2025 (12) TMI 90 - AT - Central Excise

Excise demand quashed for lack of corroboration, non-compliance with Sections 9D, 36B CEA and 65B Evidence Act

CESTAT Kolkata allowed the assessee's appeal and set aside the confirmed excise demand for alleged clandestine manufacture and clearance of wires. The ... Clandestine manufacture and removal of the goods - clearance of finished wires without payment of Excise duty, found from Computer Printouts taken from the premises of SSL and the statements recorded from their officials - the demand raised on the basis of third party's records and documents - allegation based on assumption, presumption and suspicion - cross-examination of witnesses not provided - HELD THAT:- The entire proceedings have emanated on account of verification and investigation taken up at a third party SSL. The basis for issue of the SCN is the Statements Recorded by their Dy Manager and the Managing Director and some private records seized from them along with the computer print-outs. Based on the fact that the appellant’s name has appeared as the buyer of the goods on cash basis, the present SCN has been issued. Admittedly, the finished goods of SSL is the Raw Material for the present appellant. In order to withstand the Dept’s allegations, the raw material so bought in cash is required to be converted to finished goods [without being accounted for], removed clandestine to the ultimate purchasers from whom cash should be received by the appellant. While for the alleged clandestine purchase of the raw material, the Revenue has a some form of evidence like the private records seized from SSI, in respect of manufacture of the finished goods, we do not find any evidence whatsoever about the excess electricity consumption, engagement of extra labour, excess consumption of other raw materials required for the manufacture. The Tribunals and Courts have been time and again emphasized that the input : output ratio for arriving for the quantification of finished goods is flawed. Apart from this, there is no evidence about inward / outward movement of vehicles. No statements of so called buyers of the finished goods of the appellant on cash basis have been recorded - When the basic structure of the case has been built on the Statements of the officials of SSL, it was necessary for the Revenue to follow the Section 9(D) of the CEA 1944, procedure to ascertain as to whether the statements were recorded without any coercion or pressure. It is also on record the Director of the appellant has outright denied any cash purchases. Thus it is a case of one Statement against another Statement - the recorded statements have no evidentiary value in the present case. The computer printouts have been obtained from the computers of third party, for which we observe that the procedure specified under Section 36(B) of the CEA 1944 has not been followed - The Hon’ble Supreme Court In the case of Anvar P.V. Vs. P.K. Basheer [2014 (9) TMI 1007 - SUPREME COURT], has held 'The Evidence Act does not contemplate or permit the proof of an electronic record by oral evidence if requirements under Section 65B of the Evidence Act are not complied with, as the law now stands in India.' Thus, the non-certified computer printouts taken from the third party computer cannot be used as an evidence by the Revenue. The confirmed demand is legally not sustainable and the impugned order set aside allowing the appeal of the company - appeal allowed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether the allegation of clandestine purchase of raw materials, clandestine manufacture and removal of finished goods, and consequent duty demand based primarily on third party records, statements and computer printouts, is legally sustainable in the absence of corroborative evidence from the assessee's end. 1.2 Whether statements recorded from third party officials during investigation could be relied upon as substantive evidence without complying with the mandatory procedure under Section 9D of the Central Excise Act, 1944, and without allowing cross-examination. 1.3 Whether computer printouts and electronic data seized from a third party can be treated as admissible and reliable evidence in the absence of compliance with Section 36B of the Central Excise Act, 1944 read with Section 65B of the Indian Evidence Act, 1872. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Sustainability of demand for clandestine manufacture and clearance based on third party material without corroboration Interpretation and reasoning 2.1 The foundation of the proceedings was investigation at a third party (SSL), including private records, external storage data and computer printouts seized from its premises, wherein the appellant's name appeared as a buyer of raw materials on cash basis. No incriminating material was recovered from the appellant's premises. 2.2 The alleged clandestine scheme presupposed: (i) clandestine purchase of raw material (M.S. Wire Rods) by the appellant from SSL; (ii) manufacture of finished goods out of such unaccounted raw material; and (iii) clandestine clearance of such finished goods without payment of duty. The Court examined whether there was evidence to substantiate each of these links. 2.3 Apart from third party records suggesting cash sales by SSL, the Court found no evidence regarding: excess consumption of electricity; engagement of extra labour; excess consumption of other raw materials; unusual inward/outward movement of vehicles; transporters' records; buyers' statements; or any documents showing receipt of sale proceeds for alleged clandestine clearances. 2.4 The input-output ratio was used by the department to quantify alleged clandestine production. The Court noted that Tribunals and Courts have repeatedly held that such input-output ratio is an unreliable and flawed basis for quantification when not supported by corroborative evidence. 2.5 The former Director of the appellant categorically denied purchase of raw materials from SSL; there was no entry in the appellant's books of accounts evidencing receipt of such material. The department did not bring any corroboration from the appellant's records or any independent source. 