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Century Metal Recycling Pvt. Ltd. And Another Petitoners v. Union Of India And Others

Punjab & Haryana High Court

Oct 31, 2008

Judgment

Subsequent
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Factual and Procedural Background

This petition challenged search and seizure conducted by respondent No. 2 (Commissioner of Central Excise) and sought: (i) quashing of the search and seizure, (ii) refund of Rs. 1,10,75,019/- allegedly deposited under threat of arrest, (iii) return of the petitioners' records, and (iv) a direction restraining coercive action (arrest or detention) against the petitioners and their employees.

The petitioner-firm manufactured Aluminium and Zinc Alloy Ingots falling under Chapter Headings 76 and 79 of the Central Excise Tariff Act, 1985. Raw material was largely imported and customs duty paid was credited to the CENVAT account under the Cenvat Credit Rules, 2004 and credit was availed against excise liability. Searches were conducted at the factory on 28.05.2008, followed by further searches on 06.06.2008 and other dates.

During the searches petitioners sought copies of seized documents and provisional release of seized material against bond without bank guarantee; the goods were not released. The petitioners allege they deposited Rs. 1,10,75,019/- under duress. The respondents also seized dross, which the petitioners contended was not excisable and therefore not required to be entered in the record.

In reply, respondents stated searches were on account of inferred evasion of duty based on (a) alleged receipt of fake bills from a sister concern, (b) removal of CENVATable inputs without reversing credit, (c) unaccountable sale of dross, (d) unaccounted diversion of finished goods and use, and (e) sale of other metals recovered from imported inputs. Respondents also relied on an admission by Shri Mayank Pareek of shortage of finished goods and wrongful CENVAT credit. Respondents advised furnishing an R-11 bond with 25% security by fixed deposit or bank guarantee and contended the deposit was voluntary and could be applied against any demand arising after assessment.

The court heard counsel, noted that respondents undertook to complete investigation within one month, and reserved detailed comment on the validity of the search. The court considered whether the search and seizure were called for, whether the deposited amount should be refunded, and whether the conditions for provisional release of seized goods were reasonable.

Legal Issues Presented

Whether the search and seizure were justified.
Whether the petitioners are entitled to refund of the amount deposited (Rs. 1,10,75,019/-).
Whether the conditions imposed for provisional release of the seized goods (including requirement of bond B-11 with 25% bank guarantee or cash security) are valid and reasonable.

Arguments of the Parties

Petitioners' Arguments

The searches were conducted without reason and the petitioners were forced to make the deposit before assessment; continued detention of goods subject to arbitrary conditions was illegal.
Reasons for search and seizure were required to be recorded and furnished to the petitioners.
Provisions of Sections 105 and 110 of the Customs Act, 1962 (made applicable by notification under Section 12 of the Central Excise Act, 1944) and Section 165 of the Code of Criminal Procedure (made applicable by Section 18 of the Central Excise Act) were relied upon to challenge procedure followed.
Bond B-11 conditions applied only to release of finished goods; demanding a bank guarantee or cash security equal to 25% of value of goods was unreasonable.

Respondents' Arguments

The searches and seizure were for investigating evasion of duty arising from wrongful availment of CENVAT credit and other alleged irregularities; investigations would be completed within one month.
Seizure and potential confiscation were permissible (invoking Rule 15 of the Cenvat Credit Rules, 2004) where evasion was inferred.
Dross, earlier held non-excisable by the Supreme Court in Commission of Central Excise v. Indian Aluminium Co., was made excisable by amendment to the Central Excise Tariff Act, 1985 effective 01.03.2005 (classification under sub-heading 26204010).
Applicability of Section 165 Cr.P.C. under the statute is qualitatively different, as noted in R.S Seth v. R.N Sen.
Copies of most documents were already with the petitioners; petitioners had made the deposit voluntarily; respondents required R-11 bond with 25% security for provisional release.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Commission of Central Excise v. Indian Aluminium Co.	Held that dross was not result of manufacture (i.e., not excisable under earlier law).	The court noted that under Indian Aluminium dross was held not excisable; respondents countered that dross was made excisable w.e.f. 01.03.2005 by amendment. The court treated the petitioners' position regarding dross as prima facie arguable and did not conclude that the petitioner could not make a case on this point.
R.S Seth v. R.N Sen	Noted that applicability of Section 165 Cr.P.C. is qualitatively different under the scheme of the Act.	The court recorded the respondents' reliance on this authority to support the qualitative difference in applicability of Section 165 Cr.P.C.; the court did not, at this stage, reach a conclusive determination on that point.

