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 Credit passing and wrongful availment by iron and steel manufacturers. The tribunal held that statements recorded under Section 14 of Central Excise Act cannot be relied upon without following Section 9D requirements, which are mandatory. The appellant's request to cross-examine a witness was declined, violating statutory admissibility requirements. The tribunal found no evidence of mens rea or deliberate defiance of law by the appellant. Additionally, since the main noticee had settled the dispute under Sabka Vishwas Legacy Dispute Resolution Scheme 2019 and received discharge certificate, no penalty could be imposed on co-noticees including the appellant per clarificatory circular. The tribunal also ruled the penalty was time-barred as no evidence showed collusion with fraudulent parties for duty evasion. The impugned order was set aside and appeal allowed.

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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.

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