Tangible evidences required for proving clandestine manufacture & not mere assumptions – HC

Brief of the Case

In the case of Flevel International V/S Commissioner Of Central Excise, it was held by Delhi High Court that the denial of an opportunity of cross-examination of a witness whose statements have been relied upon in the adjudication order would vitiate the order of adjudication. In the present case, the Court finds that despite a specific request made by the Appellant for cross-examination of the witnesses whose statements were recorded and were being relied upon by the Department, no serious attempts were made to secure their presence in the adjudication proceedings. There should be tangible evidence of clandestine manufacture and clearance and not merely inferences or unwarranted assumptions.

Brief Facts

The Appellant, a proprietary concern of which Mrs. Neera Khanna is the sole Proprietor, was engaged in the manufacturing of air-conditioners. The Appellant is also stated to be engaged in the trading of compressors, water coolers, transformers etc. It was a small scale unit and registered as such with the Central Excise Department. It was exempted from payment of excise duty on that basis.

On 28th February, 1992, the officers of the Central Excise Department (hereafter ‘Department’) visited the factory premises of the Appellant. They found 36 air-conditioners (ACs) valued at Rs.7, 92,000/-, 281 compressors valued at Rs.47, 77,000/-, 4 deep freezers valued collectively at Rs.41,500/-and 4 fan motors collectively valued at Rs,1,600/-.

On the same day, the officers of the Department visited the residence of Mr. Pradeep Khanna, the husband of Mrs. Neera Khanna. He was the Proprietor of M/s Thermoking. The officers seized 24 ACs from the residence of Mr. Khanna.

According to the Appellant, immediately thereafter she appeared before the officers of the Department, produced the RG-1 Register and claimed that 36 ACs were duly accounted for therein. The Appellant states that on that very date the 36 ACs, 4 fan motors and 24 ACs seized were released provisionally on 13th April 1992, after the Appellant furnished a bond and bank guarantee.

During the investigation statements were recorded by the officers of the Department of some of the persons who purportedly purchased ACs from the Appellant as well of the representatives of M/s. Sri Ram Refrigeration, Hyderabad (‘SRR’) and M/s. Kirloskar Brothers Ltd., Pune (‘KBL’). The Department served the Appellant with a Show Cause Notice (SCN) dated 27th August, 1992.

The show cause notice also alleged that although the Appellant had supplied and installed ACs, in some instances, the invoices showed the sale of compressors. The scrutiny of the ledger for the years 1988-89 and 1989-90 showed that certain payments had been made and credited in the books but no bill numbers have been mentioned against such receipts and the debit column of the ledgers also reflected the conversing position. The SCN also referred to the statement of one Mr K.V. Subba Rao, Deputy Manager (Marketing) of SRR recorded on 24th June, 1992 regarding supply of compressors to the Appellant, which was registered as an Original Equipment Manufacturer (OEM) to enable them to use the said compressors to manufacture ACs. Reference was also made to statement of one Mr. Pradeep Bhargava who stated that he had joined M/s Thermoking in July, 1998 and had been looking after its accounts, excise, banking and other matters and had been reporting both to Mr Pradeep Khanna as well as Mrs Neera Khanna. Inter alia, a reference was also made to the statement recorded of Mr Shiv Prasad, Manager (Marketing) of KBL on 4th June, 1992 regarding supply of compressors to the Appellant as an OEM. It was suggested that the Appellant being an OEM of ACs could not have traded in compressors without KBL and its other dealers coming to know of it.

In the interim reply dated 31st January, 1995 to the SCN, the Appellant, inter alia, sought the cross-examination of the persons whose statements were referred to therein and stated that all these enquiries are misleading.

The Appellant also asked for cross-examination of certain others including the officers of the Department including Mr. Subba Rao of SRR. A specific request to cross-examine Mr. Pradeep Bhargava was made in the subsequent reply dated 3rd February, 2002.

In the reply dated 3rd February 2002, the Appellant inter alia pointed out that apart from manufacturing ACs, washing machines and geysers, it was also trading in such items as well as compressors, water coolers, heat convectors etc. It was asserted that during the year 1988-89 for all such sales the Appellant had raised proper invoices copies of which were enclosed with the reply. Reference was also made to the statement of Mrs. Neera Khanna before the sales tax authorities and to the fact that the Appellant had a sales tax registration for selling compressors. It was also stated that the Appellant was allowed to retain the Central Excise registration for ACs and for other items which were exempt from payment of duty under Notification No. 175/87. The appellant maintained separate ‘simplified registers’ for such items and those registers were pre-authenticated by the officers of the Department. The Appellant offered to produce such registers at the time of hearing. It was submitted that the figures appearing in the ledger for the year 1988-89 and 1989-90 accounted for sale of goods other than ACs. It was pointed out that ACs required use of components like compressors, cooling coil, condensers, motors, capacitors, sheet metal bodies, plastic grill, filters, fans, blowers, copper tubing, thermostat, gas etc. There was nothing to show that such goods were found in excess or any such quantity was not properly accounted for so as to infer the manufacture of such a huge quantity of ACs as alleged in the SCN.

