CESTAT allows appeal finding statements under Section 108 inadmissible without Section 9D procedure

CESTAT New Delhi allowed the appeal in a fraudulent CENVAT credit case. The Tribunal held that statements recorded under Section 108 of Customs Act cannot be relied upon without following Section 9D(1) procedure for admission in evidence. The adjudicating authority failed to properly examine witnesses and follow prescribed procedures. The Tribunal found invoices and RG Register genuine, with no evidence of fraud or suppression. Extended limitation period was wrongly invoked as the department never investigated registration officers. Regular filing of ER returns supported appellant's case. Appeal allowed with no cogent evidence of fraudulent credit availment.

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The core legal questions considered by the Tribunal in this appeal include:

1. Whether the appellant fraudulently availed and utilized Cenvat credit without actual receipt of goods, thereby contravening the provisions of the Cenvat Credit Rules, 2004 and Central Excise Rules, 2002.

2. Whether the statements recorded under Section 108 of the Customs Act, 1962, relied upon by the adjudicating authority, are admissible evidence in the absence of compliance with the procedural safeguards prescribed under Section 9D of the Central Excise Act, 1944.

3. Whether the extended period for issuing the Show Cause Notice (SCN) was rightly invoked in the circumstances of the case.

4. Whether the invoices and related documents produced by the appellant establish the legitimacy of the claimed Cenvat credit.

5. Whether the absence of manufacturing activity at the appellant's registered premises justifies the presumption of fraudulent availing of credit.

6. Whether the appellant can be held liable for any alleged fraudulent registrations or non-existent manufacturers/dealers when such registrations were issued by the department without due verification.

Issue-wise Detailed Analysis

1. Fraudulent Availment and Utilization of Cenvat Credit

The relevant legal framework comprises Rules 3, 4, and 9 of the Cenvat Credit Rules, 2004, and Rules 4, 6, 8, and 11 of the Central Excise Rules, 2002, which regulate the admissibility and utilization of Cenvat credit. The department alleged that the appellant availed credit on the basis of invoices without physical receipt of goods, supported by statements recorded under Section 108 of the Customs Act, 1962.

The Court examined the evidence and found that the core reliance was on statements recorded during investigation, which were not subjected to the procedural safeguards mandated under Section 9D of the Central Excise Act. The appellant produced invoices and RG 23A registers detailing the transactions, including vehicle numbers and dates of delivery, which were not effectively challenged or falsified by the department.

The Court held that the appellant had complied with Rule 9 of the Cenvat Credit Rules by maintaining proper invoices showing duty paid, and payments were made through banking channels. The Tribunal emphasized that the law does not require the buyer to verify the supplier's payment of excise duty beyond the receipt of proper invoices and payment evidence, citing a precedent that a buyer is entitled to assume duty payment unless factually disproved.

Consequently, the Tribunal found no cogent evidence of fraudulent availing of credit by the appellant.

2. Admissibility of Statements Recorded Under Section 108 Customs Act

The Court scrutinized the procedural validity of relying on statements recorded under Section 108 of the Customs Act during investigation. It referred extensively to Section 9D of the Central Excise Act, 1944, which prescribes mandatory procedural safeguards for admitting such statements as evidence in adjudication proceedings.

Section 9D(1)(b) mandates that for a statement to be relevant, the person who made the statement must be examined as a witness before the adjudicating authority, who must then form an opinion that admission of the statement is in the interests of justice. The only exception is when the witness is unavailable under circumstances listed in Section 9D(1)(a).

The Tribunal observed that none of these procedural requirements were complied with, nor was any attempt made to summon or examine the witnesses whose statements were relied upon. The Court emphasized the mandatory nature of these provisions, noting the risk of coercion or compulsion in statements recorded during investigation and the necessity of judicial scrutiny before admission.

The Tribunal held that reliance on such statements without compliance with Section 9D renders the evidence inadmissible and the consequent orders based on such evidence unsustainable.

3. Invocation of Extended Period for Issuing Show Cause Notice

The extended period under the Central Excise Act allows for issuance of SCN beyond the normal limitation period in cases involving suppression or fraud. The department invoked this extended period based on the alleged fraudulent availment of credit.

The Tribunal found that since the department failed to establish suppression or fraud with admissible evidence, and the appellant's records were regular and filed, the invocation of the extended period was unjustified. The Court noted that the appellant had filed ER returns regularly and there was no evidence of concealment or suppression warranting extended limitation.

4. Legitimacy of Invoices and Related Documents

The appellant produced eight invoices from a registered second stage dealer, along with RG 23A Part I and II entries, detailing the quantity, value, vehicle numbers, and dates of delivery of MS Scrap, the main input for manufacturing MS Ingots.

The Tribunal found no evidence on record to falsify these documents. The invoices complied with the statutory requirements, specifically mentioning the duty paid, thus entitling the appellant to claim Cenvat credit. The Court relied on authoritative precedent affirming that proper invoices and payment through banking channels suffice to establish entitlement to credit.

5. Absence of Manufacturing Activity at Registered Premises

The department alleged that the factory premises of the appellant were non-functional and no records were found, suggesting fraudulent activity. However, the Tribunal noted that there was no evidence that the department had investigated or questioned the officers who issued the registration to the appellant. The mere absence of activity at the registered premises was insufficient to conclude fraud or fake invoices.

The appellant's regular filing of ER returns further negated the allegation of suppression or fraudulent invoicing. The Tribunal held that the lack of manufacturing activity at the premises did not justify the adverse findings against the appellant.

6. Liability of Appellant for Fraudulent Registrations Issued by Department

The Tribunal observed that the department had registered certain manufacturers and dealers without proper verification, and had not cancelled registrations even when the premises were found non-functional. The Court reasoned that the appellant, as a buyer, had no duty or competence to investigate the authenticity of the suppliers' registrations or their compliance with excise laws.

It was held that the appellant could not be faulted for relying on the registrations issued by the department and the invoices received from such registered dealers. The burden of verifying the genuineness of registrations lies with the department, not the buyer.

Significant Holdings

"The use of the word 'shall' in Section 9D (1), makes it clear that, the provisions contemplated in the sub-section are mandatory."

"It is not open to any adjudicating authority to straightway rely on the statement recorded during investigation/inquiry before the Gazetted Central Excise Officer, unless and until he can legitimately invoke clause (a) of Section 9D(1)."

"Once a buyer of inputs receives invoices of excisable items, unless factually it is established to the contrary, it will be presumed that when payments have been made in respect of those inputs on the basis of invoices, the buyer is entitled to assume that the excise duty has been/will be paid by the supplier on the excisable inputs."

"The appellant cannot be expected to investigate if the departmental officers had issued the registrations correctly or not and take business decisions accordingly."

"The extended period has wrongly been invoked while issuing the show cause notice."

"The allegations of suppressing the facts or issuing fraudulent invoices are not sustainable."

"The appellant had complied with the provisions of Rule 9 of the Cenvat Credit Rules and was entitled to claim credit on the basis of proper invoices and payment evidence."

"Non-compliance with Section 9D and Section 33 of the Central Excise Act nullifies the order confirmed in demand."

Ultimately, the Tribunal set aside the impugned order and allowed the appeal, holding that the appellant was entitled to the Cenvat credit claimed and that the departmental action was unsustainable on the facts and law.

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