2025 (10) TMI 176 - AT - Central Excise

Appeal allows quash of duty demands based on untested pen drive; electricity-based estimates and Rule 26 CER penalties vacated

M/s. Sri Poovathal Polymers, Flint Paper and Plastic Industry, Sri Durga Plastics, M. Bommanasamy, B. Poovathal, B. Karthik, S.R. Polymers, Sri Soundarajan Polymers, M.B.S. Polymers, MMJ Polymers, Mookambika Polymers, V. Rengaraj, Sri Bommiyan PolymersR. Karthick, Sri Vinayaga Polymers, R. Pommanasamy, V. Sivakumar, (K. Kannapan, M. Kalaikumar, S. Lingamuthu, B. Vinodkumar, M. Eswari, Thangamani, P. Muthusamy, A. Senthilkumar, Karthick Polymers, Asthisangaraa Polymers, Sridhar P. Partner Sri Durgaa Plastics, Saravanakumar K. Partner Sri Durgaa Plastics and G. Amsavalli Versus Commissioner of GST and Central Excise, Madurai

CESTAT allowed the appeal and set aside the impugned OIO. Demands based on an untested electronic pen drive (March 2015) were quashed. Differential duty ... Clandestine removal - data retrieved from a pen drive seized from the residential premises - consumption of electricity has been considered to demand for the period April 2015 till June 2017 - Few statements recorded from the buyers of SPP - power consumption can be the basis for arriving at the manufacture - clubbing of value of clearances - mutuality of interest - Penalties imposed against the co-noticees under Rule 26 of CER. HELD THAT:- There are no hesitation in holding that the electronic evidence namely pen drive has not been tested as an evidence either under the provisions of Indian Evidence Act or has complied with the provisions of Section 36B of CEA, to be considered as a valid evidence and hence, any demand based on such evidence cannot be sustained and accordingly, the demand of duty for March 2015 set aside, which was based on this piece of evidence. On the issue of the demand of differential duty on the clandestine clearances alleged and confirmed based on the consumption of electricity for the period from April 2015 to June 2017, the same has been challenged by the appellants on various factual metrics, as well as, settled legal position. It remains undisputed that the basis for the estimate of excess production for the disputed period (April 2015 – June 2017) was based on the electricity consumption of SPP during 2018 - 2019, a period posterior to the disputed period - this important aspect has not been properly analyzed in the impugned order along with their other submissions with respect to substantial consumption of electricity during preheats between batches. It is the case of the appellants, SPP would be running single shifts during the disputed period, which required switching off and switching on frequently, whereas, they started continuous production during 2018-19 as only virgin materials are used which is probable due to banning of certain categories of plastics. Thus, any demand of differential duty, merely based on power consumption cannot stand the scrutiny of law and is liable to be set aside. It is natural that making polybags from reprocessed materials results in more electricity consumption - Further, the allegation of clandestine manufacture and clearance has to be established through a chain of events constituting manufacturing process and tangible evidence of clandestine manufacture and clearance and not merely based on inferences, estimates or assumptions. It is found that in cases where clandestine manufacture and clearance thereof are alleged, the investigation is required to prove the same to a reasonable extent and cannot be an estimation however mathematical it may be. Further, though not exhaustive but illustrative, certain basic standard of proof for excess raw materials, unaccounted finished products, sales which are not brought to the books, realisation of sale proceeds, proof of transportation of goods, etc., should form the basis. If the department is able to substantially prove most of the above standard of proof, then power consumption can aid them to conclude clandestine production and clearance - the revenue has not discharged their onus to establish any excess production by the appellant nor clandestine removal thereof, and accordingly the demand of differential duty for the period from April 2015 to June 2017 as confirmed in the impugned Order-in-Original set aside. Clubbing of value of clearances - denial of SSI Exemption between SPP and other units - HELD THAT:- The findings of the Adjudicating Authority would not evidence pervasive financial control by SPP on the DUs as during the period as necessary proof of these transactions being reflected in the books of accounts and their Income Tax returns has been submitted by the appellant. Further, as per the provisions of Income Tax, whereby, the allowance for cash payment under the relevant provisions of Income Tax Act and rules made there under, during the disputed period was Rs.20,000/- and not Rs.10.000/- as observed in the impugned order. In respect of the allegation and finding that there existed a few common resources between SPP and others, as rightly contented by the appellants, sharing of few common expertise would not be a determining factor for clubbing of units. In the case of CCE Kanpur Vs. Sharad Industries [2013 (9) TMI 213 - CESTAT NEW DELHI], it was observed that the evidence of common office premises, common staff, common maintenance of records cannot be a sufficient ground to club the clearances of the units and prime requirement