Is it permissible to deny the benefit of the Notification to someone whom, even according to the Government of India was entitled to the benefit?

Case:                              M/s KOTHARI PETROCHEMICALS LTD
                                                           Vs
1)UNION OF INDIA,MINISTRY OF FINANCE (DEPARTMENT OF REVENUE) THROUGH THE UNDER SECRETARY TO THE GOVERNMENT NORTH BLOCK, NEW DELHI-110001
2)COMMISSIONER OF CENTRAL EXCISE, CHENNAI-I COMMISSIONERATE 26/1, MAHATMA GANDHI MARG, CHENNAI-600034
3)COMMISSIONER OF CENTRAL EXCISE AND SERVICE TAX LARGE TAXPAYER UNIT         1775, JAWAHARLAL NEHRU INNER RING ROAD, ANNA NAGAR WESTERN EXTENSION, CHENNAI-600101
4)DEPUTY COMMISSIONER OF CENTRAL EXCISE, 'C' DIVISION, CHENNAI-1 COMMISSIONERATE 26/1, MAHATMA GANDHI MARG, CHENNAI-600034
5)CHENNAI PETROLEUM CORPORATION LTD MANALI, CHENNAI-600068Citation:2014-TIOL-1923-HC-MAD-CX

Brief Facts: The petitioner has come up with the above writ petition challenging the show cause notice issued under the CENVAT Credit Rules, 2004.
The petitioner is engaged in the manufacture of Poly Iso Butylene. The main input for the product manufactured by the petitioner, is called Poly Butylene Feed Stock (PBFS), which is manufactured and supplied to the petitioner by the 5th Respondent herein.
Both according to the petitioner and according to the Respondents 1 to 4, the 5th Respondent sends PBFS through pipeline to the factory of the petitioner. The petitioner extracts Poly Iso Butylene from the input sent by the 5th Respondent and the petitioner sends back the remnants, to the 5th Respondent. The Respondents 1 to 4 themselves, have worked out on the basis of the meter readings and estimate of the process engineering that what is extracted by the petitioner accounts for 17% and what is sent back is 83% of the Feed Stock.
In exercise of the powers conferred by sub-section (1) of Section 5A of the Central Excise and Salt Act, 1944, the Central Government exempted Petroleum Gases and other Gaseous Hydrocarbons falling under Chapter Heading No.27.11 of the schedule to the Central Excise Tariff Act, 1985, intended for use in the manufacture of Poly Iso Butylene, from so much of the Excise Duty, as is in excess of the Duty leviable on the quantity of the gas consumed in the manufacture of Poly Iso Butylene. This exemption was granted first by Notification No.157/89- C.E. dated 17.07.1989.

A similar exemption Notification was issued on 01.03.2006 in respect of various items. Under Serial No.29 of the table under the said Notification, Chapter Heading 27.11 with respect to the same product was covered.
Subsequently, Notification No.12/2012 dated 17.03.2012 was issued granting exemption in respect of more than about 300 items. Serial No.83 of the said Notification also covered the very same item manufactured by the petitioner. Therefore, for the past about 20 years ever since the first exemption Notification was issued in 1989, the 5th Respondent has been enjoying the benefit of the exemption, in respect of whatever is returned to the 5th Respondent.
But suddenly the second Respondent issued a notice bearing No.20/2013 dated 07.11.2013, demanding Duty in respect of the Petroleum gas returned to the 5th Respondent during the period from October 2008 to June 2013. Aggrieved by the said notice, the petitioner has come up with the above writ petition.
The first and foremost objection taken by the Respondents 1 to 4, to the writ petition is that what is challenged is only a show cause notice and that therefore the petitioner can always give a reply and submit his objections. Even if an order is passed against the petitioner, the petitioner can work out his remedies in accordance with the procedure prescribed by law.
Without prejudice to the contention regarding the maintainability of the writ petition, it is claimed by the Respondents 1 to 4 that the petitioner receives PBFS from the 5th Respondent and various other materials from other vendors and carries on a manufacturing process that leads to a finished product. According to the Respondents, the manufacturing process leads to the production of Poly Iso Butylene, like polymers and certain goods which are collected and stored in the LPG Bullets, that are returned to the 5th Respondent without payment of Duty. What is extracted by the petitioner is of course cleared upon payment of Excise Duty. Therefore, the Respondents 1 to 4 claim that as per Rule 6 of the CENVAT Credit Rules, the manufacturer who manufactures both Dutiable and exempted products, is required to maintain separate accounts for the receipt, consumption and inventory of the inputs on which CENVAT Credit is taken. According to the respondents 1 to 4, if accounts are not separately maintained, the manufacturer has to pay 5%, 6% or 10% on the value of the exempted products and it has to be
recredited as per Rule 14. Therefore, the respondents 1 to 4 claim that the show cause notice is within the parameters of law.

