2013 (11) TMI 626 - AT - Central Excise

Clandestine manufacture and removal of goods - Request for cross examination rejected by the Adjudicatory authority - Witnesses whose statements have been relied upon in the Show Cause Notice Held that - Following Swadeshi Polytex Ltd v CCE Meerut 2000 (7) TMI 85 - SUPREME COURT OF INDIA if the Adjudicating Authority intends to rely upon the statement of any such persons the Adjudicating Authority should give an opportunity of cross examination to the appellant - The decision made by the Adjudicating Authority in his letter dated 10.10.08 and in the order denying Nova s request for cross examination of witnesses and subsequently recounted in the order is clearly in violation of principles of natural justice in the matter of the need to permit cross examination of witnesses on whose statements reliance has been placed. Establishment of Charge of Clandestine Removal of Goods Held that - Charge of clandestine manufacture of the dutiable goods and removal without discharging the duty liable by an assessee cannot be established on assumptions and presumptions - Such a charge has to be based on concrete and tangible evidence - Relying upon Oudh Sugar Mills Ltd. v. Union of India 1962 (3) TMI 75 - SUPREME COURT OF INDIA - demand of duty cannot be raised on the strength of assumptions and presumptions - There should be sufficient evidence of the removal of the goods alleged to have been manufactured and cleared without payment of duty - The charge of clandestine removal must be based on tangible evidence and not on inferences involving unwarranted assumptions. Duty demand on documents seized from premises Held that - Mere admission of a document in evidence does not amount to its proof - The demand which has been confirmed against Nova by the order is not based on evidence which as the Tribunal has repeatedly emphasized in cases of clandestine manufacture and clearance would justify a finding against the appellant - Inferential or conjectural conclusions cannot be arrived at in such cases as has been done in the present demand merely based on what GSL did with the POY allegedly sold to them by Nova - there is no tangible evidence produced by the department to establish that Nova has clandestinely manufactured and cleared POY on which the present demand has been made - the demand set aside being illegal and unjustified. Demand on the basis of statements made by the employees Held that - It is totally a different thing to assess the probative value of the contents of the document - They have to be established on evidence relatable to or linked with actual manufacturing operations - there is no such evidence forthcoming in the record before us - Mere reliance on note books/diaries or statements cannot justify a finding of clandestine manufacture and/or clearance - Apparently no efforts seem to have been made in this behalf by the investigating authorities - In the absence of all such evidence a finding that excisable goods have been clandestinely manufactured and cleared by Nova cannot justifiably be arrived at - The present demand is unjustified. Demand on Degraded Chips/Polymer Waste arising from factory - Held that - There were 9 vehicles out of 130 but the entire duty in respect of all the 130 vehicles has been confirmed. In any event this being a case of clandestine clearance evidence thereof cannot be the mere incapacity of 9 vehicles (inferred from only the Vehicle No. indicated) out of 130 to carry the goods - Corroborative evidence of actual manufacture of POY and clearance to identified person or places and of payments made are some of the required conditions which are not there in the case of the present demand as in the earlier two demands - the demand has been made without any concrete or tangible evidence and for the sole reason that no goods were sent out because the vehicle no. indicated was wrong - No attempt was made to find out from the parties to whom 130 consignments had been sent as to whether or not they received the goods - the duty demand confirmed against Nova as being not substantiated is liable to be set aside Decided in favour of Assessee.

Summary

The Court considered the following core legal issues arising from interconnected appeals challenging the confirmation of duty demands and penalties imposed under the Central Excise Act, 1944:

(i) Whether the Adjudicating Authority was justified in rejecting the request for cross-examination of witnesses whose statements were relied upon in the Show Cause Notice;

(ii) Whether the duty demand of Rs. 56,52,945/- alleging clandestine clearance of Partially Oriented Yarn (POY) from the appellant to a processor was rightly confirmed;

(iii) Whether the duty demand of Rs. 3,93,20,685/- alleging evasion of duty by suppressing the quantity of Polyester Chips produced and cleared was rightly confirmed;

(iv) Whether the duty demand of Rs. 2,82,64,613/- alleging evasion by mis-declaring POY as degraded Polyester Chips or Polymer Waste was rightly confirmed;

(v) Whether the duty demand of Rs. 9,77,62,573/- alleging diversion of duty-free clearances made to Export Oriented Units (EOUs) was rightly confirmed;

Additionally, the Court examined issues relating to the applicability of principles of natural justice, the evidentiary standard required to establish clandestine manufacture and clearance, and the joint and several liability of independent persons under Section 11A of the Act.