for clubbing of clearance of two units is that, both the units do not have any independent existence or independent machinery and infrastructure to manufacture the goods - In the instant case, the appellants have successfully demonstrated the independent existence and also independent machinery and infrastructure to manufacture the goods. Hence, the ground of the investigation that, sharing of few common resources would not be a ground to club the value of clearances between the units. Mutuality of interest between SPP and other units - HELD THAT:- All the findings of the Commissioner in the impugned Order-InOriginal would only establish an independent and physical existence of all the disputed units, whereas, the entire allegations and findings are proceeding under the premise that all the disputed units are dummy units. A dummy unit is a unit which has no physical existence but only created on paper, at the first place. This is an inherent contradiction in these proceedings, whereas, the allegations as well as the findings are recognising the physical existence of all the units on one hand but proceed to allege and confirm the value of clearances treating all the units as dummy units, on the other hand. The demand of differential duty on account of clandestine clearances shall fail summarily and also the denial of SSI Exemption and consequential demand of duty by clubbing the value of clearances of SPP and other units shall fail the scrutiny of law because of their independent existence - all the appellants namely SPP and other disputed units are independent entities for the SSI Exemption as per the relevant notifications as it existed during the disputed period. Penalties imposed against the co-noticees under Rule 26 of CER - HELD THAT:- Notwithstanding the legal position that no penalty is imposable under Rule 26 of CER when the goods are not held liable for confiscation at the first place, it is inclined to vacate the penalties for the reason that the main appeal succeeds on merits. The impugned order is set aside - appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether electronic evidence retrieved from a pen drive and relied upon without the statutory certificate under Section 36B of the Central Excise Act (pari materia to Section 65-B of the Indian Evidence Act) and without use of a notified Examiner of Electronic Evidence is admissible to sustain a demand for clandestine removals. 2. Whether estimates of clandestine manufacture and clearance based primarily on electricity consumption (comparison of disputed period consumption with a posterior period) are legally sustainable to confirm differential duty absent corroborative chain-of-evidence of manufacture and removal. 3. Whether value of clearances of multiple manufacturing units can be clubbed for denial of SSI exemption on grounds of common infrastructure, common workforce, mutuality of interest, interdependence, and alleged financial flowback, where the units assert independent physical existence and arm's-length transactions. 4. Whether penalties under Rule 26 of the Central Excise Rules are sustainable where there is no confiscation proposal or confiscation of goods in the order-in-original. ISSUE-WISE DETAILED ANALYSIS - Admissibility of electronic evidence (pen drive) Legal framework: Section 36B of the Central Excise Act prescribes admissibility conditions for computer printouts and mandates a certificate by a responsible official; Section 45A and Section 79A of the Information Technology Act / Evidence Act govern opinion of an Examiner of Electronic Evidence; Section 65-B of the Indian Evidence Act sets conditions for admissibility of electronic records and requires a certificate under sub-section (4). Precedent treatment: The Tribunal followed the binding doctrine that certificate under Section 65-B(4) (and pari materia provisions) is a condition precedent for admissibility of secondary electronic evidence; earlier decisions clarifying that originals may be proved by direct witness evidence were noted but the controlling position requires compliance or court-directed production of certificate. Interpretation and reasoning: The adjudicating authority relied on printouts from a pen drive without the requisite statutory certificate and without establishing that the retrieval agency was a notified Examiner of Electronic Evidence. Objections to mode of proof were raised before the authority and were not remedied; the Tribunal held that reliance on such electronic printouts without statutory compliance and without cogent reasons is legally impermissible. Ratio vs. Obiter: Ratio - Certificate under Section 36B/Section 65-B(4) is mandatory for admissibility of electronic secondary evidence in adjudicatory proceedings; printouts from seized storage devices cannot be relied upon in the absence of statutory certificate or production of original electronic device pursuant to statutory procedure. Obiter - observations on remedial steps the adjudicating authority could have taken. Conclusions: Demand of duty founded on the pen drive data for March 2015 is set aside because electronic evidence was not tested or admitted in accordance with statutory prescriptions and controlling judicial precedent. ISSUE-WISE DETAILED ANALYSIS - Use of electricity consumption to quantify clandestine manufacture (April 2015 - June 2017) Legal framework: Excise liability is on manufacture and removal; assessments based on estimation must conform to legal