Appellant’s Contention:

Respondent contention: Mr.Rajnish Pathiyil, learned Senior Central Government Standing Counsel appearing for the Respondents 1 to 4 has cited a long list of decisions, where the Courts refused to interfere with show cause notice. The decisions cited by the learned Senior Central Government Standing
Counsel are as follows:-
(1) Medopharam vs. Superintendent of Central Excise, Madras (1995 (77) E.L.T.524)                      (2) State of Madhya Pradesh vs. M.V.Vyavsaya and Company (MANU/SC/2146/1996).                     (3) Alembic Glass Industries Ltd., vs. Union of India (1998 (97) E.L.T. 28 (SC).                               (4) G.K.N.Driveshafts (India) Ltd., vs. Income Tax Officer (MANU/SC/1053/2002)                            (5) G.K.N.Driveshafts (India) Ltd., vs. Income Tax Officer (MANU/SC/1577/2002).                             (6) Commissioner of Customs and Central Excise vs. Charminar Non Wovens Ltd. (MANU/SC/0450/2004).                                                                                                                     (7)Special Director vs. Mohd. Ghulam Ghouse (MANU/SC/0025/2004)                                                                      (8) Malladi Drugs and Pharma Ltd., vs. Union of India (UOI) (MANU/SC/0407/2004)                             (9) Union of India (UOI) vs. Guwahati Carbon Ltd. (MANU/SC/1256/2021) = 2012-TIOL-119-SC-CUS (10) Commissioner of Income Tax vs. Chhabi Dassw Agarwal (MANU/SC/0802/2013)                       (11) Veerappa Pillai vs. Raman & Raman (MANU/SC/0057/1952).

In Medopharam, the Division Bench of this Court did not go into the question as to whether no writ petition would lie under any circumstances.
In State of Madhya Pradesh, the Supreme Court was concerned with cases arising out of public auctions conducted for the grant of licences for country made liquor. Repeated orders were passed by a learned Judge of the Madhya Pradesh High Court ignoring the nature of the jurisdiction under Article 226 and hence the Supreme court came down upon the High court. I do not know how the said decision is of any assistance to the Respondents.
In G.K.N.Driveshafts (India) Limited, the Supreme Court upheld the order of the Delhi High Court rejecting the challenge to the notices issued under Section 148 and 143(2) of the Income Tax Act, 1961. The circumstances under which the jurisdiction under Article 226 could be exercised, were not considered in the said decision.
In Charminar Non Wovens Limited, the Supreme Court was concerned with the question as to whether a particular item will fall under one sub-heading or the other. Since this is a question of fact, the Supreme Court set aside the order of the High Court.
In Mohd. Ghulam Ghouse, the Supreme Court was concerned with an interim order of status quo under the Foreign Exchange Regulation Act. I do now know how the respondents rely upon the same.
In Malladi Drugs and Pharma Limited also, the Supreme Court did not go into larger question. Unfortunately, the learned counsel for the Respondents has cited decisions selectively. There are decisions of the Supreme Court which clearly define the jurisdiction of the High Court under Article 226, as against a show cause notice. It is true that the jurisdiction of the Court to interfere at the stage of show cause notice is extremely limited and circumscribed. But it is not a case of inherent lack of jurisdiction but a case of self imposed restrictions.
In Union of India vs. Vicco Laboratories (2007 (13) SCC 270) = 2007-TIOL-215-SC-CX, the Supreme Court pointed out that normally the writ Court should not interfere at the stage of show cause notice. Abstinence from interference is a normal Rule. But the said Rule is not without exceptions. The exceptions pointed out by the Supreme Court in Vicco Laboratories are two:
(1) Where the show cause notice is issued without jurisdiction; and
(2) Where it is an abuse of the process of law. Therefore, what is required to be seen in such cases is whether the show cause notice was without jurisdiction or whether the show cause notice was nothing but an abuse of the process of law.

