PENALTY U/S 11AC: CONTROVERSY CONTINUED....

PENALTY U/S 11AC: CONTROVERSY CONTINUED....

Introduction:-

When we talk of penalty under Section 11AC and a number of interpretations and pelothra of litigation comes to mind. Penalty u/s 11AC of the Central Excise Act, 1944 is the harshest penal provision prescribed in the Act. It is mandatory in nature provided the conditions prescribed in the section are satisfied. It is imposed in the cases like fraud, collusion, willful mis-statement or suppression of facts, or contravention of any of the provisions of this Act or of the rules made thereunder. It has always been a matter of litigation since this section was inserted in the Act. This article deals with the various issues arising in this section because of Court decisions and Board Circulars.

Section 11AC – An analysis:-

Section 11AC of the Central Excise Act, 1944 prescribes that in the cases of fraud, collusion, misstatement or suppression of facts with intent to evade payment of duty; the penalty equal to amount of duty will be imposed on the assessee. For the sake of convenience, language of section 11AC is produced as follows:-

“11AC. Penalty for short-levy or non-levy of duty in certain cases.-

Where any duty of excise has not been levied or paid or has been short-levied or short-paid or erroneously refunded by reasons of fraud, collusion or any willful mis-statement or suppression of facts, or contravention of any of the provisions of this Act or of the rules made thereunder with intent to evade payment of duty, the person who is liable to pay duty as determined under sub-section (2) of section 11A, shall also be liable to pay a penalty equal to the duty so determined:”

The analysis of above para outlines the following:-

Ø Any duty of excise is not levied or short levied or not paid or short paid or erroneously refunded;

Ø The acts referred in point no. 1 are due to fraud, collusion, willful mis-statement or suppression of facts, or contravention of any of the provisions of this Act or of the rules made thereunder;

Ø There should be intention to evade payment of duty;

Ø The duty should be determined under section 11A(2) of the Central Excise Act, 1944.

As such, if all the above conditions are satisfied penalty equal to amount of duty determined u/s 11A(2) is imposed on the assessees by virtue of section 11AC. However, some relief is granted to the assessees in case the duty alongwith interest is paid within 30 days of communication of order. This is given in first proviso to section 11AC which is produced as follows:-

“Provided that where such duty as determined under sub-section (2) of section 11A, and the interest payable thereon under section 11AB, is paid within thirty days from the date of communication of the order of the Central Excise Officer determining such duty, the amount of penalty liable to be paid by such person under this section shall be twenty-five per cent. Of the duty so determined:”

As such, if the duty alongwith interest is paid within 30 days of the communication of order of Central excise officer, the penalty will be 25% of duty. As such, relief is granted in form of waiver of 75% amount of penalty. However, for availing this relief it is necessary that the penalty should also be deposited within the stipulated time of 30 days referred hereabove. This clause is contained in second proviso to this section which is produced as under:-

“Provided further that the benefit of reduced penalty under the first proviso shall be available if the amount of penalty so determined has also been paid within the period of thirty days referred to in that proviso:”

Further, if the Commissioner (Appeal) or hon’ble Tribunal reduces or increases the duty so determined u/s 11A(2), the reduced/increased amount will be considered for the purpose calculating the penalty. This is given in third proviso to this section as produced hereunder:-

“Provided also that where the duty determined to be payable is reduced or increased by the Commissioner (Appeals), the Appellate Tribunal or, as the case may be, the court, then, for the purposes of this section, the duty, as reduced or increased, as the case may be, shall be taken into account:”

Finally, the fourth proviso to this section provides that where the duty payable u/s 11A(2) is increased by Commissioner (Appeals) or Tribunal, then also the benefit of reduced penalty under first proviso will be allowed if the incremental duty and penalty alongwith interest is paid within 30 days of the order of the Commissioner (Appeals) or Tribunal. This proviso is produced as follows:-

“Provided also that in case where the duty determined to be payable is increased by the Commissioner (Appeals), the Appellate Tribunal or, as the case may be, the court, then, the benefit of reduced penalty under the first proviso shall be available, if the amount of duty so increased, the interest payable thereon and twenty-five per cent. of the consequential increase of the penalty have also been paid within thirty days of the communication of the order by which such increase in the duty takes effect.”

There are two explanations to this section: The first one says that this section will also apply in cases prior to enactment of Finance Act, 2000. The second explanation provides for adjustment of amount already paid (prior to communication of order referred in first proviso) against the total amount due.

