Rajasthan High Court - Jaipur
Cachet Pharmuceuticals (Pvt.) Ltd. ... vs The State Of Rajasthan And Ors. on 6 January, 1994
Equivalent citations: 1994(1)WLN388
JUDGMENT N.L. Tibrewal, J.
1. In this petition under Article 226 of the Constitution, the assessee, which is a private limited Company, challenges the demand of Rs. 3,06,60,879.89 raised by the District Excise Officer, Alwar (respondent No. 3) to be invalid and illegal and has, therefore, prayed to quash the Demand Notice dated July 9, 1991 (Annexure 5). The circumstances leading to the filing of the writ petition may be narrated:
2. The Company was manufacturing patent/proprietary medicines containing alcohol having its manufacturing unit in RIICO industrial Area, Bhiwadi in Alwar District. It had started production of pharmaceutical formations by using alcohol from August 27, 1987, and was paying excise duty to the State of Rajasthan. It is stated that the Company has stopped manufacturing medicines for the time being from August, 1992 for the reasons mentioned in para 11 of the writ petition. The products of the Company were liable to excise duty under the Medicinal and Toilet Preparations (Excise Duties) Act, 1955 (hereinafter referred to as 'the Act of 1955') and the rules made thereunder. The Industrial Unit of the Company functioned under physical control of the Excise officer posted there and clearance of the products was made on realisation of excise duty under the Act of 1955 on the issue of prescribed transport permit in Form T.P.I. The Demand Notice (P.IA) dated July 9, 1993, was served on the Company on 12.7.1993 showing a short payment of duty to the tune of Rs. 3,06,60,870.89 by declaring wholesale price at lower rates than the actual. Petitioner's case is that before raising the demand no show cause notice was given to it and there was no determination or calculation of the deficiency in duty and the demand was raised in an arbitrary manner in violation of the principles of natural justice. The demand has been challenged on other grounds also, including that of limitation. A perusal of the Demand Notice (Annexure 5) shows that the basis of additional demand of the duty was on the ground that the Company had made short payment of excise duty by sowing the wholesale price of the medicines at lower rates than the actuals and that a Committee was appointed by the State Government and after holding an enquiry it calculated the short payment of excise duty in the sum of Rs. 3,06,60,870.89. By the said Demand Notice the Company was asked to deposit the amount within 15 days, failing which recovery proceedings under the Rajasthan Land Revenue Act shall be initiated.
3. The respondents, in their return, have come with the case that there was great difference in the wholesale and retail prices of the medicinal preparation manufactured by the Company, and the Excise Commissioner apprehended that wholesale prices were shown at lower rates than the actuals. Therefore, a committee was constituted under the Chairmanship of Additional Excise Commissioner to enquire into the mater. According to them, the Committee and the District Excise Officer gave several letters asking the Company to furnish informations in relation to costing of wholesale prices of the products but it failed to co-operate with the Committee and did not furnish any information. Thereafter, the Committee itself collected informations and submitted a report to the State Government on 5.4.1992, on the basis of which a show cause notice, dated May 27, 1993, was issued to the petitioner questioning about the difference in wholesale and retail prices. However, the Company did not submit any reply or any material in response to the notice. It was also stated that the District Excise Officer, Alwar, was directed to compute the deficiency in duty as per the inquiry report and to submit a Balance-sheet before the Committee for its approval and, on being approved by the Committee, the Demand Notice for recovery of the amount was issued. The respondents came with a categorical case that the products of the assessee company were sold by two firms namely; M/s Alchem Laboratory Ltd., 510, Shahnagar, Dr.E. Mornes Road, Worli, Bombay and M/s Anglomad Pvt. Ltd., 702/A, Poonam Chambers, Dr. Annie Besant Road, Bombay as the Company had no net work for sale of its products. That applying the proviso (iii) of Section 4(1)(a) of the Central Excise and Salt Act, 1944 (hereinafter referred as 'the Excise Act') the price at which the medicines were sold by the aforesaid two firms was the wholesale price to the dealers, for the purposes of payment of excise duty. In other words, the principle of 'related person' was applied while fixing the wholesale price of the products of the Company and the difference of excise duty was being now charged. Thus, in substance, the case of the respondents was that the duty of excise was chargeable on the price at which the products of the Company were sold by the aforesaid two firms on applying the principle of 'related person' as provided in Section 4 of the Excise Act. Preliminary objection about the maintainability of the writ petition was also taken on the ground that the order raising demand could be challenged by way of an appeal and the same was an efficacious alternative remedy. 4. Before I deal with the various contentions made by the learned Counsel for the parties, it would be convenient to briefly refer the relevant provisions of the Act and the Rules. The Act of 1955 was enacted to provide for the levy and collection of duties on medical and toilet preparation containing alcohol, opium, Indian hemp and other narcotic drug or narcotic. Section 3 is the charging provision. It reads as under:
3. Duties of excise to be levied and collected on certain goods - (1) There shall be levied duties of excise, at the rates specified in the schedule, on all dutiable goods manufactured in India.
