Relying on statement without following procedure u/s 9D of Central Excise Act unsustainable

Commissioner Vs Bonafide Arts Pvt Ltd (CESTAT Delhi)

CESTAT Delhi held that denial of CENVAT Credit alleging non-receipt of goods based on statements without following procedure prescribed under section 9D of the Central Excise Act, 1944 is unjustified and unsustainable in law.

Facts- M/s Bonafide Arts Pvt Ltd., Jaipur is a manufacturer of MS billets falling under Chapter Heading 720 71920 of the First Schedule of the Central Excise Tariff Act, 1985.

Based on an investigation report, officers of the Central Excise Commissionerate, Jaipur initiated enquiries from the second stage dealer of Jaipur M/s Shree Mahalaxmi Scrap Trading Company who had supplied scrap to the respondent to ascertain the names of the first stage dealers from whom M/s Shree Mahalaxmi purchased the goods and also the names of the manufacturers whose goods were supplied.

After completing the investigation, a show cause notice was issued to the respondent proposing to recover CENVAT credit of Rs. 89,91,247/- under rule 14 of the CENVAT Credit Rules, 2004 read with section 11A (4) of the Central Excise Act , 1944. Interest was also proposed to be recovered under rule 14 of CCR read with section 11 AA of the Act. Penalty was proposed to be imposed under rule 15 (2) of CCR read with section 11AC of the Act. The Additional Commissioner passed O-I-O disallowing the CENVAT Credit and ordering its recovery along with interest as proposed in the show cause notice. On appeal, the Commissioner (Appeals), by the impugned order, set aside the O-I-O. Being aggrieved, revenue has preferred the present appeal.

Conclusion- Held that if the manufacturer had not manufactured the goods they could not have been supplied by the manufacturer to the first stage dealer and further to the second stage dealer and to the respondent. It certainly creates enough reasons to doubt but the issue can only be decided through a thorough investigation. If the assessee says that it had received the goods, the question is, if the second stage dealer had supplied the goods. In this case, he says he had supplied the goods. The next question is to enquire if the first stage dealer had sold the goods to the second stage dealer. The third stage of investigation is ascertaining if the manufacturer had supplied to the goods to the first stage dealer. Examining the records of each of this individual companies/ firms and recording their statements can only reveal the complete truth. If such an investigation requires statements to be recorded and if revenue proposes to use such statements in the proceedings against the assessee the procedure prescribed under the section 9D has to be followed. Otherwise, such statements are not only NOT admissible but are not even relevant to the proceedings. In this case, all the statements are rendered irrelevant as the Adjudicating Authority had not followed the procedure prescribed under section 9D.

FULL TEXT OF THE CESTAT DELHI ORDER

1. Revenue filed this appeal bearing Excise Appeal No. 50705 of 2020 to assail the order-in-appeal¹ dated 09.12.2019 passed by the Commissioner (Appeals) whereby he set aside the order-in-original²dated 28.02.2019 passed by the Additional Commissioner of CGST, Jaipur and allowed the assessee’s (respondent herein) appeal. Memorandum of Cross Objections bearing No. 50185 of 2020 has been filed by the Respondent praying that the appeal is not sustainable on merit and facts of the case and hence may be dismissed.

