TaxTMI 
TaxTMI 
2026 (2) TMI 472
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....009-10 to 2011-12. The Appellant Company is engaged in the manufacture of MS Ingots and is duly registered with the Central Excise Department. 1.2 Acting on specific intelligence, the Department initiated investigations against the Appellant on the allegation that the Company was indulging in suppression of production and clandestine clearance of MS Ingots without accounting for the same in statutory records and without payment of central excise duty. Searches were conducted at the factory premises of the Appellant and also at other premises connected with the alleged activities. During the course of investigation, the Department recovered and seized pen drives and electronic storage devices, computer printouts allegedly containing details of production and clearance, private notebooks, spiral pads, cash sheets and internal records, as well as certain documents recovered from third-party premises such as Prime Gold International. Statements were also recorded from various persons including employees, scrap suppliers, transporters, buyers and dealers. 1.3 On completion of investigation, a Show Cause Notice was issued to the Appellant Company proposing demand of duty of Rs.2,79....
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....for the Appellant and the Ld. Authorized Representative Mr. Anoop Singh, represented for the Revenue. 3. The Ld. Counsel Mr. M. Karthikeyan has submitted as follows: - i. that the entire demand is unsustainable as it is primarily based on computer printouts retrieved from pen drives, without compliance of Section 36B of the Central Excise Act, 1944. ii. It was further argued that: a. No certificate under Section 36B (4) was produced b. The computer system from which data originated was never seized c. The author and authenticity of excel sheets are unknown d. Printouts from third party premises cannot form sole basis iii. Cross-examination revealed that suppliers and buyers retracted their statements, and therefore the case lacks evidentiary value. iv. Electricity consumption method is arbitrary. v. Reliance is placed on: - a. R.A. Castings Pvt. Ltd., 2009 (237) ELT 674 (Tri.-Del.) affirmed by SC b. JJ Re-Rollers, 2017 (348) ELT 99 (Tri.-Del.) vi. It is also submitted that there was no seizure of excess stock, no transport evidence, no cash recovery, and no proof of consid....
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....AC on the Company and Rule 26 upon the Managing Director and the Manager. 4.4 The Ld. Authorized Representative further submitted that the adjudicating authority erred in dropping the demand of Rs.1,40,10,321/- relating to wrongful availment of CENVAT credit on invoices allegedly issued without actual supply of inputs. It was contended that the evidence collected during investigation clearly established that the Appellant had indulged in invoice-based credit availment without corresponding receipt of MS scrap, and therefore the impugned order, to that extent, is neither legal nor proper. 5. We have carefully heard the submissions advanced by both sides, examined the appeal records in detail, considered the statutory provisions, and the case Laws cited. 6. Upon such comprehensive consideration, the following issues arise for our determination viz., i. Whether the demand of Central Excise duty on the allegation of clandestine manufacture and clearance of MS Ingots during the period 2009-10 to 2011-12 is sustainable in law and on facts? ii. Whether the Department's appeal challenging the dropping of the proposed demand and of inadmissible CENVAT credit amoun....
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.... be established merely on the basis of private papers or electronic spreadsheets unless supported by unimpeachable corroboration. 9. At the outset, we find considerable force in the Appellant's submission that clandestine manufacture and removal is not a matter to be presumed lightly. The higher judicial fora including Tribunals have repeatedly held that such allegations must be proved with strict and cogent evidence and cannot be sustained on conjectures or surmises. 10. It is the settled proposition that clandestine manufacture and removal is a grave allegation which must be proved by the Department through a complete and unbroken chain of corroborative evidence. The Revenue is required to establish unaccounted procurement of raw materials, actual manufacture, clandestine clearance without invoices, identification of buyers, transportation of goods and flow of consideration. In CCE v. Saakeen Alloys Pvt. Ltd., 2014 (308) ELT 655 (Guj.), affirmed by the Hon'ble Apex Court in 2015 (319) ELT 117 (SC), and in CCE v. Balaji Perfumes, 2014 (300) ELT 481 (SC), it was held that private records or statements alone cannot sustain such demands in absence of independent corroboration. ....
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....tances of actual removal of unaccounted finished goods (not inferential or assumed) from the factory without payment of duty; (c) discovery of such finished goods outside the factory; (d) instances of sale of such goods to identified parties; (e) receipt of sale proceeds, whether by cheque or by cash, of such goods by the manufacturers or persons authorized by him; (f) use of electricity far in excess of what is necessary for manufacture of goods otherwise manufactured and validly cleared on payment of duty; (g) statements of buyers with some details of illicit manufacture and clearance; (h) proof of actual transportation of goods, cleared without payment of duty; (i) links between the documents recovered during the search and activities being carried on in the factory of production; etc." 12. Similar principles were reiterated in CCE v. Saakeen Alloys Pvt. Ltd., reported in 2014 (308) ELT 655 (Guj.), upheld by dismissal of Revenue appeal by the Hon'ble Supreme Court reported in 2015 (319) ELT 117 (SC), wherein it was held that clandestine removal cannot be sustained solely on the basis of recovered documents or retr....