Reasoning of Judgement: I have heard Mr. Joseph Kodianthara, learned Senior Counsel for the petitioner, Mr.Rajnish Pathiyil, learned Senior Central Government Standing Counsel for the Central Excise Department and Mr.R.Senthilkumar, learned counsel for the 5th Respondent.
From the pleadings of both sides and the arguments advanced, it is clear that two questions arise for consideration. They are:-
(1) Whether the writ petition is maintainable, since what is impugned is only a show cause notice.
(2) If the answer to the first question is in the affirmative, whether the case on hand justifies the interference with the show cause notice.

Question No.1: Maintainability
Question No.2:Having decided that the writ petition is maintainable on two limited grounds, let me now see whether the case on hand falls within any of the two grounds.
As pointed out earlier, the petitioner receives PBFS from 5th Respondent through pipelines and extracts Poly Iso Butylene from the same and sends back the remnants. The Respondents themselves have calculated that what is extracted by the petitioner constitutes 17% of what is sent by the 5th Respondent. In other words, the 5th Respondent receives back 83% of what is sent to the petitioner.
Right from the year 1989, there have been notifications for exemption in respect of petroleum gases and other gaseous hydrocarbons falling under Chapter Heading No.27.11. The first exemption Notification was issued on 17.07.1989. In the Second Notification dated 01.03.2006, this item was at Serial Number 29. In the next Notification dated 17.03.2012, this item was at Serial Number 83. In order to understand the nature of the exemption granted, it would be appropriate to extract the Notifications. The first Notification dated 17.07.1989 reads as follows:-
"In exercise of the powers conferred by subsection (1) of Section 5A of the Central Excises and Salt Act, 1944 (1 of 1944), the Central Government, being satisfied that it is necessary in the public interest so to do, hereby exempts petroleum gases and other gaseous hydrocarbons, falling under heading No.27.11 of the Schedule to the Central Excise Tariff Act, 1985 (5 of 1986), (hereinafter referred to as "the said gases"), intended for use in the manufacture of polyisobutylene, from so much of the duty of excise leviable thereon, which is specified in the said Schedule, as is in excess of the duty leviable on the quantity of the said gases consumed in the manufacture of polyisobutylene.
Explanation: For the purposes of this notification, the quantity of the said gases consumed in the manufacture of polyisobutylene shall be calculated by subtracting from the quantity of the said gases received by the factory manufacturing polyisobutylene the quantity of the said gases returned by the factory to the factory which supplied the said gases."
To the Notification dated 01.03.2006, a table was appended containing a list of about 97 items. The relevant entry at serial no.29 reads as follows:-
“Petroleum gases and other gaseous hydrocarbons received by the factory from the refinery intended for use in the manufacture of Polyisobutylene or Methyl Ethyl Ketone (MEK) and returned by the factory to the refinery from where such Petroleum gases and other gaseous hydrocarbons are received.

Explanation:- For the purposes of the exemption the quantity of the petroleum gases and other gaseous hydrocarbons consumed in the manufacture of polyisobutylene shall be calculated by subtracting from the quantity of the said gases received by the factory manufacturing polyisobutylene the quantity of the said gases returned by the factory to the refinery, declared as such under Rule 20 of the Central Excise Rules, 2002, which supplied the said gases. "

Similarly, in the Notification dated 17.03.2012, more than about 300 items were included. Petroleum gases and other gaseous hydrocarbons were included at Serial Number 83 and the entry reads as follows:-

"Petroleum gases and other gaseous hydrocarbons received by the factory from the refinery intended for use in the manufacture of polyisobutylene or Methyl Ethyl Ketone (MEK) and returned by the factory to the refinery from where such petroleum gases and other gaseous hydrocarbons are received. "

Explanation:- For the purposes of the exemption the quantity of the petroleum gases and other gaseous hydrocarbons consumed in the manufacture of polyisobutylene shall be calculated by subtracting from the quantity of the said gases received by the factory manufacturing polyisobutylene the quantity of the said gases returned by the factory to the refinery, declared as such under Rule 20 of the Central Excise Rules, 2002, which supplied the said gases. "