If we look into the entire scheme of the section 11AC, it is found that it is applicable only in case the duty is determined u/s 11A(2) of the Central Excise Act, 1944.

Duty paid before issue of show cause notice – whether attracts penalty?

Section 11A of the Central Excise Act, 1944 provides that where any duty is short levied/paid or not levied/paid or erroneously refunded, the Central Excise Officer may issue a show cause notice upon that person within one year from the relevant date. This time period to issue show cause notice may extend to five years in case of fraud, collusion, wilful misstatement or suppression of facts.

As such, the show cause notice is issued for non levy or short levy or non payment or short payment or erroneous refund of duty. In other words, if the duty and interest are paid before issue of show cause notice, there is no short levy/payment; therefore the conditions prescribed u/s 11A for issue of show cause notice are not satisfied and as such, the show cause notice cannot be issued. When show cause notice cannot be issued, the question of imposition of penalty also does not arise as it is dependent upon issue of show cause notice. There was conflict between department and assessees regarding this opinion and the litigation had undergone divergent decisions given by various appellate authorities. It was held by tribunal and even the various High Courts have also decided that the Section 11AC is not attracted when the duty is paid before the issue of show cause notice. The some of the decisions are quoted below:-

· CCE, Mangalore v. Shree Krishna Pipe Industries [ 2004 (113) ECR 718]

· Rashtriya Ispat Nigam Ltd. v. CCE, Vishakapatnam [ 2003 (54) RLT 317] as affirmed by hon’ble Apex Court & reported at 2004(163) ELT A53 (SC).

Even the Rajasthan High Court has given a new direction to this issue. It was held in the case of Union of India vs T.P.L. Industries Ltd. [2007 (214) E.L.T. 506 (Raj.)] that, demand of penalty u/s 11AC and 11AB of the Central Excise Act, 1944 was declined on the grounds that there is no short levy of duty for which such notices can be issued. Since the show cause notice cannot be issued as there is no short levy on the date of issue of show cause notice, then penalty can also not be imposed. These decisions for some time settled the matter in favour of the assessees who have deposited the duty and interest prior to issuance of show cause notice.

Penalty u/s 11AC – Mandatory or Discretionary?

The decisions given by relying on the judgments referred above were as usual not acceptable to the department and inspite of High Court decisions in favour of the assessees, the litigation continued. Then, hon’ble Supreme court of India gave the landmark judgment in the case of Union of India v. Dharmendra Textile Processors 2008-TIOL-192-SC-CX-LB. In this case, it was held that the penalty imposed u/s 11AC of the Central Excise Act, 1944 is mandatory and the authorities, tribunal or Court do not have any discretion to reduce the penalty. It was held that plain and unambiguous language need not be interpreted otherwise. In Union Budget of 1996-97, Section 11AC of the Act was introduced. It has made the position clear that there is no scope for any discretion. In para 136 of the Union Budget, reference has been made to the provision stating that the levy of penalty is a mandatory penalty. In the Notes on Clauses also the similar indication has been given. This decision seemed to blow away the expectations of the assessees who were relying upon the above referred decisions. The effect of Rajasthan High court decisions was taken away by the decision of Hon’ble Apex court in the case of Dharmendra Textiles.

Demand should be issued by invoking “intent to evade payment of duty”

After the decision of Dharmendra Textiles, the department started invoking the penal provision of Section 11AC in every demand. It was contended that the penalty under Section 11AC is mandatory and it will be equal to duty. But the assesses are maintaining that the penalty under Section 11AC can be invoked only when there is wilful suppression, fraud, collusion etc. Unless and until, the demand is issued by invoking intent to evade payment of duty, the penalty under Section 11AC can not levied. Thus, the demand should be issued under proviso to Section 11A then the penalty under Section 11AC can be imposed. This is provided in the language of the Section 11AC itself. But the department is issuing show cause notice in each and every case by proposing penal action under 11AC.

Penalty u/s 11AC – whether dependent on demand u/s 11A(2):-

Section 11A of the Central Excise Act, 1944 empowers the Central Excise Officer to issue a show cause notice in the cases where any duty is short levied/paid or not levied/paid or erroneously refunded.

