excise Act, 1944 or not - HELD THAT:- The said statements are required to be tested in terms of Section 9D of the Central Excise Act and i.e, the statement recorded during the course of investigation is to be examined in chief and thereafter the adjudicating authority has to take a decision that the said statement record during the course of investigation is admissible or not which revenue failed to do so. In that circumstances, the statements recorded during the course of investigation which later on retracted by the appellants are not admissible to allege clandestine removal by the appellants. Conclusion - The charge of clandestine removal which is a serious one has not been established by the Revenue with corroborative evidences, moreover, on the basis of the electronic evidence the case has been made out against main party M/s Trikoot has already been decided in favour of the appellant dropping the charge of clandestine manufacturing removal. Therefore, the charge of clandestine removal against the appellant are not sustainable. Consequently, the demand of duty and imposition of penalties on the appellants are not sustainable. Appeal allowed. 1. ISSUES PRESENTED and CONSIDEREDThe Tribunal considered the following core legal questions arising from the investigation and adjudication relating to alleged clandestine removal of goods:Whether the documents recovered from the premises of a third party, namely M/s Trikoot Iron & Steel Casting Ltd., can be relied upon as admissible evidence to demand duty from the appellants who were suppliers to M/s Trikoot.Whether statements recorded during the course of investigation, which were subsequently retracted by the appellants, are admissible and can be used to establish clandestine removal under Section 9D of the Central Excise Act, 1944.The applicability and interpretation of the legal principles regarding third party evidence and the evidentiary value of electronic and physical documents recovered during searches.The sufficiency of the evidence to establish clandestine removal and impose demand of duty, interest, and penalties on the appellants.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Admissibility and Reliance on Third Party Documents Recovered from M/s TrikootLegal Framework and Precedents: The Tribunal examined Section 36B(4) of the Central Excise Act, which sets conditions for admissibility of documents recovered during searches. The Tribunal also referred to several judicial precedents, including the decision of the Hon'ble Apex Court in L.K. Adwani vs. Central Bureau of Investigation, which lays down the principle that circumstantial evidence must form a complete chain, excluding every hypothesis except guilt. Additionally, the Tribunal considered the distinction between direct and third party evidence as discussed in RS Company vs. Commissioner and other cases.Court's Interpretation and Reasoning: The Tribunal noted that in the case of M/s Trikoot, the Tribunal had earlier held that the electronic documents recovered were inadmissible due to non-compliance with Section 36B(4). The appellants' demand was based on printouts from these electronic documents recovered from M/s Trikoot's premises. Since no incriminating documents were found at the appellants' premises, the question arose whether third party evidence alone could sustain the demand.The Tribunal distinguished the facts of RS Company, where corroborative evidence was found at multiple premises (supplier, transporter, buyer) and thus third party evidence was admissible. In contrast, in the present case, no corroborative evidence was recovered from the appellants' premises, and the Revenue relied solely on documents recovered from M/s Trikoot's premises.The Tribunal emphasized the Apex Court's ruling in L.K. Adwani that circumstantial evidence must be complete and exclude any reasonable hypothesis of innocence. The documents from M/s Trikoot, without corroboration from the appellants' premises, failed this test.Key Evidence and Findings: The investigation recovered physical and electronic documents from M/s Trikoot. However, electronic documents were held inadmissible. Physical documents were relied upon by the Revenue, but these were linked to statements by appellants which were later retracted.Application of Law to Facts: The Tribunal concluded that third party documents cannot be the sole basis for demand of duty against appellants without corroborative evidence from appellants' premises or direct evidence linking appellants to clandestine removal.Treatment of Competing Arguments: The Revenue argued that the relationship between M/s Trikoot and appellants as buyer and seller made the documents direct evidence rather than third party evidence. The Tribunal rejected this, holding that mere contractual relationship does not convert third party documents into direct evidence without corroboration.Conclusion: The Tribunal held that third party evidence in the absence of corroboration is inadmissible and cannot sustain