2025 (11) TMI 432 - AT - Central Excise

Recorded statements admissible only if corroborated and cross-examination allowed; denial vitiates reliance; extended limitation not invokable under ER-1

CESTAT (Allahabad) held that the recorded statements are admissible evidence but must be corroborated and the noticee must be permitted cross-examination; ... Recovery of CENVAT Credit wrongly availed on inputs and utilized against payment of Central Excise duty on final product of the party with interest and penalty - credit has been availed on the invoices against goods which were never received by the Respondent and manufactured and utilized in manufacture of finished goods - reliability of statements - admissible piece of evidence or not - extended period of limitation - HELD THAT:- The statements are definitely admissible piece of evidence and need to be corroborated in the adjudication proceedings by other tangible evidences. By cross examination the witness the noticee seeks to dis-credit the statement made by witness and if he makes the request for cross examination same should be allowed or disallowed by recording suitable reasons. The request made cannot be ignored. Impugned order specifically has concluded that order in original fails to extent of recording the reason for not permitting the cross examination, while has relied upon these statements against the noticee. In case these statements could not have been relied there is no other evidence elsewhere to establish that the Respondent had not received these goods in his factory premises and have taken fraudulent credit. Extended period of limitation - HELD THAT:- It is observed that the Respondent was undertaking manufacturing activities and also clearing the same on payment of duty. If these inputs were not been received by the Respondent then how they were manufacturing and clearing the goods. No investigation has been made in this regard neither non receipt was established any shortage in the sock of raw material etc. The entire case of the Revenue is based on various presumption and assumption and cannot be sustained. It is also found that the Respondent was making a declaration of the CENVAT Credit availed by them in the ER1 Returns filed by them. They were also making a declaration of the goods produced and cleared. If a simple brought correlation was to be made between the finished products and the CENVAT Credit availed, Revenue could have easily find out with regards to the availment of the CENVAT Credit against the inputs not received in their factory - It is agreed with the Commissioner (Appeals) that there was no ground for invoking extended period for making this demand. Thus Commissioner (Appeals) was also justified in holding that demand was time barred. There are no merits in the appeal filed by the Revenue - appeal dismissed. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether statements recorded during pre-adjudication investigation (under Section 14) can be relied upon in adjudication proceedings without complying with the procedure prescribed by Section 9D(1)(b) (i.e., examination of maker of statement as witness before the adjudicating authority and recorded reasons for admitting the statement) and without granting the noticee an opportunity for cross-examination. 2. Whether demand of CENVAT/Central Excise duty for alleged fraudulent availment can be sustained on the basis of uncorroborated third-party statements and seized documents, absent independent corroborative evidence (transporters' evidence, inventory shortage, mismatch in production/inputs) showing non-receipt or diversion of inputs. 3. Whether the extended limitation period for demand (on ground of suppression with intent to evade duty) is invokable where inputs are reflected in statutory records, returns filed, and there is no credible evidence of non-receipt, non-accountal or intent to evade. 4. Whether penalties (including personal penalties under Rule 26 and penalty under Section 11AC) can be sustained where the primary duty demand is held unsustainable for lack of evidence or procedural infirmity. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Admissibility of statements recorded during investigation and right to cross-examination Legal framework: Section 9D(1) (relevancy of statements made and signed before a gazetted Central Excise Officer) provides two routes for admissibility: (a) circumstances rendering maker unavailable (death, cannot be found, kept away by adverse party, unreasonable delay/expense), or (b) maker is examined as witness before the adjudicating authority and the authority forms opinion that the statement should be admitted in interests of justice. Section 14 governs recording of statements during inquiry/investigation. Precedent treatment: The Tribunal relied on multiple High Court and Tribunal decisions emphasizing mandatory compliance with Section 9D(1)(b) before admitting statements recorded during investigation, and that cross-examination is the normal corollary once such statements are sought to be relied upon. Authorities cited (Punjab & Haryana HC, Bombay HC, Calcutta HC and several tribunal decisions) hold that statements recorded pre-SCN cannot be straightaway relied upon unless statutory procedure followed or clause (a) handicaps apply. Interpretation and reasoning: The Court held that the adjudicating authority erred in relying on statements recorded during investigation without (i) allowing the noticee's requested cross-examination or (ii) recording reasons for not permitting cross-examination or for admitting the statement under Section 9D(1)(b) or