Validity of Rule 12CC of CER, 2002 & Rule 12AA of CCR, 2004

CASE: - ARYAN ISPAT AND POWER PVT LTD Vs UNION OF INDIA & OTHERS

CITATION: - 2011-TIOL-499-HC-ORISSA-CX

Issue:- Rule 12CC of CER, 2002 & Rule 12AA of CCR, 2004 as well as Notification No. 32/2006-CE(NT) dated 30.12.2006 – imposing restrictions on substantive rights of assessee in 2009 – whether ultra vires the Central Excise Act, 1944 and the Constitution of India when authority to make said provisions granted in 2010?

Brief Facts:- The Central Government had introduced Rule 12CC in the Central Excise Rules, 2002 vide Notification No. 30/2006-CE (NT) dated 30.12.2006 enabling the Government to impose by notification certain restrictions and to withdraw certain facilities in certain types of cases of evasion of duty. Similar provisions was introduced in the form of Rule 12AA in the Cenvat Credit Rules, 2004 vide Notification No. 31/2006-CE(NT) dated 30.12.2006 enabling Government to impose by notification certain restrictions in respect of misuse of cenvat credit.

Consequently, a composite Notification No. 32/2006-CE(NT) dated 30.12.2006 was issued under the said Rules listing out the type of facilities to be withdrawn, restrictions to be imposed and deterrent action to be taken, in case prima facie evidence existed of evasion of duty and violation of CCR, 2004 was found out and procedure to be adopted before withdrawal of facilities.

In 2009 during search of factory & office premises of petitioner by Central Excise Officers alleged incriminating documents were recovered. And physical stocktaking of finished goods showed shortage of 220 M.T. of sponge iron. Petitioner deposited duty amount of Rs. 2.26 lakhs under protest towards alleged unaccounted stock.

On the basis of scrutiny of seized documents it was alleged against the petitioner that they had received unaccounted iron ore in their factory and on average, taking consumption production ratio as the basis, it was further alleged that there was suppression of production of 11089.73 M.TS of sponge Iron during April, 2006 to December, 2007 which resulted in alleged evasion of Central Excise Duty to the tune of Rs.93 lakhs.

Show cause notice was issued to petitioner proposing to take deterrent action under Notification No. 32/2006-CE(NT) dated 30.12.2006. Pursuant to the said notice, petitioner appeared before the Chief Commissioner and submitted an application praying therein that the petitioner may be made aware of the gravamen of charges and copies of documents relied upon by the department constituting the basis for allegations/charges be supplied to enable them to make a representation in the matter.

Another show cause notice dated 25.01.2010 was issued to the petitioner to submit a representation/reply, if any, to the proposal of Commissioner to invoke provisions of Notification No. 32/2006-CE(NT) and to impose restrictions in terms of that notification.

On 02.02.2010, petitioner received another intimation letter of Department intimating him that the Chief Commissioner has permitted him to file his reply by 15.02.2010 and personal hearing was fixed to 18.02.2010. By another letter dated 05.02.2010 petitioner was intimated to collect photocopies of the seized records/documents. The petitioner submitted his representation to the Chief Commissioner on 15.02.2010 pointing out, inter alia that copies of the documents seized in course of search on 04.11.2009 as listed in Panchanama dated 4.11.2009 have not been supplied to the petitioner and the facts of the case do not warrant any action under Notification no. 32/2006. After personal hearing the Chief Commissioner, made some recommendation to the Board for imposing restrictions in terms of Notification No.32/2006-CE(NT) on the petitioner.

While the matter stood thus, the Finance Bill, 2010 was placed in the Parliament on 26.02.2010 introducing an amendment to Section 37 of the Central Excise Act authorizing to make Rules to provide for withdrawal of facilities or imposition of restrictions in case of evasion of duty or misuse of Cenvat Credit. On 8.5.2010 Presidential assent was received to the Finance Bill, 2010 as Act No. 14 of 2010.

On 21.07.2010 Member(CX) authorized by the Board passed the impugned order by which the facility of monthly payment of excise duty provided under Rule 8(1) of CER, 2002 was withdrawn and petitioner was required to pay excise duty for each consignment at the time of removal of goods from 26.07.2010 to 31.12.2010. Payment of excise duty by utilization of Cenvat Credit as provided under Rule 3(4) of the CCR, 2004 was ordered to be stopped during that period. Petitioner was directed to maintain records of receipt, disposal, consumption and inventory of principal inputs on which Cenvat credit has not been taken with effect from 26.07.2010 to 31.10.2010. Petitioner was also directed to intimate the jurisdictional Superintendent within 24 hours of receipt of principal inputs in the factory on which Cenvat credit has or has not been taken and the same should be kept available for verification for the next 48 hours and this restriction was applicable for the period from 26.07.2010 to 31.10.2010.

