2024 (10) TMI 1671 - AT - Central Excise

Clandestine removal - evasion of duty on MS Ingots manufactured from less quantities of Silico Manganese and Sponge Iron shown as received during 2010-11 - Duty involved in clandestine clearance of MS Ingots found short in factory - Duty involved in Ingots manufactured and cleared clandestinely from short found sponge iron scrap runners risers - demand based on certain documents which were recovered from the residential premises of Shri Sanjay Tiwari and employee and authorized person of the Appellant 1 - Shortages of finished goods detected during search of the factory premises - Shortages of some of the raw materials detected during search of the factory premises. HELD THAT - Though Shri Sanjay Tiwari is an employee and authorized person of the Appellant still he cannot in any way step into the shoes of Appellant. Appellant No.2 has not accepted the truth of such documents during the investigation and has refused to comment on said documents or the statements recorded from the Shri Sanjay Tiwari in respect of these documents. It is also evident that Shri Sanjay Tiwari from whose residential premises these documents have been recovered has not been made party to these proceedings and no penalty under Rule 26 of the Central Excise Rules 2002 was proposed against him or imposed by the Adjudicating Authority. The presumption under Section 36A with regards to the truth and correctness in respect of the documents recovered from such premises has been negated by various Courts and Tribunals. The truth of these documents needs to be established by way of corroborative evidence gathered during the investigation. Simple recovery of these documents does not establish the case against the Appellant. Shri Sanjay Tiwari from whose possession and premises these documents were recovered has not been made noticee/ co-noticee in the matter. Not making him co-noticee in the matter the validity of these documents in evidence needs to be looked with pinch of suspicion. Not only he is not co-noticee Appellants have not cross examined him during the adjudication proceedings. Further the clandestine has been alleged on the basis of receipt of the one of ingredients (Silico Magnese) by the Appellants of the finished goods manufactured and cleared by the Appellant. The consumption of the said ingredient as per the statement of Appellant No.2 and relied in show cause notice is about 10 kgs per ton of the finished goods which works out to be 10 100/1000 1%. No evidence has been produced in respect of any other ingredient used in the process of production. In absence of any corroboration about the factum of production consumption of raw material etc allegation of clandestine clearance on the basis of the 3rd Party documents recovered from the premises of Shri Sanjay Tiwari there is no position to uphold the demand made by the impugned order in view of the decisions referred by the counsel for the Appellant at the time of argument reproduced earlier. In case of Pan Parag India Ltd 2012 (6) TMI 100 - CESTAT NEW DELHI Delhi bench has observed that As observed in the majority order of the Tribunal in the case of M/s. Kuber Tobacco Products P. Ltd. the mathematical procedure to the last extent may not be required but the distance between might have and must have is required to be travelled and filled by the Revenue by producing independent evidences on record which can lead to inevitable conclusion of clandestine activities. As already discussed in the preceding paras we find absence of such evidences on record in which case confirmation of demand against the Appellant and imposition of penalty on various persons would not be justified. Demands made on the basis of shortages of finished goods and some raw material during the search proceedings on 14.12.2012 - HELD THAT - It is found that the such shortages have been detected on the basis of eye estimation and not on the basis of actual weighment of the stocks of raw material or finished goods. In absence of any physical verification of the stocks by actual weighment the demand made alleging clandestine clearance cannot be upheld in view of the decisions referred by the Appellant during the course of arguments. Conclusion - i) In absence of any corroboration about the factum of production consumption of raw material etc allegation of clandestine clearance on the basis of the 3rd Party documents recovered from the premises of Shri Sanjay Tiwari there is no position to uphold the demand made by the impugned order. ii) In absence of any physical verification of the stocks by actual weighment the demand made alleging clandestine clearance cannot be upheld. There are no merits in the impugned order confirming the demands - penalties also set aside - appeal allowed.

Summary

The core legal questions considered by the Tribunal in this appeal include:

1. Whether the demand of Central Excise duty on the basis of alleged clandestine removal of goods and evasion of duty, as determined from documents recovered during search and stock verification, is sustainable under the Central Excise Act, 1944 and related rules.

2. Whether the Panchnama proceedings and statements recorded during the search operations are maintainable and admissible as evidence.

3. Whether the documents recovered from the residential premises of an employee, who was not made a party to the proceedings, can be relied upon to establish clandestine clearance and duty evasion by the appellants.