2. M/s Bonafide Arts Pvt Ltd., Jaipur³ is a manufacturer of MS billets falling under Chapter Heading 720 71920 of the First Schedule of the Central Excise Tariff Act, 1985. It avails CENVAT credit on the inputs which it receives and uses in the manufacture of the final products. Based on an investigation report of the Directorate General of Central Excise Intelligence dated 17.07.2015 and an alert notice dated 05.1.2016, officers of the Central Excise Commissionerate, Jaipur initiated enquiries from the second stage dealer of Jaipur M/s Shree Mahalaxmi Scrap Trading Company who had supplied scrap to the respondent to ascertain the names of the first stage dealers from whom M/s Shree Mahalaxmi purchased the goods and also the names of the manufacturers whose goods were supplied. Statements were recorded and after completing the investigation, a show cause notice dated 13.02.2018 was issued to the respondent proposing to recover CENVAT credit of Rs. 89,91,247/- under rule 14 of the CENVAT Credit Rules, 2004⁴ read with section 11A (4) of the Central Excise Act , 1944⁵. Interest was also proposed to be recovered under rule 14 of CCR read with section 11 AA of the Act. Penalty was proposed to be imposed under rule 15 (2) of CCR read with section 11AC of the Act. After considering the written submissions by the respondent and the submissions made during personal hearing, the Additional Commissioner passed O-I-O disallowing the CENVAT Credit and ordering its recovery along with interest as proposed in the show cause notice. He also imposed penalty of Rs. 89,91,247/- upon the respondent under rule 15 (2) of CCR read with section 11AC. He further imposed a penalty of Rs. 1 lakh each upon the noticees nos. 2 to 8 of the show cause notice. On appeal, the Commissioner (Appeals), by the impugned order, set aside the O-I-O.

3. Aggrieved by the impugned order, Revenue filed this appeal.

4. Revenue’s submissions:

On behalf of the revenue, learned authorized representative made the following submissions

(i) An investigation was initiated on the basis of intelligence received from DGCEI that some second stage dealers were issuing invoices without actually supplying goods thereby allowing assessee to avail ineligible CENVAT credit. One of these second stage dealers was M/s Mahalaxmi from whom the respondent had procured invoices on which it availed CENVAT Credit. M/s Mahalaxmi had issued the invoices on the basis of the first stage dealer invoices issued by (a) Maa Parvati Engineering & casting, Kulti, (b) Surya Udyog Corporation, Kulti and (c) Hari Om Udyog, Purulia. These first stage dealers, in turn, claimed to have purchased the goods from manufacturers (a) M/s Vedic Chemicals Pvt Ltd. (b) M/s Aditya Enterprises, Bukaro and (c) M/s Ganpati Enterprises, Dhanbad. Statement of Manoj Vijay, the authorized signatory of the second stage dealer was recorded on 20.07.2016 under section 14 of the Central Excise Act in which he, inter alia, stated that they had never received the goods in physical form into their premises and had issued invoices on the basis of the invoices provided by the first stage dealers. Based on the investigation by DECEI and the relevant documents and statements the aforesaid SCN was issued. This SCN is based on 9 relied upon documents⁶ as follows;

(a) RUD-1- A letter dated 17.07.2015 issued by the Additional Director, DECEI, Jamshedpur;

(b) RUD-2- Statement dated 24.09.2014 of Shri Sudarshan Singh, Proprietor of Aditya Enterprises, Bokaro;

(c) RUD-3-Aletter 05.01.2016 of the Additional Commissioner, Central Excise and Service Tax, Dhanbad;

(d) RUD-4- Letter dated 31.05.2016 of the Superintendent of Central Excise Range, Kulti Asansol-III Division, Dist. Burdwan;

(e) RUD-5-Statement dated 15.07.2014 of Shri Ajay Kumar Sharma Proprietor of M/s Hari Om Steel Jamshedpur & M/s Hari Om Udyog, Purulia, West Ban gal;

(f) RUD-6- Statement dated 20.07.2016 of Shri Vakil Luhar, proprietor of M/s Shree Mahalaxmi Scrap Trading Co., Jaipur;

(g) RUD-7- Statement dated 20.07.2016 of Shri Manoj Vijay, Authorised Signatory of M/s Shree Mahalaxmi Scrap Trading Co., Jaipur;

(h) RUD-8- Statement dated 30.01.2017 tendered by Shri Dharamveer Singh, Director of the assessee;

(i) RUD-9- Invoices raised by M/s Shree Mahalaxmi Scrap Trading Co., Jaipur on whose strength CENVAT credit has been availed.

