Option under proviso to Section 11AC for payment of 25% of penalty

PJ/Case Study/2010-11/38

CASE STUDY

Prepared By:
CA Pradeep Jain,
Sukhvinder Kaur, LLB [FYIC]
And Parag Ghate, B.Com

Introduction:The Deemed Credit scheme was a very beneficial scheme available for the textile and textile manufacturers. But as and when the changes were made in the credit schemes and the deemed credit scheme was changed by the government to actual credit scheme from 1.4.2003. But here the biggest problem was of the credit on the stock that was lying with the assessee on 31.3.2003 or 1.4.2003. So the government came out with the onetime credit scheme for the benefit of those assesses who were now going to fall under the actual credit scheme instead of the deemed credit scheme. But the problem did not end here, the value of the stock to be taken for the onetime credit became a new issue.

Moreover, when the penalty is imposed under Section 11AC then there is a provision that if the assessee pays the duty along with interest as well as 25% penalty within 30 days of adjudication order then rest of 75% penalty will be waived. But the option for such waiver should be given in writing. If the same is not given in writing then the option can be given appellate stage also. The same is the issue of our case study.

Relevant Legal Provisions:

Section 11AC of the Central Excise Act, 1944: -

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:

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:

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:

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:

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.

Explanation: For the removal of doubts, it is hereby declared that –

the provisions of this section shall also apply to cases in which the order determining the duty under sub-section (2) of section 11A relates to notices issued prior to the date on which the Finance Act, 2000 receives the assent of the President;
any amount paid to the credit of the Central Government prior to the date of communication of the order referred to in the first proviso or the fourth proviso shall be adjusted against the total amount due from such person.

M/s Nahata Fabrics v/s CCE, Jaipur-II
[Final Order No. 1167/2010-Sn(Br), Dated: 12.10.2010]

Brief Facts:

- Appellant is engaged in the manufacture of Man Made fabrics falling under chapter heading 55.

- The procedure of Deemed Credit available in earlier Modvat Rules has been changed by the government to actual credit from 01.04.2003. Introduction of this scheme made no credit available on stock lying as on 01.04.2003 on deemed basis which was allowed at the time clearance of fabrics. Even no actual credit was available to the assessee as no duty paying documents were available were available with the assessee to avail the credit on the stock. To counter this problem, the Government announced onetime credit scheme through the Notification No. 25/2003-CE dt. 25.03.2003. Accordingly the appellant filed declaration with the department. Therefore the onetime Cenvat Credit was available on prescribed rate on each such input lying in stock as such and under process goods as well as finished goods.

- During the course of audit of the records of the appellant, it was observed that the appellants had declared the value of fabrics lying under process as on 31^st March, 2003/1^st April, 2003 by adding the process cost in the value of under-processed grey fabrics and taken the credit in terms of the Notification No. 25/03 dated 25^th March, 2003. In the same course the statements of the Director of the appellant company were also recorded wherein he stated that the total cost of under-processed fabrics was taken over into consideration for calculating the total declared value of such goods in the total value of under processed fabrics, value of gray fabrics by not deducting cash discount, processing charges including the colours and chemicals, transportation charges and profit and margin were taken into consideration. The Director also submitted that bifurcation was not required to be submitted by the appellant, hence they have shown the total value of the fabrics as on date. It was also explained by him that they have procured the colours and chemicals from the traders on which no central excise duty has been paid.

The Department was in the view that the appellant has declared excess value of products by including the processing charges in the value of gray fabrics. Hence the show cause notice was issued alleging the same.

The demand was confirmed alongwith interest and equivalent amount of penalty under section 11AC of the Central Excise Act, 1944 was imposed on the appellant. Appeal filed by the appellant before the Commissioner (Appeal) was also dismissed. Aggrieved from the said order the appellant, filed appeal before the Tribunal.