Issue-wise Detailed Analysis:

(i) Rejection of Request for Cross-Examination

The legal framework requires that when statements of persons are relied upon against an assessee, the right to cross-examine such witnesses is fundamental to ensure a fair hearing under principles of natural justice. The Adjudicating Authority rejected the appellant's request for cross-examination on grounds that no justifiable reasons were furnished and that the statements were corroborated by documentary evidence or were by persons not connected to the case.

The Court reviewed precedents including the Supreme Court decisions in Bareilly Electricity Supply v Workmen and Swadeshi Polytex Ltd v CCE, which emphasize that mere production of documents or statements does not amount to proof, and cross-examination is necessary to test the veracity of evidence. The Court found that the Adjudicating Authority's reliance on decisions that restrict cross-examination was misplaced, as those decisions were factually distinguishable, often dealing with production of documents under Section 139 of the Evidence Act where cross-examination is prohibited.

The Court held that denial of cross-examination in the present case, where statements formed the basis of the Show Cause Notice, amounted to violation of natural justice. The appellant's broad request to cross-examine 63 witnesses was justified given the nature of the allegations and evidence relied upon.

(ii) Duty Demand of Rs. 56,52,945/- on Alleged Clandestine Clearance of POY to GSL

The demand was premised on documents (notebooks and reports) seized from the premises of the processor (GSL) and statements of GSL employees, alleging clandestine procurement of POY from the appellant without duty payment. The Adjudicating Authority inferred clandestine clearance from internal records of GSL, including daily production reports and sample test reports, and statements of supervisors and directors of GSL.

The appellant challenged the probative value of these documents, emphasizing that the records were not maintained by or under the control of the appellant, and the author of the documents was not connected to the appellant. The Court applied the principle from State of Kerala v M.M. Mathew that for secret or private books to be admissible against a party, it must be shown that the books were in their exclusive possession or maintained by their employees. Here, the documents were seized from GSL, and no evidence showed that the appellant controlled or maintained the records.

Furthermore, the Court noted absence of evidence regarding purchase of raw materials by the appellant for such large-scale manufacture, absence of transport or sales documents evidencing movement of POY, and absence of payment receipts from GSL. Mere entries in GSL's notebooks and statements of GSL employees, without corroboration, were insufficient to establish clandestine clearance by the appellant.

The Court concluded that the demand was based on conjectures and surmises rather than tangible evidence and set aside the demand.

(iii) Duty Demand of Rs. 3,93,20,685/- on Alleged Suppression of Polyester Chips Production

This demand was based on diaries maintained by an employee of the appellant, Ashok Chiripal, which showed production and captive consumption of polyester chips differing from statutory records, implying suppression of production and clandestine clearance of POY. The Adjudicating Authority relied on these diaries and statements of employees to confirm the demand.

The appellant submitted that the diaries alone, without independent corroboration such as evidence of procurement of raw materials (PTA and MEG), transportation of finished goods, or payments, could not sustain the demand. The Court noted that the investigating authorities did not verify supply of raw materials from major suppliers like Reliance Industries Ltd, nor did they investigate transportation or sales of the alleged clandestine quantities. The appellant also highlighted wide and unexplained variations in diary entries and absence of cross-examination of the key declarant.

Applying established principles that clandestine manufacture and clearance must be proved by tangible evidence such as unaccounted raw material purchases, actual transportation, and receipt of sale proceeds, the Court found the demand unsustainable and set it aside.

(iv) Duty Demand of Rs. 2,82,64,613/- on Alleged Mis-declaration of POY as Degraded Chips/Polymer Waste

The Revenue alleged that the appellant issued bogus invoices showing clearance of degraded chips and polymer waste, which were in fact used to manufacture POY clandestinely cleared without duty. The demand was supported by a Regional Transport Officer's report indicating some vehicles were incapable of carrying the goods, and absence of buyer addresses and payment details.