standards and be supported by tangible evidence; Rule 173E and related jurisprudence limit reliance on electricity norms absent notified standards/experiments. Precedent treatment: Established Tribunal and higher-court precedents were cited that electricity consumption alone cannot be the sole basis for inferring excess production or clandestine removals and that clandestine manufacture requires corroborative, tangible chain-of-evidence (raw material receipts, unaccounted finished goods, transport records, realization of sale proceeds, etc.). Interpretation and reasoning: The Department computed excess production by comparing electricity consumption in the disputed period with consumption in 2018-19 (a posterior period) without accounting for material changes in the manufacturing process (use of reprocessed vs. virgin material), shift patterns, pre-heating requirements, or other operational causes for variance. The Tribunal found the adjudicating authority did not analyze appellant submissions or conduct experiments/independent analysis and improperly relied on mathematical estimation alone. Ratio vs. Obiter: Ratio - Estimates of clandestine manufacture based solely on electricity consumption, without corroborative evidence and without adopting validated norms, are unsustainable. Obiter - recommended evidentiary indicia that should form chain-of-proof in clandestine manufacture allegations. Conclusions: Differential duty demands for April 2015-June 2017 based solely on electricity consumption comparisons are set aside for lack of legally sufficient evidence of clandestine manufacture and removal. ISSUE-WISE DETAILED ANALYSIS - Clubbing of clearances and denial of SSI exemption Legal framework: Denial of SSI exemption by clubbing requires proof of a single commercial/operational entity or dummy units; indicators include pervasive financial and managerial control, mutuality of interest, common infrastructure and workforce, inter-unit transactions at non-arm's-length and flowback of funds; each case must be decided on its facts. Precedent treatment: The Tribunal applied authorities holding that mere common resources, familial relationships, inter-unit transactions at market prices, or sharing of expertise do not, by themselves, justify clubbing; mutuality requires reciprocal benefit; existence of separate registrations and independent physical infrastructure are significant factors against clubbing. Interpretation and reasoning: The appellants produced evidence of separate land/buildings, lease deeds, distinct machinery, separate electricity connections, independent statutory registrations (Factories Act, Pollution Control Board, VAT/CST/Sales Tax, PAN, SSI certificates), separate bank accounts, and separate labour and statutory filings; inter-unit sales were at market value; loans and repayments were via banking channels with interest. The adjudicating authority emphasized cash rent payments and alleged concealment but did not adequately displace documentary evidence of independent existence. The Tribunal held the authority's findings inconsistent: recognizing physical existence yet treating units as dummies without cogent proof of pervasive control or mutuality of interest from both ends. Ratio vs. Obiter: Ratio - Clubbing of clearances and denial of SSI exemption cannot be founded on speculative inferences where appellants establish independent existence, arm's-length transactions, and legitimate sources of funds; mutuality must be shown as reciprocal, and inter-unit financial transactions shown to be flowback or sham. Obiter - observations on how cash transactions may be scrutinized but cannot replace affirmative evidence of control. Conclusions: The Tribunal concluded the disputed units were independent entities entitled to SSI exemption during the disputed period; the impugned clubbing and denial of exemption were set aside and the corresponding demand disallowed. ISSUE-WISE DETAILED ANALYSIS - Penalties under Rule 26 of Central Excise Rules Legal framework: Rule 26 imposes penalty on persons liable to confiscation; customary legal position is that penalty under Rule 26 is contingent on goods being held liable for confiscation. Precedent treatment: The Tribunal acknowledged settled position that Rule 26 penalties are not sustainable absent confiscation proceedings or proposal. Interpretation and reasoning: As the principal demands and findings (clandestine removal, clubbing) were set aside on merits, and since there was no confiscation in the order-in-original, Rule 26 penalties were vacated; even on independent consideration, imposition was legally flawed where confiscation was not proposed or effected. Ratio vs. Obiter: Ratio - Penalty under Rule 26 cannot stand where goods are not held liable for confiscation or where the foundational demand fails. Obiter - none. Conclusions: Penalties imposed under Rule 26 were set aside in view of both legal principle and the success of the substantive appeals. OVERALL CONCLUSION The Tribunal set aside the impugned order in its entirety: (i) demands based on pen drive data and on electricity consumption for alleged clandestine removals were quashed for lack of admissible electronic evidence and for insufficiency of proof respectively; (ii) clubbing of clearances and denial of SSI exemption was reversed because the record established independent existence and arm's-length dealings of the units; and (iii) consequent penalties under Rule 26 were vacated.