Case Law Details
Commissioner of Central Excise Vs Saravana Alloy Steel Private Limited (Karnataka High Court)
The Karnataka High Court dismissed the Revenue’s appeal and upheld the Customs, Excise and Service Tax Appellate Tribunal’s (CESTAT) order relating to allegations of clandestine manufacture and removal of excisable goods by a steel manufacturer. The Revenue had challenged the Tribunal’s decision, which had set aside excise duty demands, penalties and related findings arising from three show cause notices issued for different periods. The dispute concerned allegations that the assessee had clandestinely manufactured and cleared steel ingots and CTD bars without payment of central excise duty. The Revenue relied principally on excess electricity consumption, expert reports on power consumption norms, statements of various persons, invoices, computer data and allegations of unaccounted procurement of scrap to support its case.
Before the High Court, the Revenue argued that the Tribunal had ignored expert opinions indicating the quantity of electricity required for manufacturing steel products and had failed to appreciate corroborative evidence such as statements of scrap dealers, transporters, company officials, invoices, loose slips and computer records allegedly establishing clandestine removal of goods. The assessee, on the other hand, contended that the Commissioner’s findings were based primarily on estimated power consumption norms without conducting any trial production at the factory and without considering the plant’s specific furnace capacity, age and operational conditions. It was also argued that the statements relied upon by the Department had been retracted and that several documents, including loose slips, lacked authenticity and could not establish clandestine manufacture.
The High Court examined the evidence relied upon by the Commissioner and the Tribunal. It noted that the Commissioner’s findings substantially rested on the opinions of Chartered Engineers and the technical report of the Nucleus Group regarding electricity consumption. During cross-examination, one of the expert witnesses admitted that no trial production had been conducted at the assessee’s plant, that no standard technical literature existed prescribing fixed power consumption norms, that furnace-specific factors had not been properly considered, and that there were errors in the calculations adopted. The Court also noted that another qualified engineer had expressed significantly different views regarding power consumption, and that varying technical reports reflected different consumption figures.
The Court agreed with the Tribunal that clandestine production of steel ingots could not be determined solely on the basis of electricity consumption. It further observed that although the Commissioner had relied upon statements of scrap dealers and invoices, many of those statements had subsequently been retracted during cross-examination or the witnesses had not appeared before the adjudicating authority. Consequently, the Commissioner had erred in relying upon such material without adequate support.
The High Court found no reliable evidence establishing procurement of raw materials outside the books of account, clandestine clearance of finished goods without payment of duty, or receipt of sale proceeds from such alleged clearances. It also observed that there was inconsistency between the oral testimony of the expert witness and the documentary material relied upon by the Revenue. In these circumstances, it held that the excise demand, which substantially rested on power consumption analysis, was unsustainable. Finding no error in the Tribunal’s appreciation of the evidence or its conclusions, the Court answered the substantial questions of law in favour of the assessee and dismissed the Revenue’s appeal.
FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT
The appellant – Commissioner of Central Excise (hereinafter referred to as, ‘revenue’) has preferred this appeal assailing the order dated 25.02.2011 in Final Order Nos.176-180/2011 passed by the Customs, Excise and Service Tax Appellate Tribunal (for brevity, “Tribunal”), whereby the Tribunal allowed the appeals filed by the assessee in Appeal Nos.E/721-723/2007 and E/840/2008, and rejected the appeal filed by the revenue in Appeal No. E/737/2007 and confirmed the demand of duty covered under the show-cause notices dated 11.08.2006, 29.01.2007, and 29.10.2007 issued by the revenue, while rejecting the revenue’s prayer for enhancement of duty.
2. The facts, in a nutshell, are that M/s. Saravana Alloy Steel Private Limited (for brevity, “SAPL”) is engaged in the manufacture of non-alloy steel ingots and rolled products falling under Chapter 72 of the Central Excise Tariff Act, 1985. It has two units. The ingots procured from Unit I on a stock-transfer basis, as well as the ingots manufactured in Unit II, are captively consumed in the manufacture of CTD bars and rods.
