Challenge to the issuance of show cause notice can be entertained in Writ Petition

Case: M/s Shakti Met-Dor Ltd v/s The Commissioner of Customs, Central Excise & Service Tax, Hyderabad

Citation: 2010-TIOL-807-HC-AP-CX

Issue:- Whether the challenge to the issuance of show cause notice can be entertained in Writ Petition?

Brief Facts:-Petitioner manufactures special type of fire resistant doors against specific orders placed on them by various Indian and International corporate clients. Show cause notice was issued to the petitioner alleging that the doors/door frames etc manufactured by them, along with their essential/integral parts i.e., hardware items, should be treated as pre-fabricated housing material classified under heading no.94060091 & the steel toilet product should be classified under heading no. 94060099. Accordingly, duty was demanded with interest and penalties were sought to be imposed on the charge of mis-declaration and suppression of facts.

The Petitioner filed writ petition in the High Court challenging the issuance of show cause notice to them.

Petitioner’s Contentions:- Petitioner submitted that the taxable event in respect of excise duty is manufacture; the expression 'manufacture' means bringing into existence a new article having a distinctive name, character or use; excise duty is payable when the goods are cleared from the factory; any subsequent event, after the sale, has no bearing on excise duty; the duty chargeable on excisable goods is with reference to their value at the time of clearance from the factory.

It was submitted that the classification list, giving details of the goods, was filed in the year 1995 which was duly verified and approved by the Excise department. They had been filing returns and paying duty under the said classification for the last fifteen years. In addition to manufacture of steel doors, the petitioner also carries on business of trading in hardware items such as locks, hinges, tower bolts, door closures, glasses etc., for the doors. They also undertake service of fixing the hardware to the door, and installing them at the site of the customer; these trading and service activities do not amount to manufacture. The petitioner does not manufacture locks, hinges or tower bolts; they are purchased by the petitioner and sold to customers for which sales tax/VAT is paid. Similarly, for the service activity of fixing the hardware on the door, the petitioner is paying service tax. This activity of trading and rendering service is being carried on by the petitioner for the past fifteen years which are reflected in their audited accounts and annual reports. The petitioner enters into three agreements with their customers (a) for manufacture and supply of doors, (b) supply of bought-out hardware items, (c) installation of doors etc. They are not engaged in the manufacture of pre-fabricated housing material. They are exclusively engaged in the manufacture of steel doors, frames and nothing else. The sale of door is an independent activity when compared with the sale of hardware items.

It was submitted that the goods, not manufactured by the petitioner, cannot be assessed to excise duty; procurement of hardware items by the customers, from the petitioner, is purely optional and at their sole discretion; in many cases doors have been supplied without any hardware items; merely by affixing the hardware items to the door, and installing the door in the building, does not convert a door into a new item which is the sine qua non for levy of excise duty; the bought-out hardware items have never been brought into the petitioner's factory and no cenvat credit, on the duty paid on such hardware, has ever been taken.

It was submitted that the Department has pre-judged the issue and the proceedings before the respondent is an empty formality. The order of the Commissioner suffers from non-application of mind; inspite of the legal position being set out in the reply, and representations submitted by them, the Commissioner has issued the impugned proceedings without taking into consideration either the petitioner's reply or their representation; and the impugned proceedings are without jurisdiction and are liable to be set aside.

Petitioner submitted further that that the respondents had, on 16.8.2004, accepted that the value of bought-out items were excludable from the value of manufactured items, and it was not open to them to now contend that they form an integral part of the manufactured items.

The matter relating to commodity classification, whether it falls under one heading or the other or attracts higher or lower duty, has to be decided on the facts arising in each case. Even though a decision may have been taken earlier, the matter may have to be re-examined on further investigation, on discovery of new facts or where the law has changed. It is not proper for the High Court to interfere in such matters at the stage of a show cause notice. (Commissioner of Cus. & C. Ex. v. Charminar Nonwovens Ltd [(2004) Vo.167 ELT 372 ( S.C )]; M/s Vasavi Business Combines).

