Delhi High Court
Rakesh Kumar Garg vs Commissioner Of Central Excise on 10 December, 2015
Author: S. Muralidhar
$~
* IN THE HIGH COURT OF DELHI AT NEW DELHI
Reserved on: December 1, 2015
Date of decision: December 10, 2015
+ CEAC 1/2011
RAKESH KUMAR GARG ..... Petitioner
Through: Mr. Krishna Kant with Mr. Manoj
Awasthi, Advocates.
versus
COMMISSIONER OF CENTRAL EXCISE ..... Respondent
Through: Mr. Satish Kumar, Senior Standing
counsel.
WITH
+ CEAC 2/2011
SANTOSH KUMAR GARG ..... Petitioner
Through: Mr. Krishna Kant with Mr. Manoj
Awasthi, Advocates.
versus
COMMISSIONER OF CENTRAL EXCISE ..... Respondent
Through: Mr. Satish Kumar, Senior Standing
counsel.
AND
+ CEAC 3/2011
DEVI DASS GARG ..... Petitioner
Through: Mr. Krishna Kant with Mr. Manoj
Awasthi, Advocates.
CEAC 1/2011, 2/2011 & 3/2011 Page 1 of 32
versus
COMMISSIONER OF CENTRAL EXCISE ..... Respondent
Through: Mr. Satish Kumar, Senior Standing
counsel.
CORAM:
JUSTICE S. MURALIDHAR
JUSTICE VIBHU BAKHRU
JUDGMENT
% 10.12.2015
Dr. S. Muralidhar, J.:
1. These three appeals are directed against the common order dated 6 th
August 2010 passed by the Customs, Excise & Service Tax Appellate
Tribunal ('CESTAT') in E/266/2006-268/2006-EX/DB arising out of an
order-in-original dated 28th October 2005 passed by the Commissioner of
Central Excise, Delhi (CCE).
2. By the impugned order, CESTAT reduced the penalty levied on the
Appellants herein by the CCE under Rule 209A of the Central Excise Rules,
1944 (CE Rules 1944) and Rule 26 of the Central Excise Rules 2002 (CE
Rules 2002) to Rs. 5 crores each.
3. While admitting these appeals on 24th October 2011, the following
question of law was framed:
"Whether the Tribunal is right in imposing penalty of Rs. 5
crores on the Appellant under Rule 26 of the Central Excise
Rules, 2002 and Rule 209A of the Central Excise Rules, 1944?
Background facts
4. The brief facts leading to the present appeals are that M/s. Amar Jyoti
Packers ('AJP'), a sole proprietary firm of which Ms. Mahesh Kumar
Gautam was sole proprietor, was engaged in manufacturing pan masala and
gutka of 'Rajdarbar' brand. Mr. Devi Das Garg (the Appellant in CEAC No.
3 of 2011), was one of the two partners of M/s. Sonal Food Products ('SFP')
which owns the 'Rajdarbar', 'Rahat', 'Rustam', and 'Raj Tilak' brands used
to manufacture gutka and pan masala by AJP. One of his sons Mr. Santosh
Kumar Garg (the Appellant in CEAC No. 2 of 2011) is the other partner in
SFP. Mr. Rakesh Kumar Garg (the Appellant in CEAC No. 1 of 2011) is the
other son of Mr. Devi Das Garg.
5. It is stated that AJP was set up on 1st April 2000 for the manufacture of
gutka and pan masala. On 13th April 2000, AJP entered into a franchisee
agreement with SJP for using the aforementioned brand names. Six months
thereafter, i.e., on 20th October 2000 the officers of the Central Excise
Commissionerate (Preventive), Delhi (hereafter 'the Department') conducted
searches in the premises of AJP and the suppliers of raw materials of AJP.
They recorded the statements of Mr. Vinod Kumar Bansal, an Accountant as
well as authorized signatory of AJP. They also recorded the statements of
Mr. Manoj Bansal, the Manager of M/s. Surya Traders ('ST'), Mr. Dinesh
Kumar, a typist of AJP and Mr. Dev Kumar Sharma, Accountant of ST. The
statements of Mr. Sunil Kumar Aggarwal and the three Appellants herein
were also recorded.
6. It is stated that Mr. Mahesh Kumar Gautam was initially unavailable for
recording his statement. He is stated to have made himself available only on
23rd April 2002. His statement came to be recorded for the first time on 26th
April 2002. What is significant, however, is that on 26th April 2002 itself
Mr. Mahesh Kumar Gautam lodged a first information report ('FIR') with
the police alleging torture by the officers of the Department. Mr. Gautam
thus retracted his statement. Subsequently he made two further statements
on 4th November 2003, when he did not implicate any of the Appellants
herein, and on 12th March 2004 which he subsequently retracted.
The show cause notice
7. In the course of investigations, the officers of the Department continued
recording statements of certain other persons and this continued well into
2004. Ultimately it was on 20th May 2004 that a show cause notice ('SCN')
was issued raising a duty demand of Rs. 33,20,03,239 with the breaking of
Rs. 5,51,94,181 for the period 1st April 2000 to 20th October 2000 and Rs.
27,68,09,058 for the period from 21st October 2000 upto 30th June 2002.
This was apart from the penalty proposed. The above SCN was issued to
M/s AJP, M/s. ST, the three Appellants herein and Mr. Vinod Bansal.
Enclosed with the SCN was a duty calculation chart drawn up on the basis
that there were 20 working machines with a production capacity of 200
pouches per minute.
8. The central allegation in the SCN was that during the course of the search
it was observed that 20 pouch packing machines were found working and
these were found manufacturing 200 pouches per minute; that the records
for consumption of raw materials in Form IV register and records for
production and clearances of finished goods in RG-1 register showed that
large quantities of gutka and pan masala had been manufactured and
clandestinely cleared without payment of excise duty and thereby there was
deliberate evasion of payment of excise duty.
