The Chennai Regional Bench of the Customs, Excise & Service Tax Appellate Tribunal has delivered a significant ruling affirming that the clubbing of clearances from independent manufacturing units to deny Small Scale Industry (SSI) exemption under the Central Excise Act requires strict adherence to principles of natural justice. The Tribunal set aside a substantial excise demand and personal penalties after finding that the Revenue failed to issue Show Cause Notices (SCNs) to the allegedly "dummy" units, rendering the entire adjudication legally unsustainable.
Background & Facts
The Dispute
M/s. N.S. Poly Industries (NSPI), a partnership firm engaged in the manufacture of polyethylene and polypropylene rolls and bags, claimed SSI exemption under Notification No. 8/2003-C.E. dated 01.03.2003. The Commissioner of Central Excise, Coimbatore, issued a Show Cause Notice (SCN) dated 05.04.2013 proposing to club the clearance values of NSPI with those of three other entities - M/s. New Poly Packs, M/s. Veerakumar Traders, and M/s. Vee Plast - to deny the SSI exemption. The aggregate clearance value, when clubbed, exceeded the exemption limit, triggering a demand for excise duty of Rs. 2,13,47,195 for the period March 2008 to June 2012, along with interest and penalties under Section 11A(4) and Section 11AC of the Central Excise Act, 1944, and Rule 26 of the Central Excise Rules, 2002.
Key Facts
- NSPI was registered and operated from Samundipuram, Tirupur.
- M/s. New Poly Packs (Proprietor: N.S. Veerakumar), M/s. Veerakumar Traders (Proprietor: S. Savitri), and M/s. Vee Plast (Proprietor: N. Shanmugam) operated from separate premises with distinct addresses.
- All three entities had independent LT power connections, separate bank accounts, and filed independent Income Tax Returns.
- Each entity held separate registrations with the Commercial Tax Department.
- Machinery details and values were disclosed in their respective IT returns for the period up to 2009.
- On 10.07.2012, officers of the Preventive Unit conducted a search at NSPI’s premises and seized "Marvel Notebooks" (Sl. Nos. 6, 7, 9, 11, 12) and recorded statements from multiple individuals.
- The same search was conducted at the premises of the three other entities, where no manufacturing machinery for PP rolls/bags was found on that date.
- Shri N. Shanmugam (Managing Partner of NSPI) and Shri T. Babu (Proprietor of M/s. Tirukumaran Poly Packs) retracted their statements via letter dated 15.12.2012 and affidavit dated 12.12.2012 respectively.
- Buyers of goods (M/s. Poomex Clothing, M/s. M.V. Exports, M/s. Saranya Garments) confirmed purchasing from all four entities with proper documentation and payments via cheque.
- RG1 and ER-3 returns filed by NSPI for the period 2007-08 to 2011-12 were undisputed and formed the basis of the demand calculation.
- No SCN was issued to M/s. New Poly Packs, M/s. Veerakumar Traders, or M/s. Vee Plast alleging them to be "dummy units".
- Goods valued at Rs. 1,00,000 were seized from M/s. Tirukumaran Poly Packs on 10.07.2012, with a proposed confiscation and redemption fine of Rs. 25,000.
- Personal penalties of Rs. 20,00,000 on N. Shanmugam, Rs. 10,00,000 each on N.S. Veerakumar and S. Savitri, and Rs. 1,00,000 each on Smt. Bhuvaneswari and Shri T. Babu were imposed under Rule 26 of CER, 2002.
Procedural History
- 05.04.2013: SCN issued by Commissioner of Central Excise, Coimbatore.
- 30.06.2014: Order-in-Original No. 08/2014-(Commr.) passed, confirming clubbing, duty demand, confiscation, and personal penalties.
- 2014: Appeals filed before CESTAT Chennai: Excise Appeal Nos. 42301 - 42306 of 2014.
- 25.03.2026: Hearing conducted before CESTAT Chennai.