Petitioner would further submit that, while demanding duty beyond one year, the onus is on the department to prove that non- payment or short payment of duty was due to fraud, collusion, willful mis - statement or suppression of facts; the notice does not give any evidence in support of such allegations; on the contrary, the facts were known to the department through audits and balance sheets submitted every year to them; in the year 2003 the petitioner's explanation, regarding inclusion of hardware items in the value of doors, was called for to which they had submitted a detailed reply; the respondents had accepted that the value of bought-out hardware items were not includable in the value of the doors; the decision was communicated to the petitioner by the respondents vide their letter dated 16.08.2004; the petitioner has not suppressed even a single fact; the audit personnel of the department visit the petitioner's office each year, and Annexures are submitted to them; copies thereof would show that the petitioner had furnished particulars of their manufacturing and trading activity separately; the petitioner has also submitted statutory forms like Form - I giving details of the doors to be manufactured; and the respondents, having admitted that the petitioner does not manufacture locks, hinges, tower bolts etc., cannot allege that the petitioner has suppressed any fact.

Respondent’s Contention:- Department submitted that the petitioner has an effective remedy of filing his explanation to the show cause notice raising all grounds which are available to them; the question, whether the commodity is to be classified under one head or the other attracting higher or lower duty, is to be decided in the facts arising in each case. After introduction of the new 8-digit tariff heading from 28.2.2005 the scope of Chapter Heading 9406 has been widened by providing separate sub-headings for pre-fabricated housing material and residuary entries. The petitioner's product, which was earlier classified under Chapter Heading 73083000, is now more appropriately classifiable under Chapter Heading 94060091. The different types of doors and products manufactured by the petitioner must be linked/fixed/attached with the said hardware items to make it a complete door/partition for the purpose of general doors, fire doors etc. In order to fix/attach the hardware items certain apertures/perforations/punching are made in the manufactured items, at the factory itself, as per designs/technical specifications; this activity confirms that the hardware items form an integral part of the manufactured items; these hardware items are also to be assessed to excise duty; the hardware items, supplied separately by the petitioner from their godown, are integral parts of the doors without which the door is not a complete article; its value had to be added for the purpose of payment of excise duty.

It was contended that the petitioner paid duty only on the value of ss doors/frames supplied from their manufacturing premises, keeping aside the value of hardware items supplied from their godown against separate trading invoices; establishment of a separate godown for transactions relating to hardware items has been done only to avoid value addition of the finished products though they are tailor made with the specifications/ designs given/ordered by the customers; the value of hardware items must be added to the assessable value of the steel doors; the petitioner would be entitled to cenvat credit on the duty paid on the hardware items; they are liable to pay excise duty and sales tax/VAT on the value added portion of the steel doors to the extent of the hardware items inclusive of their trading profit.

It was submitted that they have merely been issued a show cause notice and would have the opportunity of representing their case in writing, as well as for a personal hearing, before the Adjudicating Authority. They would also have an opportunity of invoking the appellate remedy, if need be. The department has not prejudged the issue, and no order has been passed against the petitioner. The impugned show cause notice can neither be said to be without jurisdiction nor ultra-vires; and the petitioner should be relegated to file their reply to the show cause notice.

Revenue also submitted that after 28.2.2005, when a new eight digit tariff heading was introduced, and on further investigation, the authorities were of the view that excise duty is leviable on the hardware items.

