Whether personal penalty imposable on the proprietor of the firm for classification dispute of products manufactured?

PJ/Case Study/2012-13/81

CASE STUDY

Prepared by: CA Neetu Sukhwani &
Kavita Thanvi

Introduction:

Shri Chatura Ram Gehlot, herein referred as the appellant, is proprietor of the firm M/s Prem Mehandi Centre that is engaged in the manufacture of heena products. The firm was issued with show cause notice as regards levy of excise duty on the heena products by classifying the same under chapter 33 of the Central Excise Tariff Act, 1985 while the firm classified the product under chapter 14 prescribing tariff as nil rate of duty. Simultaneously, show cause notice was also issued to the proprietor of the firm for imposition of penalty of Rs. 5,00,000/- under Rule 26 of the Central Excise Rules, 2002 for actively participating in effecting and facilitating the said clearances of heena products under nil rate of duty. It was submitted in the reply to the show cause notice that penalty should not be levied on the proprietor as there was bonafide belief that their product merits classification under chapter 14 and that the penalty equal to duty amount was already imposed on the firm. However, the submissions made were not considered by the adjudicating authority and order in original was passed confirming the imposition of penalty on the proprietor of the firm. The said order was further appealed to the Commissioner Appeals whose decision is being reported in this case study.

CHATURA RAM GEHLOT VS CCE, JAIPUR-II [OIA NO. 182-183(OPD) CE/JPR-II/2013, DT. 18.11.2013]

Relevant Legal Provisions:

Rule 26 of the Central Excise Rules, 2002-

Penalty for certain offences. — (1) Any person who acquires possession of, or is in any way concerned in transporting, removing, depositing, keeping, concealing, selling or purchasing, or in any other manner deals with, any excisable goods which he knows or has reason to believe are liable to confiscation under the Act or these rules, shall be liable to a penalty not exceeding the duty on such goods or two thousand rupees, whichever is greater.

(2)   Any person, who issues -
(i)   an excise duty invoice without delivery of the goods specified therein or abets in making such invoice; or
(ii)   any other document or abets in making such document, on the basis of which the user of said invoice or document is likely to take or has taken any ineligible benefit under the Act or the rules made there under like claiming of CENVAT credit under the CENVAT Credit Rules, 2004 or refund, shall be liable to a penalty not exceeding the amount of such benefit or five thousand rupees, whichever is greater.

Issue Involved:

The issue involved in this case was that-
Whether personal penalty imposable on the proprietor of the firm for classification dispute of products manufactured?

Brief Facts:

Shri Chatura Ram Gehlot is the proprietor of M/s Prem Mehandi Centre which is engaged in the manufacture of Henna Powder and Cone alleged to be falling under chapter 3304 and 3305 respectively of the First schedule to the Central Excise Tariff Act, 1985.

A show cause notice was issued to their firm, M/s Prem Mehandi Centre on the allegation that they have evaded Central Excise Duty amounting to Rs. 31,88,818/- by clearing their product henna powder without payment of duty when the same was classifiable under chapter heading no. 33059040 of the Central Excise Tariff Act, 1985 by suppressing the facts from the Central Excise Department and they are liable to duty under MRP based valuation under section 4A of the Central Excise Act, 1944. Simultaneously, show cause notice was also issued to Shri Chatura Ram, the proprietor of the firm for being involved in the day to day working of the unit and for irregular clearances of the excisable goods without payment of duty in contravention of the provisions of the Central Excise Act, 1944 and the rules made thereunder.

The appellant filed reply to the above mentioned show cause notice vide their letter wherein it was basically submitted that as it was genuinely believed that the heena product manufactured by their firm merits classification under chapter 14 of the Central Excise Tariff Act, 1985, the clearances were made by resorting to nil rate of duty and there was no contravention of the provisions of the Central Excise Act or the rules so as to justify imposition of penalty. It was also submitted that simultaneous imposition of penalty on the firm and the proprietor is not justifiable.

The show cause notice was adjudicated and the impugned order in original no. 09/CE/JP-II/2013-Additional Commissioner dated 29.01.2013 was passed for confirming the imposition of penalty of Rs. 5,00,000/- on the proprietor of the firm.

