M/S. Wellsuit Glass and Ceramic Pvt. Limited and Another Vs. Commissioner Central Excise and S.T., Vadodara - Court Judgment

Excerpt:
central excise act, 1944 - section 9d; h.k. thakur, j. 1. these appeals have been filed by the appellants, m/s. wellsuit glass and ceramic private limited and its managing director, shri balkrishna mangaldas thakkar against the oio no. 08/brc-1/mp/2011 dated 10.05.2011 passed by commissioner of central excise, vadodara, confirming central excise duty of rs. 9,36,30,755/- along with interest and also imposed an equivalent amount of penalty as per the provisions of section 11ac of the central excise act, 1944 read with rule 25 of central excise rules, 2002. in addition, a penalty of rs. 50 lakhs has also been imposed upon the managing director under the provisions of rule 26 of the central excise rules, 2002. 2. brief facts of the case are that main appellant m/s. wellsuit glass and ceramic pvt. limited are engaged in the manufacture of ceramic glazed mixture known as frit, falling under chapter 32 of the central excise tariff act, 1985. the frit manufactured by the appellant is used as a major raw material for manufacturing ceramic glazed tiles. glazing involves applying one or more coats of glaze liquid on the tiles and such glazing is done on tiles by a continuous process either by high pressure spray or by directly pouring the glaze liquid. the glaze liquid is prepared from a glass derivative called frit and coloured dyes and additives by grinding in alumina ball mills. it is the case of the revenue that manufacturers of ceramic glazed tiles were engaged in evasion of central excise duty. on the basis of the investigations done by dgcei, proceedings were initiated against the present appellants. the dgcei also conducted parallel investigations against the other frit manufacturers. in one of the search operations conducted by dgcei on 17.07.2008 on a ceramic tile manufacturer, m/s. sanyo cera tiles private limited (sanyo for short), the dgcei seized incriminating documents along with two computer pen-drives containing incriminating information which according to them contained documentary evidences establishing undervaluation of frit by some frit manufacturers including the present appellants. these pen drives, as per the facts stated in the show cause notice, came to be opened on 30.8.2008, 06.9.2008 and 12.09.2008 in the presence of the director of sanyo and accordingly printouts of the same were taken under various panchnamas. one such print out pertained to a file containing the print out which was marked as sr. no. a/13 of the panchnama dated 12.09.2008 and was titled as ajtak. this ajtak document contained the accounting details of sanyo which was maintained by an employee of sanyo. according to sanyo, the account details contained by the official accounts as well as the unofficial accounts of their company. according to sanyo, the details shown in this file pertained to the purchase of frit and payments made to appellants during the period from 17.12.2007 to 19.03.2008. the details of the transactions have been narrated on page 9 of the impugned show cause notice. the ajtak record was shown to the director of sanyo on 25.02.2010 and on this basis, shri mitalbhai patel was confronted with the above evidences and he confessed that buyers have received 10,000 kgs. of frit of transparent -2 quality vide invoice no. 356 dated 15.02.2008 wherein the rate per kg. of frit had been shown as rs. 7.00 per kg. whereas the actual rate of frit is rs. 24.00 per kg. a conclusion has been drawn by the adjudicating authority that appellants, by way of this one evidence, was involved in under valuing the frit. besides, the records maintained by sanyo was found to contain one more entry dated 15.05.2008 showing an amount of rs. 84,797/- as credit which was settled on 19.03.2008 wherein rs. 90,000/- had been paid through m/s. spenta sales, baroda which was also reflected in the ajtak xyz as cash hw spenta pay order and on this basis it was attempted to prove that the ajtak xyz ledger was a parallel account maintained by sanyo as stated above. the details of the unofficial ledger ajtak xyz ledger was further investigated and it was found by investigation that apart from undervaluation of frit, the said ledger reflected clandestine removal of frit in as much as it was found that for transaction in respect of item frit of opaque quality, no corresponding central excise invoice had been issued by the appellant to sanyo. this aspect was also confirmed by the director of sanyo in his statement dated 25.02.2010. 