CESTAT sets aside Rs.1.47 crore excise demands in clandestine removal case due to insufficient corroborative evidence

CESTAT Kolkata set aside excise demands of Rs.1,47,93,916/- against appellants in clandestine removal case. Revenue relied primarily on pen drive data seized from third party premises showing excess sponge iron production compared to RG1 records. Tribunal found Revenue failed to produce corroborative evidence including input-output analysis, electricity consumption, vehicle movement records, or statements from material suppliers/buyers. Pen drive author remained unidentified with no recorded statement. Statutory procedures not followed for relying on digital evidence. Demands, interest and penalties set aside due to insufficient evidence. Appeals allowed.

---

---

The core legal questions considered in this case are:

1. Whether the data contained in a Pen Drive seized from a third party's premises can constitute sufficient and admissible evidence to establish clandestine manufacture and removal of goods by the appellant.

2. Whether the discrepancy between production figures in the Pen Drive data and statutory returns (RG-1) can be treated as proof of suppression of manufacture and duty evasion.

3. Whether the Revenue's reliance on statements recorded during investigation without allowing cross-examination of the witnesses complies with statutory procedural safeguards and can be relied upon as evidence.

4. Whether the Revenue has brought sufficient corroborative evidence beyond the Pen Drive data and recorded statements to establish clandestine removal, including investigation into raw material purchases, electricity consumption, transportation, and receipt of sale proceeds.

5. Whether the penalty imposed on the second appellant is sustainable in the absence of a proven role or culpability.

6. Whether interest and penalty on the demand amount paid prior to issuance of the Show Cause Notice are justified.

Issue-wise Detailed Analysis:

1. Admissibility and Sufficiency of Pen Drive Data as Evidence of Clandestine Removal

The legal framework includes Section 36B of the Central Excise Act, which governs the admissibility of computer printouts and electronic records as evidence. The conditions under Section 36B(2) require that the computer printout must be produced by a computer regularly used for business activities, the computer must have been operational properly, and a certificate from a responsible official must be produced under Section 36B(4) to authenticate the electronic evidence.

Precedents such as Ambica Organics and Principal Commissioner of CGST & Central Excise vs Shah Foils Ltd emphasize that electronic evidence such as Pen Drive data or computer printouts must satisfy these statutory conditions to be admissible. Mere recovery of a Pen Drive from a third party's premises without identifying the author or following proper authentication procedures does not satisfy these requirements.

The Court noted that in the present case, the Pen Drive was seized from another party (GIPL), and the Revenue failed to identify the author or produce any certificate as required under Section 36B. The data was not stored in the appellant's computer system, and the conditions for admissibility were not fulfilled. The Revenue's reliance on this data alone, without proper authentication or corroboration, was held insufficient to establish clandestine removal.

The Court also referenced the Shah Foils case, where the Tribunal held that charges of clandestine removal based solely on Pen Drive data without corroboration are not sustainable. The absence of investigation into the source or authenticity of the data, or statements from the person responsible for the Pen Drive, further weakened the Revenue's case.

2. Discrepancy Between Pen Drive Data and RG-1 Figures as Evidence of Suppression

The Revenue's case was based on the difference between production and dispatch figures recorded in the Pen Drive data and the statutory returns (RG-1). The Revenue assumed that the Kiln production figures in the Pen Drive represented actual production, while the RG-1 figures were understated, indicating suppression and clandestine removal.

The Court observed that this assumption was flawed. It was pointed out that production in Kilns includes quantities that may be rejected during quality checks and thus not recorded in RG-1 returns. The Revenue's failure to consider the possibility of wastage or rejection rendered their inference perverse and based on mere assumptions.

Precedents such as Continental Cement Co. and Arya Fibres Pvt. Ltd. emphasize that clandestine removal is a serious charge requiring concrete and tangible evidence, not mere inferences or assumptions. The Court held that the discrepancy in figures without corroborative evidence such as raw material consumption, electricity usage, or transportation records cannot conclusively establish suppression.

3. Reliance on Statements Recorded During Investigation Without Cross-Examination

Section 9D(1)(b) of the Central Excise Act requires that statements recorded during investigation before a gazetted officer must be admitted as evidence before the adjudicating authority and the witness must be made available for cross-examination, except in limited circumstances.