The statements of Mahesh Kumar Gautam
9. The SCN also mentioned that summons was issued to Mr. Mahesh Kumar
Gautam, the Proprietor of M/s. AJP on seven dates and except for the
summons dated 23rd April 2002 none of the other summons was responded
to. Mr. Mahesh Kumar Gautam appeared on 26th April 2002 and gave a
statement wherein besides submitting photocopies of the agreement for
using the Rajdarbar brand and the rent agreement with the owner of the
premises at Khasra No.223, Village Budhpur, Delhi, he admitted to the
correctness of the panchnama drawn up on 20th October, 2000, which had
been signed by Mr. Vinod Kumar Bansal. Mr. Gautam was stated to have
produced a copy of the agreement dated 13th April, 2000 between SFP and
AJP which was signed by Mr. Santosh Kumar Garg and Mr. Devi Das Garg,
as Partners of SFP. He is stated to have admitted to working as a pujari in
the temple in the house of Mr. Rakesh Kumar Garg and getting Rs.2000-
3000 per month. He stated that Mr. Rakesh Kumar Garg had got him to sign
some papers for the purpose of procuring a ration card for him. Mr. Gautam
is supposed to have stated that till October, 2000, he was unaware that Mr.
Rakesh Garg had opened a factory in the name of M/s. AJP in the name of
Mr. Gautam for the manufacture of pan masala and it was only during the
raid that he became aware of the said activity. He is supposed to have
admitted to receiving raw material from M/s. ST and to the fact that each
machine installed in M/s. AJP packed 200 pouches of 2 gms each per minute
and that about 150-160 bags of finished goods were manufactured in a day.
He is further stated to have admitted that about 12-14 bags would be loaded
per trip on three wheeler tempos of make Vikram for transportation.
10. Mr. Gautam is supposed to have tendered a further statement on 4th
November, 2003, on which date he again stated that raw materials were
purchased from M/s. ST for which payments were made through cheques
and that the brand Rajdarbar was owned by SFP; and that he knew nothing
of the mixing of chemicals used in AJP's factory. However, Mr. Gautam
failed to give any further details including money invested by him; the plant
and machinery involved; the raw material purchased and the transactions in
the bank account of AJP.
11. A third statement was tendered by Mr. Gautam on 12th March, 2004
where he reiterated his earlier statement made on 4th November, 2003. He
stated that Mr. Vinod Bansal was doing the job of mixing khushboo
(perfumery compound) and Zarda and that Mr. Bansal would be knowing
whether the raw material was received from M/s. ST with or without bills;
whether the finished goods were removed without or without bill and as to
who kept the account of the finished goods supplied from the factory.
The statement of Mr. Bansal
12. The SCN also referred to the statement given on 29th April, 2002 by Mr.
Bansal described as the Accountant and Authorised Signatory of AJP. Prior
to being engaged by AJP he was working as a Manager to M/s. Krishna
Packers. He confirmed that the panchnama recorded on 20th October, 2000
was prepared in his presence and that the quantity of gutka manufactured in
one shift, as recorded therein, was correct. He is supposed to have admitted
that the production of gutka and pan masala by M/s. AJP was to the extent
of 150 bags per day whereas only 25-30 bags were shown as having been
produced per day in the RG-1 register. Mr. Bansal confirmed his signature
dated 4th July, 2001 as the authorised signatory of M/s. ST.
13. Mr. Bansal made a further statement on 17th July, 2003 where he is
stated to have admitted to having worked with AJP from March 2000 till
January, 2003. A third statement was tendered by him on 23 rd February,
2004 wherein he is supposed to have reiterated his earlier statement tendered
on 20th October, 2000. A fourth statement was tendered on 1st March, 2004
when he was confronted with bill books containing invoices. He was also
shown the bill books of M/s. Krishna Packers but he could not say anything
about the invoice books. In a statement made on 5th March, 2004 he agreed
that there was a difference in the consumption of the raw materials as shown
in the books of AJP to an extent of 8383 kgs but was unable to explain the
reasons therefor.
Other statements
14. Mr. Dinesh Kumar made a statement on 19th March, 2004 accepting his
earlier statement made on 20th October, 2000. He worked in AJP as a typist
and looked after the work of Central Excise in the absence of Mr. Bansal.
He too was earlier working with Krishna Packers till 31st March 2000 and
thereafter started working with AJP. According to him, Mr. Bansal looked
after all the work related to the factory of M/s. Krishna Packers. He did not
mention the role of any of the Appellants.
15. The next witness examined was Mr. Rajender Singh, who worked as a
packer and gave his statement on 24th February, 2004. He too worked for
AJP for 5-6 months from August, 2000 onwards. He was not present on 20 th
October, 2000 when the raid was conducted. According to him all directions
were given by Mr. Bansal who also used to disburse the salaries.
16. The statement of Mr. Ram Bhool was recorded on 5th January, 2004. He
stated that House No.1304, Gali No.2, Shiv Mandir Colony, Alipur, Delhi
was built on the land owned by his father who had expired about a year
earlier. He had rented out a room on the first floor to Mr. Babu Lal, who
worked for a company manufacturing 'Rajdarbar'. A further statement of
Mr. Ram Bhool was tendered on 23rd March, 2004 when he clarified that at
the relevant time his father was the owner of the house and a portion of the
house was rented out to a company named 'Rajdarbar' and that his father
could have provided correct information about the tenancy. He stated that
Mr. Babu Lal never visited the room after the raid on 17th November, 2000.
