2025 (10) TMI 1072 - AT - Central Excise

Clandestine removal charges lacked independent evidence; penalties under Rule 26 CE Rules, 2002 against partners set aside

Kishorbhai Shambhubhai Bhayani, Thakarshibhai Bhagwanbhai Kukadiya Versus Commissioner of CGST & Central Excise-CGST & Central Excise Surat, Gujarat

CESTAT held that charges of clandestine removal against the firm lacked independent corroborative evidence and relied improperly on third-party ... Levy of penalty on partners u/r 26 of Central Excise Rules, 2002 - conscious knowledge and involvemnt of pertners in the clandestine removal and contravention or not - charges of any clandestine removal as well as demand against firm, was set aside - reliance placed upon statement of third parties - corroborative evidences or not - HELD THAT:- Tribunal in Excise Appeal No. 11822/2018 and 12083/2016 [2019 (12) TMI 281 - CESTAT AHMEDABAD] observed that 'No independent and corroborative evidence has been brought to show any excess procurement of raw material or clearance of goods to buyer which can show that the Appellant cleared goods clandestinely. Our views are also based upon judgments in case of Sakeen Alloys [2013 (7) TMI 535 - CESTAT AHMEDABAD] and T.G.L Poshak [2001 (9) TMI 683 - CEGAT, CHENNAI]. Thus we hold that the charges of any clandestine removal against the Appellant are not sustainable. For the same reason we set aside the fines and penalties imposed upon the appellants.' The impugned order passed by the learned Commissioner imposing penalties upon the appellants is not sustainable and it is liable to be set aside and the appeals are liable to be allowed. The appeals are allowed and the penalties imposed upon the appellants are set aside. ISSUES PRESENTED AND CONSIDERED 1. Whether penalty under Rule 26 of the Central Excise Rules, 2002 can be sustained against partners for alleged clandestine removal and evasion of duty where principal demand against the manufacturing unit was set aside by the Tribunal. 2. Whether the material relied upon (delivery challans and documents seized from third parties' premises or common premises) and statements of third parties and employees (some retracted) constitute sufficient and corroborative evidence to establish clandestine manufacture/removal and quantify duty liability. 3. Whether partners who are alleged to have 'actively connived' in suppression of manufacture/clearance can be held liable for penalties in absence of direct corroborative evidence (e.g., excess raw material consumption, unexplained cash seizures, unrecorded stocks, or seizure of goods). 4. Whether SSI exemption is forfeited by use of a common trade/brand name where a co-ownership/trademark usage arrangement exists between related units operating from common premises. 5. Whether confiscation under Rule 25 can/should be ordered where excisable goods are not physically available, and the appropriate recovery provisions and interest/applicability apply. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Sustainment of penalty against partners where principal demand is set aside Legal framework: Penalty liability under Rule 26 of the Central Excise Rules, 2002 attaches to persons who transport, remove, deposit, keep, conceal, sell or purchase excisable goods which they knew or had reason to believe are liable to confiscation; enforcement must be grounded on proof of the substantive contravention (duty evasion/clandestine removal). Precedent Treatment: Tribunal decisions emphasize that penalties cannot be sustained where the foundational demand for duty/clandestine removal is not established by admissible/corroborative evidence; findings based on unsupported assumptions are vulnerable (citing principles from prior Tribunal decisions extracted in the judgment). Interpretation and reasoning: The Tribunal found that the demand against the manufacturing unit was set aside because the documents on which demand relied either bore another unit's name, were seized from common premises or third parties, and there was inadequate investigation linking seized documents to the unit in question. Given this, penal liability of partners founded on the same defective evidentiary basis cannot survive. The Court reasons that penal consequence against individuals presupposes a safe conclusion of clandestine removals attributable to the unit; absent that, the causal and mens rea links are not adequately proved. Ratio vs. Obiter: Ratio - Penalty under Rule 26 cannot be sustained against partners when the essential charge of clandestine removal by the unit is not established by corroborative evidence. Obiter - Observations on partners' supervisory roles are contextual, but the decisive legal conclusion rests on insufficiency of primary proof. Conclusions: Penalties imposed on the partners were set aside because the primary demand and clandestine removal findings against the unit were invalidated by the Tribunal's earlier decision. Issue 2 - Sufficiency and admissibility of evidence (third-party documents, delivery challans, statements) Legal framework: Revenue bears the onus to prove clandestine removal and quantification of duty by adducing corroborative evidence linking seized third-party records to removals from the assessee's premises; reliance on third-party documents or uncorroborated statements is insufficient without cross-examination or tangible linkage (established Tribunal jurisprudence). Precedent Treatment: The Tribunal reiterated established authorities holding that documents seized from third parties or statements of third parties/transporters/labourers, if uncorroborated and not subjected to cross-examination, cannot conclusively establish clandestine removals or support quantification of duty; assumptions based on such material are impermissible. Interpretation and reasoning: The Court examined delivery challans and seized papers showing inconsistencies (documents bearing another unit's name, contradictory statements, retractions). It found investigation to be partial ('half cooked'), lacking inquiries at key related entities and failing to produce transporters/customers for cross-examination. Absence of corroborative physical evidence (no excess raw material, no unaccounted stocks, no cash seizure) further weakens the case. Consequently, documents and statements relied upon do not meet the threshold of proof required to sustain demands/penalties. Ratio vs. Obiter: Ratio - Demands based solely on third-party records and uncorroborated/retracted statements are not sustainable; corroboration and opportunity for testing evidence (cross-examination) are necessary. Obiter - Discussion of specific documentary inconsistencies illustrates application but does not expand legal tests beyond settled law. Conclusions: The Tribunal's prior findings that reliance on such evidence is inadequate are determinative; therefore the departmental demands and consequential penalties based on that evidence cannot be sustained. Issue 3 - Liability of partners in absence of direct corroborative evidence (retraction affidavits, language/comprehension claims) Legal framework: Individual liability requires proof that the person had knowledge or reason to believe of the excisable goods' liability to confiscation and actively participated in or connived with clandestine removals; statements of the accused must be reliable and capable of corroboration; retraction/claims of coercion or language incomprehension undermine such statements' evidentiary value. Precedent Treatment: Tribunal authority holds that retracted statements and untested witness statements cannot form the sole basis for penal findings; reliability of confessional or explanatory statements must be evaluated with supporting material. Interpretation and reasoning: The Court notes retraction affidavits and contentions that statements were pre-compiled and/or given without proper comprehension. In absence of independent corroboration (no unaccounted stocks, no cash seizures, no corroborating supplier/customer evidence), the statements cannot be used to reliably fix individual culpability. The Tribunal therefore refuses to sustain penalties predicated on such statements. Ratio vs. Obiter: Ratio - Reliance on retracted or uncorroborated statements to attribute active connivance and impose penalty on partners is impermissible. Obiter - Observations on standard indicia of clandestine activity (excess raw material, excess power usage, unexplained cash) are illustrative. Conclusions: Penalties against partners fail for want of dependable evidence of their active connivance; claims regarding statement reliability further vitiate the prosecution's basis. Issue 4 - SSI exemption and use of common trademark/brand name Legal framework: Small Scale Industry (SSI) exemption is available based on prescribed criteria; ownership/use of a brand name per se does not disentitle an assessee from SSI benefit where a co-ownership/trademark usage arrangement exists and units operate under agreed usage. Precedent Treatment: Tribunal precedents recognize that joint or co-ownership arrangements for trademarks/brands preclude automatic denial of SSI exemption merely because goods bear a common trade name, provided the arrangement demonstrates entitlement. Interpretation and reasoning: The Tribunal examined the co-ownership agreement for the brand and concluded that the units were entitled to use the trade name on a co-ownership basis. Therefore the presence of the brand 'Bhayani' on machines does not, by itself, negate SSI exemption. The Department's denial of exemption on that ground was unsustainable. Ratio vs. Obiter: Ratio - SSI exemption cannot be denied solely because a common brand name is used where co-ownership/right to use the trademark is established. Obiter - References to supporting precedent reinforce principle but are consistent with mainstream authority. Conclusions: SSI exemption stood; denial based solely on brand usage was improper and contributed to setting aside the impugned demand. Issue 5 - Confiscation and recovery where goods not physically available; interest/recovery provisions Legal framework: Confiscation under Rule 25 requires presence/identification of goods liable for confiscation; where goods are not physically available, confiscation orders are inappropriate per settled practice; monetary recovery of tax, interest and penalties proceeds under statutory recovery provisions (Section 11A/11AA/11AB as applicable). Precedent Treatment: Departmental practice and judicial pronouncements disfavor making confiscation orders where goods cannot be seized; recovery instead pursued by monetary demands and appropriation of voluntary payments. Interpretation and reasoning: The Commissioner had indicated liability for confiscation but refrained from passing confiscation orders because the goods were not available. The Tribunal did not disturb the settled position that confiscation cannot be ordered absent goods; it also noted department's entitlement to appropriate voluntary payments and to claim interest under relevant sections if substantive duty demand is established (but here the demand was set aside). Ratio vs. Obiter: Ratio - Confiscation cannot be ordered where the alleged excisable goods are not found; appropriate statutory monetary recovery mechanisms apply when duties are otherwise established. Obiter - Discussion of appropriation of voluntary payments and applicable interest is contextual. Conclusions: No confiscation was ordered due to non-availability of goods; since primary demands were set aside, related monetary recoveries/interest were not sustained in this context.