A careful reading of the entries extracted above would show that the main part of the Notification actually contemplated the receipt of petroleum gases and other gaseous hydrocarbons received from the refinery intended for use in the manufacture of polyisobutylene and returned by the factory to the refinery from where the gases came.
There is no dispute about the fact that the petitioner receives petroleum gases and other gaseous hydrocarbons from the 5th Respondent, for the purpose of manufacture of polyisobutylene and that after the extraction, the gases and gaseous hydrocarbons are returned to the refinery of the 5th Respondent.
The explanations to these entries, which have also been extracted above make it clear that quantity of gases and gaseous hydrocarbons consumed in the manufacture of polyisobutylene is to be calculated by subtracting from the quantity of the said gases, the quantity of the gases\ returned to the refinery declared as such under Rule 20 of the Central Excise Rules, 2002. In the light of the explanation, there is also no dispute about the fact that the Respondents themselves have calculated what is extracted at 17% of what is received and what is returned at 83%.
After admitting to the application of the main part of the Notifications and the explanations to the same, the stand taken by the Respondents is that the petitioner receives not only PBFS from the 5th Respondent but also various other materials from other vendors and carries on a manufacturing process that leads to a finished product. Since there are inputs other than what is provided by the 5th Respondent, the impugned show cause notice claims that Rule 6 of the CENVAT Credit Rules would apply.
Since the Respondents rely upon Rule 6 of the CENVAT Credit Rules, 2004, it is necessary tohave a look at it. The look at CENVAT Credit Rules, 2004 would show that the object of the Rules was to allow the manufacturer of final products or provider of taxable services to take credit, known as CENVAT Credit of the Duty of Excise leviable under the Excise Act or the additional Duty leviable under Act 58 of 1957 or Act 40 of 1978. Rule 4 stipulates the conditions for allowing CENVAT Credit. Sub-rule (1) of Rule 4 makes it clear that the CENVAT Credit in respect of inputs may be taken immediately on receipt of the inputs in the factory of the manufacturer or in the premises of the provider of output service. Rule 5 provides for refund of CENVAT Credit.
Rule 6 deals with the obligation of the manufacturer of dutiable and exempted goods and provider of taxable and exempted services. Sub-rule (1) of Rule 6 states that CENVAT Credit shall not be allowed on such quantity of input or input service which is used in the manufacture of exempted goods, except in the circumstances mentioned in sub-rule (2) of Rule 6. Sub-Rule (2) of Rule 6 obliges the manufacturer or provider of output service, who avails CENVAT Credit and who manufactures final products which are chargeable to Duty as well as exempted goods to maintain separate accounts. Sub-rule (2) of Rule 6 reads as follows:-
"(2) Where a manufacturer or provider of output service avails of CENVAT credit in respect of any inputs or input services, and manufacturers such final products or provides such output service which are chargeable to duty or tax as well as exempted goods or services, then, the manufacturer or provider of output service shall maintain separate accounts for receipt, consumption and inventory of input and input service meant for use in the manufacture of dutiable final products or in providing output service and the quantity of input meant for use in the manufacture of exempted goods or services and take CENVAT credit only on that quantity of input or input service which is intended for use in the manufacture of dutiable goods or in providing output service on which service tax is payable."
But if a manufacturer of goods or provider of output service opts not to maintain separate accounts, he will have to follow either of the two options mentioned in sub-rule (3) of Rule 6.
The first option is to pay an amount equivalent to 10% of the value of the exempted goods (in respect of manufacturer of goods). The second option is to pay an amount equivalent to the CENVAT credit attributable to inputs and input services used in the manufacture of exempted goods.
A detailed procedure is prescribed in sub-rule (3A) of Rule 6 for the determination and payment of the amount under the second option stipulated in Rule 6(3)(ii).
Therefore, the sheet anchor of the case of the Respondents is that the petitioner is engaged in the manufacture of both dutiable and exempted goods and that therefore, Rule 6(3) has to be applied. According to the Respondents 1 and 2, the petitioner has not been maintaining separate accounts and hence he is liable to re-credit the amount as per Rule 14. Rule 14 provides for recovery of the CENVAT credit either taken wrongly or refunded erroneously. The recovery is to be made in terms of Section 11A of the Central Excise Act, 1944 together with interest.
But the above contentions of the Respondents, appear to be completely misconceived. The second Respondent appears to have taken a decision after nearly 23 years, as though the very extraction of Polyisobutylene by the petitioner from PBFS sent by the 5th Respondent is a manufacturing process. The Notifications for exemption issued in the years 1989, 2006 and 2012, which I have extracted elsewhere, make it very clear that petroleum gases and other gaseous hydrocarbons received from the refinery and returned after extraction of Polyisobutylene are exempted. There has never been a dispute in the past 24 years that what is received by the petitioner and what is sent back by the petitioner are both petroleum gases. This is why the apportionment of 17% and 83% as between the petitioner and the 5th Respondent has come to be accepted. The second Respondent has also omitted to take note of the fact that what is returned to the 5th Respondent is also exempted at the hands of the 5th Respondent.