Sub section (2) to section 11A states that after considering the representation made by the notice as referred in sub section (1) of section 11A, the Central excise officer will determine the excise duty payable by that person, the amount of duty should not exceed the amount proposed in the show cause notice. The person shall be liable to pay the excise duty so determined. This sub section (2) reads as follows:-

“The Central Excise Officer shall, after considering the representation, if any, made by the person on whom notice is served under sub-section (1), determine the amount of duty of excise due from such person (not being in excess of the amount specified in the notice) and thereupon such person shall pay the amount so determined.”

As such, the penalty imposable u/s 11AC is dependent upon the fact that the show cause notice should have been issued to the person and the duty so determined in consequence of that notice will be the base for calculating the amount of penalty u/s 11AC of the Central Excise Act, 1944.

The interpretation taken by the Hon’ble Supreme court in the case of Dharmendra Textiles seemed to be weakened by the subsequent decisions given on the issue. The correlation between demand u/s 11A(2) and penalty u/s 11AC was the new twist added to the battle of ‘duty paid before issue of show cause notice & penalty u/s 11AC’. Some decisions given in this line are listed as follows:-

Union of India vs Perfect Thread Mills Ltd. [2009 (234) ELT 49 (Raj.)]:-

In this case, it was contended that since the duty was deposited before issuance of show cause notice and the order of adjudicating authority did not determine any other amount of excise duty due u/s 11A(2), therefore, no penalty can be issued u/s 11AC because imposition of penalty under this section is dependent upon determination of duty u/s 11A(2) of the Central Excise Act, 1944.

UOI vs. Rajasthan Spinning & Weaving Mills [2009-TIOL-63- SC-CX]:-

In this case duty was paid by the assessee prior to issuance of the show cause notice and the payment was intimated to the proper officer of Central Excise. According to them, that was a payment made under sub-section (2B) of section 11A. It was held in the case, that in the given circumstances, there was no reason to issue any show cause notice to the appellant in respect of the duty paid by them. It was further held that penalty under section 11AC can be imposed on a person against whom there is determination of duty under sub section (2) of section 11A of the Act provided, of course, the ingredients of such penalty are found against him. A determination of duty under sub section 2 of section 11A arises only in a case where, under sub section 1, there is a show cause notice raising demand of duty, and not otherwise. The provision, on the facts of this case, prohibited issuance of show cause notice for demanding duty under sub section (1) of section 11A and, therefore, there was no question of any determination of duty under sub-section (2) of the said section. In the result, applicability of section 11AC was ruled out.

All these decisions without any further ambiguity cleared the situation that there is positive correlation between demand issued u/s 11A(2) and penalty u/s 11AC of the Central Excise Act, 1944. It is the nature of law that as soon as one issue seems to be settled by judicial rulings, another issue arises out of the same provision. Same thing happens with section 11AC of the Central Excise Act, 1944. Conflicts of section 11A(2) viz a viz 11AC seemed to be settled by above discussed decisions, very soon, the virus of litigation arose in the computer of proviso to section 11A(2) pertaining to benefit of reduced penalty.

Benefit of 25% Penalty – whether available at Adjudication stage or also at Appellate stage:-

The new issue arising in the chain of litigation of section 11AC pertain to benefit of 25% penalty as provided in first proviso to section 11A(2) of the Act. This issue was regarding the question whether benefit of reduced rate of 25% penalty is available at adjudication stage only or this benefit may be availed at appellate stage also. The fire burst up with the decision of hon’ble Punjab and Haryana High Court in the case of Commissioner of Central excise Commissionerate, Rohtak vs JR Fabrics (P) Ltd. [2009-TIOL-259-HC-P&H-CX]. A detailed decision elaborating the various provisions related to section 11AC and section 11A(2) was given. The gist of this decision is produced as follows for the sake of convenience:-