Appellant’s Contentions:

Appellant submitted that the government has changed the procedure of deemed credit to actual credit from 01.04.2003. There was no credit available on stock lying as on 01.04.2003. The government announced one time credit scheme to extend the benefit of cenvat credit on input lying in stock. The Notification No. 25/2003-CE dt. 25.03.2003 was announced for the same. The different rates were prescribed for inputs as such, under process and finished goods. This shows that the value of each such category was to be taken but the adjudication officer and appellate authority did not adhere to their submission and passed the order. Such an order is not legally sustainable.

The appellant submit that they were under obligation to declare value of each item viz. raw material, under process and finished goods. The aforesaid Notification incorporating Rule 9A did not stipulate them to declare the cost of each items or the value of inputs contained in manufacture of final or semi-finished goods. The appellant submit that the Rule specifically asked them to declare the value of inputs, under process goods and finished goods. When the value of each of them was to be declared then the credit is available on such value. It cannot be allowed on the cost price.

The appellant submit that the same Rule asked them to declare the value of inputs, semi finished goods and finished goods. No other provision for declaring value of finished goods. The appellant contended that the relevant notification had allowed one time credit on the basis of value of finished goods and not on the cost of finished goods or inputs contained in finished goods. But in case of under process goods they maintain that the cost of inputs contained in the under process goods should be declared. The same set of lines in the Rule cannot mean differently for declaration of under process and for that of declaration of finished goods. This has been done by the department in the impugned show Cause Notice. This fact was brought before the adjudication authority but he did not discuss it at all and passed the order simplicitor. The appellant authority also took the short cut by saying that the appellant did not have finished goods in his stock and as such this question does not arise. But the Rule itself says that it is to be allowed on the basis of value but the appellate authority passed the order simplicitor without discussing the plea raised by them. Such a non-speaking order is liable to be set aside.

The appellant submit that the cenvat credit available as per prescribed formula. The formula lowers the value by multiplying it by 95 and does not consider the rate of duty on colour, chemicals and other inputs. The department contention that the cost of each inputs contained in final product has to be considered for ascertaining the quantum of credit then, the given formula cannot be made applicable on account of varying rates of duty and value of different inputs. The appellant submit that the consolidated value has been prescribed for ascertaining the quantum of one time deemed credit. The contention of the department is not sustainable. But the impugned order-in-original did not discuss about the same. Even the appellate authority also did not pay weightage to the same.

The appellant submit that every assessee has taken credit on the basis of declared value and not cost of input contained in semi-finished goods. But the show cause notice was not issued to all of them even in the same Commissionerate. There were around more than 400 declaration in Jodhpur division and show cause notice is issued only to 10-15 assessees. The appellant relied upon the Apex Court decision in this regard but the appellate authority tried to distinguish the same by saying that it is a case relating to classification of goods. The facts of this case are different from that of the cited case law. Such an approach is totally erroneous. The appellant has given the declaration of other assessees to whom show cause notice is not issued although same declaration was filed by them. Thus, it is clear cut case of discrimination. But the appellate authority tried to distinguish the case of Apex Court rather than following the ratio of the decision that discrimination cannot be done between the two assesses. The learned commissioner tried to distinguish the case law cited by us on factual position. It is completely illogical. Such an order should be set aside.

The declaration filed by the appellant revealed that the quantity and value of grey fabrics as well as quantity and value of semi finished goods. If one divide the same then per unit average price will be obtained. It will show that the difference in per unit cost of grey fabrics and under process goods. This clearly establishes that the appellant has declared the value of under process goods and not the cost of grey fabrics contained in the semi finished goods. The appellant submit that the extended period has been invoked against them to demand the duty. They submitted that they have not suppressed anything from the department. They have filed the declaration as well as deemed value of goods. Filing of declaration cannot be termed as willful suppression of facts. Further, the complete detail was given to the audit when it was asked. It shows that there is no intention to suppress the facts. All the details were complete and given to the audit when it was asked by them. It cannot be termed as willful suppression of facts. Further the appellant have submitted that per unit cost of inputs as such and under process goods can be calculated from the declaration. This cost clearly reveals that they have declared the value of under process goods and not the cost of inputs contained in the under process goods. It shows that they have not willfully suppressed anything. They strongly opposed the same. As such the demand is barred by time of limitation. But the learned authority did not adhere to their submission. Such an order is not legally sustainable. But the learned Commissioner simply said that the appellant has not given the detail how the cost of the value has been worked out. But it was not required under the law. As such, it cannot be termed as willful suppression. The appellant submit that everything was told to audit party that reveals that they do not had any intention to willfully suppress the declaration details. Thus, the order-in- appeal is not legally sustainable.

