Prosecution under Central Excise Laws

1.2 S. 9 of the Central Excise Act, 1944 hereinafter
referred to as ‘the act’ contains provisions regarding penalties and offences.

This Section provides for imprisonment of 6 months to 7 years
and fine in cases where revenue involved in an offence is more than Rs.1 lac and
in other cases 3 years imprisonment and/or fine. For the second and subsequent
offence the imprisonment may extend to seven years and fine. Offences u/s.9
however are non-cognizable, as defined in Code of Criminal Procedure, 1973 by
virtue of S. 9A(1) of the Act. However, S. 9A(1) of the Act provides that for
adequate reasons, which are to be recorded in judgment, imprisonment can be for
less than 6 months. Very specifically the following are not adequate
reasons :

2.3 It is important to note that even an attempt to commit an
offence is enough to entail prosecution and fine.

3.1 S. 9AA provides that every person who, at
the time the offence was in charge of the company, and/or was responsible for
the conduct of the business, as well as the company shall be deemed to be guilty
of the offence and shall be liable to be proceeded against and punished. The
phrase ‘every person’ can lead to the highest officer viz. : managing
director, whole-time director and the person authorised to sign the excise
documents.

3.2 S. 9AA(2) provides that if the offence is committed and
it is proved that the offence has been committed with the consent or connivance
of, or is attributable to, any neglect on the part of any director, manager,
secretary or other officer of the company, then such person shall also be deemed
to be guilty of that offence and shall be liable to be proceeded against and
punished accordingly.

3.3 However, if a person proves that the offence was
committed without his knowledge or that he had exercised all due diligence to
prevent the commission of an offence, then such person will not be liable for
prosecution.

3.4 Persons involved in the removal of excisable goods.

3.5 Persons in possession of excisable goods.

4.1 The Central Board of Excise & Customs (CBEC) has issued
guidelines and procedures vide Circular Nos. 15/90-CX.6, dated 9-8-1990;
208/31/97-CX, dated 4-4-1994, 35/35/94-CX, dated 29-4-1994, 30/30/94-CX, dated
4-4-1994 and 208/21/2007-CX, dated 15-6-2007.

4.2 These instructions are as follows:

1.    Prosecution should be launched with the final approval of the Chief Commissioner or Director General of Central Excise Intelligence in specified cases after the case has been carefully examined by the Commissioner in the light of the guidelines.

2.    Prosecution should not be launched in case default is of technical nature or where the additional claim of duty is based totally on a difference of interpretation of law.

3.    Before launching any prosecution, it is necessary that the Department should have evidence to prove that the person, company or individual was guilty, had knowledge of the offence, or had intention to commit the offence, or in any manner possessed mens rea (mental element) which would indicate his guilt.

4.    In case of public limited companies, prosecution should not be launched indiscriminately against all directors of the company, but it should be restricted to only against directors like the managing director, director-in-charge of marketing and sales, director (finance) and other executives who are incharge of day-to-day operations of the factory.

5.    For the purpose of initiating proceedings, the Commissioners should go through the case file and satisfy themselves that action is taken only against those directors/partners/executives/officials where reasonable evidence exists of their involvement in duty evasion. For example, nominee directors of financial institutions, who are not concerned with day-to-day management should not be prosecuted unless there exists definite evidence to the contrary.

6.    A monetary limit of Rs.25,OO,OOOis prescribed for initiation of prosecution. However, if evidence to show exists that the person or the company has been systematically engaged in evasion over a period of time and evidence to prove mala fides is available, prosecution should be considered irrespective of the monetary limit.

7.    Persons liable to prosecution should not normally be arrested unless their immediate arrest is necessary. Arrest should be made with the approval of the Assistant Commissioner or the senior-most officer available. Cases of arrest should be reported at the earliest opportunity to the Commissioner, who will consider whether there is a fit case for prosecution.

