s.11D inapplicable where duty deposited; uncorroborated s.9D statement cannot prove clandestine manufacture or sustain penalties

CESTAT Kolkata allowed the appeal of the assessee-company, setting aside the demand of central excise duty, interest and penalties. It held that s.11D of the Central Excise Act, 1944 was inapplicable as the duty collected on the disputed clearances had been duly deposited into the government account, negating any further recovery. The Tribunal further found that the allegation of clandestine manufacture and clearance of M.S. Rounds and M.S. Flats was unsubstantiated, resting solely on an untested third-party statement without compliance with s.9D and lacking corroborative evidence. As the primary duty demand failed, the penalty on the company's Director was also quashed for absence of proven involvement.

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1. ISSUES PRESENTED AND CONSIDERED

(1) Whether recovery of duty under Section 11D of the Central Excise Act, 1944 was permissible when duty collected from the buyer had already been deposited with the Government.

(2) Whether allegations of clandestine manufacture and clearance of 2490.880 MT of finished goods, based primarily on investigation at the buyer's end and a third-party statement, were legally sustainable.

(3) Whether the statement of the buyer's director, recorded during investigation, could be relied upon without compliance with Section 9D of the Central Excise Act, 1944.

(4) Whether penalties on the appellant-company and on its director under Section 11AC of the Act read with Rule 26 of the Central Excise Rules, 2002 were sustainable in absence of a sustainable duty demand and corroborative evidence of involvement.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (1): Recovery under Section 11D when duty already deposited

Legal framework (as discussed) - Section 11D enables recovery where an assessee collects any amount as duty of excise from buyers but does not deposit the same with the Central Government. Interest under Section 11DD was also invoked in the impugned order.

Interpretation and reasoning - The Tribunal recorded that there was no dispute that: (a) the appellant issued central excise invoices to the buyer for 2490.880 MT of M.S. Rounds and M.S. Flats; (b) the appellant collected duty from the buyer; and (c) the entire duty so collected was deposited in the Government account. The transactions were on an ex-factory basis and payments were received through account payee cheques. The Tribunal held that Section 11D applies only where amounts collected "as duty" from customers are retained by the assessee and not paid to the Government. Since, in the present case, duty had already been correctly paid into the Government account, there was no statutory basis to invoke Section 11D or to again demand the same amount under that provision. Consequently, appropriation of the already paid duty against the Section 11D demand was also held to be unwarranted.

Conclusions - (a) Section 11D was inapplicable as there was no retention of duty collected from the buyer; (b) the demand of Rs. 71,14,525/- under Section 11D and interest under Section 11DD were set aside; (c) appropriation of duty already paid against the Section 11D demand was held unsustainable and set aside; (d) the duty earlier paid in the normal course on the clearances, being correctly discharged, was not interfered with.

Issue (2): Alleged clandestine manufacture and clearance of finished goods

Legal framework (as discussed) - Duty on clandestine removals was demanded under Section 11A(4) with interest under Section 11AA and penalty under Section 11AC. The Tribunal applied settled principles that clandestine clearance is a serious charge requiring cogent, corroborative evidence, and that duty cannot be demanded on assumptions, presumptions, or mere preponderance of probabilities.

Interpretation and reasoning -

(a) The entire case of the Department against the appellant was based on an earlier investigation against the buyer, wherein it was alleged that the buyer availed irregular CENVAT credit on invoices without receipt of goods. The Tribunal noted that separate show cause proceedings against the buyer had culminated in disallowance of such CENVAT credit by an order-in-original, independent of the present proceedings.

(b) The Department's allegation in the present case was that the appellant issued invoices to the buyer without actually supplying the goods and instead clandestinely diverted 2490.880 MT of finished goods to other customers without payment of duty. The Tribunal examined the appellant's evidence and statements: (i) the appellant's authorised representative stated that the goods were sold on an ex-factory basis; (ii) transportation was arranged by the buyer; (iii) duty was paid on the clearances; and (iv) payments were received through account payee cheques. The Tribunal accepted that, on an ex-factory sale, responsibility for transportation and any discrepancy regarding vehicle numbers or infrastructure at the buyer's end cannot be fastened on the seller.