17. Mr. Sunil Kumar Aggarwal, the Proprietor of M/s. ST gave a statement
on 22nd April, 2002. According to him, the premises 31/22, Bees Killa Road
Jindpur, Village Alipur, Delhi was owned by Mr. Devi Das Garg. The
premises was taken on rent with effect from 1st April, 1998. According to
him Mr. Bansal was the authorised signatory of AJP and was not related to
M/s. ST and he was not aware as to why Mr. Bansal had signed as such on
4th July 2001 in the sales tax proceedings. In a further statement on 9th
August 2002, Mr. Aggarwal inter alia stated that the factory of M/s. ST of
which he was the Proprietor commenced on 1st April, 1998. The kattha
packing machine was purchased in March, 2000. He furnished the ledger
accounts showing the purchases of supari, kattha, chuna, illaichi, tobacco,
perfume and packing materials.
18. Mr. Sunil Kumar Aggarwal who was also the Proprietor of M/s. Shree
Ram Enterprises gave another statement on 14th July, 2003. The said
concern was the predecessor to M/s. ST which was initially financed by M/s.
Candy Properties, M/s. Narsi Hotels, etc. Mr. Aggarwal stated that he was
introduced to Mr. Devi Das Garg by a relative, Mr. Vinod. He confirmed
that goods were sold to AJP and Mr. R.K. Enterprises. He was also a
Proprietor of M/s. Surya Ornaments, which would purchase old jewellery
and convert them into gold bars, which were further sold. He confirmed that
gold jewellery worth Rs.66,70,000 was purchased from the Garg family and
that they sold the gold bars made therefrom for Rs.80.00 lakh. Between
April and September 1999, he admitted to having purchased Rs.2 crore of
jewellery from the Garg family which was then converted into gold bars and
sold for Rs.2,84,44,028/-. A further statement was made by him on 31st
October, 2003. He conveyed lack of knowledge of the buyers of the gold
bars. He made a further statement on 19th February, 2004 when he claimed
to be unable to explain the presence of stock of mixture of kattha and chuna;
stock of mixture of kattha, chuna and menthol (perfume) on 31st October,
2001 as per panchnama.
19. Mr. Manoj Bansal tendered his statement on 19th February, 2004
accepting the panchnama dated 20th October, 2000 in respect of the
proceedings at the premises of M/s. ST. He confirmed the stock position in
terms of Annexure B to the panchnama.
20. Mr. Dev Kumar Sharma gave his statement on 19th March, 2004
accepting the statement earlier given by him on 20 th October, 2000. He is
also purported to have confirmed the annexures to the panchnama and
documents seized.
21. Mr. Kishore Kumar Aggarwal, Director of Narsi Foods Pvt. Ltd.
tendered a statement on 9th August, 2002. He had joined as a Director of the
said company and looked after its market, sales and purchases. He spoke of
purchasing supari from M/s. Vasu International and that they were
manufacturing sada pan masala of Narsi Gold brand and Jackpot brand. He
denied having made any purchases of raw material from M/s. ST. A further
statement was made by him on 7th April, 2003 when he stated that his
company was established in 1993 with Mr. Rakesh Kumar and that they had
sold supari and kattha.
22. Mr. Manoj Hora also explained the working of M/s. Narsi Foods Pvt.
Ltd. He too accepted the panchnama drawn on 20th October, 2000. Another
employee of M/s. Narsi Foods Pvt. Ltd. was Mr. Vinod Aggarwal whose
statement was recorded on 25th February, 2004. He explained that the
company was established in 1995 and its Directors at that time were Devi
Das. He was not aware who was the owner of the company at 3/27, Roop
Nagar, Delhi.
Statements of the Appellants
23. As far as the Appellants were concerned Mr. Rakesh Garg appeared on
23rd April, 2002 for tendering a statement. He was a Director, Partner and
Owner of fifteen companies other than M/s. Narsi Foods Pvt. Ltd. He stated
that he was not the owner of Rajdarbar but his younger brother Mr. Santosh
Kumar Garg was the owner. He stated that he was a Director in Narsi Foods
Pvt. Ltd. till 2001 when he had resigned as such. He claimed that Mr. Devi
Das Garg was no more a Director of the said company. He stated that Mr.
Devi Das is the owner of premises 31/22, Bees Killa Road, Jindpur, Village,
Alipur, Delhi, which was rented out to M/s. ST on 1st April, 1998.
24. On 7th July, 2003 Mr. Rakesh Garg appeared on behalf of his father Mr.
Devi Das Garg, his mother and his wife, and, tendered a statement. He is
inter alia supposed to have stated that his father Mr. Devi Das Garg sold
jewellery worth Rs.12,05,053.05 to Surya Ornaments, jewellery worth
Rs.7,34,478/- to M/s. Shreeji Jewellers during the year 1998-99 and
jewellery worth Rs.39,33,705/- to Surya Ornaments during the year 1999-
2000. Mr. Rakesh Garg is supposed to have stated that his father received
Rs.1,40,01,717.51 as profit from M/s. Radhika International during the year
1999-2000. He also gave details of the jewellery sold by his mother during
the year 1998-99 and 1999-2000 and that she gifted Rs.40,00,000/- to Mr.
Santosh Garg during the year 2000-2001.
25. Mr. Santosh Garg gave a statement on 9th August, 2002 stating that he
was a partner in M/s. SFP of which his father was the owner. The company
was established for the business of pan masala and gutkha and brand names
Rajdarbar, Rajtilak, Rabat, Rustam were registered. He claimed that the
company closed around 1995-96 and thereafter the brand names were
franchised to other companies on the basis of royalty. He claimed that the
brands were franchised to AJP by a franchise agreement. He submitted a
copy of the ledger; account of royalties for the last two years from AJP.
Another statement was tendered by Mr. Santosh Kumar Garg on 30 th May,
2003 when he claimed to be the owner of Rajdarbar brand.