2.6 Relying on the principles reiterated by the High Court in a cited decision (Hi Tech Abrasives), the Court stressed that clandestine removal is a serious charge requiring 'clinching evidence' and cannot be sustained solely on assumptions and presumptions. Necessary aspects such as excess production, excess raw material purchase, transport details, realization of sale proceeds, buyers' receipt of goods, power consumption etc., had not been investigated or proved. Conclusions 2.7 The burden to prove clandestine manufacture and removal lies on the department; that burden was not discharged. The demand, having been raised essentially on third party documents without corroborative evidence relating to the appellant's production, clearances or finances, is unsustainable. The confirmed duty demand, interest and penalties are therefore liable to be set aside. Issue 2: Reliance on third party statements without following Section 9D of the Central Excise Act, 1944, and without cross-examination Legal framework (as discussed) 2.8 Section 9D of the Central Excise Act, 1944 governs the relevancy of statements made before a Gazetted Central Excise Officer. Sub-section (1)(a) specifies exceptional circumstances (death, inability to appear, etc.) where such statements can be treated as relevant without examination in person. Sub-section (1)(b) mandates that, in all other cases, the maker must be examined as a witness before the adjudicating authority, which must then decide, by a reasoned order, whether the statement should be admitted in the interests of justice. Sub-section (2) extends this regime to adjudication proceedings. 2.9 The Court cited and relied upon a detailed judgment of the High Court (G-Tech Industries), which held that: (i) the procedure in Section 9D(1) is mandatory in adjudication as well as prosecution; (ii) without satisfying the conditions in Section 9D(1), a statement recorded under Section 14 cannot be treated as relevant for proving the truth of its contents; (iii) reliance on such statements without compliance with Section 9D amounts to reliance on irrelevant material; and (iv) if witnesses are not examined as required, their statements must be eschewed from evidence, and the assessee is entitled to cross-examination once the statements are admitted in evidence. Interpretation and reasoning 2.10 The basic case against the appellant was built on statements of the Dy. Manager (Accounts) and the Managing Director of SSL, recorded by the investigating officers. These statements were used to allege clandestine cash sales of raw material to the appellant. 2.11 The appellant specifically requested cross-examination of these SSL officials to establish that no material was ever supplied to the appellant. This request was not granted by the adjudicating authority. 2.12 The Court found that the department did not invoke Section 9D(1)(a) by recording any finding that the witnesses could not be produced for any legally recognized reason. Nor were the witnesses examined before the adjudicating authority as mandated under Section 9D(1)(b), followed by any reasoned order admitting their statements in evidence. 2.13 In light of the binding interpretation of Section 9D, the Court held that the statements recorded during investigation, without following the statutory procedure and without providing an opportunity for cross-examination, could not be treated as admissible or relevant to prove the truth of their contents. Conclusions 2.14 The mandatory procedure under Section 9D not having been followed, the statements of SSL officials lack evidentiary value and must be excluded from consideration. Once excluded, there remains no substantive testimonial basis to sustain the allegations against the appellant. Issue 3: Admissibility and evidentiary value of computer printouts and electronic data from a third party Legal framework (as discussed) 2.15 The Court noted that the relevant procedure for admitting electronic/computer records in excise adjudication is governed by Section 36B of the Central Excise Act, 1944, read in conjunction with Sections 65A and 65B of the Indian Evidence Act, 1872. 2.16 The Court relied on the Supreme Court's decision (Anvar P.V. v. P.K. Basheer), which held that: (i) any documentary evidence by way of electronic record can be proved only as per Section 65B; (ii) admissibility of such secondary electronic evidence depends on satisfying the conditions in Section 65B(2); (iii) a certificate meeting the conditions in Section 65B(4) (identifying the record, detailing production process, device particulars, compliance with Section 65B(2), and signed by a responsible official) must accompany the electronic record; and (iv) absent compliance with Section 65B, electronic records cannot be proved through oral evidence and are inadmissible. Interpretation and reasoning 2.17 The key digital material relied upon by the department consisted of computer printouts and data retrieved from devices seized from SSL's premises, showing alleged cash sales of raw material to the appellant. 2.18 The Court observed that these printouts were non-certified and that the statutory procedure under Section 36B of the Central Excise Act as well as the conditions under Section 65B of the Evidence Act had not been complied with. No certificate as contemplated by Section 65B(4) accompanied the printouts. 2.19 In the absence of these mandatory requirements, the authenticity and reliability of the electronic records could not be presumed. Given their susceptibility to tampering and alteration, the failure to comply with the statutory safeguards rendered them inadmissible as evidence. Conclusions 2.20 The non-certified computer printouts obtained from a third party are inadmissible and cannot be used as evidence against the appellant. Consequently, the electronic data forming a substantial basis of the demand cannot legally support the allegations. Overall conclusion 2.21 Considering (i) the absence of corroborative evidence of clandestine production and clearance; (ii) the lack of compliance with Section 9D in relying on third party statements; and (iii) the inadmissibility of non-compliant electronic records, the Court held that the demand of duty, interest and penalties is legally unsustainable. The impugned order was set aside and the appeal allowed with consequential relief as per law.