8.    Decision on prosecution should be taken immediately on completion of the adjudication proceedings. Prosecution may be launched even during the pendency of the adjudication proceedings if it is apprehended that undue delay would weaken the Department’s case.

9.    Prosecution should not be kept in abeyance on the ground that the party has gone in appeal! revision.

10.    It is necessary to reiterate that in order to avoid delays, the Commissioner should indicate at the time of passing the adjudication order itself whether he considers the case to be fit for prosecution so that it could be further processed for being sent to the Chief Commissioner for sanction.

Procedure for prosecution:

1.    In all such cases where the Commissioner of Central Excise incharge of judicial work is satisfied that prosecution should be launched, an investigation report should be carefully prepared and signed by an Asstt. Commissioner endorsed by the Commissioner and forwarded to the Chief Commissioner for decision within one month of the adjudication of the case. Report should be in the prescribed format.

2.    A criminal complaint in a Court of Law should be filed only after the sanction of the jurisdictional Chief Commissioner or Director General of Central Excise Intelligence in specified cases has been obtained.

3.    Prosecution, once launched, should be vigorously followed. The officer incharge of judicial work should monitor cases of prosecution at monthly intervals and take corrective action wherever necessary to ensure that progress of the prosecution is satisfactory.

4.    In large cities, where a number of Central Excise divisions are located, all prosecution cases could be centralised in one office, so that it will be easier for the officers to deal with the cases.

5.    In order that the prosecution may have a deterrent effect, conviction should be secured with utmost speed. Hence, regular monitoring of the progress of prosecution case is mandated.

6.    As a matter of practice, whenever in a case approval of the Chief Commissioner is sought for launching prosecution, the concerned officer should immediately take charge of all documents, statements and other exhibits that would be required to be produced before a Court. The list of exhibits, etc. should be finalised in consultation with the Public Prosecutor at the time of drafting of the complaint. It should be ensured that all exhibits are kept in safe custody.

7.    It is apparent that generally in cases of sizable evasion, persons convicted under the Act suffer very light penalties which is contrary to the spirit of the Act, as well as the purpose of launching prosecution. The Board, therefore, desires that the Commissioners of Central Excise responsible for the conduct of prosecution, should study the judgments of the Courts and where it is found that the accused persons have been let off with light punishment, the question of filing appeal should be examined with reference to the evidence on record within the stipulated time. This is equally applicable to cases where the Court orders acquittal without recording sufficient reasons in the judgment despite existence of adequate evidence which was provided to the Court.

8.    S. 9B of the Act grants power to publish the name and place of business of person, etc. convicted by a Court of Law. The power is being exercised very sparingly by the Courts. The Board desires that in all cases of conviction, the Department should make a prayer to the Court to invoke this Section. The Board vide Circular No. 849/7/2007-CX, dated 19-4-2007 has issued guidelines in this regard.

9.    For launching prosecution where there is only one Adjudicating officer for a number of factories located under different Commissionerates, procedure prescribed in the Board’s instruction No. 35/35/94-CX, dated 29-4-1994 also needs to be followed.

Either before or after the institution of prosecution, any offence under this Chapter can be compounded by the Chief Commissioner on payment of demanded sum and compounding fees. The Board has issued detailed instructions regarding compounding of offences. Procedures and guidelines for withdrawal of prosecution have also been prescribed by the Board.

Judicial decisions:

Having considered the law and the guidelines, let us consider some of the decisions of the Supreme Court and High Courts on prosecution:

1.    I. T.e. Limited v. Collector of Central Excise, Delhi 1996 (84) ELT 404 SC:

Penalty:

Majority order of the CEGAT holding that penalty is imposable for each transaction with reference to each gate pass and clearances under Rule 9(2) of Central Excise Rules – Supreme Court found no ground to interfere with the said majority opinion – Appeal to Supreme Court dismissed – S. 35L of the Act.

Prosecution:

Difference of opinion amongst Members of the Tribunal on the question of quantum of penalty – Consequent upon imposition of penalty, no prosecution should be launched against the assessee – S. 9 of the Act.