The appellants sought cross-examination of witnesses whose statements were recorded, but the Adjudicating Authority denied this on the ground that they were company employees and the documents were corroborated by statutory records.

The Court referred to the G-Tech Industries case, where the High Court held that failure to allow cross-examination renders such statements inadmissible as evidence. Without following this procedure, reliance on such statements is misguided and they lose evidentiary value.

4. Absence of Corroborative Evidence to Establish Clandestine Removal

Case law such as Continental Cement Co. and Nova Petrochemicals establish that to prove clandestine removal, the Revenue must investigate and produce corroborative evidence including:

• Purchase of raw materials in excess of statutory records
• Electricity consumption consistent with excess production
• Transportation and dispatch records
• Receipts of sale proceeds from buyers
• Statements from buyers, transporters, and other third parties
• Linkages between recovered documents and factory operations

In the present case, the Court found that the Revenue failed to investigate or produce such corroborative evidence. There was no inquiry into cash purchases, electricity consumption, transportation, or receipt of sale proceeds. The reliance on Pen Drive data and statements alone, without such corroboration, was insufficient.

5. Penalty Imposed on Second Appellant

The penalty on the second appellant was challenged on the basis that the primary allegations against the first appellant were unsustainable and that there was no specific role attributed to the second appellant in the Show Cause Notice or Order-in-Original.

The Court held that since the demand against the first appellant was set aside, the penalty on the second appellant also could not be sustained. The absence of any specific incriminating evidence or role of the second appellant justified setting aside the penalty.

6. Interest and Penalty on Amount Paid Prior to Show Cause Notice

The appellants had admitted and paid Rs.9,24,005 before issuance of the Show Cause Notice, primarily to close the issue. They contested the imposition of interest and penalty on this amount.

The Court noted that since the amount was paid before the SCN, no interest was payable. However, as the payment related to unaccounted clearances, penalty under law could be imposed. The Court accordingly held that no interest was payable but penalty at the prescribed rate was justified.

Conclusions on Issues:

• The Pen Drive data seized from a third party's premises, without identification of the author or compliance with statutory authentication requirements, is inadmissible and insufficient to establish clandestine removal.
• Discrepancies between Kiln production figures and RG-1 returns cannot be treated as proof of suppression without considering wastage and quality control factors.
• Statements recorded during investigation must be admitted as evidence before the adjudicating authority and witnesses must be available for cross-examination; failure to comply renders such statements inadmissible.
• The Revenue failed to produce corroborative evidence such as raw material purchase, electricity consumption, transportation, and receipt of sale proceeds to substantiate clandestine removal allegations.
• Penalty on the second appellant is unsustainable in the absence of proven culpability.
• No interest is payable on amounts admitted and paid before issuance of Show Cause Notice, but penalty may be imposed.

Significant Holdings:

The Court reiterated the principle that "clandestine removal is a serious charge which has to be proved with positive evidence." It held that "charges of clandestine removal on the basis of pen drive data are not sustainable" without corroborative evidence and proper adherence to statutory procedures.

The Court emphasized the statutory safeguards under Section 9D(1)(b) regarding admissibility of statements recorded during investigation, stating:

"If this procedure, which is statutorily prescribed by plenary Parliamentary legislation, is not followed, it has to be regarded that the Revenue has given up the said witnesses, so that the reliance by the CCE, on the said statements, has to be regarded as misguided, and the said statements have to be eschewed from consideration, as they would not be relevant for proving the truth of the contents thereof."

In relation to electronic evidence, the Court quoted the conditions under Section 36B and held that failure to comply with these conditions renders computer printouts inadmissible:

"We find that none of these conditions was satisfied by the Revenue in this case... Nothing contained in the printouts ... can be admitted into evidence for non-fulfilment of the statutory conditions."

The Court also underscored the necessity of corroborative evidence beyond assumptions or inferences, stating:

"The charge of clandestine manufacture and clearances cannot be established on assumptions and presumptions. Such a charge has to be based on concrete and tangible evidence."

Accordingly, the Court set aside the confirmed demands amounting to Rs.1,47,93,516/- along with interest and penalties, and quashed the penalty imposed on the second appellant. The uncontested demand of Rs.9,24,005/- was upheld with penalty but without interest.

---