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....eetham Steels Pvt. Ltd. v. CCE, reported in 2025 (3) TMI 1098 (CESTAT Chennai), as well as several other consistent decisions. The Tribunal has categorically held that computer printouts or electronic data retrieved from pen drives or other secondary devices cannot be relied upon unless the mandatory requirements of Section 36B, particularly the certificate under Section 36B(4), are strictly complied with. 18. In Geetham Steels, the Tribunal held that printouts recovered from pen drives or hard disks are inadmissible unless strict compliance with Section 36B is shown, and that in the absence of the statutory certificate under Section 36B(4), such electronic material cannot be relied upon to confirm duty demands. The Tribunal observed that electronic records, unless duly certified, do not constitute substantive evidence capable of sustaining clandestine manufacture allegations. 19.1 The ratio laid down in Geetham Steels squarely applies to the present case, as the Department's reliance here is substantially on uncertified electronic spreadsheets and printouts retrieved from pen drives. Once such electronic evidence is excluded, the very foundation of the demand becomes legally....
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....nce legally inadmissible. 19.6.1 Further, in M/s. Composite Impex and Shri Rajiv Dhuper v. Principal Commissioner of Customs (Import), New Delhi, 2025 (5) TMI 1538 (CESTAT Delhi), the Tribunal examined the admissibility of electronic records seized from pen drives. The Tribunal held that a printout taken from a secondary electronic device cannot be relied upon in adjudication in the absence of statutory compliance with Section 138C(4) of the Customs Act (pari materia to Section 36B of the Central Excise Act). The Tribunal further held that statements recorded under Section 108 of the Customs Act are not substantive evidence unless procedural safeguards akin to Section 9D/138B are complied with. 19.6.2 The reasoning in Composite Impex reinforces the principle that uncertified electronic printouts and untested statements cannot be relied upon to sustain serious fiscal demands. 19.7 It is therefore not possible to accept the contention advanced by the learned Authorized Representative for the Department that the panchnama itself should be treated as a certificate, or that the adjudicating authority could independently presume compliance with Section 36B(4) in the absence of t....
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....statutory safeguards are followed, such records cannot be elevated to the status of admissible evidence. Alleged Money Trail and Cash Transactions 26. The Department has also sought to strengthen its case by referring to cash statements and an alleged money trail showing receipt of amounts from buyers and payments to scrap suppliers. However, we find that no independent evidence of flow of consideration has been brought on record. There is no seizure of cash, no recovery of unaccounted sale proceeds, no banking trail evidencing clandestine transactions, and no buyer has been proceeded against successfully. 27. The Appellant has correctly submitted that in the absence of concrete evidence of consideration, the allegation of clandestine clearance remains unproven. Courts have repeatedly held that clandestine removal cannot be established unless the Department proves the existence of sale proceeds outside books through tangible evidence. Statements, Retractions and Cross-Examination 28. The Department has relied upon statements recorded from the Managing Director, employees, scrap suppliers and alleged buyers. However, it is an admitted position that cross-examination w....
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....nal reiterated that even if trading activities are found to be irregular, without evidence of procurement of extra raw materials, deployment of additional labour, or unaccounted transportation, the charge of clandestine manufacture cannot be upheld simply on electricity usage. 34. We observe, and hold as a matter of settled law, that the burden of proof squarely rests upon the Revenue to establish clandestine manufacture and removal through affirmative, positive and tangible evidence, and not by relying upon estimates, presumptions or theoretical assumptions. Electricity consumption, at best, can serve only as a corroborative circumstance, but it cannot be elevated to the status of the sole foundation for confirming a demand of duty. In the present case, the Department's exercise of extrapolating alleged production for the entire disputed period of nearly two years merely on the basis of one month's disputed data is wholly speculative, arbitrary and legally unsustainable. Absence of Essential Corroborative Evidence 35. We find that the Department has failed to establish the essential parameters required for clandestine removal, namely procurement of raw materials, ma....
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....he ground that the adjudicating authority failed to appreciate the evidences relating to so-called "bill trading", reverse cash flow, and admissions of suppliers. 42. We note that the Department's principal grievance, as reflected in the Review Order passed under Section 35E, is that the adjudicating authority dropped the demand mainly on the reasoning that the Department had not established a one-to-one relationship between the payments made by the assessee through banking channels and the alleged reverse cash flow received back from the dealers after deduction of commission, and further that certain dealers had produced e-Sugam numbers issued under Karnataka Sales Tax law indicating movement of goods. The Revenue contends that the adjudicating authority erred in accepting such reasoning without insisting upon documentary evidence such as weighment slips or acknowledgements of receipt at the factory premises. 43. The Department has further argued that in cases involving illegal invoice-only/Bill trading transactions, it is unrealistic to expect "mathematical precision" in proving reverse cash flow, and that clandestine financial dealings cannot be expected to be supported by....
