CESTAT Quashes SCN for Lack of Suppression or Misstatement Allegations

Nexteer Automotive India Pvt Ltd Vs Commissioner of Central Excise and Service Tax (CESTAT Bangalore)

CESTAT Quashes SCN for Lack of Suppression or Misstatement Allegations: Penalty cannot be imposed based solely on audit observations

Introduction: In a significant ruling, the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) Bangalore has quashed Show Cause Notices (SCN) against Nexteer Automotive India Pvt. Ltd. The Tribunal ruled that there were no allegations of suppression or misstatement of facts under Section 11 A(4) of the Central Excise Act (CEA).

What Led to the SCN?: Nexteer Automotive India Pvt. Ltd., a manufacturer of excisable goods, was audited for the period from January to December 2013. During this period, irregular credits were found in their accounts, which were later reversed by Nexteer on January 30, 2014. Despite this, multiple SCNs were issued, citing various amounts of tax involved.

Imposition of Penalty and Subsequent Appeals: Initially, a penalty of 50% of the duty involved was imposed on Nexteer. The company appealed against this decision, and the Commissioner (A) remanded the case to the Original Authority. However, the penalty was reimposed. Another appeal led to the upholding of this penalty by the Commissioner (A) once again.

The CESTAT Hearing: Arguments from Both Sides: During the CESTAT hearing, Nexteer’s representative argued that no penalty should be imposed, as they had immediately reversed the irregular credits. On the other hand, the representative for Revenue cited legal provisions to justify the penalty.

Why Were the SCNs Quashed?

CESTAT Bangalore noted that the SCNs failed to specify any allegations under Section 11 A(4) of the CEA. Moreover, Nexteer had immediately reversed the credit, and the audit report had acknowledged this, stating that no interest and penalty should be charged.

Reliance on Previous Rulings: Nexteer relied on past decisions, such as Landis+GYR Ltd. Vs. Commissioner of Central Excise Kolkata, to fortify their case. These cases also questioned the validity of imposing penalties based solely on audit findings, without evidence of intentional evasion of tax duties.

Conclusion: CESTAT Bangalore’s decision to quash the SCNs against Nexteer Automotive India highlights the importance of specifying allegations under Section 11 A(4) of CEA for imposing penalties. This ruling serves as an important precedent, emphasizing that penalties cannot be imposed based solely on audit observations unless there is evidence of intentional wrongdoing.

FULL TEXT OF THE CESTAT BANGALORE ORDER

M/s. Nexteer Automotive India Pvt. Ltd, the appellants are manufacturers of excisable goods viz., Halt Shaft Assembly, Column Assembly, Steering Assembly, etc. Audit officers visited the premises of the appellant and audited their records for the period from January 2013 to December 2013. During the course of audit, the audit officers found that the appellant had availed irregular credit and the entire credit was reversed by the appellant on 30.01.2014. The audit report dated 9.4.2014 observed that “As the assessee had maintained sufficient balance in their cenvat account all along, the assessee was not charged with interest and penalty.” However, show-cause notices were issued at a later date as furnished below:

These show-cause notices were adjudicated vide Order-in-Original No.25/2016; No.26/2016; No.27/2016 of 2016 all dated 29.7.2016 and Order-in-Original No.49/2016 dated 20.12.2016 wherein the Original Authority had imposed 50% of duty involved as penalty. Aggrieved by this order, the appellant preferred an appeal before the Commissioner (A), the Commissioner (A) vide Order-in-Original No.161-164/2018 dated 16.2.2018 remanded the cases to the Original Authority after observing that since the appellant had sufficient credit balance available in the CENVAT account and the fact that the credit so availed was never utilised, there appears to be no reason for imposing penalties as the credit was reversed on 30.01.2014 much before the issue of demand notice. Based on this remand proceedings, the Original Authority vide Order-in-Original No.1/2019-20 dated 7.5.2019 once again imposed penalty on the appellant which is equivalent to 50% of the duty was leviable. The appellant filed an appeal against this order and the Commissioner (A) in the impugned order No.312/2022 dated 30.8.2022, upheld the order of the Original Authority by imposing penalty.

2. When the appeal came up for hearing today, the learned Chartered Accountant Mr. Vinayaka Hegde, on behalf of the appellant submitted that the audit parties in their audit report had categorically mentioned that the assessee was not charged with interest and penalty since they had immediately reversed the credit and sufficient balance of credit was available in their records. Therefore, the show-cause notice was irregular and the adjudicating authorities should not have imposed penalty on them as is observed by the audit parties. They also submitted that the Commissioner (A) had also in his Order-in-Appeal No.161-164/2018 dated 16.2.2018 had clearly observed that since credit was reversed in 2014 much before the issuance of show-cause notices and there was sufficient credit available in their CENVAT account, therefore, imposition of penalty was not necessary but however, he remanded the case to the original authority to decide afresh.