The appellant contended that it was inconceivable that no degraded chips or polymer waste arose during manufacture of such large quantities of POY, and that degraded chips were cleared on payment of duty as reflected in statutory returns. The Court observed that the RTO's report covered only 9 consignments out of 130, and the appellant explained discrepancies as human error. Importantly, no evidence was brought on record to show actual manufacture or clandestine clearance of the alleged quantities of POY, or identification of buyers and payments received. The Court found the reasoning of the Adjudicating Authority inconsistent and lacking corroboration.

Accordingly, the Court held that the demand was not supported by concrete evidence and set it aside.

(v) Duty Demand of Rs. 9,77,62,573/- on Alleged Diversion of EOU Clearances

The Revenue alleged that the appellant cleared POY to EOUs against CT-3 certificates but the goods were diverted to the domestic market, aided by irregularities such as use of incapable vehicles, absence of recipient signatures on delivery challans, and EOUs lacking machinery to process the POY. The demand was confirmed jointly and severally against the appellant and EOUs, though ultimately confirmed only against the appellant.

The appellant submitted that statutory re-warehousing certificates, CT-3 certificates, AR-3A forms, and D-3 intimations were duly filed and acknowledged receipt of goods by EOUs, who also paid for the goods. The Board's Circular 88/98-Cus permitted issuance of re-warehousing certificates without physical verification, but required periodic scrutiny of records by departmental officers. The appellant argued that the Adjudicating Authority erred in giving precedence to delivery challans over statutory records, and that mere presence of dealer names on delivery challans did not prove diversion of goods. The appellant also pointed out lack of evidence of actual unloading or sale of goods in Surat, absence of statements from dealers named on delivery challans, and that some EOUs had demonstrated export of finished goods and discharge of export obligations.

The Court noted that the departmental officers had not conducted the required periodic checks mandated by the Board's Circular, and that the impugned order relied on vague statements of transporters and unsupported inferences. The Court also found that the EOUs represented before it denied any diversion and produced export discharge certificates. The Court emphasized that allegations of diversion require cogent and credible evidence, which was lacking.

On joint and several liability, the Court observed that the Adjudicating Authority's reliance on the definition of "manufacturer" under Section 2(f) was misplaced and that precedents held that joint liability cannot be fastened on independent persons without clear statutory or contractual basis.

The Court set aside the demand against the appellant and the penalties imposed on the EOUs.

Significant Holdings:

"There has been a denial of natural justice in the facts of the present case by rejection of the request of cross-examination of the persons whose statements have been relied upon."

"In cases of clandestine manufacture and clearance, the Revenue must establish tangible evidence such as unaccounted raw materials, actual removal of goods without duty, discovery of goods outside the factory, sale to identified parties, receipt of sale proceeds, excess electricity consumption, statements of buyers, proof of transportation, and links between documents seized and factory activities."

"Mere reliance on private/internal records or statements without independent corroborative evidence cannot sustain a finding of clandestine manufacture and clearance."

"Documents seized from third parties, not in possession or control of the appellant, do not attract presumption of truth under Section 36A against the appellant."

"Statutory records such as CT-3 certificates, AR-3A forms, D-3 intimations, and re-warehousing certificates duly acknowledged by EOUs are relevant and cannot be outweighed by unsigned delivery challans or uncorroborated statements."

"Joint and several liability under Section 11A cannot be fastened on independent persons such as EOUs and manufacturers without clear statutory mandate."

"Demands based on conjectures, surmises, or incomplete investigations without tangible evidence are liable to be set aside."

Final Determinations:

(i) The rejection of the appellant's request for cross-examination was unjustified and violated principles of natural justice.

(ii) The duty demand of Rs. 56,52,945/- for clandestine clearance of POY to GSL was not supported by tangible evidence and was set aside.

(iii) The demand of Rs. 3,93,20,685/- for suppression of Polyester Chips production was not substantiated and was set aside.

(iv) The demand of Rs. 2,82,64,613/- for mis-declaration of POY as degraded chips/polymer waste was not supported by credible evidence and was set aside.

(v) The demand of Rs. 9,77,62,573/- for diversion of EOU clearances was not established on cogent evidence and was set aside; penalties on EOUs were also set aside.

Consequently, all four duty demands and penalties imposed on the appellant and the EOUs were quashed.