26. Mr. Mithilesh Kumar Tripathi gave his statement on 21 st July, 2003 on
behalf of his wife making claims regarding sale of jewellery. Likewise Mr.
Subhash Mittal, proprietor of M/s. Shreeji Foods and Shreeji Jewellers gave
his statement on 6th November, 2003. He stated that he had started M/s.
Shreeji Foods during 1996-97 for trading in supari, kattha, chuna, etc. and
that the premises at Alipur was taken on rent from Mr. Devi Das and Mrs.
Kusum Lata Garg. The firm had a few machines some of which were sold
to M/s. AJP. M/s. Shreeji Jewellers were also started in the said premises in
March, 1999. He admitted to have purchased old gold ornaments from Mr.
Mithilesh Kumar Tripathi, Mrs. Seema Tripathi and the Appellants herein.
Case of the Department
27. According to the Department, the inference of clandestine removal of
large quantities of gutka was based on the following evidence:
i. Availability of 423 bags of manufactured pan masala and gutka in the
factory premises of AJP during the raid on 20th October 2000.
ii. That 20 packing machines out of 26 were found working on the date of
the raid with each machine manufacturing 200 pouches per minute.
iii. Admissions made by Mr. Vinod Bansal on 20th October, 2000 regarding
each packing machine packing 200 pouches per minute and that 30-35
workers were working at the time of the raid.
iv. The statement on 24th February 2004 of Rajender Singh working as a
packer in the factory of AJP regarding clearance of 160 gunny bags of
finished products per day.
v. The fact that the stock of supari and finished goods found on 20th
October, 2000 was far in excess of the balances recorded in the registers
maintained and found in the premises.
vi. The statements of Mr. Manoj Bansal, Mr. D.K. Sharma of Surya Traders;
the statement of Mr. Mahesh Gautam.
28. Mr. Mahesh Kumar Gautam lodged an FIR with the police and also sent
a telegram on 27th April, 2002 retracting the statement made by him on 26 th
April, 2002. He also furnished a medical report of the Lok Nayak Hospital
at 0030 hours.
The stand of AJP
29. During the course of the adjudication proceedings, AJP by letters dated
30th July, 2007, submitted two affidavits of Mr. V.K. Malhotra and Mr. N.K.
Arora in support of the technical reports submitted earlier on 18 th August,
2004. AJP also enclosed 34 documents and photocopies of cheques bearing
signatures of Mr. Mahesh Kumar Garg, Proprietor of AJP in order to dispel
the notion that he was only a front man for the Gargs. It was also contended
that the show cause notice dated 4th May, 2004 was beyond the period of six
months from the period under demand, i.e. 20th August, 2000 to August,
2002.
30. AJP raised a question as to how, after coming to know at the time of the
raid on 20th October, 2000 that the machines were producing 200 pouches
per minute, the Department could have allowed the clandestine removal
thereafter of the excess quantity for a period of 22 months. The RT-12 forms
submitted for the period post raid, i.e. October 2000 to August, 2002 had
been received by the Department and this showed that the production did
take place during the aforementioned period. Accordingly, it was contended
that the demand for the period after October 2000 was untenable in law. AJP
also submitted a technical report about pouch producing capacity of the
machines installed in AJP factories. According to the said report it could
never have been possible for them to produce 200 pouches per minute as
alleged by the Department.
31. The noticee also sought the examination of the aforementioned persons
whose statements have been recorded and relied upon in the SCN.
However, despite listing the matter for the personal hearing on two
occasions, i.e. 2nd August and 16th August, 2005, none of the witnesses
appeared for cross-examination. It was accordingly contended that their
statements could not be relied upon.
Case of the Appellants
32. Particular to the three Appellants herein it was contended that the
penalties imposed on them under Rules 209 and 209A of the CE Rules, 1944
and Rules 25 and 26 of the CE Rules, 2002 were not maintainable. It is
pointed out that Rule 209/25 applied only to a manufacturer which in this
case admittedly was AJP. As far as Rule 209A/26 was concerned, it applied
to the individuals who had dealt with the excisable goods as manufacturer or
in acquisition and transportation. It is pointed out that there is no such
allegation in the SCN vis-a-vis the three Appellants.
33. There was no allegation that any of them supervised the manufacture of
Pan Masala or provided the staff or machinery to AJP or obtained any profit
from AJP apart from receiving royalties on behalf of SFP. There was no
allegation of providing transportation for storage or provision of supervisory
staff or money or distribution network assistance to AJP. Even the factory
was never visited by any of them. In any event Mr. Rakesh Kumar Garg was
not involved in the brand used by AJP. The loans given by Mr. Rakesh
Kumar Garg and his brother and father of the companies of which they were
Directors gave interest bearing loans to AJP without any security. However,
the entire loan amounts stood repaid with interest well before September,
2001.
Adjudication order
34. In the adjudication order dated 28th October, 2005, the CCE held as
follows:
(i) Scrutiny of the panchnama drawn on 20th October, 2000 in the premises
of ST revealed that the unit was engaged in cutting, grinding and mixing
supari, kattha, menthol, khusboo and tobacco. This would be supplied to
AJP and Narsi foods in gunny bags. The stock of supari and finished supari
was much in excess of what is recorded in the Register. The panchnama
dated 20th October, 2000 for the proceedings at Surya Traders also revealed
that they were engaged in the readymix material in bulk for pan masala and
katha.
(ii) From the statement of Mr. Dev Kumar Sharma, the Accountant at M/s.
ST it was clear that the entire mixture was being packed in gunny bags and
supplied to Narsi Foods Pvt. Ltd in cash payment. The goods were
dispatched through local tempos and approximately 60 workers were
employed on daily wage basis against cash payment. Only kattha and supari
instead of cut/grinded/mixed supari, kattha, chuna and illaichi were
mentioned on the invoices/challans issued and signed by Mr. D.K. Sharma.