2.1. on the basis of the inferences drawn in the ajtak xyz records, the dgcei conducted search and seizure operations on the factory of the main appellant on 26.8.2008 and documents/ records were resumed under panchnama. also, physical verification regarding gas consumption of the appellant was also carried out in the factory on 23/24.02.2010 under a panchnama. further, statements of the employees and the co-appellant, shri b.m. thakkar were recorded on the same day as well as on 10.03.2010 and 29.03.2010. appellant shri b.m. thakkar was questioned about the ajtak xyz records as well as method of physical verification of production and corresponding gas consumption. investigations were also conducted in respect of the supplier of raw materials for manufacture of frit. the items in question were feldspar and quartz from m/s. kanchan ceramics. statement of shri ashok c. jain, authorized signatory of m/s. kanchan ceramics was recorded wherein he has stated, inter-alia, that they have shown lower price than actual value in their invoice in respect of feldspar and quartz supplied to the appellants. investigations were also extended to the purchasers of frit from the appellant. m/s. sony ceramics, morbi (through their partner, shri p.n. patel recorded on 24.3.2010), m/s. mod ceramic industries limited (through their director shri m.a. prajapati, shri n.m. prajapati), m/s. hem ceramics, morbi, m/s. shreeji gold ceramics pvt. limited and partner, m/s. shreeji ceramics industries, morbi, m/s. evershine cera pvt. limited through its director, m/s. silk ceramics, morbi etc. all are buyers of frit from the appellant. all these buyers have admitted to have received the frit from the appellant at undervalued prices and accordingly have made the payment of invoice value by cheque and the difference in value in cash to the appellants. these person further stated that the differential amount which was paid in cash to main appellant depended upon the quality of frit. 2.2. after the case was booked by dgcei, appellant introduced a series of new product codes. investigation also studied the pricing pattern adopted by the appellants wherein it was observed that even in case of new product codes, the appellants had cleared same quality of frit of same code at a higher price. for example, frit of product code 003 was cleared to m/s. santro ceramics at the rate of rs. 20.00 per kg. vide invoice no. 636 dated 02.09.2009, whereas just after three days the same variety of frit code was sold to m/s. sanyo cera at the rate of rs. 25.25 per kg. this made the investigation to a belief that the product continued to be undervalued even after search was conducted on 28.08.2008. the adjudicating authority after following the principles of natural justice and relying upon the statements of the purchasers of frit, the ajtak xyz ledger and other records connected with the ajtak xyz ledger and on the basis of consumption of gas as per studies done by investigation, confirmed the demands made in the show cause notice, along with interest and imposed penalties upon the appellants. 3. shri j.c. patel (advocate) appearing on behalf of the appellants would submit that the entire case of the department is based upon third party evidences. it was submitted that there is no direct evidence to show either clandestine removal or under valuation. that nothing is found at the premises of the appellants which would show that they were engaged in any illicit activities. even the statements of production supervisor and managing director are exculpatory. that these persons also denied and not admitted that the documents recovered from the premises of sanyo indicate any undervaluation. that these persons have also not been confronted with the statements of any of the purchasers of frit. that the statements of purchasers have been retracted. in any view of the matter, it was argued by him that no evidence is found from their premises and there is nothing to substantiate revenues case. that there is no independent corroboration of their statements that there is any under valuation. there is no proof of any cash payment or illicit receipt of payments when crores worth of cash transactions were alleged to have been made. he relied upon the following decisions to submit that such third party evidences and statements are not enough to substantiate a charge of clandestine removal, more so, when their cross-examination was not given:- (i). charminar bottling company pvt. limited vs. cce - [2005 (192) elt 1057 (tri.)] (ii). rama shyama papers limited vs. cce - [2004 (168) elt 494 (tri.)] (iii). rutvi steel and alloys vs. cce - [2009 (243) elt 154 (tri.)] (iv). sakeen alloys pvt. limited vs. cce - [2013 (296) elt 392 (tri.)] (v). basudev garg vs. commissioner of customs - [2013 (294) elt 353 (del.)]. 