5. Learned authorized representative submits that the impugned order is NOT proper and legal as the Commissioner (Appeals) ignored the following findings;

i. the Central Excise duty was not paid or credited to the Government Exchequer by the non-existent/ existent manufacturers and, therefore, the CENVAT credit availed on the basis of dealers invoices issued on the basis of invoices of the said manufacturer is irregular/invalid;

ii. The Superintendent of Central Excise, Burdwan sent a letter dated 31.05.2016 to the jurisdictional excise authority of the respondent’s jurisdiction informing that M/s Vedic Chemicals Pvt Ltd. (who was cited as the manufacturer in some of the invoices) had last filed excise returns on December, 2012 and thereafter stopped filing any returns. Investigations showed that the so called manufacturers M/s Vedic Chemicals did not exist at that address. It is also evident from NSDL website that they had not paid any excise duty from the month of January, 2013.

iii. Insofar as Aditya Enterprises, Bokaro, the second manufacturer is concerned, the statement of Shri Sudarshan Singh, proprietor was taken under Section 14 of the Act. He confirmed the no production activity took place and they had not sold any excisable goods had not issued any invoices.

iv. As far as the third manufacturer M/s Ganpati Enterprises is concerned, the Jurisdictional Additional Commissioner, Dhanbad sent a letter dated 05.01.2016 citing that the manufacturer is not found and he was actually fraudulently passing on CENVAT credit to the dealers.

v. The Commissioner (Appeals) has, in the impugned order, held that the invoices were issued fraudulently but that they were not bogus or fake and hence held that CENVAT credit can be taken on the basis of said invoices. This statement is self contradictory and similar orders giving the same reasoning issued by the Commissioner (Appeals) were set aside by this Tribunal in the case of M/s G L Metalics Pvt Ltd. Vs. CCE, Jaipur and in the case of Prem Jain Ispat Udyog Pvt Ltd. (Excise Appeal No. 50174 of 2019).

vi. The findings of the learned Commissioner (Appeals) that the respondent had purchased M.S scrap after paying duty and though duty may not have been paid as duty to the exchequer since the respondent was not part to the fraud credit would be available is not correct.

vii. The Commissioner (Appeals) wrongly held that when duty paid on finished goods was accepted, it inevitably leads to the evidence of receipt of inputs and their use in manufacture of the finished goods. It is evident from the statement of one of the three manufacturers and the letters from the jurisdictional officers in respect of the other two manufacturers that no manufacture had taken place and no duty was paid and nor was any return filed in ER-1. CENVAT credit cannot be available on the basis of such second stage dealer’s invoices which are issued on the basis of the invoices of “manufactures” who did not exist on pay duty.

viii. The assertion of the respondent that since the full value of the invoices has been paid through the banking channels, CENVAT must be available cannot be accepted for the reason that the goods which were supposed to have been received by the appellant were not even manufactured by the manufacturers indicated in the invoices. The simple fact that the appellant had paid an amount to its dealer as representing excise duty makes no difference to admissibility of the CENVAT credit.

ix. Respondent had pleaded that the adjudicating authority had not followed the procedure under section 9D and, therefore, the statements made before the Central Excise Officers cannot be admitted as evidence. This assertion is not correct; personal hearing was fixed on 06.08.2018 and 11.02.2019 but nobody appeared from the respondent side. Of the three manufacturers the statement of only M/s Aditya Enterprises was recorded and it was called for examination/ cross-examination but the owner of this firm sent an email stating that he was no direct or indirect involvement with the case and framed by someone and his financial conditions did not enable him to seek legal advice. The consultant of the respondent appeared on 22.02.2019 for personal hearing and cross-examination. Thus, it is not proper to say that the opportunity for cross-examination was not provided. The authorized signatory of the second stage dealer appeared for cross-examination and he was cross-examined by the consultant of the respondent on 22.02.2019 during which he reiterated the statements made before the officers under section 14 and had not retracted them. Cross-examination of the truck drivers was not conducted due reasons that there were 106 invoices whose cross-examination was sought by the respondent but the statements of these drivers themselves were not recorded. Since there were no statements of the drivers the question of their cross-examination or their examination in general under Section 9D does not arise.