3. Based on specific intelligence gathered by the officers of the Directorate General of Central Excise Intelligence, that SAPL was evading Central Excise duty by resorting to clandestine removal of excisable goods manufactured by it, search operations were conducted on 02.09.2004 at the factory premises of SAPL, the residence of the Managing Director of SAPL, and the premises of some of its dealers and raw material suppliers, and incriminating records/documents were seized. During the course of investigation, statements of several witnesses were recorded.
4. Subsequently, the investigation revealed that SAPL had clandestinely manufactured and cleared CTD bars. It was also found that the actual power consumed by SAPL for production of ingots and CTD bars was substantially higher than what was required for the accounted production. Therefore, an expert opinion was obtained from Sri G.S.Hegde, Chartered Engineer, to ascertain the actual power required for manufacture of ingots and CTD bars. Accordingly, he submitted his report dated 10.07.2006 and opined that the power required for the manufacture of ingots and CTD bars was 1000 KWH per MT and 200 KWH per MT, respectively.
5. Thus, it was revealed that SAPL had clandestinely manufactured and cleared its goods without payment of the appropriate Central Excise duty. Accordingly, Show Cause Notice No.24/2006-07 dated 11.08.2006 was issued by the Additional Director General, DGCEI, Bangalore, calling upon SAPL to show cause before the Commissioner of Central Excise, Bangalore-II Commissionerate, Bangalore, as to why:
i. Central Excise duty of Rs.7,59,27,962/- being the duty payable on the goods clandestinely manufactured and cleared by them during the period from August 2001 to December, 2005, should not be demanded from them under proviso to sub-section (1) of Section 11A of the Central Excise Act, 1944.
ii. Amount of Rs.50,00,000/- paid by them towards the duty liability for the past period, should not be appropriated towards the duty determined and demanded at (i) above.
iii. Interest for delayed payment of duty should not be demanded from them under Section 11AB of the Central Excise Act, 1944 in respect of the demand at (i) above.
iv. Penalty should not be imposed on them under Section 11AC of the Central Excise Act, 1944 and also under Rule 25 of the Central Excise (No.2) Rules, 2001/Rule 25 of Central Excise Rules, 2002.
6. Apart from the above, another show cause notice dated 29.01.2007 was issued to SAPL requiring them to show cause to the Commissioner of Central Excise, Bangalore II Commissionerate, Bangalore as to why:
i. Central Excise duty of Rs.1,84,25,204/- being the duty payable on the goods clandestinely manufactured and cleared by them during the period from 01.01.2006 to 31.10.2006 should not be demanded from them under Section 11A of the Central Excise Act, 1944.
ii. Interest should not be demanded from them under Section 11AB of the Central Excise Act, 1944 in respect of the demanded at (i) above.
iii. Penalty should not be imposed on them under Section 11AC of the Central Excise Act, 1944 and also under Rule 25 of the Central Excise Rules, 2002.
7. The above two show cause notices were adjudicated by the Commissioner of Central Excise, Bangalore II Commissionerate by passing the following common Order-in-Original No.9/2007 dated 30.04.2007 vide Annexure-B:
i. Confirmed the demand of duty of Rs.8,25,48,632/- relating to the period from August 2001 to October 2006 i.e., covered in the two show cause notices dated 11.08.2006 and 29.01.2007 and ordered to be recovered from the assessee under proviso to Section 11A of the Central Excise Act, 1944.
ii. Appropriated the amount of Rs.50,00,000/- already paid by the assessee against the demand of duty confirmed at (i) above.
iii. Imposed a penalty of Rs.8,25,48,632/- on the assessee under Section 11AC of the Central Excise Act, 1944.
iv. Imposed a penalty of Rs.5,00,000/- on the assessee under Rule 25 of the Central Excise Rules, 2001/2002.
v. Imposed a penalty of Rs.2,00,000/- each on Sri S.Nagaraji and Sri N.Saravana under Rule 26 of the Central Excise Rules, 2001/2002.