Aggrieved by the impugned order in original, the appellant filed this appeal before Commissioner (Appeals).

Appellant’s Contention:-The appellant made following contentions before the Commissioner Appeals-

1)            The appellant submit that the impugned Order in Original issued by the Adjudicating Officer confirming the imposition of penalty is wholly and totally erroneous and is liable to be set aside.

2)            The appellant submits that no penalty can be imposed under Rule 26 of the Central Excise Rules, 2002, where the assessee acted under bonafide belief that there was no contravention being made under the provisions of the Central Excise Act or the Rules made thereunder. This fact is also clear from the language of the provisions contained in the Rule 26 of the Central Excise Rules, 2002, the same being reproduced hereunder for the sake of ready reference.

“RULE 26 Penalty for certain offences — (1) Any person who acquires possession of, or is in any way concerned in transporting, removing, depositing, keeping, concealing, selling or purchasing, or in any other manner deals with, any excisable goods which he knows or has reason to believe are liable to confiscation under the Act or these rules, shall be liable to a penalty not exceeding the duty on such goods or two thousand rupees, whichever is greater.

(2) Any person, who issues -
      (i)         an excise duty invoice without delivery of the goods specified therein or abets in making such invoice; or
            (ii)        any other document or abets in making such document, on the basis of which the user of said invoice or document is likely to take or has taken any ineligible benefit under the Act or the rules made there under like claiming of CENVAT credit under the CENVAT Credit Rules, 2004 or refund, shall be liable to a penalty not exceeding the amount of such benefit or five thousand rupees, whichever is greater.”

On careful perusal of the language, it is observed that this Rule prescribes penalty for any person who intentionally deals with excisable goods in such a manner that he is aware of the fact that such goods are liable for confiscation under the Act or the Rules made thereunder. The language clearly indicates that the person, should be willfully engaged or has knowledge of the fact that his act may lead to confiscation of goods under this Act but this is not the situation in the present case. In the present appeal, the appellant has acted only in the manner the other manufacturers in the industry act and has followed the practice of classifying the product manufactured by their firm under chapter 14, thereby availing the exemption from payment of excise duty and as such, it cannot be held that the appellant were engaged in the activity with intention to evade payment of duty. Moreover, the issue under consideration is of classification of the product manufactured by the firm and it is very common to have disparities as regards classification, which cannot by any stretch of imagination be construed as a wilful act so as to attract the provisions of confiscation and thereby imposition of penalty under the Rule 26. Therefore, imposition of penalty under Rule 26 is neither justifiable nor warranted in the facts and circumstances of the present case and hence the impugned order should be set aside and the appeal should be allowed.

3)            The appellant further submit that imposition of personal penalty under Rule 26 of the Central Excise Rules, 2002 is not justified. Penal provision can’t be invoked unless the specific allegations are made to justify the same. And whereas the impugned order in original has not brought any specific commission or omission on part of the proprietor (appellant) of the firm. It has been held by various Appellate Authorities that where there is neither any finding nor any allegation in show cause notice or the order in original regarding particular commission or omission on part of proprietor/partner of a firm which shows that there was intention to evade the duty, the personal penalty is not imposable. Reliance is placed on following case laws in this regard:-

a.            COMMISSIONER OF CUSTOMS, ICD,TDK, NEW DELHI Versus CYBER EXPRESS PVT. LTD. 2004 (172) E.L.T. 388 (Tri. - Del.)the verdict’s of same as follows:-

“Penalty - Imposition of - Director of Company - No act of omission or commission on his part brought on record - HELD : He was not liable to penalty - Sections 113 and 114 of Customs Act, 1962. [para 5]”

b.            COLLECTOR OF C. EX., NEW DELHI versus NEW TOBACCO COMPANY LTD. 2001 (134) E.L.T. 176 (Tri. - Kolkata)-