3.1. learned advocate for the appellants would further state that in this case, they have also produced direct evidence of raw material, its value and the process manufacture of various grades of frit made by them. that the data furnished clearly shows that there could not have been under valuation. in the context of retraction of statements, it was argued that appellants have denied any reference of a wrong doing for which he relied upon the decision reported at shalimar rubber industries vs. cce [2002 (146) elt 248 (sc)] and p.v. varghese vs. cegat [2008 (232) elt 42018-20]. he made the bench to go through paragraph 12.2 of the show cause notice to emphasise that the departments allegation that frit of same code was sold at different prices, was ex-facie wrong as is evident from the relevant invoices and the rg-1. that for taking valuation of goods, department has wrongly taken the codes. with regard to unofficial ledger recovered from the premises of sanyo i.e. (ajtak xyz ledger), learned advocate argued that the official transactions of the appellants for this very period are also not reflected in the pen-drive. that there is only one transaction and only on the basis of that one transaction, the entire demand cannot be fastened and confirmed against the main appellant. he vehemently argued that the said unofficial ledger of sanyo, which is also of one page so far as the present appellants are concerned, is also recovered and decoded under suspicious circumstances as per various panchnamas. he narrated in details of proceedings, as to how at each stage panchnama was drawn on at least 6 to 7 occasions for withdrawing of 92 pages. it was his case that the number of pages also varied from time to time. he submitted that there is no panchnama which shows sealing of the pen-drive in the first panchnama and that even the name of the panchas is wrongly written. 3.2. with regard to consumption of gas, learned advocate relied upon the statements of shri balkrishna m. thakkar, managing director, that the consumption of gas would vary on the quality of frit, raw material used, condition of kiln, gas pressure, fluxes used etc. it was thus argued that there are various factors which affect the consumption of gas and there cannot be a fixed ratio of consumption of gas for a specific frit output. he also argued that in october 2007, there was a change in the management and the new management took a series of steps to improve quality of frit and made the gas consumption efficient. they also installed three new refractory kiln with greater production capacity and used superior refractories which were better maintained from time to time. he drew attention of the bench to the fact that services of a ceramic consultant was engaged to get better yield. he relied upon the submissions and records to show the purchase of new kiln and generating set. it was due to these efforts that the ratio of gas consumption from 2008-09 onwards went down from 844 scm/mt to 286 scm/mt as indicated in para 13.2 of order-in-original dated 10.05.2011. that before 2008 there was no generator available with appellant and every time there was a power failure, large quantities of gas was used in re-firing the kiln. he produced documents relating to installation of dg set. he referred to the purchase bills to show superior quality of refractories replaced in the kilns after 2008-09. he argued that as per the statement of shri balkrishna thakkar himself, which is recorded by the department, there cannot be any fixed ratio of gas consumption and that after the new management took over, they have improved the efficiency of the unit and that mere gas consumption cannot be used as a factor for clandestine manufacture and removal. he explained that frit consists of two components i.e. glass and silicone dioxide. that the melting point of glass is very high and other materials called fluxes are added, as per expert consultations, to lower melting point such as borax, boric acid and zinc oxide etc. that when fluxes are used, the melting point required for manufacture of frit is reduced. learned advocate referred to extracts from the book, industrial ceramics by felix singer and the book glassing and decoration of ceramics tiles by autorivari and extracts from the journal, ceramic industry, january 2000 as well as various extracts downloaded from internet to support his case. he referred to the following decisions to submit that gas consumption alone can not be the sole basis of clandestine manufacture and removal of the finished product:- (i). vishwa traders pvt. limited vs. cce - [2012 (278) elt 362] (ii). cce vs. vishwa traders pvt. limited - [2012 (287) elt 243] (iii). mukesh dye work vs. cce - [2006 (196) elt 237] (iv). southern ispat limited vs. cce - [2009 (248) elt 270] (v). svm cera tea limited vs. cce - [2013 (292) elt 580] it was emphasised by the advocate of the appellant that there is no proof of illicit transportation of goods or any finished goods found unaccounted at the premises of the purchasers or with any transporter. he also argued that no shortages/ excess of raw materials/ finished goods were found in their factory premises of the main appellant. 