The Appellant also furnished for each of the year 1988-89 and 1989-90 statements showing item wise sale proceeds receipts in respect of heat convectors, coolers, geysers, water coolers, washing machines and ACs. It was asserted that the figures mentioned were “duly supported by the detailed statements prepared for each year showing reference of bill number, the person to whom goods sold, ledger folio number including the amount charged and also appearing in the ledger.” The statements prepared and enclosed were said to completely tallying with the details of bills indicated in the ledger thus explaining the nexus between the entries and figures with the goods sold. The Appellant pointed out that there was no basis for concluding that 606 ACs had been sold by the Appellant and, therefore, the demand raised in that behalf was unsustainable in law.

The Commissioner of Central Excise („CCE‟) passed the adjudication order on 4th January 2014. According to the CCE, it transpired during investigation that the Appellant was not eligible for exemption under Notification No. 75/87 CE dated 1st March 1987 on the ACs as the aggregated value of clearances of all excisable goods from Thermoking, Jass Kann and Thermotech had exceeded the laid down eligibility limit. The appellant filed an appeal before CESTAT against the Commissioner’s order.

In the appeal filed by the Appellant before the CESTAT there was a difference of opinion between the Hon’ble Members.

The two issues on which there was a difference of opinion was, therefore, (i) regarding clandestine removal of 24 ACs with the duty demand of Rs.3,16,800 and (ii) the duty demand of Rs.58,44,825 for the clandestine clearance of 606 ACs. It was on the above two aspects that reference was made to the third Member.

The resultant position was that by a majority of 2:1, two issues were decided against the Appellant viz., the clandestine removal of 606 ACs with a corresponding duty demand of Rs.58,44,825 and the clandestine removal of 24 ACs with a corresponding duty demand of Rs.3,16,800.

Contentions of the Appellant

The Appellant seeks to urge only one part of the question framed by the Court concerning the alleged clandestine clearance of 606 ACs with the corresponding duty demand of Rs.58,44,825. The Appellant was not pressing the appeal as regards the clandestine removal of 24ACs and the corresponding duty demand. The Appellant, has also drawn the attention of the Court to a decision of the CESTAT in Arya Fibres Pvt. Ltd. v. CCE, Ahmedabad-II 2014 (311) ELT 529 (Tri.-Ahmd.) where the entire law concerning clandestine removal has been discussed and the legal position has been summarised as under:

“(i) There should be tangible evidence of clandestine manufacture and clearance and not merely inferences or unwarranted assumptions;

(ii) Evidence in support thereof should be of:

(a) raw materials, in excess of that contained as per the statutory records;

(b) instances of actual removal of unaccounted finished goods (not inferential or assumed) from the factory without payment of duty;

(c) discovery of such finished goods outside the factory;

(d) instances of sale of such goods to identified parties;

(e) receipt of sale proceeds, whether by cheque or by cash, of such goods by the manufacturers or persons authorized by him;

(f) use of electricity far in excess of what is necessary for manufacture of goods otherwise manufactured and validly cleared on payment of duty;

(g) statements of buyers with some details of illicit manufacture and clearance;

(h) proof of actual transportation of goods, cleared without payment of duty;

(i) links between the documents recovered during the search and activities being carried on in the factory of production; etc.”

Contentions of the Revenue

The Respondent, raised a preliminary objection concerning the maintainability of this appeal. The Revenue pointed out that the Department’s appeal against same impugned order of the CESTAT on the issue of the clubbing of the liability of the Appellant with that of M/s. Jass Kann International and M/s. Thermotech was dismissed by this Court on the ground of maintainability since it involved an issue of exemption which in turn had a relation to the rate of duty of excise. The revenue also relied on an order dated 28th January 2015 passed by this Court in CEAC No. 106/2014 (Commissioner of Central Excise v. Vijay Kumar Arora).