2.    Collector of Central Excise, Hyderabad v. Electrolytic Foils Ltd., 1997 (91) ELT 543 sc:

Appeal for prosecution  dismissed when respondents cannot be served notice since the unit was completely closed down and even land on which unit stood had been sold – S. 35L of the Act.

Order:

The service on the respondent has not been possible because the unit has closed down and the information supplied by the Deputy Commissioner (Legal) is that even land on which the unit stood has since been sold to M/s. Nagarjuna Palma (India) Ltd. which is constructing its own factory on the land purchased by it. It is, therefore, obvious that the respondent unit has completely closed down and even the parcel of land owned by it has been dis-posed of and, therefore, we see no reason in permitting the appellant to pursue this appeal. We dispose of the appeal since the respondent cannot be served.

3.    Santram Paper Mills v. Collector of Central Excise, Ahmedabad 1997 (96) ELT 19 SC:

Prosecution:

Tribunal deciding against assessee – Effect – Prosecution in a Criminal Court is to be determined on its own merits and according to law, uninhibited by the findings of the Tribunal – S. 9, S. 33 and S. 35D of the Act.

4.    Parsin  Chemicals  Ltd.  v. Asstt.  Commissioner, 2003 (154) ELT A176 SC:

Prosecution:

Whether to be quashed if launched by authority contrary to Circulars issued by Board ? (2) – Contravention and evasion of duty spread over two years – Whether Board Circular No. 15/90-CX. 6, dated 9-8-1990is applicable? – (3) Whether Board’s Circular No. 208/31/97-CX. 6, dated 12-12-1997 is perspective in nature?

The Supreme Court granted leave in petition for special leave to appeal filed by Parsin Chemicals Ltd. Against order of the Andhra Pradesh High Court 2002 (146) ELT 39 (A.P.). While granting leave, the Supreme Court passed the following order:

Leave granted. Stay to continue.

The Andhra Pradesh    High Court had held that:

5.    P. Krishnamurthi v. Assistant Collector of c. Ex., IDO, Shivakasi 1978 ( 2) ELT (J 628) Mad. :

Prosecution:

A minor cannot be prosecuted for offences merely on the ground that he is a partner of a firm which is being prosecuted for violation of Central Excise Law, because he cannot look after the affairs of the factory.

6.    Kedar Nath Goenka v. Superintendent of Central Excise, 1978 (2) ELT (J 538) Cal. :

Prosecution:

It is clear from the words ‘whoever commits’ in S. 9(1) that a person is made personally liable for an offence committed under the Central Excises Act and the liability cannot be extended to any other person merely by virtue of an office or position he holds in a company or firm, unless it is specifically averred in the complaint that he is guilty of an act of commission or omission which amounts to an offence punishable under the Act.

7.    Union of India v. [asbhai and another, (8) ELT902 M.P. :

Summary    trial  for offence:

If the offence committed was punishable with imprisonment for a term exceeding two years such as in Central Excise Act, the trial Magistrate was not competent to try an accused summarily u/s. 461 of the Code of Criminal Procedure and if so tried, the trial is absolutely void. [para 9]

Scope of S. 9 of the Act, and S. 260 and S. 461 of Criminal Procedure Code.

8.    Union of India v. Ram Narayan Sahu, 1986 (25) ELT 148 Cal. :

Prosecution:

Acquittal  invalid  when  complaint filed u/s.9(1)(d) (ii) of the Act treated as summons case instead of warrant case – Warrant case envisages sentence for more than two years, while S. 9(1)(d)(ii) prescribes three years imprisonment – Hence complaint u/s.9 is a complaint case – Case remanded to the Trial Court for retrial treating the case as warrant case – S. 2(w) and S. 256 of the Code of Criminal Proce-dure.

