Facts of the Case

M/s Narbada Industries, Bari Brahmana, Jammu, was engaged in the manufacture of “Menthol Flakes” and availed area-based exemption under Notification No. 56/2002-CE dated 14.11.2002. During November 2007 to March 2010 it procured crude mentha oil from suppliers based mostly in Uttar Pradesh, and having paid excise duty on clearances through CENVAT Credit/PLA, availed refund/self-credit of Rs. 23,61,38,350. Acting on intelligence inputs, the Commissionerate, Central Excise Meerut-II investigated and found that farmers named in vouchers seized from M/s Sachin and Nitin Enterprises, Lucknow were non-existent, and concluded that the assessee had shown production and clearance without actually manufacturing. A show cause notice was issued and the Adjudicating Authority confirmed the demand. The CESTAT, Chandigarh set aside that order on 28.08.2018, and the Revenue appealed under Section 35G of the Central Excise Act, 1944.

Issues Involved

  1. Whether the Tribunal can ignore inquiry and statements recorded under Section 14 of the Central Excise Act, 1944 read with Sections 193 and 228 of the Indian Penal Code, 1860.
  2. Whether the Tribunal was correct in allowing relief where the suppliers of crude menthol oil were found non-existent during investigation.
  3. Whether the Tribunal was correct in holding the demand based on assumption and presumption unsustainable without going into the facts emerging from the investigation.
  4. Whether relief could be allowed where the party had allegedly indulged in fraud and issued invoices without manufacture.
  5. Whether the Tribunal’s order is justified in accordance with Notification No. 56/2002-CE dated 14.11.2002.

Petitioner’s Arguments

  • The CESTAT erroneously ignored the inquiry and investigation conducted by the Commissionerate.
  • The impugned order is not in conformity with the provisions of Notification No. 56/2002-CE dated 14.11.2002.
  • Once it was firmly established that the origin of the raw material used in the alleged manufacturing process was fabricated, the jurisdictional Authority had no option but to hold that the entire transaction — from procurement of raw material to manufacture of finished products and their removal from the unit — was fake and manipulated to claim the benefit of area-based exemption.

Respondent’s Arguments

  • The Revenue’s case rests entirely on an investigation of farmers who allegedly supplied crude mentha oil to the respondent’s suppliers; the suppliers were traders and the respondent procured nothing directly from farmers.
  • In the absence of any independent investigation into the respondent’s own functioning, the demand could not have been raised.
  • The reply to the show cause notice, reproduced in paragraphs 5 to 7 of the CESTAT order, was neither referred to by the Adjudicating Authority nor controverted by the department.

Court Order / Findings

  • The action of the appellant, based solely on the investigation conducted by the Commissionerate, was not sustainable in law.
  • The respondent was not associated with that inquiry; it was conducted entirely at its back and could not be made the sole basis for action.
  • The Commissionerate could only conclude that farmers named in vouchers seized from a supplier were non-existent, thereby doubting procurement by the suppliers, not by the respondent.
  • The respondent produced certificates from the Commercial Tax Officer and the District Industries Centre, Jammu, three-shift working permission from the Inspector of Factories and Boilers, audited financial statements and periodic returns. Consignments were entered at the toll barrier and purchases were verified by DIC officers.
  • The questions raised are essentially disputed questions of fact and cannot be termed substantial questions of law. The appeal was dismissed, with liberty to the Authority to conduct a fresh investigation in accordance with law.

Important Clarification

  • To recover refund availed under Notification No. 56/2002-CE, the Authority must establish that no raw material was procured, that no manufacturing activity was undertaken during the relevant period, and that no excisable goods were removed and the refund was fraudulently claimed.
  • The report of another Commissionerate may at most be prima facie material to initiate action, but cannot be the sole basis for taking action.
  • Any action must follow an in-depth inquiry giving the assessee a fair opportunity of defence, in compliance with the principles of natural justice.

Sections Involved

  • Section 35G of the Central Excise Act, 1944 – Appeal to the High Court on substantial questions of law
  • Section 14 of the Central Excise Act, 1944 – Power to summon persons
  • Sections 193 and 228 of the Indian Penal Code, 1860
  • Notification No. 56/2002-CE dated 14.11.2002 – Area-based exemption and refund/self-credit of duty

Decision – In Favour of

In favour of the Assessee. The Revenue’s appeal was dismissed and the CESTAT order setting aside the demand was upheld, subject to liberty to the Department to conduct a fresh investigation in accordance with law. High Court of Jammu & Kashmir and Ladakh at Jammu; CEA No. 7/2020; Coram: Hon’ble Mr. Justice Sanjeev Kumar and Hon’ble Mr. Justice Puneet Gupta; pronounced 31 December 2024.

Link to Download the Order

Click here to download the full order – Commissioner of Central GST and Central Excise, Jammu v. M/s Narbada Industries (CEA No. 7/2020)