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.... (210) ELT 484 (SC) to contend that penalty under Rule 26 can be imposed even in cases involving issuance of invoices without actual movement of goods. However, we find that the said decisions are clearly distinguishable on facts and cannot be mechanically applied to the present case. In Madhumilan Syntex, the Hon'ble Supreme Court upheld penalty where there was a clear and established finding of deliberate involvement in fraudulent availment and passing on of inadmissible credit through fictitious documentation. Similarly, in Suraj Medical Agencies, the Tribunal sustained penalty only after recording categorical findings that the noticee was knowingly engaged in issuing invoices without supply of goods, and such fraudulent activity stood independently proved by strong corroborative material. 48. In the present case, however, the adjudicating authority has dropped the substantive demand of inadmissible credit itself on the ground that the Department failed to establish non-receipt of inputs through cogent and corroborative evidence. Once the foundational allegation of invoice-only transactions has not been proved, the very basis for invoking Rule 26 penalty disappears. Rule 26 p....
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....s also subject to statutory safeguards. Even assuming such statements were not retracted until cross-examination, their evidentiary value cannot automatically override documentary evidence of movement such as e-Sugam numbers, VAT documentation, statutory invoices, and recorded entries in RG-23 registers. Moreover, in the present proceedings, the adjudicating authority found that several alleged cash receipts did not match the amounts paid through NEFT/RTGS, and large gaps remained unexplained, thereby weakening the Department's commission-return theory. 53. The Appellant has rightly distinguished that cases of invoice-only/Bill trading credit denial must be supported by proof such as absence of transport documents, non-existence of suppliers, lack of capacity, or factory-level shortage of inputs. In the present case, the investigation did not reveal shortages of scrap, no transporter evidence was examined, and no physical discrepancy was found at the time of search. Therefore, the adjudicating authority's conclusion that the Department failed to establish nonreceipt cannot be said to be perverse. 54.1 The Department's argument that the case should be remanded for verification....
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....t arises for our determination is whether the penalties imposed upon the Appellant Company under Section 11AC of the Central Excise Act, 1944, and upon the Managing Director and the Manager under Rule 26 of the Central Excise Rules, 2002, can be sustained in the facts and circumstances of the present case. The impugned Order-in-Original has imposed an equal penalty of Rs.2,79,48,525/- on the Company under Section 11AC, and has further imposed personal penalties on the Managing Director and the Manager alleging their conscious involvement in clandestine manufacture and removal of MS Ingots. The Appellants have strongly contested the imposition of penalties by submitting that once the substantive demand itself is unsustainable, the penalties automatically fall, and in any event, the essential ingredients for invocation of penal provisions have not been established. 60. The Department, on the other hand, has contended that the conduct of the Appellant reflects deliberate suppression and intent to evade duty, and therefore penalty under Section 11AC is mandatory. It is the Department's submission that the evidence collected during investigation, including private records, electronic....
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....fall. In this regard, reference may be made to the Supreme Court ruling in CCE v. Balaji Perfumes, 2014 (300) ELT 481 (SC), wherein it was held that serious allegations of clandestine removal require strict proof, and in absence of such proof, not only duty demand but also penalties cannot be sustained. 65. The Department has argued that the adjudicating authority recorded findings of suppression and contumacious conduct, and therefore penalty must follow. However, we find that such findings are not supported by legally admissible evidence. Mere repetition of the allegations in the Order-in-Original cannot substitute the strict burden of proof required in clandestine removal matters. The Supreme Court in Oudh Sugar Mills Ltd. v. Union of India, 1978 (2) ELT (J172) (SC) has held that findings based on suspicion, conjectures or assumptions cannot sustain penal consequences. In the present case, the evidentiary deficiencies are fundamental, and therefore the imposition of penalty cannot be upheld. 66. The Appellant has further contended that even assuming duty demand was sustainable, penalty under Section 11AC could not have been imposed mechanically without establishing deliber....
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....pendent corroboration such as seizure of goods, transport documents, or money trail. Hence, personal penalties are clearly unjustified. 72. The Department has argued that since clandestine activity was alleged, penalties should be upheld to deter evasion. However, deterrence cannot substitute legality. Penal provisions must be applied strictly and only when statutory conditions are fulfilled. The Tribunal cannot sustain penalties merely on suspicion or on incomplete evidentiary material. 73. On the contrary, it is on record that during cross-examination, the Managing Director and other witnesses denied clandestine dealings, and the Department failed to produce corroborative evidence such as seizure of goods, transport documents, or buyer confirmations. Once the substantive demand fails, the very basis for holding the goods liable to confiscation disappears, and consequently, Rule 26 penalties cannot survive. 74. The Tribunal in Geetham Steels Pvt. Ltd. (supra) has also held that where clandestine removal is not proved, penalties on directors and managers under Rule 26 are liable to be set aside. The same principle applies here. The Department cannot impose personal penalti....