2025 (12) TMI 512 - AT - Central Excise

Excise demand fails where s.14 statements used without s.9D compliance; clandestine scented supari removal unsustainable

The Tribunal allowed the assessee's appeal and set aside the Commissioner (Appeals)' order confirming clandestine removal of scented supari for July ... Clandestine clearances of goods for the period from July, 2014 to June, 2017 - quantum of clandestine clearances ascertained on the basis of maximum running speed of packing machines used for packing of the final product manufactured by the appellant i.e. scented supari - HELD THAT:- A person who makes a statement during the course of an inquiry has to be first examined as a witness before the adjudicating authority and thereafter the adjudicating authority has to form an opinion whether, having regard to the circumstances of the case, the statement should be admitted in evidence, in the interest of justice. Once this determination regarding admissibility of the statement of a witness is made by the adjudicating authority, the statement will be admitted as an evidence and an opportunity of cross-examination of the witness is then required to be given to the person against whom such statement has been made. It is only when this procedure is followed that the statements of persons making them would be of relevance for the purpose of proving the facts which they contain. Section 9D of the Central Excise Act is almost identical to section 138B of the Customs Act. The Punjab and Haryana High Court in Jindal Drugs Pvt. Ltd. vs. Union Of India [2016 (6) TMI 956 - PUNJAB & HARYANA HIGH COURT] held that unless and until one of the circumstances contemplated by clause (a) of section 138B(1) of the Customs Act applies, the adjudicating authority is bound to strictly follow the procedure contained in clause (b) of section 138B(1) of the Customs Act, before treating a statement recorded under section 108 of the Customs Act as relevant. In Additional Director General (Adjudication) vs. Its My Name Pvt. Ltd. [2020 (6) TMI 72 - DELHI HIGH COURT], the Delhi High Court examined the provisions of sections 108 and 138B of the Customs Act. The department placed reliance upon the statements recorded under section 108 of the Customs Act. The Delhi High Court held that the procedure contemplated under section 138B(1)(b) has to be followed before the statements recorded under section 108 of the Customs Act can be considered as relevant. Thus, both section 9D(1)(b) of the Central Excise Act and section 138B(1)(b) of the Customs Act contemplate that when the provisions of clause (a) of these two sections are not applicable, then the statements made under section 14 of the Central Excise Act and under section 108 of the Customs Act during the course of an inquiry under the two Acts shall be relevant for the purpose of proving the truth of the facts contained in them only when such persons are examined as witnesses before the adjudicating authority and the adjudicating authority forms an opinion that the statements should be admitted in evidence. It is thereafter that an opportunity has to be provided for cross-examination of such persons - It has been observed that the statements recorded during inquiry/investigation by officers has every chance of being recorded under coercion or compulsion and it is in order to neutralize this possibility that statements of the witnesses have to be recorded before the adjudicating authority, after which such statements can be admitted in evidence. In the preset case, it would be seen that the order of the Commissioner (Appeals) regarding clandestine removal of goods is based on the statement of the Director and the Supervisor of the appellant made under section 14 of the Central Excise Act. These two persons were not examined before the adjudicating authority. Their statements, therefore, would have no relevance. The finding regarding clandestine removal of goods based on the said statements, therefore, cannot be sustained. The order dated 03.02.2022 passed by the Commissioner (Appeals) would, therefore, have to be set aside and is set aside - appeal allowed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether the findings of clandestine manufacture and removal of excisable goods, and the consequent duty demand, interest, and penalties, could be sustained when they were based substantially on statements recorded under section 14 of the Central Excise Act, 1944 without compliance with section 9D. 1.2 Whether, in the absence of compliance with section 9D of the Central Excise Act, statements recorded during investigation could be treated as relevant and admissible evidence for proving the truth of their contents. 1.3 Whether, in the facts of the case, the denial of cross-examination and reliance on such statements resulted in violation of the mandatory statutory procedure and vitiated the order of the appellate authority. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 & 2: Admissibility and evidentiary relevance of statements recorded under section 14 in the absence of compliance with section 9D; sustainability of findings of clandestine removal and consequential demands/penalties Legal framework 2.1 The Tribunal examined sections 14 and 9D of the Central Excise Act, 1944. Section 14 empowers Central Excise Officers to summon persons to give evidence or produce documents in any inquiry, and statements are recorded under this provision. Section 9D governs the 'relevancy of statements under certain circumstances' and prescribes when such statements can be treated as relevant to prove the truth of the facts they contain. 