2025 (6) TMI 261 - AT - Central Excise

Clandestine removal - Revenue failed to bring on record any corroborative material - disallowance of Small Scale Industries (SSI) exemption under N/N.8/2003-CE dated 01.03.2003 as amended - HELD THAT - The case set up by the Revenue in the SCN is that the Appellant being a manufacturer of pesticides (excisable goods notified under Section 4A) and organic manure (chargeable to Nil rate of duty) has clandestinely manufactured and cleared both pesticides and organic manure to the extent quantified in the SCN and therefore the value of first clearances of pesticides exceeded Rs.1.5 crores in 2011-12 onwards and also the aggregate value of clearances of both pesticides and organic manure exceeded Rs.4.0 crores in 2012-13. It is on this ground that the benefit of exemption under Notification No.8/2003-CE dated 01.03.2003 has been restricted for the period 2011-12 2012-13 and denied for the period from 2013-14 to 2015-16 (upto 8th August 2015) and consequently duty has been demanded on excess clearances. The SCN also proposed appropriation of amount deposited during investigation and recovery of inadmissible credit taken on the basis of documents issued prior to six months/one year. There is no corroborative material on record to support the aggregate value of clearances stated in the SCN. Once the initial burden was on the Revenue to prove clandestine clearances to the extent stated in the SCN the Revenue was required to bring tangible and sufficient material on record to support the basis for value of clearances and in absence of any such material it is difficult to uphold the aggregate value of clearances adopted in the SCN. The charge of clandestine removal to the extent stated in the SCN cannot be sustained since it is not based on sufficient and tangible evidence but based on statements and sale details along with MRP Lists obtained during the course of recording of statement which alone cannot form the basis of demand in absence of any other corroborative material on record. Once the charge of clandestine removal does not stands proved the denial of exemption to the Appellant on the ground of aggregate clearances exceeding limits specified in the exemption notification also cannot be upheld. The amount appropriated under the adjudication order towards this demand also cannot be sustained. Conclusion - The case of clandestine clearances to the extent stated in the SCN and thereby denial of exemption is not based on sufficient and tangible evidence and therefore the demand of duty on this count is liable to be set-aside. Appeal allowed.

Summary

The core legal questions considered in this appeal revolve around the following issues:

(i) Whether the demand of excise duty on the appellant is sustainable, given the allegation of clandestine removal of goods and consequent disallowance of Small Scale Industries (SSI) exemption under Notification No.8/2003-CE dated 01.03.2003, as amended;

(ii) Whether the statements recorded from the appellant's partner under Section 14 of the Central Excise Act, 1944, which were alleged to be under duress and later retracted, can be relied upon as corroborative evidence to sustain the charge of clandestine removal;

(iii) Whether the valuation of clearances, particularly the use of sale details and Maximum Retail Price (MRP) lists obtained during investigation, is correct and supported by independent inquiry or corroborative evidence;

(iv) The interpretation and applicability of the proviso inserted in Notification No.8/2003-CE dated 01.03.2006, which excludes goods chargeable to nil rate of duty from exemption;

(v) The legal effect of the appellant's admission of duty liability in the letter dated 16.11.2015, especially in light of the subsequent clarification regarding the excisability and duty rates on organic manure;

(vi) The validity of the demand for recovery of Cenvat credit under Rule 14 of the Cenvat Credit Rules, 2004, particularly where the credit was availed but reversed before utilization;

(vii) The imposition of interest and penalties in the absence of sufficient evidence and the correctness of findings recorded by the adjudicating and appellate authorities.

Issue-Wise Detailed Analysis

1. Demand of Excise Duty and Allegation of Clandestine Removal

The appellant, a manufacturer of pesticides and organic manure, claimed exemption under Notification No.8/2003-CE. The Revenue alleged clandestine removal of goods beyond exemption limits during 2011-12 to 2015-16, resulting in disallowance of SSI exemption and demand of excise duty of Rs.1,10,96,149/- along with interest and penalties.

The legal framework mandates that the Revenue must discharge the initial burden of proving clandestine removal by producing sufficient and tangible evidence. Precedents from various High Courts, including the Allahabad, Delhi, and Calcutta High Courts, have consistently held that clandestine removal is a serious charge requiring corroboration through evidence such as excess raw material purchases, abnormal electricity consumption, dispatch and transportation details, realization of sale proceeds, and flow of funds.

In the present case, the Court found that the Revenue failed to bring any such corroborative material on record. There was no evidence of excess production, purchase of raw materials, or other indicia of clandestine manufacture and removal. The investigation did not include inquiries into dispatch particulars, realization of sale proceeds, or verification of retail sale prices in the market.

Consequently, the Court held that the charge of clandestine removal was not sustained, thereby invalidating the basis for denying SSI exemption and the consequent demand of duty.

2. Reliance on Statements Recorded Under Duress

The Revenue heavily relied on two statements recorded from Shri Hardesh Barathi during investigation, which included sale details and MRP lists used to quantify duty liability. The appellant contended that these statements were recorded under duress, were retracted, and lacked corroboration.

