The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Kolkata, has set aside a central excise duty demand of ₹4.34 crore holding that computer data retrieved during searches and statements recorded during investigation could not be used to establish clandestine clearance when the mandatory statutory safeguards governing their admissibility were not followed.

The Bench of Ashok Jindal (Judicial Member) and K. Anpazhakan (Technical Member) ruled that the statements relied upon by the Revenue were inadmissible in the absence of examination-in-chief and cross-examination under Section 9D of the Central Excise Act, 1944. It further held that data and printouts retrieved from computers, CPUs and pen drives could not be treated as admissible evidence because the requirements of Sections 36B(2) and 36B(4), including the prescribed certification, had not been satisfied.

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The Tribunal consequently quashed the duty demand of ₹4,34,56,993, the equal penalty imposed on the company under Section 11AC, and the personal penalty of ₹50 lakh imposed on its director, Jawahar Lal Vig, under Rule 26 of the Central Excise Rules, 2002.

The appellant/assessee is engaged in manufacturing and clearing sponge iron and charcoal falling under Chapters 72 and 27 of the Central Excise Tariff Act, 1985.

The proceedings arose from intelligence gathered by the Preventive Branch of the CGST and Central Excise Commissionerate, Jamshedpur. During a search at what was described as the secret office of Maa Tara Ferrotech Limited, officials recovered records that allegedly referred to purchases of sponge iron from Jai Mangla Sponge Iron.

On September 16, 2016, officers searched the company’s factory at Kurli, Chandil, its office at Akashdeep Plaza in Jamshedpur, and the residence of its director. Business records, CPUs and a 16 GB pen drive were seized from the premises.

According to the Department, the data retrieved from the electronic devices contained information relating to the procurement, manufacture and dispatch of goods. The authorities alleged that the company had manufactured and cleared sponge iron and charcoal without issuing central excise invoices and without paying duty.

The investigation also relied on statements made by company personnel. The company’s accounts manager allegedly stated that clearances without invoices were made at the direction of the plant-in-charge and with the directors’ knowledge. The plant-in-charge, in turn, allegedly stated that goods were removed without payment of duty and without excise invoices on the director’s instructions.

An assistant accountant allegedly stated that invoices were prepared manually on the basis of information supplied through informal papers, which were destroyed after use, while corresponding computer entries were made by other persons.

The Department also contacted Bunty Overseas Private Limited concerning certain transactions. That entity confirmed that the goods shown in an enclosed list had been exported. Statements of some vehicle owners were recorded as well, though they were unable to produce transport documents, citing the age of the transactions and stating that the relevant consignment papers remained at the destination.

Based on the seized material, the Revenue alleged that 44,954.27 metric tonnes of coal and 22,179.32 metric tonnes of iron ore had been procured without being recorded in the statutory accounts. It claimed that these raw materials were used to manufacture unaccounted finished products.

The Department ultimately alleged clandestine clearance of 16,639.630 metric tonnes of sponge iron and 15,873.090 metric tonnes of charcoal between November 1, 2014 and September 7, 2016.

A show-cause notice dated December 9, 2019 proposed recovery of ₹4,34,56,993 by invoking the extended limitation period under Section 11A(4) of the Central Excise Act. The amount comprised central excise duty of ₹4,31,06,267, education cess of ₹2,33,816 and secondary and higher education cess of ₹1,16,910.

On March 17, 2021, the Commissioner of CGST and Central Excise, Jamshedpur, confirmed the entire demand with interest. The Commissioner also imposed an equal penalty of ₹4,34,56,993 on the company under Section 11AC and a personal penalty of ₹50 lakh on its director.

Both the company and the director challenged the adjudication order before CESTAT.

The appellants argued that the case was principally based on statements of employees and dispatch reports or other data allegedly retrieved from the seized computers. They submitted that the investigation had failed to collect the independent evidence ordinarily required to prove clandestine manufacture and removal.