the demand of duty.Issue 2: Admissibility of Statements Recorded During Investigation and Subsequently RetractedLegal Framework and Precedents: Section 9D of the Central Excise Act governs the admissibility of statements recorded during investigation. The Tribunal referred to various decisions including P. Alavikutty vs. Director, Enforcement Directorate, Naresh J. Sukhawani vs. Union of India, and others, which emphasize the need to test such statements in chief and the adjudicating authority's discretion to admit or reject them.Court's Interpretation and Reasoning: The Tribunal observed that statements recorded during investigation were retracted by the appellants. The adjudicating authority failed to conduct the mandatory examination in chief to determine the admissibility of these statements under Section 9D.Key Evidence and Findings: The Revenue relied on confessional statements to establish clandestine removal. However, these statements were subsequently retracted and no further evidence corroborated them.Application of Law to Facts: Since the procedural safeguards under Section 9D were not complied with, the statements could not be treated as admissible evidence against the appellants.Treatment of Competing Arguments: The Revenue contended that retraction of statements should not absolve appellants, citing precedents supporting the admissibility of such statements despite retraction. The Tribunal held that without proper examination in chief and corroboration, such statements cannot be relied upon.Conclusion: Statements recorded during investigation and later retracted are not admissible to establish clandestine removal in the absence of compliance with Section 9D.Issue 3: Sufficiency of Evidence to Establish Clandestine Removal and Demand DutyLegal Framework and Precedents: The Tribunal applied the principles of burden of proof and the requirement of a complete chain of evidence to establish clandestine removal. It referred to the Apex Court's ruling in L.K. Adwani emphasizing the necessity of excluding every reasonable hypothesis except guilt.Court's Interpretation and Reasoning: The Tribunal found that the Revenue failed to produce admissible electronic evidence or corroborative physical evidence from the appellants' premises. The confessional statements were retracted and inadmissible. The evidence recovered from M/s Trikoot was held inadmissible as third party evidence without corroboration.Key Evidence and Findings: The investigation revealed shortage and excess of goods at M/s Trikoot, but no such discrepancies were found at appellants' premises. No incriminating documents were recovered from appellants. The appellants admitted supply of goods but denied clandestine removal.Application of Law to Facts: The Tribunal applied the legal standard that demands must be based on reliable and admissible evidence forming a complete chain. The absence of such evidence led to the conclusion that clandestine removal was not established.Treatment of Competing Arguments: The Revenue argued that physical documents and confessional statements sufficed to establish clandestine removal. The Tribunal rejected this due to procedural lapses and lack of corroboration.Conclusion: The charge of clandestine removal was not established; therefore, the demand of duty, interest, and penalties on appellants were unsustainable.3. SIGNIFICANT HOLDINGSThe Tribunal held:'Documents recovered from third party to allege appellants clandestine removal should be corroborated by some positive evidence recovered from the appellant which Revenue has failed. In that circumstances, we hold that third party evidence is not admissible evidence in the absence of any corroboration.''The statements recorded during the course of investigation which later on retracted by the appellants are not admissible to allege clandestine removal by the appellants.''In view of the above discussion, we hold that the charge of clandestine removal which is a serious one has not been established by the Revenue with corroborative evidences, moreover, on the basis of the electronic evidence the case has been made out against main party M/s Trikoot has already been decided in favour of the appellant dropping the charge of clandestine manufacturing removal. Therefore, we hold that the charge of clandestine removal against the appellant are not sustainable.'The Tribunal established the core principles that:Third party evidence recovered during searches cannot be the sole basis for demand without corroboration from the accused's premises or direct evidence.Statements recorded during investigation must be examined in chief and admitted as per Section 9D to be relied upon; mere retracted statements are inadmissible.Demand of duty and penalties require a complete and unbroken chain of admissible evidence excluding reasonable hypotheses of innocence.Accordingly, the Tribunal set aside the impugned order, allowed all appeals, and quashed the demand of duty and penalties imposed on the appellants.