(2) The duties aforesaid shall be leviable-
(a) where the dutiable goods are manufactured in bond, in the State in which such goods are released from a bonded warehouse for home consumption, whether such State is the State of manufacture or not;
(b) Where the dutiable goods are not manufactured in bond, in the State in which such goods are manufactured.
(3) Subject to other provisions contained in this Act, the duties aforesaid shall be collected in such manner as may be prescribed.
Excise duty is thus imposed by S3 of the manufacture of dutiable goods at the rates specified in the Schedule. Sub-section (2) indicates the stage at which duty is levied; where Sub-section (3) provides for collection of duty. It lays down that the duties shall be collected in such manner as may be prescribed. Section 3, therefore, imposes a duly on the manufacture of medicinal preparation to pay excise duly and it lays down the rates and also indicates the stage at which the duty is to be levied. So far as collection of duty is concerned the Act leaves the same to the rule making authority. The relevant part of the Schedule applicable in the present case for the levy and collection of excise duty is also reproduced for the sake of convenience:
THE SCHEDULE (See Section 3)
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Item Description of dutiable goods Rate of Duty
No.
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1. Allopathic medicinal Preparations.
(i) medicinal preparations containing alcohol which are not capable of being consumed as ordinary alcoholic beverages-
(a) patent or proprietary Twenty per cent, m ad valorem or
medicines. rupees six and sixty paise per litre
of purealcohol content,
whichever is higher.
(b) Others. Rupees six and sixty paise perlitre
of pure alcohol content.
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Explanation II to the Schedule provides that where any article is chargeable with duty at a rate appended on the Value of the article, such value shall be deemed to be the value as determined in accordance with the provisions of Section 4 of the Central Excise and Salt Act, 1944.
5. Section 4(1)(a) of the Central Excise Act reads as under:
Section 4-Valuation of Excisable Goods for purposes of Charging of Duty of Excise.: (1) Where under this Act, the duty of excise is chargeable on any excisable goods with reference to value, such value, subject to the other provisions of this section, be deemed to be-
(a) the normal price thereof, that is to say, the price at which such goods are ordinarily sold by. the assessee to a buyer in the course of wholesale trade for delivery at the time and place of removal, where the buyer is not a related person and the price is the sole consideration for the sale: Provided that
(i) Where, in accordance with the normal practice of the wholesale trade in such goods, such goods are sold by the assessee at different prices to different classes of buyers (not being relates persons) each such price shall, subject to the existence of the other circumstances specified in Clause (a), be deemed to be the normal price of such goods in relation to -each such class of buyers;
(ii) Where such goods are sold by the assessee in the course of wholesale trade for delivery at the time and place of removal at a price fixed under any law for the time being in force or at a price, being the maximum, fixed under " any such law, then, notwithstanding anything contained in Clause (HI) of this proviso, the price or the maximum price, as the case maybe, so fixed, shall in relation to the goods so sold, be deemed to be the normal price thereof; (Hi) where the assessee so arranges that the goods are generally not sold by him in the course of wholesale trade except to or through a related person, the normal price of the goods sold by the assessee to or through such related person shall be deemed to be the price at which they are ordinarily sold by the related person in the course of wholesale trade at the time of removal, to dealers (not being related persons) or where such goods are not sold to such dealers, to dealers (being related persons), who sell such goods in retail;
(b)...