The appellant submit that the penalty is not imposable as it is a matter of interpretation of the notification. Further, the demand is not sustainable on the basis of grounds listed above. As such the penalty should not be imposed on the appellant. Further, looking to the facts of the case, the harsh penal action of equal penalty was not warranted at all. In case of other assesses, the learned adjudication officer has imposed 10% penalty only and these were the similar issue and similar facts of the case. The appellant pleaded before the adjudication officer but he did not adhere to the submission. As such, the penalty on higher side should be waived. Moreover, the option under Section 11AC was not provided to them and hence the benefit of 25% penalty can be given at appellate stage also.

Issue Involved:

The issue involved in this appeal was that

Whether the value of fabrics calculated on the date of applicability of new Notification will include cash discount, processing charges including charges on colours and chemicals, transportation charges and profit margin?

When the option under Section 11AC is not given by the lower authorities to the appellant, can it be given at further stage by the Tribunal?

Decision of the Tribunal:

The Tribunal found that the appellant has included all the disputed expenses in the value of fabrics to claim credit as per Notification No. 35/03-CE.

The Tribunal noted that the main contention of the appellant is that they have incurred expenses on the inputs and they have made some process on these inputs and these inputs have taken the shape of some finished fabrics which are inputs for further processing.

It was held that in fact a semi-finished goods may be input for some other unit, but that cannot be said to be input for the appellant’s own unit. Hence, the facts of the case of Balkrishna Textiles Pvt Ltd are not applicable to this case.

Further it was held that in fact the cash discount, processing charges including the colours and chemical, transport, profit and margin are to be deducted from the value on which the appellant has taken the credit. Hence, the duty demand is confirmed against the appellant.

It was further held that the appellant has suppressed the facts from the department as they have not disclosed how they had arrived at the value of fabrics to avail credit on 31^st March, 2003. Accordingly, the extended period is invokable in this case.

With regard to the penalty under Section 11AC, it was held that when there is suppression of facts the penalty equivalent to duty is leviable on the appellants. But the Tribunal found that the Lower Authorities have not given the option to the appellant to pay 25% of the duty confirmed as penalty as per the proviso (1) & (2) of section 11AC of the Central Excise Act 1944.

Accordingly, the Tribunal gave the option to the appellant to pay 25% duty confirmed as penalty within 30 days of the issue of this order as held by the Hon’ble Delhi High Court in the case of K.P. Pouches. Failing which the appellant shall be liable to pay 100% of duty as penalty. With these observations, appeal is dismissed.

Order of the Tribunal:

Appeal dismissed accordingly.

Conclusion:

The Tribunal has correctly held that while imposing penalty under Section 11AC, the Adjudicating Authority is required to give option to the assessee to deposit the 25% of the penalty at the time of passing of the adjudication order. And if such an option is not given, then relief is available to the assessee to take such a ground before the Appellate Authority/Tribunal/Court as giving of an option is a mandatory right available to him. Therefore the Tribunal has rightly given the option to the appellant to deposit 25% penalty as the option was not given to the appellant by the lower authorities.

The Board has issued Circular no. 898/18/09-CX dated 15.09.2009 for the same saying that the option to pay 25% penalty is available only at adjudication stage. It cannot be extended at appellate stage. But the tribunal has correctly held that when the option was not given at adjudication stage in writing then it can be given at appellate stage.

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PJ/CASE STUDY/2010-11/38
18 January 2011

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PJ/CASE STUDY/2010-11/38
18 January 2011