6. Submissions on behalf of the respondent. The respondent company made the following submissions;

(a) The show cause notice is mainly based on the statements of various persons recorded before the Central Excise Officers and the procedure prescribed under section 9D was not followed in these cases as has been held in Jindal Drugs Pvt Ltd vs. Union of India⁷. A statement recorded under section 9D is relevant to prove a fact only if the person who made the statement is examined by the adjudicating authority and he concludes that the statement must be admitted. This has not been done in any of the statements. Therefore, the statements recorded, namely, RUD-2, RUD-5, RUD-6, RUD-7 and RUD-8 cannot be considered at all. If these are ignored the only basis of the show cause notice are the letters issued by the Additional Director DGCEI (RUD-1) Additional Commissioner, Dhanbad (RUD-3) and Superintendent of Central Excise, Budwan (RUD-4). There is no dispute about RUD-9 which are the undisputed invoices on the strength of which the appellant had taken the CENVAT credit.

(b) No opportunity of cross-examination was provided to the respondent. He sought cross-examination of all the persons whose statements have been relied upon but of the 5 persons only Manoj Vijay authorized signatory of the M/s Shree Mahalaxmi Scrap Company (RUD-7) appeared for cross-examination during which he admitted that the goods have been directly unloaded of the factory of the premises of the respondent. Revenue is relying upon the statement of Vijay that the goods were not received in the premises of M/s Mahalaxmi. It is true that the goods have not gone to the premises of second stage dealers because the goods were, on account of second stage dealer, directly sent to the respondent.

(c) Revenue has not disputed that final products were actually manufactured and sold by the respondent. It would not have been possible to do so unless it had received the inputs for use in their manufacture.

(d) All payments were made by the respondent through banking channels only to the dealers who have supplied the goods under the cover of cenvatable invoices. There is no allegation or evidence of flow back of cash to the respondent.

(e) Reliance has been placed on the judgment of Allahabad High Court in Commissioner of Central Excise and Service Tax, vs. Juhi Alloys Limited⁸, wherein it was held that it would impractical to require the respondent to go behind the record maintain by the first stage dealer to ascertain the original manufacture is issuing or not. The High Court held that CENVAT credit should be allowed if the respondent acted with all reasonable diligence while procuring goods from the The issuance of transaction can further be appreciated by invoices, consignment sent statue records / transpire cross-examination of drivers etc., but no efforts were made in this regard by the revenue. Therefore, revenue submissions are not applicable.

(f) The truck drivers who were supposed to have transported the goods could have been cross-examined to ascertain if the goods were delivered or not but such cross-examination was not allowed by the adjudicating authority.

(g) The investigation is incomplete and the show cause notice is not sustainable.

(h) In view of above the impugned order may be upheld and the revenue’s appeal may be rejected.

7. In his submissions, learned authorized representative sought to show that the vehicles under which the goods were supposed to have been transported under the invoices were not capable of carrying the quantity of steel because there were either small trucks or scooters On a specific query from the Bench, he fairly admitted that this aspect was not made part of the show cause notice.

8. We have considered the submissions of both sides and perused the records.

9. Insofar as the last effort by the learned authorized representative to establish that the vehicles indicated in the invoices were not capable carrying the goods is concerned, we find that this was not part of the show cause notice. Therefore, it cannot be admitted at this stage. There can be many reasons for this anomaly. For example, the goods may have never been transported at all or the goods were transported but the vehicle numbers were wrongly entered in the invoices due to clerical error, etc. This should have been investigated and after investigation an opportunity should have been provided to the assessee to defend its case. We, therefore, find that this assertion cannot be accepted at this stage.

10. The case of the Revenue is that the respondent received cenvetable invoices on the basis of which it had taken CENVAT credit, but it had not received under the goods. It is also the case of the revenue that the invoices carried the name of the first stage dealer as well as the name of the manufacturers. In all, there were three manufacturers of which statement of Sudharshan Singh, Proprietor of Aditya Enterprises, Bokaro was recorded and he admitted they had not manufactured any goods during the period. This is also substantiated by inquiries by the revenue. Insofar as the other two manufacturers, namely, M/s Vedic Chemicals Pvt Ltd. And Ganpati Enterprises, Dhanbad are concerned, the jurisdictional officers reported that these companies did not manufacture any goods at all during the relevant period nor were they even find present at the premises. Statement of Manoj Vijay, the authorized signatory of the second stage dealer, who issued the invoices was recorded and he was also cross-examined before the adjudicating authority. He asserted that they never received the goods in their premises and issued invoices on the strength of invoices issued by the first stage dealer. The case of the revenue is that it implies that goods were never supplied at all. The explanation of the respondent is that the goods were sent directly to their premises without first transporting them to the premises of the second stage dealer. This assertion is also confirmed during cross-examination of Manoj Vijay.