invoking clause (a). The rationale: statements recorded during inquiry have risk of coercion/compulsion and must be tested before the adjudicating authority; where maker is available, procedure of examining maker as witness and recording reasons is mandatory. Mere reliance on such statements in absence of compliance renders them without evidentiary value. Ratio vs. Obiter: Ratio - statements recorded during investigation are inadmissible in adjudication unless Section 9D(1)(a) or (b) complied with; requested cross-examination must be allowed or refusal reasoned. Obiter - discussion of general rationale (risk of coercion) follows established precedent but reinforces mandatory nature. Conclusion: The revenue's reliance on investigative statements without following Section 9D(1) procedure and without permitting cross-examination was legally impermissible; such statements could not sustain the demand. Issue 2: Sufficiency of evidence to establish non-receipt/diversion of inputs and fraudulent availment of CENVAT credit Legal framework: Rule 3/14 of the CENVAT Credit Rules and Section 11A/11AA of the Central Excise Act govern denial/recovery of CENVAT credit and interest; establishment of fraudulent availment requires evidence showing inputs were not received/used and intent to evade duty. Precedent treatment: Tribunal relied on decisions holding that uncorroborated third-party statements, without independent evidence (transporter records, inventory shortages, mismatch between inputs procured and production, non-accountal) cannot prove non-receipt; duty-paid character of invoices and accounting/returns filed shifts heavy burden onto revenue to show the inputs were not those covered by invoices. Interpretation and reasoning: The Court examined material: statutory records showed inputs accounted and finished goods produced/cleared on payment of duty; no transporter inquiries, no evidence of shortage, no independent corroboration that goods did not reach factory. The adjudicating authority's assumption of non-receipt rested mainly on third-party statements and a seized document that was not relied upon in the SCN and not investigated further. Given the absence of tangible corroboration, the Tribunal found the demand unsustainable on merits. Ratio vs. Obiter: Ratio - demand for fraudulent CENVAT credit cannot be sustained solely on uncorroborated statements and assumptions; revenue must produce independent corroborative evidence to establish non-receipt/diversion. Obiter - references to examples where correlation between inputs and finished goods could have been used by revenue to investigate further. Conclusion: The department failed to discharge burden of proving non-receipt/diversion by preponderance of probability with corroborative evidence; therefore the demand on merits was not sustainable. Issue 3: Invocation of extended limitation period on ground of suppression with intent to evade duty Legal framework: Extended period for issuance of demand is available where there is suppression of facts with intent to evade duty; requires establishment of concealment or intent. Precedent treatment: Decisions cited indicate that extended period cannot be invoked where inputs are duly recorded, returns filed and no credible evidence of suppression or intention to evade is shown. Interpretation and reasoning: Tribunal found that inputs were entered in CENVAT accounts, returns were filed, finished goods cleared on payment of duty, and no credible evidence of concealment or non-accountal was produced. Absence of corroborative material (inventory checks, transporter verification, admission by officers) undermined any inference of suppression with intent. Thus extended limitation period could not be invoked; SCN issued in 2017 for credits taken during 2012-15 was time barred. Ratio vs. Obiter: Ratio - extended period not invokable absent credible evidence of suppression/intent; accounting and returns tilt balance against extended period. Obiter - suggestions that simple correlation checks could have been used by revenue to investigate. Conclusion: Extended period was not available; the demand was time barred and thus unsustainable on limitation grounds as well. Issue 4: Consequences for penalties and personal penalties where duty demand is unsustainable/procedurally vitiated Legal framework: Penalties under Section 11AC and personal penalties under Rule 26 attach to proven contraventions; sustenance of penalty depends on legality of primary demand and proof of mens rea/knowledge where personal penalty is sought. Precedent treatment: Authorities establish that if primary demand is unsustainable, consequential penalties cannot stand; personal penalty under Rule 26 requires material showing the person had awareness or involvement in irregular credit taking. Interpretation and reasoning: Because the demand was set aside on procedural (inadmissibility of statements) and evidentiary grounds (lack of corroboration/non-receipt not established) and extended period unavailable, penalties confirmed below lacked foundation. Additionally, no evidence showed traders/directors had requisite knowledge to attract Rule 26; thus personal penalties were not warranted. Ratio vs. Obiter: Ratio - penalties (including personal) are unsustainable when the underlying demand fails for want of evidence or where procedural infirmities vitiate proceedings. Obiter - reference to standards for attracting Rule 26 was explanatory of evidence required. Conclusion: Penalties and personal penalties imposed in consequence of the unsustainable demand could not be sustained and were rightly set aside.