4. shri k. sivakumar (ar) appearing on behalf of the revenue argued that the unofficial ledgers at sanyo proves the departmental case, inasmuch as invoice no. 356 dated 15.02.2008 shows the value of the frit as rs. 7.00 per kg. whereas the unofficial ledger for this transaction shows the value of the same as rs. 24.00. he argued that main appellant kept on changing the production codes and that the raw materials used by the appellant was controlled by the commission agents whose addresses and contacts kept on changing and so the dgcei could not investigate at their end. that one such raw-material supplier kanchan ceramics admitted to the undervaluation. in the context of clandestine removal, he argued that gas consumption was recorded by ongc staff and, therefore, the same could not be manipulated by the appellant. according to him, there was no material change in the technology adopted to increase the yield. he relied upon the unofficial ledgers of sanyo again to show unaccounted purchases. he submitted that though the study by dgcei showed 389 scms of gas used per mt of frit, actual gas consumption per ton came down to 216 scms/ mt and therefore, to even out seasonal variations, an average consumption of 318 scm/ mt was adopted and clandestine removals were worked out accordingly. learned ar made detailed submissions as to why the records from the pen drive can be relied upon and that this aspect has been properly dealt with in details in the order by the adjudicating authority. he also submits that the details from the pen drives were obtained only by using the software cd supplied by the assessee themselves. 5. heard both sides and perused the case records. in the present proceedings adjudicating authority has decided the case against the appellants on two accounts. one portion of demand is pertaining to undervaluation of frit manufactured by the main appellant on the basis of a print-out titled ajtak taken from one of the pen drives seized by the investigation. this pen drive was maintained by an employee of sanyo who were one of the manufacturers of ceramic tiles from the frit purchased from the appellants. in this print out, the rate of one kg. of a particular type of frit (transparent 2) manufactured by the appellant has been shown to be rs. 24.00 per kg. as against rs. 7.00 per kg. shown in the selling invoice. the same has been confirmed by the statement of shri mitalbhai patel, director of sanyo. it is the case of the appellant that cross-examinations of the third party evidences has not been granted to them in spite of repeated requests. adjudicating authority has written eleven pages from para 10.1 to 10.3 on the aspect as to why appellants request for cross-examination is not justified, however, one fails to understand as to how one entry of transparent -2 quality frit, in a pen drive maintained by an employee of sanyo can be applied to the entire period for determining undervaluation during which different varieties of frit are manufactured. there could be variation in the sale prices of the same product as per the transaction price and market negotiations. to test this piece of the evidence, it is perfectly justified on the part of the appellant to seek cross-examination of the persons who maintained the record in the pen-drives. further, there are factual irregularities in the panchnamas prepared by the investigation justifying cross-examination of the panchas. in this regard section 9d of the central excise act, 1944 is reproduced below:- section 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 providing, 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 any 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 interest of justice. (2). the provisions of sub-section (1) shall, so far as may be, apply in relation to any proceeding under this act, other than a proceedings before a court, as they apply in relation to a proceeding before a court. 5.1. the above provisions of section 9d were examined by delhi high court in the case of basudev garg vs. commissioner of customs [2013 (294) elt 353 (del.)] and following law was laid down after considering the judgments of apex court on the issue of cross-examination:- 14. the division bench also observed that though it cannot be denied that the right of cross-examination in any quasi judicial proceeding is a valuable right given to the accused/noticee, as these proceedings may have adverse consequences to the accused, at the same time, under certain circumstances, this right of cross-examination can be taken away. the court also observed that such circumstances have to be exceptional and that those circumstances have been stipulated