11. We find that the show cause notice is based on 9 relied upon documents of which one is a set of the invoices in dispute (RUD-9). These are alleged to be ineligible for CENVAT credit based on five statements of Sudarshan Singh of Aditya Enterprises (RUD-2), Ajay Sharma of Hari Om Steel (RUD-5), Vakil Luhar of M/s Mahalaxmi Scrap (RUD-6), Manoj Vijay authorized signatory of M/s Mahalaxmi Scrap (RUD-7) and Dharamveer Singh, Director of the assessee (RUD-8).

12. For any document to be used as evidence in any proceedings it must be relevant and admissible. As per section 9D, statements made before the Central Excise Officers will be relevant if procedure prescribed in it is followed:

“9D. Relevancy of statements under certain circumstances.—

(1) A statement made and signed by a person before any Central Excise Officer of a gazetted rank during the course of any inquiry or proceeding under this Act shall be relevant, for the purpose of proving, in any prosecution for an offence under this Act, the truth of the facts which it contains,^—

(a) when the person who made the statement is dead or cannot be found, or is incapable of giving evidence, or is kept out of the way by the adverse party, or whose presence cannot be obtained without an amount of delay or expense which, under the circumstances of the case, the Court considers unreasonable; or

(b) when the person who made the statement is examined as a witness in the case before the Court and the Court is of opinion that, having regard to the circumstances of the case, the statement should be admitted in evidence in the interests of justice.

(2) The provisions of sub-section (1) shall, so far as may be, apply in relation to any proceedings under this Act, other than a proceeding before a Court, as they apply in relation to a proceeding before a Court.”

13. It has been held in a number of decisions including Jindal Drugs that the procedure under section 9D is mandatory. The relevant portion of this decision is as follows:

“ 8. In view of the fact that the case of the petitioners is essentially premised on Section 9D of The Central Excise Act, 1944, it would be appropriate to reproduce the said provision, in extenso, thus :

“9D. Relevancy of statements under certain circumstances.-

(1) A statement made and signed by a person before any Central Excise Officer of a gazetted rank during the course of any inquiry or proceeding under this Act shall be relevant, for the purpose of proving, in any prosecution for an offence under this Act, the truth of the facts which it contains,-

(a) when the person who made the statement is dead or cannot be found, or is incapable of giving evidence, or is kept out of the way by the adverse party, or whose presence cannot be obtained without an amount of delay or expense which, under the circumstances of the case, the Court considers unreasonable; or

(b) when the person who made the statement is examined as a witness in the case before the Court and the Court is of opinion that, having regard to the circumstances of the case, the statement should be admitted in evidence in the interests of justice.

(2) The provision of sub-section (1) shall, so far as may be, apply in relation to any proceeding under this Act, other than a proceeding before a Court, as they apply in relation to a proceeding before a Court.”

9.A plain reading of sub-section (1) of Section 9D of the Act makes it clear that clauses (a) and (b) of the said sub-section set out the 3 of 10 CWP No. 12714 of 2016 circumstances in which a statement, made and signed by a person before the Central Excise Officer of a gazetted rank, during the course of inquiry or proceeding under the Act, shall be relevant, for the purpose of proving the truth of the facts contained therein.

10. Section 9D of the Act came in from detailed consideration and examination, by the Delhi High Court, in J.K. Cigarettes Ltd. vs. CCE, 2009 (242) ELT 189 (Del). Para 12 of the said decision clearly holds that by virtue of sub-section (2) of Section 9D, the provisions of sub-section (1) thereof would extend to adjudication proceedings as well.