2.2 Section 9D(1)(a) provides that a statement made and signed before a gazetted Central Excise Officer shall be relevant in prosecution when the maker is dead, cannot be found, is incapable of giving evidence, is kept out of the way by the adverse party, or cannot be produced without unreasonable delay/expense. Section 9D(1)(b) applies in other cases and requires that the person who made the statement be examined as a witness before the court/adjudicating authority and that the authority form an opinion that, in the interests of justice, the statement should be admitted in evidence. 2.3 By virtue of section 9D(2), the requirements of section 9D(1) apply equally to adjudication proceedings under the Central Excise Act. The Tribunal also noted that section 9D is substantially identical to section 138B of the Customs Act, 1962, both of which have been judicially held to be mandatory. Interpretation and reasoning 2.4 The Tribunal held that statements recorded under section 14 become relevant for proving the truth of their contents only if the procedure in section 9D is followed. Where the circumstances in section 9D(1)(a) do not apply, section 9D(1)(b) mandates a two-step process: (i) examination of the maker of the statement as a witness before the adjudicating authority, and (ii) a reasoned opinion of the adjudicating authority that, having regard to the circumstances, the statement should be admitted in evidence in the interests of justice, followed by an opportunity for cross-examination. 2.5 The Tribunal relied on judicial precedents interpreting section 9D and section 138B, including decisions wherein High Courts and the Tribunal had consistently held that: (a) section 9D is mandatory, not directory; (b) statements recorded during investigation have a possibility of being obtained under coercion or compulsion; (c) to neutralize such risk, the statute requires examination before the adjudicating authority and a conscious decision on admissibility; and (d) if this procedure is not followed, such statements cannot be treated as relevant evidence and must be eschewed from consideration. 2.6 Applying these principles, the Tribunal noted that the Commissioner (Appeals) had explicitly founded the conclusions of clandestine manufacture and removal on the statements of the Director and Supervisor recorded under section 14, treating them as reliable and sufficient evidence, and further held that denial of cross-examination did not vitiate the proceedings. 2.7 The Tribunal found that in the present case: (i) the two persons whose statements were relied upon (Director and Supervisor) were not examined as witnesses before the adjudicating authority; (ii) there was no finding or assertion that any of the conditions under section 9D(1)(a) existed; and (iii) there was no recorded opinion by the adjudicating authority on the admissibility of such statements under section 9D(1)(b). Consequently, the mandatory procedure under section 9D had not been followed. 2.8 In light of the above, the Tribunal held that the statements of the Director and Supervisor, recorded under section 14, could not be treated as relevant or admissible evidence for proving the alleged clandestine removals. Any finding sustained solely or substantially on such statements, without compliance with section 9D, was legally unsustainable. Conclusions 2.9 The Tribunal concluded that the statements recorded under section 14, in the absence of examination of the makers as witnesses before the adjudicating authority and without a determination under section 9D(1)(b), had no evidentiary relevance for proving the truth of the alleged clandestine manufacture and removal. 2.10 As the findings regarding clandestine removal were based on such inadmissible statements, the Tribunal held that the conclusions on clandestine clearances, and the resulting demand of duty, interest, and penalties, could not be sustained. Issue 3: Effect of non-compliance with section 9D and denial of cross-examination on validity of the appellate order Interpretation and reasoning 3.1 The Tribunal noted that the Commissioner (Appeals) had rejected the assessee's challenge to the evidentiary value of the statements and to the denial of cross-examination, holding that there was no violation of natural justice and that the statements were reliable under section 14. 3.2 However, the Tribunal, following the binding interpretation of section 9D, held that the very foundation of relying on such statements in adjudication was vitiated due to non-compliance with the mandatory statutory procedure. Where section 9D is not followed, such statements are to be excluded from consideration, and findings based on them cannot stand. Conclusions 3.3 The Tribunal held that the order of the Commissioner (Appeals), to the extent it upheld the demand, interest and penalties on the basis of statements recorded under section 14 without following section 9D, was legally unsustainable. 3.4 Consequently, the impugned appellate order was set aside in its entirety, and the appeals were allowed.