Reasoning of the Judgment:- The High Court held that the practice of entertaining Writ petitions questioning the legality of show cause notice, stalling the proposed enquiry and retarding the investigative process to ascertain facts with the participation and in presence of the parties, must be deprecated. Unless the High Court is satisfied that the show cause notice is non-est Writ Petitions should not be entertained for the mere asking, and as a matter of routine, and the petitioner should, invariably, be directed to respond to the show cause notice and take all stands, highlighted in the writ petition, therein. (Special Director v/s Mohd. Ghulam Ghouse [2004-TIOL-05-SC-FEMA] and other judgments)

The High Court observed that a show-cause notice does not give rise to any cause of action as it is not an adverse order which affects the rights of a party. It is quite possible that, after considering the reply to the show-cause notice, the authority concerned may drop the proceedings and/or hold that the allegations are not established. A show-cause notice does not infringe the rights of anyone. It is only when a final order, adversely affecting him, is passed that the said person can be said to have any grievance. (Union of India v/s Kunisetty Satyanarayana [(2007) 1 SCJ 102 (2007) 1 SCJ 102]; Saravani Impex Pvt. Ltd.)

It was held that when a show-cause notice is issued under a statutory provision calling upon a person to show-cause he must, ordinarily, place his case before the authority by showing cause. The purpose of issuing a show-cause notice is to afford an opportunity of hearing to the person concerned, and Courts should be reluctant to interfere at that stage as it would be premature. (State of U.P. v Shri Brahma Datta Sarma [AIR 1987 SC 943]; M/s Vasavi Business Combines; M/s Jasper Industries Pvt. Ltd). The appropriate course for the recipient is to reply to the show-cause notice enabling the authorities to record their findings and then, if necessary, the matter can be carried in appeal to the Tribunal and, thereafter, to this Court. (Union of India v Bajaj Tempo Limited [1997 (94) ELT 285 (SC)]; M/s Vasavi Business Combines; M/s Jasper Industries Pvt. Ltd)

The High Court noted that interference would be justified only when the notice is ex-facie a 'nullity' or non- est in the eye of the law for absolute want of jurisdiction of the authority to even investigate into the facts, or totally "without jurisdiction" in the traditional sense of that expression i.e., even the commencement or initiation of the proceedings on the face of it, and without anything more, is totally unauthorised. In all other cases, it is only appropriate that the party shows cause before the authority concerned and takes up the objection regarding jurisdiction therein. (Executive Engineer, Bihar State Housing Board v. Ramesh Kumar Singh [(1996)1 SCC 327]; Mohd. Ghulam Ghouse; M. Ramalinga Reddy; Saravani Impex Pvt. Ltd) Whether the show cause notice was founded on any legal premise is a jurisdictional issue which can even be urged by the recipient in his reply to the notice, and such an issue can also be initially adjudicated by the authority, issuing the very notice, before the aggrieved can approach the Court. (Mohd. Ghulam Ghouse; M. Ramalinga Reddy; Saravani Impex Pvt. Ltd; M/s Vasavi Business Combines; M/s Jasper Industries Pvt. Ltd)

It was held that Abstinence from interference at the stage of issuance of the show-cause notice, in order to relegate parties to the proceedings before the authorities concerned, is the normal rule. However the said rule is not without exception. Where a show-cause notice is issued either without jurisdiction, or is an abuse of process of law, the Writ Court would not hesitate to interfere even at the stage of issuance of the show-cause notice. (Union of India v. VICCO Laboratories [2007- TIOL -215-SC-CX]. The High Court has the power to issue, in a fit case, an order prohibiting an authority from acting without jurisdiction. Where such an action of the authority, acting without jurisdiction, subjects or is likely to subject a person to lengthy proceedings, and unnecessary harassment, the High Court will issue appropriate orders or directions to prevent such consequences. The existence of an alternative remedy is not always a sufficient reason for refusing a party relief by a Writ or Order prohibiting an authority, acting without jurisdiction, from continuing such action. (Calcutta Discount Co. Ltd. v. Income Tax Officer, Companies District I, Calcutta [2002- TIOL -550-SC-IT-CB]). Where the threat of prejudicial action is wholly without jurisdiction, a person cannot be asked to wait for injury to be caused to him before seeking the Court's protection. If, however, the authority has the power in law to issue the show cause notice it would not be open to the person, asked to show cause, to approach this Court under Article 226 of the Constitution at the stage of notice. (Chief of Army Staff v. Major Dharam Pal Kukrety [(1985) 2 SCC 412]; Saravani Impex Pvt. Ltd.)