“Penalty - Evidence not produced to show active involvement of the directors of appellant company - Penalty not imposable in absence of any specific role shown to have been played by them - Rule 173Q of Central Excise Rules, 1944. [1988 (38)E.L.T.264 (Del.); 1988 (103)E.L.T.675 (Tribunal); 1995 (78)E.L.T.301 (Tribunal) relied on]. [para 10]”1

c.     BIJENDRA KEDIA Versus COMMISSIONER OF CUSTOMS (P), CALCUTTA 2001 (133) E.L.T. 791 (Tri. - Kolkata)The verdict’s of same is as follows:-

“Penalty (Customs) - Exports, over-invoicing - Partner, Partnership firm - Evidence - Penalty on assessee as a partner of a partnership firm without adverting to any evidence on record reflecting on his liability to penal action not sustainable, apart from fact penal provisions of Section 114 of Customs Act, 1962 not invokable in a charge of over-invoicing of exported goods.”

d.    EMCO Ltd Vs CCE, Mumbai-II [2010-TIOL-679-CESTAT-MUM]
Confessionalstatement regarding clandestine removal of raw material is not enough to impose penalty on General Manager - Such argument is far-fetched. If this argument is accepted, the very purpose of adjudication will be defeated - A penalty cannot be imposed on the strength of mere allegation. It will be imposed on the strength of clear finding of penal liability. - liability under Rule 209A should have been established by the lower authorities by clearly disclosing the manner in which the General Manager dealt with the goods in question. If it is shown that he dealt with the said goods in a manner indicating his knowledge or belief that the goods were liable to confiscation, he can be mulcted with a penalty under Rule 209A. Neither of the lower authorities has come anywhere near this area - Penalty imposed on the General Manager set aside:MUMBAI CESTAT;
Although, the above cited cases pertain to penalty on directors, partners in case of confiscation of goods, their ratio is equally applicable in the case of proprietor of a concern and so the benefit of the above cited decisions should be extended to the appellant and the impugned order in original should be quashed.

4)            It is further submitted that the impugned order in original has already imposed the penalty on the proprietorship firm of an amount equal to duty involved under section 11AC of the Central Excise Act, 1944 read with Rule 25 of the Central Excise Rules, 2002. If penalty is alleged to be imposed on the firm, it should not be imposed on the proprietor separately. It has recently been held by hon’ble Punjab and Haryana High Court that in case of a proprietary concern, the rights and obligations of proprietor/partner as well as proprietary/partnership firm are one and the same. Thus, when the penalty is already imposed on the proprietary/partnership firm, it should not be imposed again on the proprietor/partner. This has been decided in the following case:-
·         Vinod Kumar Gupta Vs CCE [2012-TIOL-324-HC-P&H-CX]-
Central Excise - Issue of invoice without movement of goods - Penalty on proprietary concern / partnership firm as well as on the proprietor / partner - Legality of - A firm in mercantile usage is the firm in its own, strictly in the eye of law, it is not a legal entity like a natural person. Therefore, the rights and obligations of a firm are really rights and obligations of the individual partners of the firm, therefore, penalty imposed on the firm would amount to imposition of penalty to the proprietor or the partner, as the case may be, therefore, imposition of penalty on the proprietor independently would not be legal. - Appeal allowed : PUNJAB AND HARYANA HIGH COURT
In the light of above decision, since the penalty is already imposed on the proprietary/partnership firm, it should not be imposed separately on the proprietor/partner. Thus, in the given case, when the penalty has been imposed on the proprietorship firm, it cannot be imposed on the proprietor of that firm. Similar decision has been given in the following cases:-
a.    Silkon Silk Mills (Exports) Ltd. v/s Commissioner of Customs-II, Bombay [1997 (89) ELT 151 (Tribunal)]
b.    Globe Rexine Pvt. Ltd. v/s CCE, Chennai [2006 (4) STR 340 (Tri.-Chennai)]

In the light of above decisions, the impugned order in original is not tenable in imposing the separate penalty on the proprietor and is liable to be quashed.