8. Aggrieved by the above order of the Commissioner, the assessee preferred appeals before the Tribunal. Even the revenue preferred an appeal before the Tribunal on the ground that though the total amount of Rs.9,43,53,166/- was demanded in the show cause notices, the Commissioner has confirmed duty amount of Rs.8,25,48,632/-.
9. Later, one more show cause notice dated 29.10.2007 was issued to SAPL requiring SAPL to show cause as to why –
i. Central Excise duty of Rs.1,17,17,417/- being the duty payable on the goods clandestinely manufactured and cleared by them during the period from 01.11.2006 to 30.06.2007 should not be demanded and recovered from them under proviso to Section 11A(1) of the Central Excise Act, 1944.
ii. Interest should not be demanded from them under Section 11AB of the Central Excise Act, 1944 in respect of the demanded at (i) above.
iii. Penalty should not be imposed on them under Section 11AC of the Central Excise Act, 1944 and also under Rule 25 of the Central Excise Rules, 2002.
10. The aforesaid show cause notice was adjudicated by the Commissioner of Central Excise, Bangalore-II Commissionerate, vide Order-in-Original No. 12A/2008 dated 30.04.2008, whereby the demand of duty of Rs.1,17,17,417/- relating to the period from 01.11.2006 to 30.06.2007 was confirmed and ordered to be recovered from the assessee under Section 11A of the Central Excise Act, 1944. A penalty of Rs. 1,17,17,417/-was also imposed on the assessee under Section 11AC of the Central Excise Act, 1944. Further, a penalty of Rs. 2,00,000/-was imposed on the assessee under Rule 25 of the Central Excise Rules, 2002. Interest was also demanded under Section 11AB of the Central Excise Act, 1944.
11. Aggrieved by the above order also, the assessee preferred an appeal before the Tribunal.
12. The Tribunal, vide Final Order Nos. 176 to 180/2011 dated 25.02.2011, while considering all the appeals, confirmed Order-in-Original No.9/2007 dated 30.04.2007 and Order-in-Original No.12A/2008 dated 30.04.2008 passed by the Commissioner of Central Excise. The Tribunal thereby confirmed the demand of duty covered under the show-cause notices dated 11.08.2006 and 29.01.2007 issued by the revenue, while rejecting the revenue’s prayer for enhancement of duty.
13. The revenue, being aggrieved by the same, has preferred the instant appeal.
14. The instant appeal was heard by a Co-ordinate Bench of this Court on 04.09.2014 and was dismissed on the ground that any question relating to the value of goods for the purpose of assessment falls outside the purview of Section 35G of the Central Excise Act and squarely within the ambit of Section 35L of the Act, which is required to be determined by the Hon’ble Apex Court. Aggrieved by the said order, the revenue preferred Civil Appeal Nos. 2675-2679/2016 before the Hon’ble Apex Court. The Hon’ble Apex Court, by invoking its extraordinary power under Article 142 of the Constitution of India, set aside the order passed by the Co-ordinate Bench of this Court in CEA Nos. 34-37/2011 and 13/2012 and restored the appeals to the file of this Court, directing this Court to dispose of the same on merits.
15. Heard the learned counsel Sri Aravind V.Chauhan for the appellant and Smt Vani H., learned counsel for the respondent.
16. Apart from raising several contentions, learned counsel for the appellant primarily contended that the Tribunal had grossly erred in setting aside the demand on the ground that determination of clandestine production of steel ingots solely on the basis of power consumption is not safe and reliable. It was submitted that the department had obtained an expert opinion from a Chartered Engineer regarding the maximum energy consumption for the manufacture of ingots and CTD bars. As per the said opinion, the maximum energy required for manufacture of ingots was 1000 KWH per MT and 200 KWH per MT for manufacture of CTD bars. Further, the Chartered Engineer had assessed that the average energy consumption of the factory was 1200–1250 KWH per tonne. It was also contended that the Department had relied upon the technical opinion/report of the Nucleus Groups set up by the Central Excise and Customs Department, according to which, the energy consumption for production of steel ingots varies from 500 to 1026 KWH per tonne. It was further pointed out that the Tribunal had not considered the report of the qualified engineer engaged by the assessee, namely, K. Ramesh.