Held by Hon’ble High Court of Delhi

The Hon’ble High Court stated that it is settled law that the denial of an opportunity of cross-examination of a witness whose statements have been relied upon in the adjudication order would vitiate the order of adjudication. In Basudev Garg v. Commissioner of Customs 2013 (294) ELT 353 (Del), this Court referred to Section 9D of the CE Act and noted that even while upholding its constitutional validity in J & K Cigarettes Ltd. v. Collector of Central Excise (2011) 22 STR 225 (Del), a Division Bench of this Court had observed that the circumstances under which the right of cross-examination can be taken away would have to be “exceptional”. This would include circumstances where the person who had given the statement was dead or cannot be found or is incapable of giving evidence or is kept out of the way by adverse party or whose presence cannot be obtained without an amount of delay or expense which, under the circumstances, the Court considers unreasonable. It was held by the Court in Basudev Garg (supra) that “it is clear that unless such circumstances exist the noticee would have a right to cross-examine the person whose statements are being relied upon even in quasi judicial proceedings.”

In the present case, the Court finds that despite a specific request made by the Appellant for cross-examination of the witnesses whose statements were recorded and were being relied upon by the Department, no serious attempts were made to secure their presence in the adjudication proceedings. A perusal of the adjudication order of the CCE shows that as far as Mr. Pradeep Bhargava is concerned, the summons issued to him were returned with the remarks “left without address‟ by the postal authority. No further attempt appears to have been made to secure his presence. After simply noting the above fact the CCE in the order-in-original dated 14th January 2004 observed that “hence no purpose was going to be served by sending a fresh summons to him.”

To say the least, this was the most perfunctory way of dealing with the request, particularly since the statements made by Mr. Pradeep Bhargava, a former employee of M/s. Thermoking, to the effect that 1022 compressors had been diverted by M/s. Thermoking to the Appellant, formed one of the strong pieces of evidence with the Department to conclude that they had been used for manufacture of ACs. The Department failed to show the existence of any of the extraordinary circumstances under Section 9D of the Act to justify the denial of right to cross-examine Mr. Pradeep Bhargava. In the considered view of the Court, this was a serious infraction which vitiated the adjudication order.

As regards the request for cross-examination of the other witnesses, the adjudication order again dealt with this perfunctorily. It simply stated in para 36 that if the request made by the Appellant in the letter dated 31st January 1985 for cross-examination of “such a large number of persons was granted it would have take the case to a non-ending process.” This cannot be a justified reason within the meaning of Section 9D of the Act to deny that opportunity to the Appellant. Further the CCE proceeds to observe that in their reply dated 3rd February 2002 the Appellant had somehow shortened the list of persons it wanted to cross-examine. This is not borne out from the reading of the reply dated 3rd February 2002.

The CCE also wrongly proceeded on the basis that there was no right of cross-examination overlooking the fact that Section 9D of the Act restricts the grounds on which the cross-examination can be denied. It also overlooks the decision of the Supreme Court in Swadeshi Polytex Ltd. v. Collector of Central Excise (2000) 122 ELT 641 (SC) and Laxman Exports Ltd. v. Collector of Central Excise (2002) 143 ELT 21 (SC) to the effect that when a statement is used against an Assessee an opportunity of cross-examining the persons who made those statements ought to be given to the Assessee.

The Hon’ble Court referred to the judgment in the case of GTC Industries Limited v. Collector of Central Excise, New Delhi 1997 (94) ELT 9 (SC), the Supreme Court has frowned upon the practice of the adjudicating authority looking into allegations contained in another SCN to return a finding against the Assessee. In the present case, the CCE has opined that Mr. Pradeep Bhargava‟s statement could not be ignored in view of the SCN issued to M/s. Thermoking. The Court is informed that the SCN issued to M/s. Thermoking is still pending consideration and, therefore, this is yet another reason why it could not have been relied upon in the adjudication order.

The Hon’ble Court also finds that no attempt has been made to undertake any serious investigation even as regards the details furnished by the Appellant or those gathered in the course of investigation. In cases of clandestine removal a certain standard is expected of the Department before a finding can be reached against an Assessee. In Oudh Sugar Mills Ltd. v. Union of India 1978 (2) ELT (J 172) (SC), the Supreme Court pointed out that the inference drawn by the authorities only on the basis of the entries in the ledgers would be insufficient. It was pointed out that in the factory where the turnover was considerable and the operations conducted involved a human element in a significant way it would not be right to base the conclusions only on surmises.

In the present case, there is no attempt made by the Department to substantiate the allegation of manufacture of as many as 606 ACs by the Appellant. No evidence has been produced to show that the basic raw materials required for manufacturing such a large number of ACs was procured by the Appellant.

For all of the aforementioned reasons, the Court is satisfied that the impugned majority order of the CESTAT on the issue of clandestine removal of 606 ACs by the Appellant without payment of duty suffers from serious errors and, therefore, cannot be sustained in law.

In view of the above the appeal is allowed.