- 27.05.2026: Final Order pronounced.
The Parties' Positions
Appellants (NSPI and its partners): Argued that the three entities were independent, legally registered manufacturing units with separate infrastructure, accounts, and tax filings. They contended that clubbing their clearances without issuing SCNs violated natural justice. They further challenged the reliance on retracted statements, absence of documentary evidence for clandestine manufacture, and the imposition of personal penalties without confiscation of goods.
Respondent (Revenue): Contended that the three entities were "dummy units" created solely to evade SSI exemption, with no actual manufacturing capacity. Relied on statements recorded during investigation and seized notebooks to support the allegation of suppression and clubbing.
Relief Sought
The appellants sought:
- Setting aside of the impugned Order-in-Original dated 30.06.2014.
- Cancellation of the excise duty demand of Rs. 2,13,47,195.
- Cancellation of confiscation order for goods valued at Rs. 1,00,000.
- Cancellation of personal penalties totaling Rs. 42,00,000.
- Restoration of SSI exemption for NSPI based on its own clearances.
The Legal Issue
The central question was whether the Commissioner could legally club the clearance values of independent entities with those of the appellant to deny SSI exemption under Notification No. 8/2003-C.E. without issuing Show Cause Notices to those entities, thereby denying them an opportunity to be heard in violation of the principles of natural justice.
Arguments Presented
For the Appellant
The appellant’s counsel, Shri M.S. Nagaraja, argued that the three entities - M/s. New Poly Packs, M/s. Veerakumar Traders, and M/s. Vee Plast - were distinct legal entities with independent registrations, bank accounts, power connections, and tax filings. He cited Commissioner CGST (East) v. Unitech Containers Pvt. Ltd. [2017 (358) ELT 99 (Del.)], affirmed by the Supreme Court in 2024, to establish that clubbing clearances without issuing SCNs to the affected units is a violation of natural justice. He further contended that retracted statements, without corroboration or examination under Section 9D of the Central Excise Act, have no evidentiary value. He relied on Surya Wires Pvt. Ltd. v. Commissioner of Central Tax [2025-TIOL-736-CESTAT-DEL] to argue that statements recorded during investigation cannot be admitted unless the witness is examined before the adjudicating authority. He also demonstrated that RG1 and ER-3 returns filed by NSPI showed higher production than the seized notebooks, negating the allegation of clandestine manufacture. He emphasized that personal penalties under Rule 26 require prior confiscation of goods, which was absent.
For the Respondent
The Revenue, represented by Shri P. Ayyam Perumal, contended that the three entities were mere trading concerns with no manufacturing capacity and were created as "dummy units" to fragment clearance values and evade SSI exemption. He relied on the statements recorded during the search on 10.07.2012 and the absence of machinery on that date to infer non-existence of manufacturing facilities since 2008. He argued that the pattern of fund transfers and common ownership justified clubbing. He did not dispute the absence of SCNs to the three entities but maintained that the overall evidence of fraud was sufficient to uphold the order.
The Court's Analysis
The Tribunal conducted a meticulous review of the facts, legal precedents, and procedural compliance. It emphasized that the principle of natural justice is not a mere formality but a foundational requirement of administrative adjudication. The Court observed:
"The Commissioner has undeniably not complied with this legal requirement of law. We may usefully refer to the judgment of the Hon'ble High Court of Delhi in the case of Commissioner CGST (East) Vs Unitech Containers Pvt Ltd. [2017 (353) ELT 99 (Del)]. The Hon'ble High Court has upheld the order of the CESTAT setting aside the order of the Commissioner who had confirmed the clubbing of clearances and demand of duty without issuing SCNs to the other units whose clearances were clubbed with that of the Respondent."
