Mere mentioning of Rule without specifying the clause is not proper for imposing penalty for fraud, suppression.

PJ/Case Laws/2012-13/1521

Case:- INOX AIR PRODUCTS LTD. Versus COMMISSIONER OF C. EX., HYDERABAD

Citation:- 2013 (30) S.T.R. 47 (Tri. – Bang.)

Brief Facts:-In this appeal filed by the assessee, the short question which arises for consideration is whether, under Rule 15(4) of the CENVAT Credit Rules, 2004, they are liable to be penalized on the facts of this case.

The assessee has a manufacturing unit (Unit-I) at Isnapur and a service providing unit (Unit-II) at Bhadrachalam. During the period from April 2007 to April 2008, Unit-I took CENVAT credit on certain input services totalling to Rs. 4,98,899/- though it was not eligible to do so. This credit was, in fact, meant for Unit-II (provider of output service). The irregular availment of CENVAT credit by Unit-I was noticed by the Department in October 2008, whereupon the credit was reversed forthwith on 16-10-2008. Later on, interest was paid on 1-2-2010. Meanwhile, show-cause notice dated 21-4-2009 was issued by the Department requiring the appellant (Unit-I) to show-cause as to why

(a)   an amount of Rs. 4,98,899/- being CENVAT credit irregularly taken on invoices pertaining to other unit should not be recovered under Rule 14 of CENVAT Credit Rules read with proviso to Section 11A of Central Excise Act, 1944 and the credit reversed amount to Rs. 4,98,899/- should not be adjusted towards the amount demanded.

(b) interest under Rule 14 of CENVAT Credit Rules, 2004 read with Section 11AB of the Central Excise Act, 1944 on (a) above should not be paid by them.

(c)   penalty under Rule 15 of CENVAT Credit Rules, 2004 read with Section 11AC of the Central Excise Act, 1944 should not be imposed on them.

The above proposals were contested by the party. In adjudication of the dispute, the original authority confirmed the demand and appropriated the payment of Rs. 4,98,899/- towards such demand. It also confirmed the demand of interest on duty. It also imposed a penalty of Rs. 2000/- on the party under Rule 15(3) of the CENVAT Credit Rules, 2004. The interest and penalty demanded by the adjudicating authority were paid up by the assessee. The non- imposition of penalty under sub-rule (4) of Rule 15 of the CENVAT Credit Rules, 2004 read with Section 78 of the Finance Act, 1994 by the adjudicating authority was reviewed in the Department and accordingly an appeal preferred to the Commissioner (Appeals). The learned Commissioner (Appeals) allowed that appeal by setting aside the penalty of Rs. 2000/- imposed under Rule 15(3) and imposing penalty of Rs. 4,98,899/- under Rule 15(4) on the assessee. This higher penalty is under challenge in the present appeal of the assessee.

Appellant Contentions:-The appellant submits that no ground for imposing penalty under Rule 15(4) was alleged in the show-cause notice. Both the provisions have been invoked against the assessee by the lower appellate authority in violation of the principles of natural justice inasmuch as they were not put to notice of any such proposal. The learned counsel has relied on the following decisions :-

1.          CCE, Pune-I v. Thermax Ltd. [2010 (254) E.L.T. 111 (Tri.-Mumbai)]

2.          Lanco Industries Ltd. v. CCE, Tirupathi [2011 (265) E.L.T. 118 (Tri.-Bang.) = 2012 (25) S.T.R. 206 (T)]

3.          CCE, Meerut v. BHEL [2012 (280) E.L.T. 433 (Tri.-Del.)

Respondent Contentions:-The learned Additional Commissioner (AR) refers to the show-cause notice and submits that, if the averments/allegations contained in paragraphs 2, 5 and 6 are read together, the show-cause notice will be found to have set up a case for imposing penalty on the party under sub-rule (4) of Rule 15. It is argued that such penalty cannot be resisted by the appellant by mere reason of non- mentioning of sub-rule (4) ibid or of Section 78 of the Finance Act, 1994 in the show-cause notice. The wrong mention of Section 11AC of the Central Excise Act is also not fatal to the Revenue. It is the further submission of the learned Additional Commissioner (AR) that, for the purpose of invoking the extended period of limitation, the show-cause notice clearly alleged against the assessee contravention of rules with intention to evade payment of duty. As the demand confirmed against the appellant by the original authority by invoking the extended period of limitation has not been challenged by them, they are precluded from resisting penalty under Rule 15(4) read with Section 78. The arguments of the learned Additional Commissioner (AR) run in these lines.