4. Whether the demand based on shortages of raw materials and finished goods detected by eye estimation without physical weighment is valid.

5. Whether the appellants were afforded adequate opportunity for cross-examination of witnesses and whether denial of such opportunity vitiates the proceedings.

6. Whether the penalties imposed under Sections 11AC and Rule 26 of the Central Excise Rules, 2002, are justified in the facts and circumstances of the case.

Issue-wise Detailed Analysis

1. Validity of Demand Based on Alleged Clandestine Removal and Duty Evasion

The legal framework involves the Central Excise Act, 1944, specifically Sections 11A(1), 11A(4), 11AB, 11AA, and 11AC, along with Rules 4, 6, 8, 10, 11, 12, 25, and 26 of the Central Excise Rules, 2002. The Revenue alleged that the appellants clandestinely removed MS Ingots manufactured from unaccounted raw materials (Silico Manganese, Sponge Iron, Scrap, etc.) without payment of duty, based on documents seized during searches and stock discrepancies.

The Tribunal examined the evidentiary basis of the demand, which primarily rested on:

• Documents recovered from the residential premises of Shri Sanjay Tewari, an employee and liaison officer of the appellants, showing receipt of Silico Manganese in quantities not reflected in factory records.
• Statements of Shri Sanjay Tewari and Shri Navin Jain (Director and Authorized Signatory), acknowledging the discrepancies and consumption rates of Silico Manganese in production.
• Shortages of finished goods and raw materials detected during search on 14.12.2012, though these were based on eye estimation rather than physical weighment.

The appellants contested the demand on grounds that the documents from Shri Sanjay Tewari's residence were private third-party documents not admissible under Section 36B(2) of the Central Excise Act and the Indian Evidence Act, 1872, and that no corroborative evidence linked the documents to actual clandestine manufacture or clearance. They also argued that shortages based on eye estimation cannot form the basis for quantification of duty demand.

The Tribunal referred to various precedents emphasizing that clandestine manufacture and clearance must be established by tangible and corroborative evidence such as:

• Excess raw material purchase or consumption beyond statutory records.
• Actual removal of unaccounted finished goods without payment of duty.
• Discovery of such goods outside the factory premises.
• Statements of buyers or evidence of receipt of sale proceeds.
• Evidence of excess electricity consumption or other indicia of clandestine production.
• Links between recovered documents and factory operations.

In the instant case, the Tribunal observed that the demand was based mainly on one ingredient (Silico Manganese), which constituted only about 1% of the raw material used, without evidence regarding other major raw materials or corroboration through electricity consumption, transport records, or sale proceeds. The Tribunal also noted that no investigation was conducted regarding the furnace or electricity consumption, which are critical for establishing clandestine production in an induction furnace setting.

Accordingly, the Tribunal held that the demand lacked sufficient corroborative evidence and was primarily founded on assumptions and uncorroborated documents, which is legally insufficient to sustain a clandestine removal charge.

2. Maintainability and Admissibility of Panchnama and Statements Recorded During Search

The Tribunal examined the validity of the Panchnama dated 14.12.2012 at the factory and residential premises and the statements of Shri T.S. Pandey and Shri Sanjay Tiwari recorded during search under Section 14 of the Central Excise Act.

The search warrants were found to be validly issued, and the Panchnama detailed the premises, witnesses, officers present, and documents seized. Shri T.S. Pandey, authorized signatory and office in charge, participated in the stock verification and expressed satisfaction with the process. Similarly, Shri Sanjay Tiwari's statement was recorded without duress and was not retracted.

The appellants challenged the independence of Panch witnesses and contended that failure to allow cross-examination violated principles of natural justice.

The Tribunal noted that although the appellants requested cross-examination belatedly, they failed to avail the opportunity granted and used adjournments as delaying tactics. The Tribunal relied on judicial precedents confirming that denial of cross-examination, where no specific reasons are provided or where witnesses are not challenged timely, does not vitiate proceedings.

Therefore, the Tribunal upheld the maintainability and admissibility of the Panchnama and statements, rejecting the appellants' objections.

3. Reliance on Documents Recovered from Non-Party Employee's Premises

The documents forming the basis of a substantial part of the demand were recovered from the residential premises of Shri Sanjay Tiwari, an employee and liaison officer of the appellants, who was not made a party to the proceedings and was not subjected to penalty.