The Tribunal rejected the Revenue’s reliance on retracted statements, noting that the Commissioner neither examined the witnesses nor provided an opportunity for cross-examination, as mandated by Section 9D(1) of the Central Excise Act. It held:
"Reliance therefore on retracted statements without giving proper justification cannot be used against Appellant. Therefore, the findings based on such inadmissible statements cannot be sustained."
Regarding the seized notebooks, the Tribunal noted that the appellant had submitted a comparative analysis showing that RG1 and ER-3 returns recorded higher production than the notebooks, directly contradicting the allegation that the notebooks were production records. The Commissioner’s assertion that "other notebooks may have been hidden" was deemed speculative and unsupported.
The Tribunal also examined the statements of buyers, which confirmed purchases from all four entities with proper documentation and payment via cheque. These statements, far from supporting the Revenue’s case, corroborated the appellants’ claim that the three entities were independent suppliers.
On the issue of personal penalties under Rule 26, the Tribunal held that such penalties are contingent upon the confiscation of goods under Section 11AC. Since no confiscation order was passed against NSPI or its partners, the imposition of personal penalties was legally untenable. The Court cited CCE Bangalore v. Vijaya Steels Pvt. Ltd. [2012 (282) ELT 215 (Kar.)] to affirm:
"For application of the Rule, the condition precedent is any excisable goods which he knows or has reason to believe are liable to confiscation under the Act or the Rules, then penalty is leviable under the aforesaid provision."
Finally, the Tribunal held that since the duty demand was based entirely on the clubbing of clearances - which was held illegal - the entire quantification of duty in Annexure 1 to the SCN was unsustainable. The Court further noted that the Department had access to NSPI’s ER-3 returns from the outset and could not allege suppression or intent to evade duty after years of inaction.
The Verdict
The Appeals were allowed. The impugned Order-in-Original dated 30.06.2014 was set aside in its entirety. The excise duty demand of Rs. 2,13,47,195 was cancelled. The confiscation order for goods valued at Rs. 1,00,000 was quashed, and the redemption fine of Rs. 25,000 was set aside. The personal penalties of Rs. 20,00,000 on N. Shanmugam, Rs. 10,00,000 each on N.S. Veerakumar and S. Savitri, and Rs. 1,00,000 each on Smt. Bhuvaneswari and Shri T. Babu were cancelled. The SSI exemption claim of M/s. N.S. Poly Industries was restored to be assessed on its own clearances alone, without clubbing. The order directed the Revenue to compute any liability, if any, based solely on NSPI’s ER-3 returns for the period, subject to limitation.
What This Means For Similar Cases
Clubbing Requires Independent SCN
- Practitioners must now insist that any attempt to club clearances of separate legal entities requires a separate SCN to each entity, giving them a full opportunity to rebut.
- Failure to issue SCN to third-party units renders the entire clubbing order void ab initio, regardless of the strength of circumstantial evidence.
- This principle applies equally to GST, Customs, and Central Excise proceedings.
Retracted Statements Are Inadmissible Without Corroboration
- Statements recorded during investigation that are later retracted cannot be the sole basis for adjudication.
- Adjudicating authorities must examine witnesses under Section 9D of the Central Excise Act and allow cross-examination.
- Reliance on unexamined, retracted statements invites setting aside of orders.
Personal Penalties Require Confiscation as Prerequisite
- Personal penalties under Rule 26 of CER, 2002 cannot be imposed unless goods are first confiscated under Section 11AC.
- Practitioners should challenge personal penalties where confiscation is absent or invalid.
- The Tribunal’s reliance on Vijaya Steels establishes a binding precedent for this requirement.
Documentary Evidence Trumps Assumptions
- ER-3 returns, bank statements, and IT filings carry greater weight than speculative inferences from search operations.
- Revenue must produce positive documentary evidence of clandestine manufacture - such as unaccounted raw material purchases, excess power consumption, or unrecorded transportation - not mere suspicion.
- The burden of proving intent to evade duty remains on the Revenue, and cannot be shifted by procedural shortcuts.
