By TIOL News Service

MUMBAI, JUNE 13, 2014: THE Appellants are engaged in the manufacture of solvents, namely, Beesol-7000 and Beesol-7100 for which the main input is Naphtha. The case of the Revenue is that the appellants have fraudulently availed MODVAT credit of duty paid on the Naphtha either without actual receipt of the same in the factory or without consuming the same for manufacture of solvent. Inasmuch the allegation is that Naphtha which is used for adulteration of petrol, diesel etc. was illegally diverted and the appellants have manipulated their records to indicate that said Naphtha has been used in the manufacture of solvents.

The allegation of diversion of Naphtha is based upon non-production of final product viz. solvents, which in turn is based upon three main evidences. The first evidence is that 22 out of 45 purported purchasers of solvent were found to be non-existent or if found in existence they, in their statements have said that they never purchased solvent from the appellant. Only in one case, purchaser has stated that he bought one consignment (against many consignments shown in the records). The second evidence is that number of bank accounts were opened in Mumbai/Navi Mumbai on behalf of purported existent and non-existent purchasers (who were located in different parts of the country) and large amounts of cash were deposited which in turn were transferred to appellants account as if receipt of sale amount of solvents. Third evidence is relating to transportation of solvents. Revenue has demanded an amount equivalent to the credit of duty taken on Naphtha for the entire period namely September 1998 to May 2001.

The Commissioner confirmed the demand of Rs.12,38,49,639/- along with interest and equal penalty, a penalty of Rs.20 lakhs was also imposed on Mr. Ashwin Pandya, a Director in the appellant company, Rs.25 lakhs on Mr. Lalit Kumar Nagpal, Chairman, BSEL, Rs.10 lakhs on Mr. Anil Kumar Nagpal, proprietor of M/s Meghraj Bulk Carriers.

Before the CESTAT the main contention is that it is incorrect to state that there was no manufacturing activity in the factory or no solvent was being manufactured in the factory. In support of his contention, the learned counsel produced various documents including the visit of the Central Excise officers, drawal of sample of the final product, issuance of the SCN on classification issue and various other documents to prove that the factory is functional and Naphtha was received in the factory.

Another contention was that the credit of duty paid on Naphtha has been used for clearance of final product, namely Beesols and in case Beesol was not manufactured and cleared, as alleged, no duty was payable, and, therefore, debit made by the appellant towards duty should be treated as reversal of credit. More than two dozen case laws were cited in support of the above submission. To this submission, the Bench asked as to why refund claim was then not filed, the appellant said that such a proposition was incorrect in view of a host of decisions in the subject matter.

The appellant also submitted that the demand proposed u/r 57I was illegal as the provisions did not exist on the date of issue of the SCN. Many case laws were cited in this regard too.

The Revenue representative justified the order passed by the adjudicating authority confirming the demand and imposing penalties etc.

The Bench after hearing both sides at length rejected the submissions made by the appellant in the matter of ‘payment of duty on Beesol solvent as reversal of credit of duty taken on Naphtha' by distinguishing the case laws and inter-alia observing -

+ We think the learned advocate has tried to oversimplify the complex scheme of excise administration.

+ Here customers are non-existent, unknown and so called manufacturing is bogus, and transactions are fraudulent.

On the question of invocation of rule 57I of CER, 1944 for recovery when the provisions no longer existed, the Bench after an exhaustive narration on the legality of the issue sprinkled with extracts from the apex Court decision in Kolhapur Cane Sugar Works - 2002-TIOL-188-SC-CX etc. concluded that in view of the provisions of section 38A of the CEA, 1944 inserted by the FA, 2001, Notes of Clauses, the rationale for insertion of the same as evinced in the Departmental Instruction No. 18/GL-18/2000 GIMF (DR)'s F.No. 275/126/2000-CX.8A dated 18.10.2000 and the Larger Bench decision in Kisan Sahkari Chini Mills Ltd vs CCE - 2002-TIOL-458-CESTAT-DEL-LB the appellant's contention cannot be sustained and hence rejected the same.

Nonetheless on the factual details emerging from the investigation, the Bench observed -

“16. From the demand notice/Show Cause Notice it is not clear what has happened in the case of remaining buyers/purchasers of Beesols. It appears there were 23 other purchasers. Whether investigations could be done with these 23 purchasers and results thereof are not forthcoming. If the results obtained were positive, i.e. they have purchased Beesols from appellant as per the quantities shown in the records then the appellant would be required to be given the benefit of credit of duty paid in respect of the Naphtha used in the manufacture of Beesols sold to these buyers.”

The CESTAT further noted -

“In the circumstances, we are of the view that the ends of justice would be met by (i) disallowing the credit of Naphtha taken which is estimated (based upon input/output ratio) to have been used in the manufacture of Beesols the solvents purported to be sold to the 22 buyers (excluding the few consignments of two of such buyers who have admitted to have purchased one or two consignments); (ii) in respect of the remaining customers, appellants may be given last chance to produce all the invoices as also transport documents and ledger account detailing the banking transaction to enable verification of money trail. Revenue may verify these details about the correctness and authenticity and based upon such verification allow the credit of Naphtha taken on the estimated quantity which have been used in the manufacturing of the Beesol.”

The submission by the appellant of the demand being hit by limitation was negated by observing that it was a clear cut case of fraud & suppression of facts with intention to evade duty.

As regards the personal penalties imposed, the Bench upheld the same and also observed that the fact that Shri Lalit Kumar Nagpal became Director from a particular date will not make any difference as he was controlling the affairs and was mastermind behind the diversion of Naphtha through the period. However, the Commissioner was asked to re-determine the quantum of penalty as the matter was being remanded.

In a nutshell, the matter was remanded for re-determining the duty liability.

Deposit in passing: Incidentally, the period involved is September 1998 to May 2001, the O-in-O is dated 31.3.2006, the appeal was heard by the CESTAT on 22.01.2014 and the date of the decision is 13.05.2014.

Quite possibly, we may hear more from the High Court in the coming days!

(See 2014-TIOL-1015-CESTAT-MUM)