Sub-section (4) defines 'assessee' to mean the person who is liable to pay the excise duty under the Act and includes his agent. 'Related person' has been defined in Clause (c) of Sub-section (4) asunder:
(c) "related person" means a person who is so associated with the assessee that they have interest, directly or indirectly, in the business of each other and, includes a holding company, a subsidiary company, a relative and a distributor of the assessee and any sub-distributor of such distributor.
Explanation -In this clause "holding company" "Subsidiary company" and 'relative' have the same meaning as in the Companies Act, 1956.
Wholesale trade has been defined in Clause (e) as under:
"Wholesale trade" means sales to dealers, industrial consumers, Government, local authorities and other buyers, who or which purchase their requirement otherwise than in retail.
6. Thus, Section 4 of the Excise Act provides for the determination of value for the purpose of charging the duty of excise under the Act. It provides that the price of which the excisable goods are ordinarily sold by the assessee to a buyer in the course of wholesale trade for delivery at time and place of removal as defined under Sub-section (4)(b) of Section 4 is the basis for determination of excisable value provided, of course, the buyer is not related person within the meaning of Sub-section (4) (c) and the price is the sole consideration for the sale. This provision is subject to the terms of three provisions of Sub-section (1) (a). Under Clause (iii) where the goods are sold in the course of wholesale trade by the assessee to or through a related person, the normal price shall be the price at which the goods are sold by the related person in the course of wholesale trade at the time of removal to dealers (not being related persons) or where such goods are not sold to such dealers, to dealers being related persons who -sell such goods in retail.
7. The Central Government, in exercise of powers conferred by Section 19 of the Act has made the rules, namely, the Medical and Toilet Preparations (Excise Duties) Rules, 1965 (herein after referred to as 'the Rules'). Chapter III containing rules 11 to 17 provide for levy and refund of, and, exemption from the duty. Rules 6, 9, 10 and 11 provide for payment and recovery of duly and also the time and manner of the payment. Rule 12 confers residuary power for recovery of duly if unpaid on account of short levy or deficiency or for any other reason, it remains unpaid. Rules 11 and 12 shall be relevant for the decision, as such, they are reproduced as under:
11. Recovery of duties or charges short-levied or erroneously refunded -where duties or charges have been short- levied through in-advertence, error collusion or mis-construction on the part of an excise officer or through mis-statement as to the quantity or description of such goods on the part of the owner, or when any such duty or charge, after having been levied, has been, owing to any such cause erroneously refunded the person chargeable with the duty or change, so short-levied, or to whom such refund has been erroneously made, shall pay the deficiency or repay the amount paid to him in excess, as the case may be, on written demand by the proper officer being made within six months from the date on which the duty or charge was paid or adjusted in the owner's account current, if any, or from the date of making the refund."
"12. Residuary powers for recovery of sums due to Government - Where these rules do not make any specific provision for the collection of any duty, or of any deficiency in duty if the duty has for any reason been short-levied, or of any other sum of any kind payable to the collecting Government under the Act or these rules, such duty, deficiency in duty or sum shall, on written demand, made by the proper officer, be paid to such person and at such time and place, as the proper officer may specify.
8. In the back ground of the facts and the provisions of the Act and the Rules, I now proceed to deal with the various contentions raised by the learned Counsel for the parties. First of all, I would like to dispose of the preliminary objection raised by the respondents about the maintainability of the writ petition on the ground of alternative remedy of an appeal. It is no doubt true that Rule 127 makes a provision of an appeal but in the facts and circumstances of the present case, the preliminary objection can be rejected on two grounds. Firstly, the challege to the demand raised by the District Excise Officer is based purely on legal grounds including that of limitation and violation of the principles of natural justice. Secondly, the Demand Notice has been issued by the District Excise Officer on the report of the Committee appointed by the Excise Commissioner. No useful purpose would be served by filing an appeal to the Excise Commissioner, who was a party in getting the inquiry conducted against the assessee. One of the grounds of challenge in the writ petition is that the District Excise Officer had no jurisdiction to raise additional demand of excise duty after the expiry of six months as the case is squarely covered by Rule 11. In Calcutta Discount Co. Ltd. v. Income-tax Officer, Companies District, Calcutta and Anr. , the notice issued by the Income Tax Officer under Section 34 of the Income Tax Act 1922, was challenged in a writ petition, under Article 226 of the Constitution. Their Lordships of the Supreme Court over-ruled the preliminary objection in the following manner:
In the present case the company contends that the condition precedent for the assumption of jurisdiction under Section 34 were not satisfied and came to the court at the earliest opportunity. There is nothing in its conduct which would justify the refusal of proper relief under Article 226. When the Constitution confers on the High Courts the power to give relief in fit cases and the courts would be failing to perform their duty if relief is refused without adequate reasons. In the present case we can find no reason for which relief should be refused.
