2025 (7) TMI 1134 - AT - Central Excise

CESTAT sets aside penalty under Rule 26(2) for Cenvat Credit fraud lacking proper evidence and witness examination

CESTAT New Delhi allowed the appellant's challenge against penalty imposed under Rule 26(2) of Central Excise Rules, 2002 for alleged fraudulent Cenvat ... Levy of penalty u/r 26 (2) of the Central Excise Rules, 2002 - fraudulent passing on of the Cenvat Credit and wrong availment of the same by the manufacturers of Iron & Steel products - statutory mandate of admissibility of the statement has not been fulfilled - extended period of limitation - HELD THAT:- Apparently, the request of the appellant to cross examine said Pradeep Kumar Agrawal was declined. It is the settled position of law that statements recorded under Section 14 of the Central Excise Act cannot be relied upon as evidence without following the rigor of Section 9D of the Act. It has been further held that the provisions of Section 9D is mandatory in nature. From the statement of the appellant dated 11.05.2016 it was found even by Commissioner (Appeals) that the appellant has deposed about being involved in supply of Bazar Scrap but to M/s Prakash Industry Ltd. only and he had not supplied Bazar Scrap to any other unit. Just because the subsequent testimony about supplying Bazar Scrap to M/s Raghubir Concast Pvt. Ltd. Raipur, was acknowledged by the appellant, He cannot be alleged to have supplied the scrap to M/s GIPL and other manufacturers in Dhanbad and Raipur on fake invoices without supply of goods, as alleged in the show cause notice - it stands clear that the statutory mandate of admissibility of the statement has not been fulfilled in the present case. Resultantly the sole reliance on the statement that too for purpose of imposing penalty on the appellant is not sustainable. Penalty otherwise is a grave word of criminal consequence. Hon’ble Supreme Court in the case of Hindustan Steels Ltd. Vs. State of Orissa [1969 (8) TMI 31 - SUPREME COURT] has held that penalty will not ordinarily be imposed unless the party obliged either acted deliberately in defiance of law and was guilty of conduct contumacious or dishonest or acted in conscious disregard of its obligation. The Hon’ble court further held that even if a minimum penalty is prescribed the authority competent to impose penalty will be justified in refusing to invoke penalty when there is a technical or venial breach of the provisions of the Act or where the breach flows from the bona fide belief that the offender is not liable to act in the manner prescribed by the statue - The essential criterion for invoking the provisions of Rule 26 is the presence of mensrea on the part of the person referred to in the provision. In the present case, no evidence has been adduced by the department to show that the Appellant was having the belief that there is any duty evasion. The positive evidence which is missing in the present proceedings. It is also an apparent and admitted fact that the main noticee M/s GIPL, the company has got settled the dispute under Sabka Vishwas (Legacy Dispute Resolution) Scheme, 2019 (SVLDRS). The law has been settled that once the demand against the company stands settled, no question arises of imposition of penalty either on its director or on its raw material suppliers - It also apparent on record that appellant also applied under SVLDRS but his request was rejected holding it premature, being prior the final decision on settlement request of main noticee., M/s GIPL. As already observed, the main notices M/s GIPL has already been issued the discharge certificate, the co noticee should not have been penalized in terms of the clarificatory Circular No. 1071/4/2019 dated 27.08.2019. Hence it is held that the order of imposition of penalty upon the appellant is not sustainable, the demand as such is no more existing. Time limitation - HELD THAT:- There is no allegation in the show cause notice nor any evidence produced by the department proving any positive act on part of the appellant which may amount to be called as collusion with the alleged fraudulent parties that too with the intention of evasion of Payment of excise duty. Resultantly, proposal of imposition of penalty upon the appellant vide the show cause notice dated 18.08.2017 is held to be barred by the period of limitation. The order under challenge is hereby set aside - the appeal is hereby allowed. ISSUES: Whether penalty under Rule 26(2) of the Central Excise Rules, 2002 can be imposed on a commission agent alleged to have abetted in wrongful availment of Cenvat Credit based solely on statements recorded during investigation without compliance with Section 9D of the Central Excise Act, 1944.Whether statements recorded under Section 14 of the Central Excise Act, 1944 are admissible evidence without following the mandatory procedure under Section 9D.Whether imposition of penalty is sustainable in absence of mens rea or knowledge of duty evasion on part of the appellant.Whether penalty can be imposed on an employee or director of a company under Rule 26(2) of the Central Excise Rules, 2002.Whether settlement of duty demand under Sabka Vishwas (Legacy Dispute Resolution) Scheme, 2019 (SVLDRS) by the main noticee precludes imposition of penalty on co-noticees including directors or suppliers.Whether invocation of extended period of limitation in issuing the show cause notice is justified in the absence of evidence of suppression or collusion by the appellant. RULINGS / HOLDINGS: The penalty under Rule 26(2) cannot be sustained where the sole basis is a statement recorded under Section 14 without compliance with Section 9D, as the 'statutory mandate of admissibility of the statement has not been fulfilled' and such statements cannot be relied upon.Statements recorded under Section 14 of the Central Excise Act are not admissible evidence unless the procedure under Section 9D is strictly followed, which requires examination of the person before the adjudicating authority and formation of an opinion that the statement should be admitted in the interest of justice.Imposition of penalty requires evidence of guilty knowledge or mens rea; in the absence of such evidence, penalty cannot be imposed. The appellant's conduct did not demonstrate deliberate defiance or conscious disregard of legal obligations.Penalty under Rule 26(2) cannot be imposed on any employee or director of a company merely by virtue of their position; such imposition is 'wrongly imposed' in the present case.Once the main noticee has settled the duty demand under SVLDRS and obtained a discharge certificate, no penalty can be imposed on its directors or raw material suppliers; the penalty against the appellant is therefore 'not sustainable' and the demand 'is no more existing.'The extended period of limitation is not invokable absent evidence of suppression or collusion by the appellant; the penalty proposal is 'held to be barred by the period of limitation.' RATIONALE: The Court applied the statutory framework of the Central Excise Act, 1944, specifically Sections 9D and 14, emphasizing the mandatory nature of Section 9D for admissibility of statements recorded during investigation. The decision follows the precedent set by the High Court of Chhattisgarh in Hi-Tech Abrasives Ltd. and other High Courts and Tribunals, which hold that failure to comply with Section 9D renders such statements inadmissible.The Court relied on the principle from the Supreme Court in Hindustan Steels Ltd. that penalty is a 'grave word of criminal consequence' and should not be imposed without proof of 'deliberate defiance,' 'conduct contumacious or dishonest,' or 'conscious disregard' of obligations, thus requiring mens rea.Regarding imposition of penalty on directors or employees, the Court followed established precedents (Z.U. Alvi, Sterlite Industries, Kamdeep Marketing) that Rule 26(2) does not extend to such persons merely by their corporate position.The Court recognized the effect of the Sabka Vishwas (Legacy Dispute Resolution) Scheme, 2019, holding that settlement and discharge of duty demand under SVLDRS extinguishes the basis for penalty against co-noticees, supported by recent tribunal decisions.On limitation, the Court found no evidence of suppression or collusion by the appellant, and since the main noticee complied with statutory ER-6 returns, the extended limitation period was not applicable, consistent with Supreme Court rulings on limitation in excise matters.