Reasoning of Judgment:- We have considered the submission on both sided.Tribunal was not impressed with the above arguments put forth on behalf of the Department. Rule 15(4) of the CENVAT Credit Rules, 2004 reads as follows :-

(4) In a case, where the CENVAT credit in respect of input services has been taken or utilized wrongly by reason of fraud, collusion, wilful misstatement, suppression of facts, or contravention of any of the provisions of the Finance Act or of the rules made thereunder with intention to evade payment of service tax, then, the provider of output service shall also be liable to pay penalty in terms of the provisions of Section 78 of the Finance Act.

For imposing a penalty on any person under the above provision, the Department should clearly allege in the relevant show-cause notice that such person has wrongly taken or utilized CENVAT credit on input services by reason of fraud, collusion, wilful mis-statement, suppression of facts or contravention of any of the provisions of the Finance Act, 1994 or of the rules made thereunder with intention to evade payment of service tax. None of these ingredients was alleged in the subject show-cause notice for imposing penalty on the appellant under Rule 15(4). Para 5 of the show-cause notice contains an allegation to the effect that the appellant had contravened certain rules with intention to evade payment of duty, but such allegation was made for the specific purpose of invoking the extended period. For imposing a penalty under Rule 15(4), no allegation of that kind was raised in the show-cause notice vide para 6 of the notice. Irregular availment of CENVAT credit as alleged in para 2 of the show-cause notice is a ground for invoking Rule 15(3) and not for invoking Rule 15(4). The adjudicating authority rightly invoked Rule 15(3) to impose a penalty of Rs. 2000/- on the assessee. The appellant authority clearly erred in setting aside this penalty and, that too, in an appeal preferred by the Department. For the reasons already stated, the penalty imposed on the appellant under Rule 15(4) by the lower appellate authority is not sustainable. The Tribunal's decision in the case of Thermax Ltd. (supra) is squarely applicable to the facts of the instant case. Paragraphs 4 & 5 of the cited judgment are reproduced below:-

“As rightly pointed out by the respondents, none of the ingredients for a penalty under Section 11AC was expressly alleged in any of the show-cause notices. It is settled law that, where the department seeks to penalize a person on any of the grounds covered by the text of Section 11AC, they have necessarily got to allege such grounds and prove the same in adjudication of the case. In the absence of allegation of fraud, collusion, suppression of facts, wilful mis-statement of facts or contravention of rules with intent to evade payment of duty by the respondents, there can be no penalty on the respondents under Section 11AC of the Act. In the cases of UOI v. Dharamendra Textile Processors - 2008 (231) 3 (S.C.) and UOI v. Rajasthan Spinning & Weaving Mills - 2009 (238) 3 (S.C.), it was emphatically laid down by the Apex Court that a penalty under Section 11AC of the Act was mandatory where one or the other ingredient for such a penalty specified under that section was alleged and established by the Revenue against the person sought to be penalized. None of such ingredients was alleged by the Revenue in any of these cases, let alone proof thereof. In all these cases, the lower appellate authority proceeded on the premise that the penalties imposed by the original authority were under Section 11AC of the Act and consequently, in all these appeals of the Revenue, the appellant has raised grounds in support of their prayer for imposing penalties on the respondents under Section 11AC, though it is apparent from the record that, in most of the cases, the adjudicating authority had not imposed any penalty under Section 11AC. The prayer in these appeals for imposition of penalties on the respondents under Section 11AC cannot be granted inasmuch as none of the show-cause notices alleged anything in support of such a penalty”.

It has been usefully argued by the learned counsel for some of the respondents that, though the show-cause notices invoked Rule 15 of the CENVAT Credit Rules, 2004, any sub-rule was not specified therein. The different sub-rules of Rule 15 cover different factual situations and, therefore, it was incumbent on the department to specify the particular sub-rule which they wanted to invoke in a particular show cause notice. However, this was not done in any of these cases. In the case of Amrit Foods v. CCE - 2005 (190) 433 (S.C.), the Hon’ble Supreme Court had occasion to consider a similar case which arose under Rule 173Q of the erstwhile Central Excise Rules, 1944. Their Lordships noted that Rule 173Q contained six clauses, the contents of which were not the same. It was held that it was necessary for the assessee to be put on notice as to the exact nature of contravention for which they were liable under Rule 173Q. In that case, any particular clause of Rule 173Q (1) was not specified in the show-cause notice and, on this ground, the Tribunal had set aside the penalty imposed on the assessee. The Tribunal's order was affirmed by the Apex Court. This decision of the Apex Court is in support of the respondent's case against penalty under Rule 15.

In the result, the penalty imposed on the appellant under Rule 15(4) by the Commissioner (Appeals) is set aside and the one imposed on them under Rule 15(3) by the original authority is restored. The appeal is accordingly disposed off.

Decision:-Appeal disposed off.

Comment:- The crux of this case is that mere mentioning in the show cause notice that penalty is imposable under Rule 15 would not suffice until and unless specific clause is mentioned along with reasons for imposition of penalty under the relevant clause.

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PJ/Case Laws/2012-13/1521

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