17. Further, he also contended that the Tribunal has erred in not considering the aspect that there were cases of procurement of raw materials, i.e., scrap, without proper account. It was submitted that the available computer printouts and invoices establish clandestine removal of goods, supported by corroborative documentary evidence. The evidence of one Saravana, Director of SAPL, clearly revealed clearance of goods under parallel and duplicate invoices, which were unaccounted for and were cleared to other customers. Further, verification of records and loose slips recovered from the premises of M/s. R.G. Trading Company revealed that a total quantity of 6,48,355 kg of scrap for the period from February 2004 to July 2004 was supplied to SAPL. However, the same was not reflected in the ledger account. This fact was admitted by the Director, G. Nagaraji. Similarly, loose slips recovered from the premises of Azad Steels indicated purchase of 1,242.043 metric tonnes by SAPL without accounting. The said fact was also admitted by the Managing Director. The transportation of goods was also admitted by the drivers of the company in their voluntary statements.
18. It was further contended that, without properly appreciating all these aspects, the Tribunal has passed the impugned order confirming the demand and penalty imposed in Order-in-Original No.9/2007 and Order-in-Original No.12A/2008 dated 30.04.2008 passed by the Commissioner, which has resulted in grave injustice. As such, it was submitted that the impugned order is liable to be set aside, and the appeal be allowed.
19. Per contra, learned counsel for the respondent – SAPL, supporting the impugned order, contended that the Tribunal, on assessment of evidence and materials available on record, has passed a well-reasoned order which does not call for any interference by this Court. According to her, the Commissioner passed the Order-in-Original confirming a huge demand based on consumption norms recommended by one G.S. Hegde, without determining each furnace separately with reference to its capacity, size, make, and age. His report did not involve any test run of the machines and did not disclose any authority for arriving at the standard norm of 700–800 units for production of 1 tonne of ingots and 100–125 units for 1 tonne of CTD bars. In cross-examination, the said witness has categorically admitted the above aspects.
20. Further, it is stated that the conclusion was arrived at by the Commissioner based on the statement of the Managing Director of the company, and the said statements were subsequently retracted vide affidavit/retraction letter dated 03.11.2004. According to her, the allegations of unaccounted purchase of scrap based on loose sheets recovered from dealers ought not to have been relied upon by the Commissioner, since the same did not contain the name of the assessee or any signature and were merely ‘kaccha slips’. The cross-examination of the Investigation Officer on this aspect was denied.
21. Learned counsel further contended that entire documents relied upon by the Commissioner were vague, and the Commissioner ignored the retraction of the initial statement of M.A.Gaffar regarding the entries. As such, there is no tangible evidence to establish clandestine manufacture and clearance of ingots and CTD bars by the company without payment of duty. By appreciating all these aspects, the Tribunal has rightly passed the impugned order. Accordingly, she prays for dismissal of the appeal.
22. This Court, while admitting this appeal, has framed the following substantial questions of law:
“1. Setting aside the duty demanded and confirmed by totally ignoring the evidences of more power consumption than that required for production of quantity shown in the statutory records to have been produced as well as other corroborative documentary evidences?
2. Ignoring the evidences in the form of statements of various persons recorded under Section 14 of Central Excise Act substantiating department’s case?
3. Setting aside the penalty imposed on the asssesee under Section 11AC of Central Excise Act, 1944 and under Rule 25 of Central Excise Rules, 2002?