In this case, the duty and interest were paid before issuance of show cause notice and the same was intimated to the department. But the show cause notice was issued and the case was adjudicated as follows: Duty and interest already paid were appropriated by the adjudicating authority. Penalty equal to amount of duty was imposed u/s 11AC and 38A and rule 25 of erstwhile Central Excise (No. 2) Rules, 2001. Penalty of Rs. 1 lacs was imposed on managing director of the company. The assessee filed appeal before Commissioner (Appeal) who modified Order in original and removed the penalty on Managing director. The assessee reached Tribunal wherein it was held that the assessee was liable liable to pay only 25 percent of duty amount as penalty by placing reliance on a judgement of the Delhi High Court in the case of CCE v. Malbro Appliances Private Ltd. 2007(208) ELT 503. Whereas, the revenue counsel relied on the decision of Union of India v. Dharmendra Textile Processors 2008(231 )ELT 3(SC) = 2008-TIOL-192-SC-CX-LB and argued that a plain reading of 2nd proviso to Section 11 AC of the Act would make it clear that equal amount of duty found to be paid to the revenue is to be realised as penalty and therefore the amount of 25% imposed by the Tribunal as penalty is liable to be set aside. It was submitted by counsel of assessee that proviso to sub section 2 of section 11 AC of the Act says that where duty is determined and the interest payable thereon under Section 11 AB of the Act is paid within 30 days from the date of communication of the order of the officer determining such duty then the amount of penalty has to be 25% of the duty so determined. He has further submitted that the assessee has been deprived of the opportunity to pay 25% of the duty because no benefit of the proviso was extended to the dealer respondent by imposing penalty equivalent to 25% of the duty amount.

It was contended by the counsel of the assessee that the first two provisos postulate a concessional rate of penalty in case the amount of duty as determined under sub section 11 A (2) of the Act and the interest payable thereon under Section 11 AB of the Act stand paid within thirty dates from the date of communication of the order of the officer determining such duty. In such a case the amount of penalty has been stipulated to be 25% of the duty so determined.

The second proviso further imposes an obligation that the benefits contemplated by first proviso are to be available if the amount of penalty so determined has also been paid within a period of thirty days. In other words, if the duty as determined under Section 11 A(2) of the Act by the Central Excise Officer is paid within thirty days then penalty equal to the amount of duty is not required to be paid and the amount contemplated in lieu of the penalty is 25 % of the total amount of excise duty determined the officer concerned. But since this benefit was not extended to the assessee – neither by the adjudicating authority or first appellate authority; Tribunal extended the same to the assessee. However, it was held by hon’ble High Court that if the duty as determined under Section 11 A(2) of the Act by the Central Excise Officer is paid within thirty days then penalty equal to the amount of duty is not required to be paid and the amount contemplated in lieu of the penalty is 25 % of the total amount of excise duty determined by the officer concerned. The amount of 25% imposed as penalty is not because any discretion is vested in the Court or the Tribunal but because of 1st and 2nd provisos incorporated by the Parliament w.e.f. 12.5.2000.

The decision given as above was backed by good analysis of the provisions of section 11A(2) and section 11AC. It seemed to affirm the decisions given by the various appellate authorities on the previous issues arising in the section 11AC. The main outcome of the decision was that the benefit of reduced rate of penalty is also available at appellate stage if the same is not allowed at the adjudication stage to the assessees. Once again a favourable decision was given in favour of the assessees, but it seems that such decisions are not appreciated by the Revenue. The reason being issuance of Circular No. 898/18/09-CX dated 15.9.2009 which says benefit of reduced penalty is available only at adjudication stage.

Circular No. 898/18/09-CX dated 15.9.2009:-

This latest circular is issued in consequence of a decision given by Commissioner (Appeals) wherein the benefit of reduced rate of penalty u/s 11AC is allowed within 30 days of the communication of the Order in Appeal. In this circular it is clarified that benefit of reduced penalty is available only at the adjudication stage. The relevant para from the Circular is produced as follows:-

“The provisions relating to reduction of penalty to 25% are contained in proviso (1) to (4) of Section 11AC. In terms of proviso (1) and (2), a penalty imposed under Section 11AC can be reduced to 25% on fulfillment of following conditions.

i. Duty determined under Section 11A(2) and interest payable thereon has been paid within 30 days.

ii. The said period of 30 days is calculated from the date of communication of the order passed by a Central Excise Officer determining the duty.

iii. The reduced 25% penalty is also paid within 30 days of the date of communication of the order passed by the Central Excise Officer.

From the above it is clear that in order to avail the benefit of 25% penalty, the duty, interest and penalty are required to be paid within 30 days of communication of the order passed by the adjudicating authority. Further, the reading of proviso (4) would also support this interpretation because the said proviso stipulate that wherever duty amount is increased at any appellate stage, in that case in order to avail the benefit of 25 % penalty, the assessee is required to pay differential amount within 30 days of the passing of the order by the appellate authority. A combined reading of allthe 4 proviso would, therefore, make it clear that the benefit of 25% penalty is applicable only when the assessee has paid duty, interest and the reduced penalty within 30 days of communication of the order passed by the adjudicating authority.”

