The Jammu & Kashmir and Ladakh High Court has held that the action of the department, based solely on the investigation conducted by the Commissionerate, was not sustainable in law.
The bench of Justice Sanjeev Kumar and Justice Puneet Gupta has observed that an in-depth investigation is required to be conducted by the jurisdictional Authority by providing the respondent-assessee with a fair opportunity to explain and put up its defence. The report of the Commissionerate may form the basis for suspecting malpractices indulged in by the respondent but cannot be the sole basis for taking action. The investigation conducted by the Commissionerate could, at the most, be taken as a prima facie material to initiate action against the respondent.
The respondent/assessee is having Central Excise Registration and was engaged in the manufacture of “Menthol Flakes”. It was entitled to and was availing the benefit of area based exemptions in terms of Notification No.56/2002-CE dated 14.11.2002 as amended.
The assessee, during the relevant period i.e from Nov 2007 to March 2010, procured raw material i.e crude mentha oil against invoices from various suppliers, mostly based in the State of U.P. Since the respondent had paid the excise duty on the manufactured goods removed from its unit by utilization of CENVAT Credit/PLA, as such, in terms of Notification dated 14.11.2002, it availed the refund/self-credit of Central Excise Duty paid through PLA amounting to Rs.23,61,38,350 under self credit option.
While the respondent was enjoying the benefits of area based exemptions under the Notification dated 14.11.2002, the department received some intelligence inputs that the respondent was mis-utilising the exemption scheme in order to avail refund of the Central Excise Duty.
The investigation was undertaken by the Commissionerate, Central Excise Meerut in which it came to be established that the assessee had actually not manufactured goods, but had fraudulently shown production and clearance thereof with an intent to avail illegal monetary benefits at the cost of the Government exchequer. The investigation concluded that the assessee had adopted a modus operandi of showing production and clearance of excisable goods without actually manufacturing the same and, thus, misused the provisions of Exemption Notification dated 14.11.2002.
The investigation by the Commissionerate revealed that during the relevant period, the respondent had procured the raw material from M/S Sachin and Nitin Enterprises, Lucknow, M/S Neeraj Traders, Lucknow and M/S Rapti Commission Agency, Lucknow.
The investigation by the Commissionerate focussed on verifying the farmers who had allegedly supplied goods to certain suppliers of the respondent. Based upon the investigation, the Commissionerate issued show cause notices to the buyers and manufacturers falling within its jurisdiction. A specific inquiry in respect of M/S Sachin and Nitin Enterprises, Lucknow was also conducted.
The summons issued to M/S Sachin and Nitin Enterprises, Lucknow were not complied with. The officers of the Commissinerate, Central Excise Meerut-II searched various branches of M/S Sachin and Nitin Enterprises located at different places of District Barabanki in U.P. Some of the premises were found closed and locked. The Head office of M/S Sachin and Nitin Enterprises, situate at Indira Nagar, Lucknow too was searched on 26.08.2009 in which 45 books containing 100 vouchers each, showing different payments made to the farmers for the purchase of crude menthe oil, for the year 2007-08, were recovered.
The farmers, who were named in the vouchers, and had allegedly supplied the crude mentha oil to M/S Sachin and Nitin Enterprises, were verified through jurisdictional officers of the Central Excise. The farmers randomly selected from the purchase vouchers were found non-existent.
It is on the basis of this investigation conducted by the Commissionerate, the jurisdictional Commissioner concluded that the J&K based units were not purchasing raw materials, so there was no question of manufacture of finished goods as had been shown by the respondent to avail the area-based exemptions. The jurisdictional Authority, thus, initiated the proceedings by issuing a show cause notice to the respondent, raising a demand for the duty refunded in terms of Notification dated 14.11.2002.
The Adjudicating Authority confirmed the demand on the ground that the farmers who had allegedly supplied the raw material i.e, mentha oil were, non- existent and that, in the absence of any supply of raw material, there was no manufacturing process undertaken by the respondent.
The CESTAT concluded that there was no evidence on record proving that the respondent was not the manufacturer and had not produced the excisable goods during the relevant period. Consequently, the CESTAT held that there was no illegality or fraud committed by the respondent in availing the refund of excise duty paid by it on the removal of goods manufactured in its unit.
The court held that with a view to deny the benefit of the exemptions envisaged under Excise Notification dated 14.11.2002, the appellant was required to demonstrate and prove that during the relevant period, when the refund was claimed by the respondent, it had not procured any raw material, nor had it undertaken any manufacturing process. This could have been determined by the appellant by conducting an inquiry/investigation specifically focused on these aspects of the matter.
The court while dismissing the appeal filed by the department held that the the order and judgment passed by the CESTAT do not suffer from any error or legal infirmity.
Case Details
Case Title: Commissioner of Central GST and Central Excise, Jammu and Kashmir Jammu Versus Narbada Industries
Case No.: CEA No. 7/2020
Date: 31.12.2024
Counsel For Appellant: Rohan Nanda
Counsel For Respondent: Sudhir Malhotra