2.1 The learned Chartered Accountant also relied on the decision in the case of Landis + Gyr Ltd. vs. Commissioner of Central Excise, Kolkata-V: 2017 (49) S.T.R. 637 (Tri.-Kolkata) wherein it was held that adjudicating authorities had not discussed the facts that which were suppressed or mis-declared or mis­stated by appellant except observing that the audit had pointed the irregular credit availed by them. And in para 6 and 7, it has further held that:

“6. ………………………………. I also find that the Adjudicating authority as well as the Appellate authority did not discuss the facts which were suppressed or mis-declared or mis-stated by the appellant, except observing that had the Audit not pointed out the said wrong credit, the amount would not have been recovered from the appellant. I find this reasoning standing alone cannot be accepted as a ground for confirming suppression, mis-statement or mis-declaration of facts by the appellant, in availing the inadmissible CENVAT credit on the input services used in the trading of the goods and not in or in relation to the manufacture of the goods.

7. Needless to mention, the very objective of conducting the Audit of records of an assessee is to ascertain the correctness of payment of duty, availment of CENVAT credit, etc.. Any shortcomings noticed during the course of Audit, itself cannot be reasoned that the deficiency was due to mala fide intention on the part of assessee.

2.2 Further, reliance was placed on the decision rendered by the Hon’ble High Court of Karnataka in the case of Commr. of Central Excise, Bangalore-I vs. Geneva Fine Punch Enclosures Ltd.: 2011 (267) E.L.T. 481 (Kar.) wherein it has been held that:

“6. Further that the entire duty and interest was paid voluntarily on being pointed out. It held that no case for imposing the penalty is made out. The commissioner was in total error in passing the order and imposing the penalty. Under these circumstances, we do not find any infirmity in the order passed by the Tribunal. No substantial question of law involved in this appeal that arises for consideration. Hence, the appeal is dismissed.”

3. The learned Authorised Representative for the Revenue submitted that as per Section 11A(5):

Section 11A(5): Where, during the course of any audit, investigation or verification, it is found that any duty has not been levied or paid or short-levied or short-paid or erroneously refunded for the reason mentioned in clause (a) or clause (b) or clause (c) or clause (d) or clause (e) of sub­section (4) but the details relating to the transactions are available in the specified record, then in such cases, the Central Excise Officer shall within a period of five years from the relevant date, serve a notice on the person chargeable with the duty requiring him to show cause why he should not pay the amount specified in the notice along with interest under Section 11AA and penalty equivalent to fifty percent of such duty.”

He submits that appellant was liable to pay 50% of penalty which has been rightly imposed by the adjudicating authority. He also relied on the judgment rendered in the case of Alstom Projects India Ltd. vs. Commissioner of Customs, C. Ex. And Service Tax, Coimbatore: 2018 (3) TMI 604 – CESTAT CHENNAI and in the case of Commissioner of Central Excise, Allahabad vs. NIBI Steel Ltd.: 2008 (11) TMI 474 – CESTAT, New Delhi wherein it was discussed that the appellants are rightly to be penalised for having availed irregular credit.

4. Heard both sides. The audit officers visited the appellant’s unit in the month of January and February 2014 and during the course of audit, they noted that some irregular credit was being availed on certain input services. Irregular credit taken on input services during the period from January 2013 to December 2000 was ₹87,811, 4,45,680 and 2,86,271 and these amounts were reversed by the appellant on 30^th January 2014. The audit report dated 9/4/2014 admitting the payments made by the appellant stated “as the assessee had maintained sufficient balances in their cenvat account all along the assessee was not charged with interest and penalty”. Later on, show cause notices dated 18 January 2016 and 22 January 2016 were issued imposing penalty on the appellant under Section 11A(5) read with Section 11AC of the Central Excise Act 1944. These show cause notices which culminated into Order-in-Original was set aside by the Commissioner(Appeals) on the ground that “given the fact that the audit objections were accepted by the appellant and the amounts demanded were paid up by way of a reversal of credit and also noting that the appellant had sufficient credit balance available in the cenvat account and the fact that the credit so availed was never utilised, there does not appear to be any case for imposing penalties since the amount availed as credit was reversed in 2014 much before the issue of the demand notice”. However, the Commissioner (Appeals) had remanded for de novo adjudication which has resulted in the present impugned order justifying the imposition of penalty. The above facts are undisputed and therefore the question now arises is whether the notices issued in 2016 which resulted in the issuance of the impugned order for imposing penalty was legally correct and justifiable.