Against the impugned order imposing restrictions, the Petitioner has filed writ petition before the High Court for declaring Rule 12CC of CER, 2002 and Rule 12AA of CCR, 2004 as well as the Notification No. 32/2006-CE(NT) dated 30.12.2006 ultra vires the Central Excise Act, 1944 and prayed that the same be set aside.

Petitioner’s Contentions:- It was contended that the Rule 12CC of CER, 2002 and Rule 12AA of CCR, 2004 as well as the Notification No. 32/2006-CE(NT) dated 30.12.2006 were ultra vires the Central Excise Act, 1944. Prior to Finance Bill 2010 bringing amendment to Section 37 of the Central Excise Act enabling the Central Government to make Rules for deterrent action/withdrawal of facilities granted under the Central Excise Act and the Cenvat Credit Rules, the Central Government did not have power to introduce the said Rules.

It was submitted that the rule making power was given to the Central Government only by the Finance Bill, 2010 which was introduced in Parliament on 26.02.2010 and assented to by the President on 08.05.2010. The said amendment is intended to be prospective. There is no other Section in the Central Excise Act which authorizes the Central Government to introduce the said Rules having effect of taking away substantive rights granted under the Act or the CER, 2002, or the CCR, 2004. That the Notification no. 32/2006 affects the substantive right of tax payers and that said Notification has not been notified under the Central Excise Act, rather it has been notified under Rules 12CC of Central Excise Rules, 2002 and 12AA of the CC Rules, 2004 which are ultra vires the provisions of the Act. Notification no.32/2006 suffers from various fundamental defects and violates the substantive statutory rights of the petitioner and other Manufacturers.

It was submitted that in case Revenue is prima facie satisfied on the basis of investigation that any particular tax payer evades a duty, they are required to proceed for determination of evasion as provided under Section 11A(1) of the Act. Therefore, any order passed under Notification No. 32/2006 concluding evasion of duty and consequential stoppage of monthly uuty payment or restrictions on use of Cenvat Credit before issuance of notice under Section 11A (1) of the Act is derogatory to the provisions of Section 11A of the Act.

Petitioner placed reliance on the judgment in the case of Laghu Udyog Bharati v. Union of India [2002-TIOL-162-SC-ST]. The CER, 2002 and CCR, 2004 have been notified under Section 37 of the Act to carry out the provisions of CE Act, 1944. They can regulate the procedural aspects, but they cannot take away the substantive rights conferred under the Act. Thus, Notification No. 32/2006 notified under the Rules and affecting the substantive rights of the tax payers is not sustainable. The action contemplated under the said Notification No. 32/2006 amounts to double jeopardy as for the same offence independent action shall be taken by the department by issuing show cause notice under Section 11A(1) of the Act and proposing imposition of penalty under Section 11AC and recovery of interest u/s. 11AB of the Act and is thus violative of Article 20 of the Constitution. The action contemplated under the said notification is not based on final finding of any authority rather it is based on prima facie finding of the department. The proceedings under Notification No. 32/2006-CE(NT) shall interfere with the adjudication proceedings under Sec.11A (2) of the Act and thus adjudication proceedings shall be no longer independent. The provision contained in the Notification is extremely harsh, excessive, oppressive, unreasonable and thus violates the letter and spirit of Art. 19 (1)(g) of the Constitution. The action contemplated under Notification No. 32/2006 affects the substantive rights of tax payers as under the scheme of the notification there is no right of appeal.

It is further argued that the impugned order passed against the petitioner imposing restrictions is not sustainable in law as there is no material on record to prima facie indicate that the petitioner has evaded payment of Central Excise duty upto Rs.10 lakhs. Rs.2, 26,000/- was paid under protest and not paid voluntarily. The petitioner was not supplied with all documents seized in Panchanama to enable him to make effective representation. The impugned order is too harsh, excessive and punitive and has the effect of temporary closure of industry of the petitioner inasmuch as 80% of the duty is paid by using Cenvat Credit. Stoppage of use of Cenvat Credit has seriously affected the working capital of the petitioner. The rule and notification do not provide any time limit for which restriction has to be imposed. The Central Excise Officer, who exercises power u/s.11A of the Act is subordinate to the Members of the Board and shall be prejudiced against the petitioner in view of the finding of the Chief Commissioner and action of the Member of the Board. Reliance is placed on the case of Hiren Aluminium Ltd. V. Union of India [2009-TIOL-83-HC-MUM-CX]. It is argued that the Bombay High Court has stayed the operation of an order passed by the Member (CX) under Notification No. 32/2006-CE(NT) pending examination of the issue whether the said Rules 12CC and 12AA are ultra vires the provisions of the Act.