4. Setting aside the penalty imposed on the Managing Director and Director under Rule 25 of Central Excise Rules, 2002?
5. Whether the Hon’ble CESTAT erred in law in setting aside the order of the Adjudicating Authority in a case of Clandestine Removal and Clandestine Manufacture of Excisable Goods, by substituting its own appreciation of evidence for that of the Commissioner, holding the extended period of limitation under the proviso to Section 11A of the Central Excise Act, 1944 inapplicable and interfering with the penalty imposed under Rule 25 of the Central Excise Rules, 2002 read with Section 11AC of the Act and the order of confiscation?”
23. We have given our anxious consideration to the submissions made by the learned counsel for the respective parties, so also perused the documents and materials available on record.
24. As all the questions of law raised are interrelated, they are dealt with and answered together.
25. As could be gathered from the records, it is not in dispute that the assessee company was engaged in the manufacture of ingots and CTD bars. It had two induction furnaces of 2.5 MT capacity each and two furnaces of 7 MT capacity each. The principal allegation against the assessee is that it indulged in large-scale evasion of duty by resorting to clandestine manufacture and removal of finished goods. To establish this allegation, the revenue has primarily relied upon the evidence stated to have been recovered by the Directorate General of Central Excise Intelligence, namely invoices used by SAS, alleged non-accountal of scrap purchased from three dealers, alleged under-valuation of scrap, data recovered from the computer of SAS, excess consumption of electricity beyond industry norms, and the statements of the Managing Director and other persons.
26. On careful examination of the Order-in-Original passed by the Commissioner, confirming a demand, it is seen that the demand was substantially founded on consumption norms furnished by one G.S. Hegde and one K. Ramesh, both Chartered Engineers, as well as the technical report of the Nucleus Group. In cross-examination of G.S. Hegde, it was categorically elicited that no trial production was conducted at the assessee’s plant during his study for ascertaining power consumption. He further admitted that there was no standard data or technical literature available to arrive at a fixed standard of power consumption. He also conceded that he had not separately factored the 2.5 MT capacity furnace at the assessee’s plant, while the 7 MT furnaces were relatively newly installed. He further admitted an error in his calculation in adopting 400 heats per month instead of 150 heats. His evidence further discloses that the power consumption was determined on the basis of reasonable estimation without any scientific backing or technical literature prescribing standard norms, and without proper adjustment for variations in raw material, furnace condition, and other relevant operational factors affecting output. These aspects of the matter have been elaborately considered and dealt with by the Tribunal.
27. The evidence of another witness, K. Ramesh, a qualified engineer, indicates that power consumption varied from 1510 to 1870 units for one ton of CTD bars in the plant. However, this opinion was not duly considered by the Commissioner. Though the Commissioner placed reliance on the study conducted by the National Institute of Secondary Steel Technology, which estimated the power consumption per ton of ingot at 1427 KWH, another technical report of the Nucleus Group set up by the CBEC indicated that the energy consumption for production of steel ingots varied from 500 to 1026 KWH per tonne.
28. By examining the above evidence and materials on record, we are of the view that the Tribunal has rightly held that clandestine production of steel ingots cannot be determined solely on the basis of power consumption. Though the Commissioner has placed reliance on the statements of scrap dealers and invoices, it is seen that the said dealers had subsequently retracted their statements in cross-examination and in their evidence, and some of them had not even appeared before the Commissioner. In these circumstances, the Commissioner has erred in placing reliance on such invoices and the evidence of scrap dealers.
29. There is no reliable evidence on record to establish procurement of raw materials outside the books of account, clandestine clearance of finished goods without payment of duty, or receipt of sale proceeds therefrom. Thus, there exists a clear inconsistency between the oral testimony of G.S. Hegde and the documentary material relied upon by the Revenue. In such circumstances, the demand confirmed by the Commissioner, resting substantially on the power consumption analysis as assessed by the expert G.S.Hegde, is untenable. The Tribunal has, therefore, correctly appreciated these aspects of the matter in the light of the settled position of law. We find no error in the impugned order of the Tribunal.
30. Accordingly, we answer substantial questions of law Nos. 1 to 4 in the affirmative and substantial question of law No. 5 in the negative. Consequently, the appeal is dismissed.
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