(iii) The CCE also referred to the statements of, Mr. Sunil Kumar, Proprietor
of M/s. ST and Mr. Manoj Bansal and held that M/s. ST was a front firm for
the family.
(iv) As regards the statements made on various dates from October, 2000 to
February, 2004 by Mr. D.K. Sharma, Mr. Manoj Bansal and Mr. Sunil
Kumar it was not mentioned by them that the mixture seized was not
capable for being used in Pan Masala/gutkha. This stand, therefore, was an
afterthought. It was nevertheless acknowledged that Mr. Sharma was not
available for cross-examination.
(v) Since the technical report produced was of a later date, i.e. 21st July,
2004, wherein it was stated that the machines installed in the premises of
M/s.ST could not produce Pan Masala or tobacco, the CCE rejected the
report holding it to be a "dictated one and not reliable". The plea that the
mixture made by M/s. ST could not be used for making Pan Masala was
rejected. There were two machines installed and the mixing did not require
any sophisticated physical or chemical reaction. Even an oven for making
supari was not necessary. Consequently it was held that M/s. ST was
capable of manufacturing Pan Masala mixture for use in making the
pouches and were actually supplying the quantities to AJP without issuing
proper bills.
(vi) The annual production of AJP was much higher than what was recorded
in the RG-1 register, implying that the actual quantum of production was
suppressed with the intent to suppress clearances of finished goods so
manufactured to evade central excise duty liabilities. The statements
recorded during investigation and the panchnama prepared fully proved the
case of the Department.
(vii) The CCE also found that the technical report submitted by the AJP was
not reliable and, therefore, was not acceptable. Apart from the technical
report of Mr. D.K. Malhotra, other technical reports prepared by Mr. Deepak
Anand and Mr. N.K. Arora were also rejected since they were not on the
basis of any detailed analysis of the production capacity of the machines. In
this basis, the demands raised in the SCN were affirmed by the CCE.
Appeals to the CESTAT
35. Appeals were filed against the order of the CCE by AJP as well as the
Appellants herein. However, the appeal of AJP was dismissed in default and
not carried further in appeal to this Court.
36. As far as the appeals of the Appellants were concerned, by the order
dated 12th April 2006, the Tribunal directed the Appellants to make a pre-
deposit of Rs.2 crore each. This order was affirmed by the High Court on 7th
July, 2006 while extending the period for making the pre-deposit by two
months. The Supreme Court affirmed the order on 4th September, 2006.
Impugned order of CESTAT
37. By the impugned order, the CESTAT has affirmed the order of the CCE
in original to the extent of holding that the Appellants are liable for penalty.
However, the amount of penalty levied on each of the Appellants was
reduced from Rs.25crore, Rs.21crore and Rs.21 crore on Mr. D.D. Garg, Mr.
R.K. Garg and Mr. S.K. Garg respectively to Rs.5 crore each.
38. The CESTAT noted that other than the statement of Mr. M.K. Gautam
there was no other independent evidence showing that the Appellants were
the persons controlling AJP and its operations. The CESTAT rejected the
plea that the said statement retracted by Mr. Gautam on the very next day,
was obtained by subjecting him to duress and coercion. According to the
CESTAT there was no denial that Mr. Gautam was working only as a pujari
on monthly wages of Rs.2,000 to Rs.3,000 in the house of Mr. R.K. Garg
and it was difficult to believe that overnight he became the manufacturer of
a popular 'Rajdarbar' brand Gutka and Pan Masala.
39. According to the CESTAT notwithstanding the retraction of the
statement by Mr. Gautam it had the 'ring of truth'. It was not known
whether the police had taken any action on his complaint or any order of the
court had been passed. The medical examination only showed his symptoms
as loose motions, vomiting and abdominal pain with umbilical region
tenderness and there was no remark or observation in the said report whether
there were any signs of his being beaten up. Therefore, the CESTAT held
that his retraction based on the complaint given by him to the police and the
medical examination did not prove in any way that his statement dated 26 th
April 2002 had been recorded under duress or coercion. A reference was
made to the decision of the Supreme Court in Vinod Solanki v. Union of
India 2009 (233) ELT 157 (SC).
40. The CESTAT also referred to the fact that the further statements of Mr.
Gautam were recorded on 4th November 2003 and 12th March 2004 where he
confirmed the earlier statement dated 26th April 2002 as true and correct. In
the said statements also, he had stated that the machines installed in AJP had
been taken from M/s. Krishna Packers on credit and that both M/s. Krishna
Packers and M/s. ST were related to the Garg family. In that view of the
matter, all three statements of Mr. Gautam were treated as voluntary and
hence admissible in evidence.
41. The CESTAT also referred to the statement of Mr. Dev Kumar Sharma
dated 20th October 2000, which had not been retracted, which stated that it
was the Gargs who were the actual owners of M/s. ST and that the raw
materials, i.e., supari, tobacco, illaichi, chuna, kattha, perfumes etc., were
being supplied by M/s. ST after grinding and mixing all those and
converting them into pan masala/gutka on the instructions of the Gargs.
42. The CESTAT recorded that the statement of Mr. Dev Kumar Sharma
was corroborated by receipt of certain consignments of raw materials by
M/s. ST from M/s. Sai Fragrance and Flavours with the address at Jindpur,
Alipur, Delhi whereas the invoice address mentioned was the Model Town
office premises of Gargs. This also corroborated the statement that the said
premises i.e. D-1/2, Model Town-III, Delhi was the headquarters of AJP.
Further although Mr. Vinod Bansal was the Manager and authorised
signatory of AJP, and on paper had no relationship with M/s. ST, he had
signed on several papers as its authorised signatory. This showed that Gargs
through Mr. Vinod Bansal were controlling both ST as well as AJP.