Distinction between a warrant case and a summons case

Warrant case means a case relating to an offence punishable with imprisonment for a term exceeding two years, while summons case is one which is not a warrant case. In determining the nature of the case, the Court will have to be guided by the consideration of the maximum punishment liable to be imposed on the accused according to the disclosures made in the petition of complaint. The advantage of following this procedure is that treating the case as a warrant case, the Magistrate trying the case will be competent to impose the minimum punishment, while the disadvantage of treating the case as a summons case he would not be in a position to impose the maximum punishment prescribed for the gravity of the offence, if the offence so demands. [para 5]

Prosecution:

An order of acquittal passed in a summons case u/s.256 of the Code of Criminal Procedure is not treatable as an order of discharge u/ s.249 of the Code of Criminal Procedure.

The difficulty in construing the order of acquittal u/ s.256 as an order of discharge u/ s.249 of the Code is that a fresh complaint for the same offence filed .hereafter is barred u/ s:468 of the Code. [para 5]

The Trial Magistrate is directed to treat the case as a warrant case and try it according to the procedure prescribed therefor by the Code. [AIR 1938 Cal. 205; AIR 1909 Pat. 105 relied upon], [para 5]
 

9.    Sharadchandra Shripad Marathe v. Gurushant Gangadhar Kamble, 1986 (25) ELT 915 (Bombay) :

Prosecution of a new  employee:

Complaint regarding conspiracy to evade excise duty – Process issued by the Trial Court quashable when petitioner joined service a few days before the excise raid – Inherent powers exercisable, if the process of Trial Court results in abuse of the process and gross injustice to the petitioner – Asking the petitioner to approach the Trial Court for discharge in the face of the admitted position is not worth-while – S. 482 of the Code of Criminal Procedure read with Article 226 of the Constitution of India.

Prosecution of New Director:

Accused Director joining company only a few days before raid and not a participant in conspiracy to evade taxes – Inherent powers of the High Court invokable where allowance of prosecution would amount to abuse of process of Court and gross injustice to the accused – Process issued quashable – S. 9(1)(d) of the Act, read with S. 120B of the Indian Penal Code, – S. 482 of the Code of Criminal Procedure, and Article 227 of the Constitution of India.

Vicarious    liability    :

Deeming provision for vicarious liability of Directors for acts committed by the Company is inapplicable against Directors not holding office prior to introduction of provision from 27-12-1985 – S. 9AA of the Act.

10.    Mulki Suryanarayanrao Rau and Anoher v. Gurushant Gangadhar Kamble and Others, 1987 (30) ELT 712 (Born.) :

Prosecution: Evasion of duty :

S. 9 of the Act and S. 120B of the Indian Penal Code – Conspiracyto evade payment of duty – If on proper evidence, the Court is satisfied that certain persons did conspire to commit the offence of tax evasion, the company as well as the persons who committed or conspired to commit such offence are punishable with imprisonment and fine. – Persons will include all those who aided and abetted the commission of an offence, whether inside or outside the company.

Prosecution:

Criminal conspiracy – Conspiracy is a matter of inference deducible from some criminal acts of the parties accused, done in pursuance of an apparent criminal purpose and to carry it into execution.

When conspiracy continued even after the retirement of accused Nos. 8, 9 and 10, it could be inferred that the tax evasion must be with complete knowledge of all the conspirators including those who retired.

Defence:

Merely because Secretary of the company was working under superior direction is no defence for criminal acts – therefore, he cannot be absolved from liability of tax evasion.

Proceedings Character:

The grant of Central Excise licence would partake the character of adjudication proceedings and not the character of criminal proceedings.

Prosecution:

Initiation of criminal process by Magistrate against accused not quashable when there is sufficient material to show that the said accused were in league with the company in the matter of evasion of duty.

Criminal conspiracy:

Agreement of two or more persons to do an illegal act is a positive fact which could be proved by direct or circumstantial evidence.