in section 9d of the central excise act, 1944. the circumstances referred to in section 9d, as also in section 138b, included circumstances where the person who had given a 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 and expense which, under the circumstances of the case, the court considers unreasonable. it is clear that unless such circumstances exist, the noticee would have a right to cross-examine the persons whose statements are being relied upon even in quasi judicial proceedings. the division bench also observed as under:- 29. thus, when we examine the provision as to whether the provision confers unguided powers or not, the conclusion is irresistible, namely, the provision is not uncanalised or uncontrolled and does not confer arbitrary powers upon the quasi judicial authority. the very fact that the statement of such a person can be treated as relevant only when the specified ground is established, it is obvious that there has to be objective formation of opinion based on sufficient material on record to come to the conclusion that such a ground exists. before forming such an opinion, the quasi judicial authority would confront the assessee as well, during the proceedings, which shall give the assessee a chance to make his submissions in this behalf. it goes without saying that the authority would record reasons, based upon the said material, for such a decision effectively. therefore, the elements of giving opportunity and recording of reasons are inherent in the exercise of powers. the aggrieved party is not remediless. this order/opinion formed by the quasi judicial authority is subject to judicial review by the appellate authority. the aggrieved party can always challenge that in a particular case invocation of such a provision was not warranted. 5.2. in view of the above legal position and the facts of this case adjudicating authority was not correct in disallowing the cross-examination of persons listed in para 10.1 of oio dated 10.05.2011, except cases covered by section 9d of the central excise act, 1944. 6. on the issue of clandestine removal of frit, based on the gas consumption of the main appellant, it is observed from para -13.2 of the order-in-original dated 10.05.2011 that records maintained by main appellant show the gas consumption for making 1 mt of frit from 844 scm to 286 scm. it has been contested by the appellant that gas consumption varied from season to season, from one quality of frit to other quality of frit, use of better technology etc. it has also been brought on record that after change in the management in oct 2007 and installation of new furnaces and new refractories, the gas consumption has reduced. further appellant has also brought on record that due to expert consultations and use of certain fluxes also the gas consumptions per mt of frit have come down. evidences were also brought on record during the course of hearing regarding installation of an electricity generator and replacement of better quality refractories in the kilns by the main appellant. under the above factual matrix, the method used by the investigation can not be a sound method to demand duty on assuming 318 scm of gas required for manufacturing one mt of any quality of frit. the improper method adopted by the revenue for calculating duty was agitated by the appellants before the adjudicating authority as per para 4 (xi) to (xxxiii) of the order-in-original dated 10.05.2011. it is observed that during conducting of gas consumption studies on 23/ 24.02.2010 by investigation only frit product code op 202 was being manufactured. it has been contested by the appellant that different frit product codes may consume different quantities of gas. as the appellant is not undertaking the manufacture of one standard product, in the interest of justice, it will be appropriate to conduct a few more representative studies of different frit product codes in order to arrive at a more realistic gas consumption pmt of frit manufactured. 7. in the light of the observations made in para 5.2 and 6 above the matter is required to be remanded back to the adjudicating authority to extend the opportunity of cross-examination of the persons specified in para 10.1 of the order-in-original dated 10.05.2011 and also to conduct a few more representative studies on the gas consumption on the pre-dominant frit codes manufactured by the appellant during the relevant period. 8. subject to the above observations, appeals filed by the appellants are allowed by way of remand. appellants directed not to seek the refund of pre-deposit already made till the disposal of the remand proceedings by the adjudicating authority. adjudicating authority will give an opportunity of personal hearing to the appellants and decides the issues after passing a speaking order.