(c) The Tribunal observed that no independent evidence was produced by the Department to support the allegation that the appellant clandestinely manufactured and cleared the same quantity to unnamed other customers. There was no corroborative material such as evidence of excess raw material purchases, excess production, extra electricity consumption, transport documents indicating unaccounted removals, identification of actual clandestine buyers, realization of sale proceeds of alleged unaccounted clearances, or discovery of unaccounted finished goods outside the factory. Reference was made to judicial precedents which require tangible corroborative evidence in matters of clandestine removals and reject demands based merely on private records or uncorroborated statements.

(d) The Tribunal emphasized that charges of clandestine removal cannot be sustained solely on presumptions or on inferences drawn from the buyer's conduct or infrastructure, particularly when there is no evidence that the appellant diverted goods to other parties or received any unaccounted consideration.

Conclusions - (a) The allegation that the appellant clandestinely manufactured and cleared 2490.880 MT of finished goods to third parties was held unsubstantiated and unsupported by corroborative evidence; (b) the demand of Rs. 71,14,525/- under Section 11A(4) on account of alleged clandestine manufacture and clearance, along with consequential interest, was set aside.

Issue (3): Admissibility and evidentiary value of third-party statement under Section 9D

Legal framework (as discussed) - Section 9D of the Central Excise Act governs the relevancy and admissibility of statements made before gazetted Central Excise officers. It prescribes conditions under which such statements may be treated as relevant and the mandatory procedure for their use as evidence, including examination of the maker as a witness and opportunity for cross-examination, unless circumstances under Section 9D(1)(a) exist.

Interpretation and reasoning -

(a) The adjudicating authority had primarily relied upon the statement of the buyer's director, who had allegedly admitted that the buyer's transactions were only on paper and that invoices were received without corresponding physical receipt of goods. The Tribunal found that this statement, though recorded during investigation, had not been dealt with in accordance with Section 9D-there was no examination of the maker before the adjudicating authority, no recorded satisfaction for admitting the statement in evidence, and no opportunity for cross-examination.

(b) By referring to binding judicial precedents interpreting Section 9D, the Tribunal held that: (i) statements recorded during investigation cannot be treated as relevant evidence to prove the truth of their contents in adjudication proceedings unless Section 9D(1) is complied with; (ii) in absence of compliance, such statements lose their evidentiary value; and (iii) if the procedure under Section 9D is not followed, reliance on such statements amounts to reliance on irrelevant material, which vitiates the finding.

(c) The Tribunal applied these principles to the present case and held that the buyer's director's statement, being untested and admitted without compliance with Section 9D, had no evidentiary value and could not be used to sustain the demand or to prove that no goods were actually supplied by the appellant.

Conclusions - (a) The statement of the buyer's director, recorded during investigation, was held inadmissible and devoid of evidentiary value for want of compliance with Section 9D; (b) such untested statement could not be relied upon to support the allegations of non-supply of goods or clandestine diversion by the appellant.

Issue (4): Sustainability of penalties on the company and its director

Legal framework (as discussed) - Penalty equal to duty was imposed on the company under Section 11AC for alleged suppression and clandestine clearances. A separate penalty was imposed on the director under Rule 26(1) read with Rule 26(2)(ii) of the Central Excise Rules, 2002 for alleged involvement in the offence.

Interpretation and reasoning -

(a) The Tribunal held that once the substantive duty demands, both under Section 11D and under Section 11A(4) for clandestine clearances, were found unsustainable on merits, no question of penalty or interest could survive. With the main charge itself failing, penal provisions could not be independently invoked.

(b) As regards the director, the Tribunal found that the Department had not brought on record any corroborative evidence to establish his personal knowledge, participation, or conscious involvement in any act of issuing bogus invoices or diverting goods to undisclosed customers. In absence of specific evidence, mere designation as director could not justify penalty under Rule 26.

Conclusions - (a) Penalty on the company under Section 11AC, being consequential to an unsustainable demand, was set aside; (b) penalty on the director under Rule 26(1) read with Rule 26(2)(ii) was also set aside due to absence of corroborative evidence of his involvement; (c) with both demands having been quashed on merits, corresponding liabilities for interest and penalties did not survive.

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