There can, therefore, be no doubt about the legal position that the procedure prescribed in sub-section (1) of Section 9D is required to be scrupulously followed, as much in adjudication proceedings as in criminal proceedings relating to prosecution.

11. As already noticed herein above, sub-section (1) of Section 9D sets out the circumstances in which a statement, made and signed before a gazetted Central Excise Officer, shall be relevant for the purpose of proving the truth of the facts contained therein. If these circumstances are absent, the statement, which has been made during inquiry/investigation, before a gazetted Central Excise Officer, cannot be treated as relevant for the purpose of proving the facts contained therein. In other words, in the absence of the circumstances specified in Section 9D(1), the truth of the facts contained in any statement, recorded before a gazetted Central Excise Officer, has to be proved by evidence other than the statement itself. The evidentiary value of the statement, insofar as proving the truth of the contents thereof is concerned, is, therefore, completely lost, unless and until the case falls within the parameters of Section 9D(1).

12. The consequence would be that, in the absence of the circumstances specified in Section 9D(1), if the adjudicating authority relies on the statement, recorded during investigation in Central Excise, as evidence of the truth of the facts contained in the said statement, it has to be held that the adjudicating authority has relied on irrelevant material. Such reliance would, therefore, be vitiated in law and on facts.”

14. For this reason alone, all the statements become irrelevant and, therefore, also inadmissible to the present proceedings.

15. The cross-examination of one of the persons Manoj Vijay was allowed in which he asserted that the goods were transported not to his premises but were transported directly to premises of the Once we ignore all these statements, the only evidence left are the letter of the Additional Director, DGCEI indicating that intelligence was received, the letter of the Additional Commissioner, Dhanbad, which is an alert notice indicating that Ganpati Enterprises was found to be non-existent and the letter of superintendent of Central Excise, Burdwan indicating that M/s Vedic Chemicals Pvt Ltd is also closed.

16. In our considered view, these three letters by themselves are not sufficient to establish that no goods were supplied to the respondent and only invoices were supplied on the strength which the respondent had taken CENVAT credit. It needs to be pointed out that the respondent is a user of the scrap which it procured from second stage dealer. The second stage dealer procured the goods from the first stage dealers, who, in turn, indicated that they purchased from the manufacturers.

17. The buyer of scrap or input is not required to launch an investigation to find out if his supplier had, in turn, purchased the goods properly from his suppliers (first stage dealer) and that first stage dealer had, in turn, purchased the goods from the manufacturer and if that manufacturer had, during the relevant time, manufactured the goods and also paid excise duty. All that is required is for the user is to obtain the goods under the cover of proper invoices which the respondent did.

18. It is true that if the manufacturer had not manufactured the goods they could not have been supplied by the manufacturer to the first stage dealer and further to the second stage dealer and to the respondent. It certainly creates enough reasons to doubt but the issue can only be decided through a thorough investigation. If the assessee says that it had received the goods, the question is, if the second stage dealer had supplied the goods. In this case, he says he had supplied the goods. The next question is to enquire if the first stage dealer had sold the goods to the second stage dealer. The third stage of investigation is ascertaining if the manufacturer had supplied to the goods to the first stage dealer. Examining the records of each of this individual companies/ firms and recording their statements can only reveal the complete truth. If such an investigation requires statements to be recorded and if revenue proposes to use such statements in the proceedings against the assessee the procedure prescribed under the section 9D has to be followed. Otherwise, such statements are not only NOT admissible but are not even relevant to the proceedings. In this case, all the statements are rendered irrelevant as the Adjudicating Authority had not followed the procedure prescribed under section 9D.

19. In view of above, we find no reason to interfere with the impugned order. The impugned order is upheld and the appeal filed by the Revenue is dismissed. The Cross Objection filed by the respondent are disposed of.

[Order pronounced on 30.10.2023]

Notes:

1 Impugned order

2 OIO www.taxguru.in

3 the Respondent

4 CCR

5 the Act

6 RUD

7 2016 (340) ELT 67 (P & H)

8 2014 (302) ELT (481)