43. According to the CESTAT, the above evidence was sufficient to prove
the case of the Department against the Gargs. This was even if the gold
transactions of Garg family with M/s Surya Ornaments and M/s Shreeji
Jewellery were ignored on the ground that these transactions pertained to
1998-99 and 1999-2000 period, whereas the period of duty evasion was
from 1st April 2000 to 31st August 2002. Further the Gargs themselves have
adduced no evidence to show that they had no connection with ST and AJP
other than the agreement of NFPL with AJP regarding the use of 'Rajdarbar'
brand. A reference was made to the decision of the Supreme Court in
Naresh J. Sukhawani v. Union of India 1996 (83) ELT 258 (SC) and it was
held that the statement of Mr. Gautam was in the nature of an inculpable
statement of a co-accused which could be used as substantive evidence
against Mr. Gautam. Further the statement was corroborated by the
statements of Mr. Dev Kumar Sharma and Mr. V.K. Bansal.
Submission of counsel
44. This Court has heard the submissions of Mr. Krishna Kant, learned
counsel for the Appellant and Mr. Satish Kumar, learned counsel for the
Respondents.
45. It is submitted by Mr. Kant that the CESTAT erred in failing to notice
that no penalty could have been imposed on the Appellants under Rule 26 of
the CE Rules 2002 as there was no allegation in the SCN or any conclusion
drawn in the order in original by the CCE or by the CESTAT itself to the
effect that any of these Appellants ever received or purchased any goods
from AJP or sold any goods manufactured by AJP. There was no evidence
also that any of the Appellants supervised the dispatch or the removals made
by AJP or provided any distribution network assistance to it or transported
stored any goods or provided any premises for production or storage of any
goods. There was no evidence that any of the Appellants appointed any
supervising staff in AJP. In other words, none of the ingredients of Rule 26
stood satisfied. There was no evidence that any of these Appellants received
money out of the sales made by AJP or any profits therefrom or provided
machines to AJP or any financial assistance for its activities of clandestine
removal of excisable goods. As regards the allegation that most of the
companies in which Mr. D.D. Garg was Director gave interest free loan to
AJP without security, the CESTAT failed to notice that the entire loan
amount was repaid by AJP even prior to the date of search.
46. As regards the retraction by Mr. Gautam of his statement, it is urged by
Mr. Kant that the CESTAT overlooked the legal position explained in K. I.
Pavunny v. Assistant Collector of Central Excise, 1997 (90) ELT 201(SC),
Ravindran @ John v. Superintendent of Customs 2007 (80) RLT 427 and
Mahindra Chadnra Dey v. CEGAT 1992 (58)ELT 192 (Ca1.) and several
orders of the CESTAT itself which required independent corroboration of
retracted statements before they could be relied upon. It was not noticed that
as far as Mr. Gautam was concerned, there were several acts done by him
which substantiated the plea that he was in fact the proprietor of AJP.
47. On the other hand, Mr. Satish Kumar, learned Senior Standing counsel
for the Department sought to support the impugned order of the CESTAT.
According to him the CCE had undertaken a detailed analysis of the
evidence on record and in particular the evidence of Mr. Mahesh Kumar
Gautam. He submitted that the involvement of the three Appellants in the
affairs of AJP was convincingly established. He submitted that with the
dismissal of AJP's appeal by the CESTAT, the order-in-original of the CCE,
as far as the liability of AJP was concerned, became final. It is no longer
open, therefore, even for the Appellants to assail that part of the order of the
CESTAT.
Rule 26
48. The present appeals essentially concern the role of the three Appellants
and whether the penalty levied on them under Rule 26 of the CE Rules 2002
and Rule 209A of the CE Rules 1944 was justified. Rule 26 of the CE Rules
2002 reads as under:
"Any person who acquires possession of, or is in any way
concerned in transporting, removing, depositing, keeping,
concealing, selling or purchasing, or in any other manner
deals with, any excisable goods which he knows or has
reason to believe are liable to confiscation under the Act or
these rules, shall be liable to a penalty not exceeding the
duty on such goods or rupees ten thousand, whichever is
greater."
49. Rule 209A of the CE Rules 1944 was more or less similarly worded.
These are penal provisions that call for a strict interpretation. Therefore, in
order that penalty may be levied, it will have to be satisfactorily proved that
the ingredients of Rule 26 of the CE Rules 2002 are existent qua the person
proposed to be subject to the penalty. In other words, for the purposes of
levy of penalty the Department would have to show the actual involvement
of the person sought to be penalised in the actions of possessing,
transporting, removing, keeping, concealing, selling or purchasing, etc. of
the excisable goods, which he knows or has reason to believe are liable to
confiscation.
50. In Gian Mahtani v. The State of Maharashtra AIR 1971 SC 1898 it
was observed by the Supreme Court that the main accused, who played the
leading role "in extensive smuggling operations on his own admission" did
create a serious suspicion but "according to the system of jurisprudence
which we follow, conviction cannot be based on suspicion nor on the
conscience of the Court being morally satisfied about the complicity of an
accused person."
51. The SCN which proposed the penalty would have to make out a case for
how Rule 26 is attracted. In the present case, apart from merely stating that
the three Appellants were in control of the affairs of AJP, there is nothing in
the SCN which points to how they were actually involved in the
transporting, removing or clearing of excisable goods by AJP. The SCN at
the same time acknowledges that AJP is an independent entity against whom
the SCN was also issued and against whom a separate order has been passed
confirming the demand of duty and interest, apart from penalty.
52. The mere fact that challenge by the AJP to the adjudication order failed,
on account of its appeal being dismissed in default by the CESTAT, does
not preclude the Appellants from showing that the penalty against them is
not justified in law.