5. Let’s examine section 11A(4) and 11A(5) under which the notices were issued. The relevant clauses of section 11A reads as follows:

(4) Where any duty of Excise has not been levied or paid or has been short levied or short paid or erroneously refunded, by the reason of-

(a) fraud; or

(b) collusion; or

(c) any wilful misstatement; or

(d) suppression of facts; or

(e) contravention of any of the provisions of this act or of the rules made thereunder with intent to evade payment of duty

(5) where, during the course of any audit, investigation or verification, if it is found that any duty of Excise has not been levied or paid or has been shot levied or short period or erroneously refunded for the reasons mentioned in clause (a) or (b) or (c) or (d) or (e) of sub-section (4) of section 11A the details relating to the transaction are available in the specified record, then in such cases, the central excise officer shall, within five year period from the relevant date serve a notice on the person chargeable with the duty requiring him to show cause why he should not pay the amount specified in the notice along with interest under section 11AA with penalty equivalent to 50% of such duty demanded”.

In order to invoke these provisions, it is necessary to prove either fraud or collusion or wilful misstatement or suppression of facts or contravention of any of the provisions with intention to evade payment of duty. Unfortunately, none of these ingredients have been invoked in the notices and the impugned order also does not provide any evidences except to state that that the irregular availment of cenvat credit came to light only at the time of audit. In this regard the observations made by the tribunal in the case of Landis+GYR Ltd. Vs. Commissioner of Central Excise Kolkatta-V: 2017 (49) STR 637 becomes relevant, the Tribunal observed that “the adjudicating authority as well as the appellate authority did not discuss the facts which were suppressed or mis-declared or have been recovered from the appellant, except observing that had the audit not pointed out the said wrong credit, the amount would not have been recovered from the appellant. I find this reasoning standing alone cannot be accepted as a ground to confirming suppression, the statement or mis-declaration of facts by the appellant, in availing the inadmissible cenvat credit on the input services using the trading of the goods and not in relation to the manufacture of the goods”. The present case is based only on the audit para and there is no iota of evidence to prove either suppression or misdeclaration of facts or contravention of provisions with intention to evade payment of duty. On the other hand, the appellant immediately reversed the credit as and when it was pointed out by the audit officers and the officers clearly noted that interest and penalty are not to be levied. Inspite of these notices were issued after nearly 2 years after the audit observations and reversal of credit.

6. Moreover, during the relevant period section 11A (2B) which reads as follows:

“Where any duty of excise has not been levied or paid or has been short-levied or short-person paid or erroneously refunded, the person, chargeable with the duty may pay the amount of duty (on the basis of his own ascertainment of such duty or on the basis of duty ascertained by a Central Excise Officer before service of notice on him in the sub-section (1) in respect of the duty, and inform the Central Excise Officer of such payment in writing, who on receipt of such information shall not serve any notice under sub-section (1) in respect of the duty so paid”.

These provisions are rightly applicable in the facts and circumstances of the present case as there is no allegation of suppression or misstatement of facts or any other sub-clauses of section 11 A(4).

7. In similar set of facts and circumstances, the Hon’ble Karnataka High Court in the case of Commissioner of Central Excise Bangalore-I versus Geneva Fine Punch Enclosures Ltd.: 2011 (267) E.L.T. 481 (Kar.) held that “the determination of liability to pay duty is a condition precedent for imposing penalty. If demand of duty is coupled with intention to evade and without contesting the claim voluntarily pays the duty and interest payable thereon for the delay in payment of duty on the stipulated date, the question of the officer determining the duty payable would not arise. It is only in some cases where duty is determined coupled with the fact that the duties evaded by reason of fraud, collusion or any wilful misstatement or suppression of facts or contravention of any of the provisions of this act or the rules made thereunder with intent to payment of duty, the liability to pay penalty arises. Secondly, the aforesaid requirement i.e., the cause of evasion of duty is not mentioned in the show cause notice. Further that the entire duty and interest was paid voluntarily on being pointed. It held that no case for imposing the penalty is made out”. With these observations the order of the Tribunal held not to impose penalty, was upheld by the Hon’ble High Court of Karnataka.

8. In view of the above observations on merit and on the basis of the decisions as discussed above, I find no merit either in the show-cause notices or in the impugned order.

9.  Accordingly, the impugned order is set aside and the appeal is allowed.

(Order pronounced in open court on 31/08/2023.)