5)            It is further submitted that none of the submissions made by the appellant in their reply to the show cause notice were considered while passing the impugned order in original. Such an order, without even considering the submissions of the appellant amounts to non-speaking order which is not tenable in the eyes of law and is liable to be set aside. The submissions made in the reply are briefly stated as follows:

Ø It was submitted that on analyzing the Rule 26, it is clear that the appellant are not liable for penalty proposed under this rule as they had no malafide intention. They were under bonafide belief that they have cleared goods i.e. Henna powder/paste which fall under chapter 14 and are exempted from excise duty. Thus, they were not supposed to get their firm registered and hence there was no clandestine removal of goods with an intent to evade payment of duty. Therefore, there is no contravention of any of the provisions of Central Excise Act, 1944 or of Central Excise Rules, 2002 as alleged in the impugned show cause notice and also penalty under Rule 26 is not warranted.

Ø It was further submitted that although no penalty is imposable on them as they have not contravened any of the provisions of the Central Excise Act or the Rules made thereunder but if it is accepted for the sake of argument that penalty is imposable on them then, penalty under Rule 26 cannot be imposed on the proprietor of the concern where he was not actively involved in the default committed and where penalty has already been proposed to be imposed on the concern. As such, imposing penalty both on the proprietor and proprietorship firm for the same default being committed is neither warranted and nor justifiable. This view is supported by the decision given in various cases as follows:
o    Commissioner of Central Excise, Mumbai vs Metal Press India [2009 (246) ELT 303 (Tri.-Mum)]
o    Moontex Dyeing & Printing Works vs Commissioner of C.Ex., Surat [2007 (215) ELT 46 (Tri.-Ahmd.)]
o    Kamdeep Marketing Pvt. Ltd. vs Commissioner of C.Ex., Indore [2004 (165) ELT 206 (Tri.-Del)]
o    B.C. Sharma vs Commissioner of C.Ex., Jaipur [2000(122) ELT 158 (Tri)]
o    Standard Pencils Pvt. Ltd. vs Collector of Central Excise, Madras [1996 (86) ELT 245 (Tri.)]
As, the above cited submissions were not considered, the order is passed in gross violation of the principle of the natural justice and is not sustainable in light of the decisions cited as follows:
·                    Commissioner of Central Excise, Bangalore versus Srikumar Agencies [2008 (232) E.L.T. 577 (S.C.)]
·         CC Vs Essar Oil Limited [2010-TIOL-560-HC-AHM-CUS]
·         State of Himachal Pradesh Vs Sardara Singh [2008-TIOL-160-SC-NDPS]

The analysis of these decisions makes it clear that the order passed without giving reasons for the same is not justified in the eyes of law. In the case of appellant also, no reasons has not also been assigned why the above referred submissions and case laws cited by them are not applicable and why their benefit has not been extended to them. As such, the impugned order passed without assigning the reasons is not justified and is liable to be quashed. The appeal should therefore be allowed.

Order of the Commissioner (Appeals):-The reasoning adopted by the Commissioner Appeals while deciding the appeal is stated as follows-
In the appeal filed by the proprietor Shri Chutra Ram, it has been contended that there was no specific allegation that he had knowledge that the goods were liable to confiscation; therefore he was not liable to penalty under Rule 26 of the Central Excise Rules, 2002. It has also been submitted that since penalty under section 11AC has been imposed on the firm separate penalty on the proprietor is not imposable. They have also cited case laws in support of this argument. It has been held in a large number of cases by the Hon’ble Tribunal and various High Courts that since a firm have no identity distinct from the proprietor, separate penalties on them are not warranted. Accordingly, they set aside the penalty imposed on Shri Chutra Ram.

Decision:The appeal was allowed.

Conclusion:The analogy that can be drawn from this case is that simultaneous imposition of penalty on the proprietorship firm and the proprietor is not warranted as various high courts have held that there is practically no distinction between the proprietor and the firm. Accordingly, imposition of penalty on both for the same offence would tantamount to levy of double penalty for the same crime. Moreover, in the present case, the non-payment of duty was on account of bonafide belief that the product merits classification under chapter 14 prescribing nil rate of duty. As such, penalty should not be imposed for classification disputes as no malafide intention in such cases can be attributable to the assessees.

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