Respondent’s Contentions:- Excise Department argued that the restrictions as per order dated 21.07.2010 were only for the period from 26.07.2010 to 31.10.2010 which has already expired. A reading of the Notification No.32/2006 dated 30.12.2006 in Explanation (i), it is clarified that a person, against whom the order under sub-para (3) of Para 4 has been passed, may continue to take CENVAT Credit. However, he would not be able to utilize the credit for payment of duty during the period specified in the said order. The credit is not denied nor is the order denying the petitioner his right to take such credit. Therefore, there is no permanent injury. It is only a temporary restriction of the facilities he enjoys under the Rules. The injury, if any, is only temporary in nature and as is implicit from the Explanation (i), there is no perpetual denial of the benefit as the assessee continues to take Cenvat Credit. This restriction might affect his fund flow or interest cost temporarily for evading Central Excise Duty on detection. It is a summary scheme with an object to act as a deterrent against tax evaders by withdrawal of facilities from such persons so as to bring the assessee on correct track for future statutory compliances.

It was submitted that by way of amendment in Section 37, sub-section (2), after clause (xiii), clause (xiiia) was inserted, which provides for withdrawal of facilities on imposition of restriction etc. This amendment was to be brought into force after the enactment of the Finance Bill, 2010. After the said Bill was introduced in the Finance Budget in the year 2010 and got the President's assent on 08.05.2010 it was incorporated in Section 37(2) of the Act. Section 37 deals with general power of the Central Government to make rules under sub-section (1) to carry into effect the purpose of this Act. Subsection (2) enumerates the matter providing for “in particular and without prejudice to the generality of the foregoing power”. Thus, this section did not require that the enumerated rules would be exhaustive. Any rule, if it could be shown to have been made to “carry into effect the purpose of the Act” would be within the rule making power. Chapter-2 of the Act deals with” Levy and Collection of Duty” i.e., Sections 3 and 3A categorically states notwithstanding anything contained in Section 3 as may be relevant it is of the opinion that it is necessary to safeguard the interest of revenue specify by notification in the Official Gazette. Amendment to Section 37 by the Act of Parliament received the assent of the President on 08.05.2010. The operational period of restriction being from 26.07.2010 limiting it to five months has commenced much after the Notification i.e. 08.05.2010 and the restrictions operate after the incorporation of the same into the Act having the force of law. Therefore, the action of the Board cannot be questioned on the ground that the Board was unauthorized to impose such restrictions under Rule 12CC of the CER, 2002 and Rule 12AA of the CCR, 2004 and cannot be challenged on the ground of being ultra vires.

In support of his contention, reliance was placed on the judgment of the Apex Court in the case of Asst. Collector of Central Excise v. Ramakrishna Kulwant Rai [1989 (41) ELT 3 (SC)].

It was submitted that modern State in exercising its sovereign power of taxation has to deal with complex factors relating to the object to be taxed and restrictions to be imposed. Further placing reliance on decision of the Apex Court in case of Bhavesh D. Parish and others v. Union of India and another [2002-TIOL-520-SC-MISC)] (para-23, 24 and 30), it is argued that the machineries of the State would not work if it were not allowed a little play in its joints. In the end, it was submitted that Rule 12 CC of CER, 2002 and Rule 12 AA of CCR, 2004 and Notification No. 32/2006-CE(NT) are not ultra vires either the Central Excise Act or Constitution of India, therefore, they prayed for dismissal of the writ petition.

Reasoning of Judgment:- The High Court was of the view that the Central Government has made the Rules 12CC of CER, 2002 and Rule 12AA of CCR, 2004 in the year 2006 without any authority of law which power was vested in the Central Government in the year 2010 by inserting clause (xiiia) in sub-section 2 of Section 37 and therefore, the two Rules are ultra vires the Central Excise Act, 1944. Consequently, Notification No. 32/2006-CE(NT) issued in pursuance of Rule 12CC of CER, 2002 and Rule 12AA of CCR, 2004 is not sustainable in law.

Accordingly, the impugned order No. 38/2010-M (CX)/DA dated 21 st July, 2010 passed pursuant to Notification dated 30.12.2006 was held to be not sustainable and was quashed.

Decision:- Appeal allowed.

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PJ/Case Laws/2011-12/1295

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