Criminal conspiracy to evade payment of duty – Modus operandi of levying a surcharge over the price of goods for freight, insurance and handling charges whether came up before the Board of Directors or not is a matter of evidence and prosecution cannot shut up from leading such evidence – S. 9 of the Act, 1944 and S. 120B of the Indian Penal Code.

Criminal conspiracy to evade payment of duty – Evidence of documents as defence not necessary to prove the innocence at this stage of initiation of proceedings – Only prima facie evidence is required to be considered for the allegations made in the complaint.
 
Vicarious    liability    :

Penalty – Firm – Directors of a firm – Penalty irnposable on the Directors for their individual acts and not on the principle of vicarious liability.

11.    Brahm Vasudeva and Others v. K. L. Bajaj, Assistant Collector, Central Excise Division, Jalandhar, 1988 (33) ELT 20 (P&H) :

Complaint without disclosing the manner in which the petitioners were concerned with the commission of offence or manufacture of goods – Complaint not maintainable – S. 9 of the Act, 1944.

12.    G. P. Goenka v. Asstt.  Collector of Central Excise, 1988 (37) ELT 167 (A.P.) :

For launching criminal prosecution proceeding against a company. The accused company must be represented by some person who is in charge of overall affairs of company – S. 9AA of the Act, 1944. (A.P.)

13.    K. K. Girdhar v. M. S. Kathuria,  1988 (37) ELT 353 (Delhi) :

Personal presence of accused – Offence u/ s. 9(1)(a) of the Act, 1944 – Granting of remand to custody at the instance of police, personal presence of the accused is not required before the Magistrate – though, as a matter of caution, personal presence of the accused is desirable, so that the accused may move an application for his release on bail- S. 344 of the Criminal Procedure Code.

14.    Hrushikesh Panda v. Union of India, 1992 (61) ELT 591 (Orissa):

Prosecution:

Clearance of goods by firm without excise gate passes and recovering duty from consignees but not crediting it to Excise Department – Managing Director liable under Rule 225 of Central Excise Rules, 1944 for non-payment of duty – Conviction and sentencing of petitioner u/s.9(1)(b) and (bb) of the Act, valid.

15.    Utkal Fero Alloys Ltd. v. State of Orissa, 1992 (61) ELT 600 (Orissa) :

Prosecution:

Detailed reasons not required to be given at the stage of cognizance of offence as there exists a prima facie- case against the accused – Order of the Magistrate valid S. 9(1), (b), (bb) of the Act read with Rules 9(1), 53, 173B, 173C, 173F, 173G of Central Excise Rules, and S. 204 of Code of Criminal Procedure, 1973.

16.    Toesta Electronics v. Asstt. Collector of Central Excise, Bangalore, 1995 (75) ELT 456 (Kar.) :

Prosecution:

There is no statutory requirement for sanction of any prescribed authority for prosecuting a person u/s.9 of the Act read with Rule 207 of Central Excise Rules, Prosecution – Compounding of offence – Natural justice – Provisions of Rule 210A of Central Excise Rules, applicable to offences punishable u/s.9 of Central Excises and Salt Act, – But there being no need for any sanction of any authority for launching prosecution u/s.9. The question of issue of notice making an offer to the accused for compounding the offence at the stage of sanction for prosecution does not arise.

Prosecution against companies and firms (apart from their officers concerned) maintainable, there being no obligatory sentence of imprisonment in all cases u/s.9 of the Act. A specific averment as to the involvement of directors, managers, partners, etc. in the complaint is not mandatory – It is sufficient if papers enclosed with the complaint indicate their involvement prima facie – S. 9 of the Act.

Goods manufactured and cleared without obtaining licence – Exemption from payment of excise duty to excisable goods does not dispense with requirement of obtaining licence – Prosecution against petitioner for not having obtained licence, proper – S. 6 of the Act read with Rule 174 and Rule 9(1)(b) of Central Excise Rules.