The impugned show cause notice actually has the effect of destroying the very exemption notification. A careful look at the ad hoc exemption order bearing No.23/3-95-CX dated 24.03.1995 issued by the Under Secretary to the Government of India, Ministry of Finance, Department of Revenue would show that the Government itself was aware of the supply by the 5th Respondent of Polyisobutylene enriched LPG to the petitioner through the pipeline. The petitioner extracts Polyisobutylene and returns the remnant after subjecting it to a process. The exemption Notification as originally issued on 17.07.1989, was actually rescinded by another Notification dated 01.03.1994, when Modvat was extended to petroleum products including LPG. Therefore, when companies like the petitioner made representations, the Government of India decided to restore the exemption by issuing a Notification No.116/94-CE dated 24.06.1994. But during the period from the date of withdrawal of exemption (1.3.1994) and the date of restoration of exemption (23.06.1994), the petitioner was made to pay the full incidence of Excise Duty. Therefore, the Government of India passed an order dated 24.03.1995, directing refund of the Duty paid during the said period.
Therefore, it is clear that the Government of India was fully aware of the nature of the exemption Notification, the nature of the manufacturing process carried on by the petitioner and the entitlement of the petitioner to the benefit. Being an authority functioning under the Government of India, the second Respondent is bound by the exemption Notification as well as the decision taken by the Government of India way back in 1995.
As rightly pointed out by the learned Senior Counsel for the petitioner, the recourse to Section 11A is not permissible unless the petitioner is found to be ineligible for exemption. The Government found even at the time when the exemption Notification was withdrawn that the petitioner was entitled to exemption. Therefore, the impugned notice is wholly without jurisdiction and nothing but an abuse of the process of law, enabling this Court to interfere with the same under Article 226.
The reliance placed by the learned Senior Counsel for the petitioner upon the decision of the Division Bench of the Delhi High Court in J.K. Synthetics vs. Union of India, (1981, E.L.T. 328 (Delhi), in my opinion is well-founded. In para 15 of the said decision, the Division Bench pointed out that when there are no changes in the circumstances, either factual or legal, it would not be open to the Department to upset the apple-cart and come to a new conclusion. The Division Bench of the Delhi High Court relied upon a passage from Lord Radcliffe to the effect that the applicability or otherwise of the Rules to estoppel and res judicata to such proceedings turns not on whether the earlier decisions were taken on the judicial side or not, but rather on the principle that in matters of a recurring annual tax, a decision on appeal with regard to one year's assessment is set not to deal with "sadem quaistio" is that which arises in respect of an assessment for another year. Therefore, the department cannot be permitted to take different stands, unless there are good and cogent reasons for a change in future.
Moreover, exemption Notifications are always to be construed strictly. Just as nobody can be brought within the purview of an exemption Notification, by way of interpretation, it is also not permissible to deny the benefit of the Notification to someone whom, even according to the Government of India was entitled to the benefit.
The impugned show cause notice is nothing but an attempt to unsettle what was settled for nearly 24 years. What was settled for 24 years was not merely at the level of the Commissioner of Central Excise but at the level of the Government of India as seen from the ad hoc Notification issued in 1995 directing refund. Therefore, the impugned show cause notice is wholly without jurisdiction and nothing but an abuse of the process of law. Hence, the writ petition is allowed and the impugned show cause notice is set aside. No costs. Consequently, M.P.Nos. 1 and 2 are closed.

Decision: Petition Allowed

Comment:- If assessee is involved in manufacture of dutiable and exempted goods then as per Rule 6 of CCR,2004 Cenvat credit shall not be allowed on such quantity of input or input service which is used in the manufacture of exempted goods, except in the circumstances mentioned in sub-rule (2) of Rule 6. Sub-Rule (2) of Rule 6 obliges the manufacturer or provider of output service, who avails CENVAT Credit and who manufactures final products which are chargeable to Duty as well as exempted goods to maintain separate accounts. But if a manufacturer of goods or provider of output service opts not to maintain separate accounts, he will have to follow either of the two options mentioned in sub-rule (3) of Rule 6.
(1) To pay an amount equivalent to 10% of the value of the exempted goods (in respect   of manufacturer of goods).
(2)To pay an amount equivalent to the CENVAT credit attributable to inputs and input services used in the manufacture of exempted goods.

Moreover, exemption Notifications are always to be construed strictly. Just as nobody can be brought within the purview of an exemption Notification, by way of interpretation, it is also not permissible to deny the benefit of the Notification to someone whom, even according to the Government of India was entitled to the benefit.

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PJ/CASE LAW/2014-15/2472

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