The evidence of Mahesh Kumar Gautam
53. The main evidence relied upon by the Department in support of its case
against the Appellants herein is that of Mr. Mahesh Kumar Gautam. As
already noticed there were three statements made by him. The first one was
on 26th April, 2002 where he is supposed to have made several incriminating
statements to the effect that the actual owners of AJP were the Gargs.
However, this was retracted by him at the earliest available opportunity by
lodging an FIR to the police and also by producing the medical certificate in
support of his contention that the statement had been extracted under duress
and coercion.
54. The reasons given by the CCE which had been accepted by the CESTAT
in rejecting the above explanation is that the medical certificate itself did not
show that Mr. Gautam was beaten up by the excise officials. Neither the
CCE nor the CESTAT could have taken upon themselves to determine what
the true purport of the medical certificate was. Given the proximity of the
lodging of the FIR accompanied by the medical certificate it rendered
probable the version of Mr. Gautam that he was subjected to third degree
torture when he made the statement on 26th April, 2002. The CCE and the
CESTAT should have been cautious in proceeding to rely on such statement
without seeking independent corroboration.
55. The decision in K.I. Pavunny v. Assistant Collector, Central Excise
(supra), holds that where a confession is shown to be involuntary, as a
matter of prudence, the authority should seek some independent
corroboration. In the present case the fact that an FIR was registered by Mr.
Gautam against the excise officials immediately after the statement was
given is a strong indication of the lack of voluntariness in making the
statement.
56. In Ravindran and Peter John v. The Superintendent of Customs 2007-
TIOL-89-SC-CUS, the Supreme Court cautioned that a confession cannot
form the sole basis of a conviction under the Customs Act. Two other
decisions that are relevant in this context are V. Ananthraman v. Union of
India 2003 (151) ELT 278 (Bom.) and Nicco Corporation Ltd. V.
Commissioner of Service Tax 2014 (307) ELT 228 (Cal.).
57. As pointed out by the learned counsel for the Appellants certain other
crucial factors which do not appear to have been considered either by the
CCE or the CESTAT are that Mr. Gautam continued filing documents on
behalf of AJP even after the conclusion of the search proceedings. The
agreement signed by him on 22nd March 2000 with Mr.D.N. Rana for hiring
the premises for the factory was not shown to be a false document. The
application for obtaining the central excise registration of AJP and the
declaration under Rule 173-B were signed by him. He had sent a letter to the
Department authorizing Mr. Vinod Bansal to sign documents for excise
purposes; a franchisee agreement with SFP was signed by him; the Central
Excise Bond in Form B-1was executed by him on 7th September 2000; he
applied for sales tax registration both under the Delhi Sales Tax Act as well
as the Central Sales Tax Act. In April 2000, he gave a statement to the Sales
Tax Department that he was the proprietor of AJP. Even after the raid, he
continued to file income tax returns as well as sales tax returns and complied
with other statutory requirements. He filed his own income tax return for the
AY in which search was conducted showing his income from business. He
filed an application to the income tax department for issuance of a PAN
mentioning himself as proprietor of AJP.
58. Further, Mr. Gautam's statement made on 4th November, 2003 does not
contain anything incriminating as far as the Appellants herein are concerned.
He talks of the payments made to M/s ST and to Krishna Packers. He states
that the owner of the Rajdarbar brand was SFP and that the accountant of the
AJP was Mr. V.K. Bansal. When he was asked: "Those persons who had
given you to use your own Branch, what kind of control was there regarding
the quality etc. of the goods manufactured by Amar Jyoti Packers and in
what manner?" he answered "Sometimes Sonal Food Products may come
and check." When asked "Who used to look after the work of compounding
mixing and who used to do?" he answered "Shri Vinod Bansal, who was the
Accountant in Amar Jyoti Packers..." When specifically asked whether
there was "any kind of office or any connection in House No.1304, Shiv
Mandir Colony, Alipur Village?" he stated "In my knowledge there was no
connection with me or with Amar Jyoti Packers with this address." Nothing
in these replies to the above detailed questions show that he was a stranger
to the business of AJP as is sought to be projected by the Department.
59. In his statement dated 4th November 2003, there was a pointed question:
"What do you do nowadays?" he stated "I and my family are being
originally doing puja archana and I am also doing the same work because I
am free/unemployed." When asked about purchase of plant and machinery
of AJP, he stated that had purchased some machines from the market. No
question was asked about the Gargs being the real owners of the business.
Consequently the Court fails to appreciate on the reading of the above
statement dated 4th November, 2003, as has been done by the CCE and the
CESTAT, that Mr. Gautam reaffirmed the statement made on 26th April,
2002.
60. On 12th March 2004, Mr. Gautam was again shown his earlier statement
dated 26th April, 2002 and asked to reaffirm it. This time again when asked
who used to do the mixing of the scent and zarda etc., he named Mr. V.K.
Bansal. He also stated that he had seen his statement of 4 th November 2003
and read it and he was fully satisfied with it. A reading of the statement
dated 12th March 2004 shows that according to Mr. Gautam, it was
essentially Mr. V.K. Bansal who was looking after the work of AJP. When
asked: "Who used to look after the factory and its office and account works
in Amar Jyoti Packers", Mr. Gautam answered: "The accounts relating to
Amar Jyoti Packers and other office work were looked after by Shri Vinod
Bansal. Besides him there was no other person." It is also significant that
this statement was also retracted by Mr. Gautam, a fact which is not taken
note of by either the CCE or the CESTAT.
61. Consequently the Court is unable to concur with the CCE or the
CESTAT that the evidence of Mr. Gautam clinches the issue concerning the
Gargs being the actual owners of the AJP. Both the CCE and the CESTAT
have proceeded on an erroneous appreciation of the statements of Mr.
Gautam.
