The Customs, Excise and Service Tax Appellate Tribunal, Mumbai, has delivered a pivotal ruling clarifying that penalties imposed on co-noticees under the Central Excise Rules cannot survive once the main noticee settles its tax liability under the Sabka Vishwas (Legacy Dispute Resolution) Scheme, 2019. This decision reinforces the principle that secondary liabilities are derivative and cannot persist independently after the primary obligation is extinguished.
Background & Facts
The Dispute
The dispute arose from show-cause notices issued under the Central Excise Rules, 2002, against M/s. Nashik Strips Pvt. Ltd. (main noticee) and two co-noticees - M/s. Salasar Ispat Pvt. Ltd. and Shri Vijay Kumar Jindal - for alleged evasion of excise duty on M.S. Ingots. Penalties of ₹1,00,000 each were imposed on the co-noticees under Rule 26 of the Central Excise Rules, 2002, based on witness statements and seized private documents.
Procedural History
- 2017-18: Show-cause notices issued by the Commissioner of CGST & Central Excise, Nashik.
- 2018: Commissioner (Appeals) upheld the penalty against co-noticees.
- 2019: Appeals filed before CESTAT Mumbai.
- 2020: Main noticee settled its tax liability under the SVLDR Scheme, 2019, obtaining a discharge certificate under Section 126 of the Finance Act, 2019.
- 2021: CESTAT disposed of the main noticee’s appeal on grounds of settlement.
- 2026: Co-noticees’ appeals heard and decided.
Relief Sought
The appellants sought quashing of the penalty orders, arguing that their liability was entirely derivative of the main noticee’s liability, which had been extinguished by settlement. They further contended that the evidence against them - witness statements and seized documents - was legally unsustainable due to lack of cross-examination and absence of physical recovery.
The Legal Issue
The central question was whether penalties against co-noticees under Rule 26 of the Central Excise Rules, 2002 can be sustained after the main noticee has settled its entire duty liability under the SVLDR Scheme, 2019, and whether uncorroborated, un-cross-examined statements can form the basis of penalty imposition.
Arguments Presented
For the Appellant
The appellant’s counsel relied on multiple CESTAT precedents, including Dinesh Kanoria v. Commissioner of Central Excise, P.B. Vyas v. Commissioner of Central Excise, and B.V. Kshatriya v. Commissioner of GST & CE, to argue that the SVLDR Scheme’s settlement extinguishes all consequential liabilities. He emphasized that the co-noticees were neither producers nor possessors of the goods, and no excess stock was found during seizure. He further argued that witness statements, which were later retracted and never cross-examined despite tribunal directions, have no evidentiary value under Section 59 of the Evidence Act and must be expunged.
For the Respondent
The Respondent contended that the SVLDR Scheme benefits only those who apply for settlement, and co-noticees who did not avail the scheme cannot claim immunity. He relied on para 62 of the Order-in-Appeal, asserting that opportunities for cross-examination were provided but witnesses failed to appear, thereby justifying reliance on recorded statements.
The Court's Analysis
The Tribunal examined the nature of liability under the Central Excise Rules and the intent of the SVLDR Scheme. It held that penalty liability against co-noticees is not independent but arises from the same transactional nexus as the main noticee’s duty liability. Once the primary liability is extinguished by settlement under Section 126 of the Finance Act, 2019, the legal foundation for penalizing co-noticees vanishes.
"When the main noticee has settled the entire tax dues under the SVLDR Scheme, the basis for imposing penalty on co-noticees ceases to exist, as their liability is consequential and not primary."
The Court further held that un-cross-examined statements, even if recorded during investigation, carry no evidentiary weight. Citing State of U.P. v. Krishna Kumar, it reaffirmed that cross-examination is indispensable for admissibility of witness testimony in quasi-judicial proceedings. The seized documents were found to belong to the main noticee, not the co-noticees, and no physical evidence of evasion was recovered from their premises.
The Tribunal also noted that Section 124(1)(b) of the SVLDR Scheme explicitly allows co-noticees to avail nil penalty if they file a declaration, reinforcing the legislative intent to provide comprehensive relief. The Board Circular No. 1071/4/2019-CX8 further supports this interpretation.
The Verdict
The appellants succeeded. The Tribunal set aside the penalty orders against both co-noticees, holding that penalty cannot survive after the main noticee’s duty liability is extinguished under the SVLDR Scheme, and that un-cross-examined statements cannot sustain penalty imposition.
What This Means For Similar Cases
Penalty Liability Is Derivative, Not Independent
- Practitioners must now argue that penalty against co-noticees is void ab initio if the main noticee settles under SVLDR Scheme.
- Authorities cannot continue proceedings against brokers, suppliers, or agents once the principal’s liability is discharged.
- Any penalty order issued post-settlement must be challenged on grounds of legal futility.
Un-Cross-Examined Statements Are Inadmissible
- In all excise, GST, and customs proceedings, failure to conduct cross-examination nullifies investigative statements.
- Tribunals and adjudicating authorities must record reasons for non-appearance of witnesses before relying on such statements.
- Petitioners should move to expunge such evidence at the earliest opportunity under Section 59 of the Evidence Act.
SVLDR Scheme Benefits Extend to Co-Noticees
- Even if co-noticees did not file a declaration, the scheme’s structure implies automatic benefit where primary liability is settled.
- Practitioners should cite Board Circular No. 1071/4/2019-CX8 and CESTAT precedents to argue for equitable treatment.
- Authorities must be directed to withdraw penalty proceedings against co-noticees upon proof of main noticee’s settlement.