Court's Reasoning and Analysis

The court proceeded on the following reasoning, reflecting the sequence and legal principles applied in the opinion:

The matter was under investigation and respondents undertook to complete investigations within one month; accordingly the court declined to express any final view on the validity of the search and seizure at that stage.
On the deposit of Rs. 1,10,75,019/-, the court observed that irrespective of whether the deposit was made under coercion or voluntarily, unless there is an assessment and demand the amount cannot be appropriated by the department. No justification had been shown for retaining the amount other than the claim it was voluntarily deposited. Consequently, the petitioners were entitled to the return of the deposited amount.
On detention and conditions for release of goods, the court emphasized the object of seizure (to ascertain facts and safeguard revenue interests) but held that pending investigation goods cannot be detained indefinitely nor can harsh or unreasonable conditions be imposed for release. There can be no presumption of forfeiture; security to cover value of goods is appropriate only where a clear prima facie case for confiscation is made out. Mere hypothetical power of forfeiture is insufficient to require onerous security.
The court examined the factual bases for the department's inference of evasion: wrongful availment of CENVATable inputs, omission to enter dross, low value addition, and excess stock. The court observed: (a) Indian Aluminium previously held dross not excisable but the department relied on a statutory amendment making dross excisable w.e.f. 01.03.2005; (b) prima facie the petitioner's position on dross was arguable and could not be summarily rejected; (c) low value-addition and excess stock may justify investigation or cancellation of CENVAT credit but did not, by themselves, justify confiscation; (d) discrepancy between assessed value (< Rs. 5 crores) and alleged tax evasion (Rs. 23 crores) and the absence of any demand for three months militated against indefinite detention without clear prima facie case.
The court found no material supporting the allegation of unaccounted diversion of finished goods; panchnamas relied upon contained allegations only of non-entry of dross and excess raw material stock. There was nothing to show the revenue would suffer irreparable loss if goods were released on an undertaking to pay any duty found due after investigation. It was also noted that Bond B-11 conditions were not shown to be applicable to raw material.
On balance, the court concluded that continued detention of goods or imposition of conditions that made release impracticable would be arbitrary in the absence of a clear prima facie case for confiscation, and that reasonable procedure must be followed even where jurisdiction to investigate exists.

Holding and Implications

Holding: The petition was partly allowed. The court directed respondent No. 2 to forthwith return the amount deposited by the petitioners (Rs. 1,10,75,019/-) and to release the seized goods on the petitioners furnishing an undertaking in terms identical to Form B-11 prescribed under Rule 206 of the Central Excise Rules, without any bank guarantee or cash security. The petitioners were also permitted to take copies of all records they sought, at their cost. The petition was disposed of accordingly.

Implications: The direct consequences for the parties are (a) immediate refund of the deposited amount and (b) release of seized goods on an undertaking (Form B-11) without requiring bank guarantee or cash security. The court did not set aside searches or make final findings on the merits of the investigation; it limited its order to procedural reliefs preserving the revenue's ability to investigate and make demand if justified. The opinion does not announce any new broad precedent beyond the application of established principles on reasonableness of detention and the need for a clear prima facie case before imposing onerous security conditions.

Show all summary ...

