Pradeep Jain - Chartered Accountant

PJ/CASE STUDY/2007-08/003

13 July 2007

PJ/Case Study/07-08/03 Date: 13/07/2007

CASE STUDY

INTRODUCTION

Man is a creature of God. Man is not a machine hence occurring of mistakes is a normal phenomenon. The law to make the defaulter realize his mistake imposes penalty and looking towards the seriousness of the matter it may sometimes also adopt serious provisions. One such provision in Central Excise Act, 1944 was for imposition of interest on delayed payment of duty or erroneous refund. These provisions were stated in the section 11AB of the same Act. Thus the question arouse is that whether the powers given by the Act to Central Government by the virtue of the said section can be exceeded or not. Another issue is can Rules dominate the provisions provided in the Act. In this case study we are discussing the case of Lucid Collids Limited vs. Union of India [2006 (200) E.L.T. 377 (Raj.)]

RELATED PROVISIONS OF THE ACT

Section 11AB of the act provides the amount of interest to be charged in case of delayed payment of duty. The section reads as follows: -

“Interest on delayed payment of duty :- Where any duty of excise has not been levied or paid or has been short levied or short-paid or erroneously refunded, the person who is liable to pay the duty as determined under sub-section (2), or has paid the duty under sub-section (2B) of section 11A, shall, in addition to the duty, be liable to pay interest at such rate not below ten per cent and not exceeding thirty-six per cent per annum, as is for the time being fixed by the Central Government, by notification in the Official Gazette, from the first date of the month succeeding the month in which the duty ought to have been paid under this Act, or from the date of such erroneous refund, as the case may be, but for the provisions contained in sub-section (2), or sub-section (2B), of section 11A till, the date of payment of such duty......”

Rule 8(3) of Central Excise Rules, 2002 provides the rates of interest as declared by the Central Government. This Rule reads as follows: -

“If the assessee fails to pay the amount of duty by the due date, he shall be liable to pay the outstanding amount along with an interest at the rate of two per cent, per month or rupees one thousand per day, whichever is higher, for the period starting with the first day after due date till the date of actual payment of the outstanding amount:

Provided that the total amount of interest payable in terms of this sub-rule shall not exceed the amount of duty which has not been paid by date:

Provided further that till such time the amount of duty outstanding and the interest payable thereon are not paid, it shall be deemed that the goods in question in respect of which the duty and interest are outstanding, have been cleared without payment of duty and the consequences and the penalties as provided in these rules shall follow.”

BRIEF FACTS OF THE CASE “Lucid Collids Limited vs. Union of India”

Here the petitioner is Lucid Collids Limited, a limited concern. The petitioner was under the default of delayed payment of duty of excise. While totaling the duty liability, they forgot to add one invoice. While reconciling the annual duty liability, they found the mistake. They rectified this error by debiting the same in the Cenvat account.

The audit party visited the factory to conduct the audit of the unit. They have also found this late payment of duty. There by he was asked to pay the interest on the amount of duty postponed, under Rule 8(3) of Central Excise Rules, 2002.

As per the Rule 8(3) the petitioner had to pay the interest at the rate equivalent to 2% per month or Rs. 1,000 per day whichever is higher. He falls under the obligation of paying the interest rate at Rs. 1000 per day. The petitioner was aggrieved by such provisions. They contended that these are penal provision in grab of interest. They also put forward the argument before the authorities that the interest should have relation to the amount defaulted. But the provisions like 1000/- per day is normally seen in penalty provisions. But the department did not adhere to the submission of the petitioner. The superintendent threatened to take action against the unit.

The petitioner was left with no option except to approach the High Court. He contended on the view that the interest rate so prescribed by the Central Government is not in conformity with the provisions empowering the Central Government to do so.

The petitioner contended on the view that the Central Government is not empowered to lay the procedure and method for levy of quantification of interest but merely authorizes to notify the rate of interest per annum which is to be levied on delayed payment of Duty. These interest rates as specified in Rule 8(3) do not fulfill the conditions provided for declaration of such rate by the Central Government. He contended that Section 11AB empowers the Central Government to declare the interest rate not below ten per cent and not exceeding thirty-six per cent per annum. Moreover the rate so prescribed must be a uniform rate applicable without any discrimination. The Central government declared the interest rates to be chargeable on delayed payment of duty to be at 2% subject to minimum interest @ Rs. 1,000/- per day. These rates so specified by the Central Government fail to fulfill the requirements of the provisions of Section 11AB. The Rule cannot have overriding effect on the Act. In this case, the Rule is exceeding provisions contained in the Act. Thus, the impugned Rule 8(3) is Ultra vires and liable to quashed.

The petitioner further contended that such interest rate as specified by the Central Government is not ad valorem chargeable. If the amount of duty postponed ranges between 1, 00,000 to 1,000 still he has to pay the interest @ of Rs. 1,000 per day as per the Central Government specification. It does not necessarily mean that in a given case, the interest may be, at X per cent and in another case, it is @ Y per cent. Which do not satisfy the requirements as required by the provisions of the Section 11AB.

Moreover, prescribing the higher of the two ceilings that is 2% per month or Rs. 1,000/- per day does not take into account that charging of interest at the rate of 1,000/- uniformly in all cases may exceed the ceiling of 36% per annum rate of interest which is the maximum limit of rate of interest which the Central Government can notify.

On the other hand revenue said that the levy of interest on delayed payment of duty has been in accordance with Rule 8(3), and therefore, has validly been charged.

DECISION OF THE HIGH COURT

The High Court considering all the facts of the case allowed the appeal on the ground that the part of Rule 8(3) which includes expression “at the rate of two per cent, per month or rupees one thousand per day, whichever is higher” is held to be invalid. Consequently, interest chargeable on delayed payment had to be only at the rate of 2% per month or for that matter 24% per annum as notified by the Central Government which is between the permissible limits in ‘terms of Section 11AB.

COMMENT

The issue was whether the Rules can override the Act and can Central Government exceed the limits of the powers conferred to it. The High Court held that the Rate specified by the Central Government was not in conformity with the powers given. The interest rate should be fixed and the provisions provided in the Act should be followed.

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PJ/CASE STUDY/2007-08/003
13 July 2007

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