They pointed to the absence of any physical stock discrepancy, evidence of abnormal electricity consumption, statements from the alleged buyers, reliable transportation records, statements from truck drivers, weighment slips, evidence of additional labour, proof of receipt of unaccounted sale proceeds, corresponding commercial-tax action, and statements from suppliers of the allegedly unaccounted raw materials.

The appellants also contended that the persons whose statements were used against them were not effectively examined and offered for cross-examination. Therefore, those statements could not be relied upon without compliance with Section 9D.

On the electronic evidence, they argued that the computer printouts did not meet the statutory conditions under Sections 36B(2) and 36B(4). In particular, the records were not accompanied by the certificate required to identify the electronic device, explain how the record was produced, and authenticate the data through a person occupying a responsible official position in relation to the device.

The Revenue supported the Commissioner’s findings and sought dismissal of the appeals.

CESTAT identified two principal questions: whether the investigation statements were admissible without following Section 9D, and whether the data retrieved from CPUs and pen drives was admissible without compliance with Section 36B.

On the first question, the Bench noted that the statements relied upon by the Revenue had never been tested through examination-in-chief and the makers had not been offered for cross-examination.

The Tribunal held that the procedure under Section 9D is mandatory. Unless a case falls within the statutory exceptional circumstances, a person who made a statement during an investigation must first be examined as a witness before the adjudicating authority. The authority must thereafter form an opinion that admitting the statement is in the interest of justice. Only after this process can the question of cross-examination arise.

Relying on judicial precedents, including the Punjab and Haryana High Court’s ruling in Ambika International v. Union of India, the Bench concluded that statements recorded during the investigation could not be used to demand duty when the statutory procedure was not followed.

The Tribunal accordingly held that the statements in the present case were inadmissible in the absence of examination-in-chief and cross-examination.

Turning to the electronic records, CESTAT found that data retrieved from CPUs, computers and pen drives had never been tested under Sections 36B(2) and 36B(4) of the Central Excise Act.

Section 36B lays down the conditions under which computer-generated material may be admitted as evidence. Among other requirements, the provision calls for a certificate identifying the electronic record and the manner in which it was produced, giving particulars of the device involved, and addressing the statutory conditions governing its operation and use.

The Bench relied on its earlier decisions in Ramgarh Sponge Iron Private Limited, Trikoot Iron & Steel Casting Limited and Jai Balaji Industries Limited. It observed that compliance with Section 36B is mandatory and that computer printouts or data recovered from electronic devices cannot, without the prescribed safeguards, be used to support a duty demand.

The Tribunal also referred to the Supreme Court’s rulings on Section 65B of the Evidence Act, noting that the provision is pari materia with Section 36B of the Central Excise Act in relation to electronic evidence.

It rejected the proposition that deficiencies in the statutory certificate could be cured merely through a panchnama or by the adjudicating authority independently examining whether the relevant conditions had been met.

The Bench therefore held that the data and documents retrieved from the seized computers, CPUs and pen drives were inadmissible for sustaining the allegation of clandestine clearance.

The Tribunal further observed that an allegation of clandestine manufacture and removal requires tangible evidence rather than inferences or assumptions. Relevant factors ordinarily include proof of unaccounted raw materials, actual removal of finished goods, discovery of such goods outside the factory, sale to identified buyers, receipt of sale proceeds, abnormal electricity consumption, buyer statements, actual transportation, and a demonstrable link between seized records and factory operations.

In the present case, the Department had not examined the company’s manufacturing capacity. There was no proper investigation of all the alleged buyers of finished goods or suppliers of raw materials. Nor was there an investigation into the labour and electricity that would have been required to manufacture the alleged unaccounted quantities.

The Bench held that these foundational elements were absent. Once the statements and electronic data were excluded as inadmissible, no other evidence remained to prove clandestine manufacture and removal.

CESTAT concluded that the Revenue’s case rested on electronic documents and investigation statements that could not be admitted in evidence. In the absence of independent corroborative material, the charge of clandestine clearance was unsustainable.

The Tribunal set aside the entire central excise duty demand. Since the underlying demand itself failed, it held that no penalty could be imposed either on the company or its director.

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