Adarsh Kumar Goel, J.:— This petition seeks quashing of search and seizure conducted by respondent No. 2 Commissioner of Central Excise and for a direction to refund a sum of Rs. 1,10,75,019/- deposited by the petitioners under the threat of arrest. Further prayer is for return of the records of the petitioners. Prayer has also been made for not taking any coercive action of arrest or detention against the petitioners and his employees.

2. Case of the petitioner-firm is that it manufactured Aluminum and Zinc Alloy Ingots falling under Chapter Heading Nos. 76 and 79 of the Central Excise Tariff Act, 1985. The raw material is mainly imported. The custom duty paid is credited to the CENVAT account under the Cenvat Credit Rules, 2004 and credit is availed against liability to pay excise duty on the finished product. On 28.5.2008, search was conducted at the factory of the petitioner firm which was followed by further search on 6.6.2008 and other dates.

3. The petitioners made request to provide copies of the documents which were seized or to allow them to make photocopies of the same. During search, the petitioners were informed that excess stock of raw material was found, for which the petitioners gave explanation. The petitioners sought provisional release of seized material against bond without bank guarantee, but the goods were not released.

4. The petitioners made a deposit of Rs. 1,10,75,019/- under duress. The respondent No. 2 also seized dross, apart from raw material, which according to the petitioners was not excisable and on that account not required to be entered in the record.

5. In the reply filed by the respondents, case of the respondents is that search and seizure were conducted on account of evasion of duty which was inferred from the following:—

(a) received fake bills without actually receiving the material from its sister concern dealer namely M/s Grand Metal Industries, Delhi & Faridabad,

(b) the removal of CENVATable inputs without reversing the credit,

(d) unaccounted diversion of finished goods and unaccounted use and

(e) sale of other metals recovered from imported inputs.

6. It has further been stated that Shri Mayank Pareek admitted the facts that there was shortage of finished goods and that CENVAT credit has been taken wrongly. Further stand of the respondents vide letter dated 17.6.2008 (Annexure R-2) is that copies of most of the documents were already with the petitioners. The respondents advised the petitioners to furnish R-11 bond for value of seized goods with security of 25% of the face value by way of Fixed Deposit or bank guarantee. As regards the return of money, stand of the respondents is that the petitioners made the deposit voluntarily against the duty which may arise during the course of assessment.

7. We have heard learned counsel for the parties and perused the record.

8. Contention raised on behalf of the petitioners is that search was without any reason and the petitioners were forced to make the deposit even before the assessment and that continued detention of goods by offering to release them on arbitrary conditions was illegal. It is submitted that reasons were required to be recorded for search as well as for seizure and the said reasons were required to be furnished to the petitioners. Reference was made to provisions of Sections 105 and 110 of the Customs Act, 1962 which were applicable by virtue of notification issued under Section 12 of the Central Excise Act, 1944 and Section 165 of the Code of Criminal Procedure which was applicable by virtue of Section 18 of the said Act. It was submitted that condition for provisional release of goods by requiring Bond B-11 which was applicable only to release of finished goods and demand of Bank guarantee or cash security equal to 25% of value of goods was unreasonable.

9. On behalf of the respondents, it was submitted that the matter was being investigated and investigations will be completed within one month and that search and seizure was conducted for evasion of duty on account of wrongful availment of CENVAT, which could lead to confiscation under Rule 15 of the Cenvat Credit Rules, 2004. It has further been pointed out that the Dross which was held to be not excisable in the judgment of Honble the Supreme Court in Commission of Central Excise v. Indian Aluminium Co. Ltd,1 was made excisable by amendment to the Central Excise Tariff Act, 1985 w.e.f 1.3.2005 by classifying the same under sub heading 26204010.

10. Further contention is that applicability of Section 165 of Code of Criminal Procedure was qualitatively different under the scheme of the Act, which has been noticed in the judgment of the Honble Supreme Court in R.S Seth v. R.N Sen,2.