The appellants argued that such documents, being third-party private records, cannot be relied upon without corroborative evidence and that the presumption of truth under Section 36A of the Central Excise Act does not apply.

The Tribunal acknowledged that mere recovery of documents from a non-noticee's premises does not conclusively establish their truth or relevance against the appellants. It emphasized the need for corroborative evidence linking such documents to actual clandestine manufacture or clearance.

Given the absence of such corroboration and the failure to make Shri Sanjay Tiwari a party, the Tribunal expressed reservations about the evidentiary value of these documents and declined to uphold the demand based solely on them.

4. Validity of Demand Based on Stock Shortages Estimated by Eye Estimation

The Revenue's demand also relied on shortages of raw materials and finished goods detected during search, which were determined by eye estimation rather than actual physical weighment or inventory reconciliation.

The Tribunal referred to binding precedents holding that stock verification by eye estimation is not a reliable method for quantifying shortages or clandestine removals. Without actual weighment or documented methodology, such estimation cannot form the basis for demand or penalty.

Accordingly, the Tribunal held that the demand based on eye estimation of shortages is not sustainable.

5. Opportunity of Cross-Examination and Principles of Natural Justice

The appellants contended that denial of cross-examination of witnesses, particularly Shri Sanjay Tiwari, violated principles of natural justice and rendered the proceedings unfair.

The Tribunal found that the appellants delayed their request for cross-examination and ultimately failed to appear on the scheduled date. The Tribunal cited judicial decisions establishing that failure to provide cross-examination where no specific reasons are given or where the party fails to avail the opportunity does not vitiate the proceedings.

Further, since Shri Sanjay Tiwari was an employee of the appellants and his statements were not retracted or challenged with evidence, the Tribunal found no prejudice caused by the absence of cross-examination.

6. Justification for Imposition of Penalties

The penalties under Section 11AC and Rule 26 of the Central Excise Rules, 2002, were imposed on the appellants and a director for alleged duty evasion and involvement in clandestine clearance.

Given the Tribunal's conclusion that the demand for duty itself was not sustainable due to lack of corroborative evidence, the penalties founded on the same allegations could not be upheld.

The Tribunal accordingly set aside the penalties imposed on the appellants and the director.

Significant Holdings

"The confirmation of demand of duty against the assessee based upon the allegations of clandestine removal leading to the financial burden to the assessee as also resulting in criminal prosecution of the authorized persons is required to be done on the basis of evidences which generates confidence in the prosecution case."

"Mere reliance on note books/diaries or statements cannot be considered as enough evidence for clandestine manufacture and clearances."

"In absence of any corroboration about the factum of production, consumption of raw material etc, allegation of clandestine clearance on the basis of the 3rd Party documents recovered from the premises of Shri Sanjay Tiwari we are not in a position to uphold the demand made by the impugned order."

"Shortages detected on the basis of eye estimation cannot be the basis for quantifying the demand for deciding the charge of clandestine removal."

"Denial of cross examination which does not cause any prejudice to the final outcome is not violative of the principle of natural justice and it shall not vitiate the proceedings."

"The truth of such documents can be presumed to be true unless the contrary is proved, but mere recovery of documents from premises of a non-noticee without corroborative evidence is not sufficient to establish clandestine removal."

"In absence of sufficient and tangible evidence such as purchase of excess raw materials, excess electricity consumption, transport records, and receipt of sale proceeds, the demand and penalties cannot be sustained."

"The appellants' failure to avail the opportunity for cross-examination and absence of any specific reason for cross-examination negates the claim of violation of natural justice."

Final determinations:

• The demand of Central Excise duty amounting to Rs. 3,43,89,580/- on account of alleged clandestine removal and duty evasion is not sustainable due to absence of corroborative evidence and reliance on uncorroborated third-party documents and eye-estimated shortages.
• The Panchnama and statements recorded during search are maintainable and admissible, but the evidentiary value of recovered documents from a non-noticee's premises is limited without corroboration.
• The penalties imposed on the appellants and the director are set aside as the foundational demand itself is unsustainable.
• The appellants were afforded adequate opportunity for cross-examination, and denial thereof does not vitiate the proceedings.
• The appeals are allowed, and the impugned order is set aside accordingly.