17.    Vasu Chemicals v. Assistant Commissioner of Central Excise, Madurai 2001 (134) ELT 24 (Mad.) :

Prosecution:

Criminal proceedings not to be stayed till disposal of appeal against order of confiscation, because confiscation proceedings having nothing to do with criminal prosecution – S. 482 of the Code of Criminal Procedure.

18.    H. S. Ranka v. P. K. Mehra, Asstt. Collector, Dept. of Central Excise, [aipur 2002 (150) ELT 1413 (Raj.) :

Prosecution:

Order of Collector against accused of non-accountal of goods in RG-1 register set aside by Tribunal on basis of some correspondence without recording any evidence – Prosecution launched not on basis of that order, but on physical verification of excisable goods – Held : criminal proceedings could not be quashed on basis of decision of the Tribunal finding in favour of accused, though Criminal Court may take that into account – S. 9 of Act. However, judgments in rem of Civil Court have binding effect on Criminal Court – S. 41 of Evidence Act,1872. [para 10]

Prosecution:

Offence by company – No allegation made in complaint or evidence brought on record that the chairman of the company was personally guilty of any omission or commission of a punishable offence – Petition for prosecution u/ s.482 of Code of Criminal Procedure set aside – S. 9 of the Act. [paras 11, 12]

19.    Rajni v. Union of India, 2003 (156) ELT 28 All. :

Prosecution:

Arrest of person under the Act has to be made only when there is a prima facie case against the accused and that too by following the due process of law except in cases prescribed u/s.13 – Authorities working under a special act such as Central Excise Act, cannot override the provisions of the Code of Criminal Procedure as regards the arrest or filing of the complaint – S. 9AA, S. 13 and S. 19 – On completion of the enquiry the authorities have power to file a complaint and pray before the Court for action in accordance with law. [paras 24 and 25]

20.    Kamaiaka  Minerals  & Mfg. Co. Ltd. v. Asstt.  CC & CE.,  Davangere,  2005 (184) ELT 356 Kar. :

Complaint filed against company and Managing Director and Director of company for having committed an offence punishable u/s.9(1)(i) of Central Excise Act, – No allegation was made that accused were in charge of company or responsible for conduct of business of the company at the time of commission of offence – Complaint also did not disclose essential ingredients of the offence – Held: proceedings cannot be launched against company u/s.9(1)(i) of the Act – read with S. 482 of Code of Criminal Procedure. [paras 9, 10]

21. Inder Setia v. Central Excise Department,  Noida, 2008 (224) ELT 385 All. :

Bail :

Arrest made for offence punishable u/s.9 and u/s. 9AA of Central Excise Act, read with Indian Penal Code – Power of arrest u/s.13 is confined to offences prescribed in Central Excise Act, – Offences u/ s.420, u/ s.467, u/ s.468 and u/ s.471 IPC were added for which Central Excise officers have no power to arrest – Arresting without any notice and without summoning, held power u/s.13 was exercised arbitrarily. Dispute as to who is responsible for payment of excise duty, can be settled only by the proper forum and the High Court abstained from recording any finding thereon – S. 9A makes offences non-cognizable and S. 9A(2) makes offences compoundable either before or after the institution of prosecution – In spite of existence of such provision, without ascertaining facts, S. 13 was resorted to for arresting the applicant – As there was no charge of tampering of evidence or charge of absconding – The applicant was released on bail.

I would conclude by stating:

1.    To avoid harassment and eliminating chances of prosecution of Directors the Board of Directors of a company should delegate, authorise and make responsible a person for each unit registered under the Central Excise Act, 1944 and at regular intervals take a compliance report from such person. It would be advisable also to have the compliance reports audited by internal auditors and or secretary of the company.

2.    The challenge in this ever-changing environment of increasing litigation where at times the individuals concerned take the safer course of initiating prosecution proceedings is to ensure awareness of and compliance with the relevant laws, rules and regulations to avoid even the remote chance of prosecution. Let us always be aware of the fact that prosecution impacts both business and reputation.