As such, this circular state that the benefit of reduced penalty is available to the assessee only at the adjudicating stage and the period of 30 days is to be calculated from the date of passing order in original. The circular says Commissioner (Appeal) cannot allow this benefit at appellate stage.

Analysis of Circular:-

The analysis of Circular viz a viz first and second proviso to section 11AC makes it clear that mere plain reading of these provisos can derive the interpretation drawn by the Circular. The first and second provisos ibid are reproduced as follows:-

The analysis of above makes it clear that the first proviso talks of reduced amount of penalty if the duty so determined u/s 11A(2) alongwith interest is deposited within 30 days of communication of that order. In other words, it affirms the fact that the benefit of reduced penalty will be available if duty and interest are deposited within prescribed limit of 30 days. The second proviso says that the benefit of reduced penalty will be available if the penalty is also deposited within the period of thirty days referred to in the first proviso. However, this interpretation taken in the Circular would fail in case where the duty and interest are paid before the issue of show cause notice and the order appropriates the duty and interest but imposes penalty equal to amount of duty. In such cases, the first condition is duly satisfied as the duty and interest so paid before issue of show cause notice, come within the time limit prescribed under first proviso. However, it is clear that benefit of reduced rate of penalty is allowable to such assessees as per first proviso. But since the order in original has imposed the 100% penalty, the assessee would have no option but to go to Commissioner (Appeal) for availing this benefit. As such, the interpretation taken by the Circular is not considering all the aspects pertaining to the scheme of section 11AC of the Central Excise Act, 1944.

Circular vs P & H High Court decision:-

The circular no. 898/18/09-CX dated 15.9.2009 says that the Commissioner (Appeal) cannot allow the benefit of reduced rate of penalty under proviso to section 11AC. Is this Circular contrary to the decision of hon’ble Punjab & Haryana High Court in the case of Commissioner of Central excise Commissionerate, Rohtak vs JR Fabrics (P) Ltd. [2009-TIOL-259-HC-P&H-CX] as discussed above? Let’s recall – in this case, the benefit of reduced rate of penalty was allowed at Tribunal stage. Hon’ble High Court has affirmed this act of Tribunal by saying that if the duty and interest are paid within 30 days of communication of order, then the benefit of reduced penalty to the extent of 25% of duty should be extended to the assessee. It was decided that where the duty and interest are paid within 30 days of communication of order, then the benefit of reduced rate of penalty is available to the assessee. Given in the facts and circumstances of the case, the duty and interest were deposited prior to issue of show cause notice. It was held that it is an obligation on the adjudicating authority that he allows this benefit to the assessee by passing order in original imposing reduced rate of penalty. Since the adjudicating officer as well as Commissioner (Appeal) failed to do so, hon’ble Tribunal allowed the same which was affirmed by hon’ble Tribunal. It was further held that the benefit of reduced rate of penalty is not at the discretion of any adjudicating or appellate authority, it is by virtue of provisos inserted in the section 11AC. In the Circular, the clarification so given is contradicting this decision. The clarification says that the Commissioner (Appeal) cannot extend the benefit of reduced rate of penalty to the assessee whereas the detailed decision so given by hon’ble P&H High court has held that once the mandatory conditions of paying duty and interest within 30 days of passing of order are satisfied, the benefit of reduced rate of penalty is to be allowed to the assessee. The prime authority to allow this benefit is the Adjudicating officer, if he fails to do so, Commissioner (Appeal) has right to do so.

Beginning of a new litigation:-

Once again, the Board has brought up a Circular that is contradictory to the decisions given by the Appellate authorities. The Circular no. 898/18/09-CX dated 15.9.2009 and the decision of hon’ble Punjab & Haryana High Court in the case of Commissioner of Central excise Commissionerate, Rohtak vs JR Fabrics (P) Ltd. [2009-TIOL-259-HC-P&H-CX] are contradictory to each other. There is no doubt that department will take shelter of Circular and the assessees would go in shed of this decision, as a result, a new battle would commence. There are a lot of decisions which state that the decisions of High Court or any other appellate authority are binding on the Revenue. But, looking to the increase in contradictory Board Circulars and judicial pronouncements, further clarification is required as to which one will prevail over the other in case of contradiction. Still awaited...

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