62. Considering that Mr. Gautam's statements implicating the Appellants
were retracted, the CCE and the CESTAT should have produced other
independent corroborative evidence. That clearly was not available in the
present case. It is the statement of Mr. Gautam that has been relied upon to
hold that there was 'maximum involvement' of Mr. Rakesh Kumar Garg in
the clandestine activity although as already noticed hereinbefore the
statement of Mr. Gautam was a weak evidence. Even in the statement of
Mr. Santosh Garg, there was no admission about his being involved in the
management or control of AJP. No cross-examination was offered of any of
the witnesses whose statements were relied upon in the order of the CCE.
63. Significantly the case made out by the Department was also that M/s. ST
was also a front unit of the Garg family. However, no penalty was levied on
M/s. ST on the ground that there is no evidence on record that they were
concerned with the clandestine clearance of pan masala.
64. The CCE proceeded to hold that "duty and penalty" can be "realised
only from Gargs and neither from M/s. AJP nor Mr. Gautam." It is perhaps
for this reason that the CCE proceeded to impose a high penalty on the
Gargs. This contradicted the final operative portion of the said order where a
penalty of Rs.33,20,02,329/- was, in fact, levied on AJP under Section 11AC
of the CE Act apart from levying penalty of Rs.21 crores on Mr. Devi Das
Garg under Rules 209 and 209A of the CE Rules 1944 as well as Rules 25
and 26 of the CE Rules, 2002.
65. In Commissioner of Central Excise, Meerut-I v. R.A. Castings Pvt. Ltd.
2011 (269) ELT 337 (All.) allegations were made against the Assessees
therein about using fictitious firms to avoid the liability arising from share
trading. It was inter alia observed by the High Court, while affirming the
order of the CESTAT which set aside the duty demand as well as penalty,
that reliance has been placed on the incriminating statements of the share
brokers who had not been produced for cross-examination. In Union of
India v. M.S.S. Foods Products Ltd. 2011 (264) E.L.T. 165 (MP), the
proceedings against the Respondent therein for clandestine removal of gutka
ended in quashing of the demands by the CESTAT. This was because no
material was brought on record to indicate to whom the imported goods
were sold and how the goods were clandestinely removed from the factory.
It was observed that excise duty cannot be levied "merely on the basis of
assumption or presumption." Reliance in that case was placed on the
statement of the proprietor of the Respondent and it was held that since there
was no admission in the said statement that the seized product was
manufactured by the Respondent or cleared from its factory premises, the
said statement was not sufficient to initiate action against the Respondent.
66. As already noticed there is no question of application of Rule 25 since
that applies only to the actual manufacturer of the excisable commodity
whereas that is not even the case of the Department vis-a-vis the three
Appellants.
67. Another important point that was overlooked by the CCE and the
CESTAT is that the entire duty was raised on the basis of the capacity of the
packing machines for the period 1st April, 2000 to 31st August, 2002,
whereas the Department after having conducted the search on 20th October,
2000 did not, in fact, apprehend a single consignment clandestinely removed
after 20th October, 2000 up to 31st August, 2002.
68. Secondly, prior to the amendment introducing Section 3A under the
Finance Act 2008, empowering the Central Government to charge excise
duty on the basis of capacity of production in respect of notified goods (the
provision was made effective from 10th May, 2008), there was no provision
to levy duty on pan masala or gutka on the basis of the pouch packing
machine(s). Considering that the demand was being raised for the past
period 1st April, 2000 to 31st August, 2002, the Department had to
demonstrate the legal basis for demanding the duty on the basis of the
capacity of the pouch packing machines.
69. Thirdly, neither the SCN notice nor the order in original or the impugned
order of the CESTAT discussed any evidence regarding purchase and
storing and transporting of the huge quantity of raw material of 6,200 MT,
which would be required to manufacture the quantity stated to have been
produced in excess by AJP. There appears to have been no investigation
conducted on this aspect of the matter.
The case qua each Appellant
70. As regards Mr. Rakesh Kumar Garg, his connection with SFP or AJP
was not established. It was only Mr. Gautam who alleged that Mr. Rakesh
Kumar Garg got some papers signed from him. However, the fact that there
was a rent agreement executed on 22nd March, 2000 itself and an application
was filed for Central Excise registration and a General Bond Form B-1 itself
shows that Mr. Gautam was fully conscious and aware of what he was doing
while acting on behalf of AJP.
71. As far as Mr. Santosh Kumar Garg is concerned, the link between SFP
of which he was a partner and AJP as far as manufacturing and sale of gutka
and clandestine removal is concerned has not been established. All that was
brought on record was that SFP received royalty payments regularly from
AJP. Three statements were recorded of Mr. Santosh Kumar Garg and in
none of them he was confronted with the clandestine removal of
consignments by the AJP.
72. As far as Mr. Devi Das Garg is concerned, the Department does not deny
that he is a permanent resident of Mathura and there is no evidence on
record specifically connecting him with the activities of AJP.
Conclusion
73. For all the aforementioned reasons, the Court holds that the requisite
evidence necessary for levy of penalty on each of the Appellants under Rule
26 of the CE Rules 2002 was not brought on record by the Department and,
therefore, the levy of penalty was in the first place is unsustainable.
74. For the aforementioned reasons, the Court sets aside the order of the
CESTAT dated 6th August, 2010 restricting the penalty amount vis-a-vis
each of the Appellants to Rs.5 crores. The amounts deposited by the
Appellants during the pendency of these appeals will be returned to them
together with any interest accrued thereon. The guarantees furnished by the
Appellants shall stand discharged.
75. The appeals are allowed in the above terms but in the circumstances with
no orders as to costs.
S. MURALIDHAR, J.
VIBHU BAKHRU, J.
DECEMBER 10, 2015