On the facts of the present petition, the High Court decided to examine only those grounds on the basis of which the impugned show cause notice is said to suffer from inherent lack of jurisdiction. It was noted that the other grounds can as well be agitated by the petitioner, after submitting their reply to the show cause notice, before the Adjudicating Authority.

The High Court held that the jurisdiction of the High Court, under Article 226 of the Constitution, should not be permitted to be invoked in order to challenge a show-cause notice unless, accepting the facts stated therein to be correct, the show-cause notice is, ex facie, without jurisdiction (State of U. P. v. Anil Kumar Ramesh Chandra Glass Works [2005) 11 SCC 451)]). Mere assertion by the petitioner that a notice is without jurisdiction would not suffice. It should, prima facie, be established to be so. Where factual adjudication is necessary interference is, ordinarily, ruled out. (VICCO Laboratories; Saravani Impex Pvt. Ltd.)

The High Court therefore briefly referred to the contents of the show cause notice and observed that it is not in dispute that the petitioner's godown, from which the bought-out items were supplied directly to the customers is located far away from the petitioner's factory premises; and these bought-out items neither entered the petitioner's factory premises nor were they cleared therefrom. The case of the respondents, in short, is that these bought-out items form an integral part of the manufactured items i.e., stainless steel and other doors, and excise duty is liable to be paid thereupon. In order to relegate the petitioner to the remedy of filing a reply to the show cause notice this Court must be satisfied, prima facie, that the contentions urged on behalf of the department, is not without merit; and the bought-out items, which allegedly form an integral part of the manufactured items, are also liable to be subjected to excise duty even though such bought-out items never entered the petitioner's factory premises; they were not manufactured by the petitioner; and were not cleared from the factory.

The High Court relied upon the case of Commissioner of Central Excise v. Frick India Ltd [(2007) Vol. 216 ELT 497] and noted that it is evident, from the judgment of the Supreme Court that bought-out items, even if they are not manufactured by the petitioner and are supplied from their godown located at a far distance from their factory, are also liable to excise duty if they form an integral part of the manufactured items. On the premise, that the bought-out items form an integral part of the products manufactured by the petitioner, the value of the bought-out items are liable to be included in the assessable value of the manufactured items for the purpose of determining the excise duty payable.

Thus, it was held that the impugned show cause notice cannot, therefore, be said to be non- est, a nullity or as wholly without jurisdiction. The High Court clarified that it did not examine the issue whether, in fact, these bought out items form an integral part of the manufactured items as these are questions of fact which the Adjudicating Authority would first examine on a reply being submitted by the petitioner to the show cause notice.

The High Court did not examine the issue whether the judgment of the Supreme Court in Frick India Ltd runs contrary to several judgments of larger benches of the Supreme Court on the ground that as the prima-facie opinion of the adjudicating authority, when examined in the light of the law laid down in Frick India Ltd, is certainly a possible view. In such circumstances the show cause notice cannot be said to suffer from an inherent lack of jurisdiction.

It was observed that the while the submission of the Respondent cannot be said to be without merit, the High Court did not propose to examine them at this stage since all these contentions can as well be urged in the reply to the show cause notice. At the stage of a show-cause notice, this Court is required to presume that the allegations in the show cause notice are true. The contentions urged before the High Court in this regard can as well be raised by the petitioner before the Adjudicating Authority, after they submit their reply to the show-cause notice.

The High Court further held that the Adjudicating Authority shall, without being influenced by the observations made hereinabove on merits, consider the matter, duly dealing with all the contentions urged, both in the reply, if any, submitted by the petitioner within three weeks from today and in the course of oral hearing, and, thereafter, pass orders in accordance with law.

Judgment:- Appeal dismissed.

Comments

PJ/Case Laws/2010-11/1013

Post a Comment

Query