The Supreme Court's pronouncement in Commissioner of Customs (Imports) vs. Ganpati Overseas mandates that statements recorded by officers must be fair, judicious, and free from coercion to be admissible and reliable. The adjudicating authority failed to examine whether the statements were voluntary or recorded under duress, despite the appellant raising this plea specifically.

The Court observed that the adjudicating authority's reliance on these statements was flawed, as it ignored the appellant's alternative submissions and the fact that the sale details and MRP lists were obtained during the recording of the allegedly coerced statement. Moreover, the statements were not admitted under Section 9D of the Central Excise Act, which prescribes mandatory procedural safeguards before such statements can be relied upon as evidence.

Given the retraction of statements and absence of corroborative material, the Court held that the statements could not form the basis for sustaining the demand.

3. Valuation of Clearances and MRP Lists

The valuation of clearances was based on sale details and MRP lists obtained from the appellant's partner during the investigation. The appellant challenged the correctness of these valuations, arguing that the MRP lists were prepared under the Revenue's direction and were higher than previously submitted sales data.

The Court noted that no independent market inquiry or verification from regular purchasers was conducted by the Revenue to validate the MRP lists. The appellant had declared retail sale prices on packaging, as evidenced by the panchnama at the factory premises, undermining the Revenue's reliance on the MRP lists obtained during the statements.

The Court concluded that the valuation adopted by the Revenue was not supported by sufficient inquiry or corroboration and was therefore unsustainable.

4. Interpretation of Notification No.8/2003-CE and the Proviso Inserted by Notification No.8/2006-CE

The appellant contended that the proviso excluding goods chargeable to nil rate of duty from the exemption notification meant that conditions of the exemption notification did not apply to such goods (organic manure). The Revenue argued that since both pesticides and organic manure are excisable goods, the aggregate clearance limits applied to both.

The Court held that the proviso's intent was to clarify that exemption would not apply to goods chargeable to nil rate of duty, meaning their clearance value should not be included in calculating aggregate limits for exemption. The Court rejected the appellant's interpretation as leading to ambiguity and emphasized that ambiguities in exemption notifications are to be strictly construed in favor of the Revenue, citing the Supreme Court's ruling in Commissioner of Customs vs. Dilip Kumar & Co.

Therefore, the aggregate clearance limits applied to pesticides and not to organic manure for the purpose of exemption calculation.

5. Effect of Admission of Duty Liability in Letter Dated 16.11.2015

The appellant admitted duty liability in a letter dated 16.11.2015, calculating duty on both pesticides and organic manure at 12.36%, under the impression that SSI exemption was available only till 2012-13 and that organic manure was not exempt.

The Court found that at the time of the letter, there was genuine doubt regarding the excisability of organic manure, which was clarified only upon issuance of the SCN. Since organic manure was later treated as chargeable to nil rate of duty, and the charge of clandestine removal was not sustained, the admission of duty liability on organic manure was contrary to law.

However, the aggregate value of clearances derived from the admitted duty liability was presumed correct for calculation purposes, and it was found to be below the exemption limits, negating any adverse inference.

6. Recovery of Cenvat Credit Under Rule 14 of Cenvat Credit Rules, 2004

Rule 14(1) provides for recovery of credit wrongly taken or refunded. Clause (i) applies where credit is taken but not utilized, and clause (ii) applies where credit is taken and utilized wrongly.

The Revenue did not allege utilization of the credit. The appellant initially intended to avail credit but reversed it in books under protest before any utilization upon receipt of the SCN.

The Court held that since the credit was never utilized and was reversed before use, no amount of credit was effectively taken. Therefore, the demand for recovery of credit and interest was unsustainable.

Moreover, the appellant was not entitled to credit on documents older than the prescribed period, and in any event, the reversal before utilization negated any credit liability.

7. Imposition of Interest and Penalties

Since the demand of duty and credit recovery was set aside for lack of sufficient evidence, the consequential demand for interest and penalties also fell.

The Court found the findings on these aspects to be perverse and based on irrelevant material, and accordingly set aside the interest and penalties imposed.

Significant Holdings

"Clandestine removal is a serious charge against the manufacturer, which is required to be discharged by the Revenue by production of sufficient and tangible evidence."

"There is no material on record to show excess production, purchase of raw material, excess electricity consumption, excess sale of finished goods, clandestine removal, transportation, payment, realisation of proceeds, modes and flow back of funds etc."

"Statements recorded under duress cannot be used against the person making the statement. It is for the adjudicating authority to find out whether there was any duress or coercion in the recording of such a statement."

"Before relying on statements recorded during investigation, the adjudicating authority must invoke Section 9D and follow the prescribed procedure to admit such statements as evidence."

"The benefit of ambiguity in exemption notifications must be strictly interpreted in favour of the Revenue."

"Where credit was availed in books but reversed before utilization, no amount of credit was effectively taken, and demand for recovery is not sustainable."

"In absence of sufficient and tangible evidence to prove clandestine removal, the denial of SSI exemption and consequent demand of duty cannot be upheld."

The Court ultimately allowed the appeal, setting aside the demand of excise duty, recovery of Cenvat credit, interest, and penalties, thereby restoring the appellant's entitlement to SSI exemption under the relevant notification.