2025 (7) TMI 409 - AT - Central Excise

CESTAT sets aside excise duty demand on molasses under Rule 4(2) as revenue failed to prove procurement from khandsari manufacturers

M/s Welcome Distilleries Pvt. Ltd. Versus Commissioner, Audit, Central Goods & Service Tax and Central Excise, Indore

CESTAT NEW DELHI set aside demand for excise duty under Rule 4(2) of Central Excise Rules, 2002 on molasses procurement. The SCN alleged appellant liable ... Demand of duty under Excise Rule 4 (2) on the molasses procured by the appellant - appellant had not procured any molasses from khandsari sugar factories but only procured it from sugar mills - burden of proof - Rule 4 of the Central Excise Rules, 2002 - HELD THAT:- The SCN is rather strangely worded. While it demands duty invoking Excise Rule 4(2) which applies only to molasses procured from Khandsari sugar manufacturers, there is not even a whisper in the entire SCN that the appellant had procured molasses from khandsari sugar manufacturers, let alone any evidence in support. Even the statements of the appellant’s officials recorded by the central excise officers and reflected in the SCN nowhere even indicate that any molasses was procured form Khandsari sugar manufacturers. Thus, the SCN does not even assert that the elements which make duty on molasses payable by the appellant existed. Had the Principal Commissioner who issued the SCN cared to read Excise Rule 4(2) or cared to look at the invoices under which the molasses was procured by the appellant, he would not have issued the SCN. In this case, the allegation in the SCN was that the appellant was liable to pay duty under Excise Rule 4(2). If neither side produced any evidence to establish this liability, evidently the SCN issued by the Revenue would fail and the proposals therein must be dropped. Therefore, the burden of proof was on the Revenue and not on the appellant - Even on the fact “that the appellant had procured molasses from khandsari sugar manufacturers”, if Revenue wanted the adjudicating authority, this Tribunal or any superior court to believe this to be fact, it must prove it. The SCN not only does not prove but does not even assert that the appellant had procured molasses from Khandsari sugar manufacturers. While passing the impugned order, the Commissioner also did not record any finding that the appellant had procured molasses from khandsari sugar manufacturers. However, since the appellant could not prove otherwise, he confirmed the demand of duty. He further proceeded to impose an equal amount as penalty. What the Commissioner did is the equivalent of convicting somebody of theft because he could not prove that he had not stolen without the court even finding if the person had stolen and if so, what had he stolen and from who and when. The SCN and impugned order have been issued with no application of mind and with no regard for the law or the facts and serve no purpose other than harassing the appellant. The impugned order is set aside - appeal allowed. The core legal questions considered in this appeal are:1. Whether the appellant is liable to pay excise duty under Excise Rule 4(2) on molasses procured, specifically whether the molasses was procured from khandsari sugar manufacturers, which triggers the shifted duty liability to the buyer.2. Whether the appellant is liable to pay excise duty on carbon-di-oxide byproduct, considering the exemption notification applicable to goods below a certain value threshold.3. The proper allocation of the burden of proof regarding the appellant's liability under Excise Rule 4(2), particularly whether the Revenue or the appellant must prove the source of molasses procurement.Issue 1: Liability to pay excise duty under Excise Rule 4(2) on molasses procured from khandsari sugar manufacturersThe relevant legal framework is Excise Rule 4(2) of the Central Excise Rules, 2002, which states that where molasses is produced in a khandsari sugar factory, the person procuring such molasses shall pay the excise duty as if he had produced it himself. This shifts the duty liability from the producer (khandsari manufacturer) to the buyer.Precedents and settled principles establish that the burden of proof lies on the party asserting a fact. Sections 102 and 103 of the Indian Evidence Act clarify that the Revenue, having issued the show cause notice (SCN) alleging liability under Rule 4(2), must prove that the appellant procured molasses from khandsari sugar manufacturers.The appellant contended that it procured molasses only from sugar mills which had already paid excise duty, supported by invoices. The Revenue's SCN and impugned order failed to assert or provide any evidence that the molasses was procured from khandsari sugar manufacturers. The statements of the appellant's officials recorded during investigation also did not indicate procurement from khandsari sources.The Tribunal observed that the SCN was 'strangely worded' and lacked any factual foundation to invoke Rule 4(2). The Commissioner's confirmation of demand was based on the appellant's failure to prove the negative-that it did not procure molasses from khandsari manufacturers-contravening the principle that the burden of proof lies on the Revenue to establish the appellant's liability.The Tribunal emphasized that the Commissioner's approach was legally flawed, equating it to convicting a person without establishing the foundational facts of the alleged offence. The absence of any assertion or evidence in the SCN meant the demand could not be sustained.Issue 2: Liability to pay excise duty on carbon-di-oxide byproductThe appellant claimed exemption from excise duty on carbon-di-oxide under Notification No. 8/2003-CE dated 8.3.2003, which exempts goods below a specified value threshold from duty.The Commissioner rejected this claim, reasoning that if the value of molasses clearances was included, the appellant's total clearances exceeded the threshold limit, thereby attracting duty on carbon-di-oxide.The Tribunal did not elaborate extensively on this issue but implicitly found the Commissioner's reasoning flawed in light of the overall setting, particularly given the invalid demand on molasses duty. Since the molasses duty demand was set aside, the basis for exceeding the threshold and thereby attracting duty on carbon-di-oxide also fell away.Issue 3: Burden of proof regarding liability under Excise Rule 4(2)The Tribunal relied on Sections 102 and 103 of the Indian Evidence Act, 1878, to clarify that the burden of proof lies on the party asserting a fact-in this case, the Revenue asserting that the appellant procured molasses from khandsari sugar manufacturers and is liable to pay duty accordingly.The SCN failed to assert or prove this fact, and the appellant cannot be compelled to disprove a fact not alleged or established. The Tribunal underscored that the Revenue must establish the appellant's liability by evidence, failing which the demand must be dropped.The Commissioner's confirmation of demand on the basis that the appellant failed to prove the negative was rejected as legally unsound.Significant holdings and core principles established:'The settled legal principle is that the one who asserts must prove and if Revenue asserted in the SCN that the appellant was liable to pay duty under Excise Rule 4(2), it was for the Revenue to prove the liability and not the other way round.''The SCN and impugned order have been issued with no application of mind and with no regard for the law or the facts and serve no purpose other than harassing the appellant.''If neither side produced any evidence to establish this liability, evidently the SCN issued by the Revenue would fail and the proposals therein must be dropped.''The Commissioner confirmed the demand holding that the appellant had failed to prove that the molasses was NOT procured from khandsari sugar manufacturers. What the Commissioner did is the equivalent of convicting somebody of theft because he could not prove that he had not stolen without the court even finding if the person had stolen.'The Tribunal set aside the impugned order and allowed the appeal, providing consequential relief to the appellant.