11. The questions for consideration are whether the search and seizure was called for, whether the petitioners were entitled to refund of the amount deposited and whether the conditions for provisional release of seized goods are valid.

12. Since the matter is under investigation, which respondents have undertaken to conclude within one month, we do not consider it necessary to express any opinion at this stage on the validity or otherwise of search and seizure.

13. As far as the amount deposited by the petitioners is concerned, case of the petitioners is that the same was deposited under coercion. Case of the respondents was that the same was deposited voluntarily. Whatever be the position, unless there is assessment and demand, the amount deposited by the petitioners cannot be appropriated. No justification has been shown for retaining the amount deposited, except saying that since it was voluntarily deposited. In view of this admitted position, the petitioners are entitled to be returned the amount paid.

14. As regards release of goods, the object of seizure admittedly is to ascertain facts and to safeguard the interest of the revenue against any possible evasion of duty. Pending investigation, the goods cannot be detained for indefinite period nor any harsh or unreasonable condition can be imposed for release thereof. There can also be no presumption that the goods will be forfeited. Question of securing against the value of goods can arise only if a clear prima facie case for confiscation is made out. Mere hypothetical existence of power or provision for forfeiture cannot be a ground to require security to be furnished for the value of goods which normally will be very onerous condition.

15. Even though, we have not expressed any opinion on merits, we are required to go into question of reasonableness of conditions for provisional release in the background of facts on record. Allegation of the respondents from which inference of evasion of duty is sought to be drawn, relates to wrongful availment of Cenvatable inputs.

16. As regards omission to make entry of dross, the petitioner has pointed out that as per law laid down by the Honble Supreme Court in Indian Alluminium (supra) dross was not excisable item. According to the department, the same was excisable w.e.f 1.3.2005 The Honble Supreme Court held that dross was not result of manufacture. Prima facie, it cannot be held that case of the petitioner was not arguable or that prima facie the record in respect of dross was not kept with a view to evade duty. Similarly, the other basis for inference of evasion of duty is that the petitioner has shown low value addition to the cost of raw material while valuing the final product. This inference may be a ground to investigate the matter but not a ground to confiscate the goods. Further, allegation that on stock verification, there was excess stock, could also not be clear ground for confiscation and could at best be a ground for canceling the CENVAT credit. The value of the goods has been assessed to be less than Rs. 5 crores but in the reply, it has been stated that there was estimated tax evasion of Rs. 23 crores. The seizure took place almost three months earlier and no demand has so far been raised. In these circumstances, without making out a clear prima facie case, continued detention of goods or imposition of such conditions as make release of goods impossible, will be arbitrary. Even though, there may be jurisdiction to conduct search or investigation and make demand of duty, the same has to be done by following reasonable procedure. Detaining goods for a long period, in the circumstances, cannot be held to be part of fair. procedure. Allegation of unaccounted diversion of finished goods has not been sought to be supported by any material. Panchnamas Annexures P. 1, P. 2, P. 4, P. 6 and P. 7 do not contain any allegation of diversion of finished goods. Only allegation in the said Panchnamas relates to non entry of dross in the record and there being excess stock of raw material. There is nothing to show that any loss will be suffered by the revenue if the goods are released against undertaking of the petitioner to pay duty which may be found due as a result of investigation. It has also not been shown that for release of raw material, conditions of Bond B-11 are applicable.

17. Accordingly, we partly allow this petition and direct the respondent No. 2 to forthwith return the amount deposited by the petitioners and to release the goods on furnishing undertaking in terms identical to the terms in Form B-11 prescribed under Rule 206 of the Central Excise Rules without any bank guarantee or cash security.

18. The petitioners will also be allowed to take copies of all the records which they may seek, at their cost.

19. The petition is disposed of accordingly.

Sd/- L.N Mittal, J.

R.M.S

Petition disposed of.