In Ram and Shyam Company v. State of Haryana and Ors. , the following observations were made in relation to alternative remedy: -
Ordinarily it is true that the Court has imposed a resraint in its own wisdom on its exercise of jurisdiction under Article 226 where the party invoking the jurisdiction has an effective, adequate alternative remedy. More often, it has been expressly stated that the rule which requires the exhaustion of alternative remedies is a rule of convenience and discretion rather than rule of law. At any rate it does not oust the jurisdiction of the court. Where - the order complained against is alleged to be illegal or invalid as being contrary to law, a petition at the instance of person adversely effected by it, would lie to the High Court under Article 226 and such petition cannot be rejected on the ground that an appeal lies to the higher officer or the State Government. An appeal in all cases cannot be said to provide in all situations an alternative effective remedy keeping aside the nice distinction between jurisdiction and merits I need not detain myself on the preliminary objection as I am satisfied that the demand in question is being challenged in the writ petition on purely legal grounds which are of jurisdictional nature. The preliminary objection is, therefore, rejected.
9. The first and the foremost ground on which the assessee has assailed the validity of the additional demand made by the District Excise Officer for differential duty related to the applicability of the definition of "related person" in Clause (c) of Sub-section (4) of Section 4 of the Excise Act. As stated earlier, Section 3 of the Act is the charging provision of the excise duty and it provides that excise duty shall be leviable at the rates specified in the schedule on all dutiable goods. As per the schedule, the rate of duty is 20% ad valorem on medicinal preparations of patent or proprietary medicines containing alcohol, which are not capable of being consumed as ordinary alcoholic beverages. Explanation II of the Schedule states that the value of the article shall be deemed to be the value determined in accordance with the provisions of Section 4 of the Excise Act. Normal price mentioned in Section 4(1)(a) of the Excise Act is the price at which the goods are ordinarily sold by the assessee in the course of wholesale trade. It is the wholesale price charge by him, which may vary according to the first proviso to Section 4(1)(a) with different class of buyer. It may also be, according to the second proviso, the price fixed as the wholesale price under any law or the maximum price where the law fixes the maximum. The price may also be a different price if the case falls within third proviso to Section 4(1)(a). In that even it will be the price charged by a related person in the course of wholesale trade. Thus, under Clause (iii), where the goods are sold in the course of wholesale trade by the assessee to or through a related person, the normal price shall be the price at which the goods are sold by the related person in the course of wholesale trade at the time of removal, to dealers (not being related person)or where such goods are not sold to such dealers, to dealers (being related person), who sell such goods in the retail. The plea of the respondents to justify the additional demand of the excise duly is based on Clause (c) of Sub-section (4) of Section 4 of the Excise Act on the ground that two Distributors, namely; M/s Alchem Laboratory and M/s Anglomad Pvt. ltd., were related persons and, as such, the normal price of the medicine for the purpose of determination of value to charge duty of excise is the price at which the goods were sold by the above two Distributors of the Company to the wholesale dealers. From the perusal of the report of the Committee dated 5.12.1992 (Annexure R/6) also it is clear that the basis for the demand of additional excise duty is the price at which the goods were sold by the above two Distributors to wholesale dealers. The Committee has based its view on Clause (c) of Sub-section (4) of Section 4 of the Excise Act. Therefore, the question requires for consideration is as to whether the above referred two Distributors of the Company come within the definition of 'related person' as provided in Clause (c) of Sub-section (4) of Section 4 of the Excise Act. Clause (c) defines "related person" to mean a person who is so associated with the assessee that they have interest, directly or indirectly, in the business of each other and includes a holding company, a subsidiary company, a relative and a distributor of the assessee and any sub distributor of such distributor.
10. A close scrutiny of Section 4 of the Excise Act would reveal that Section 4(1)(a) provides that the value of the goods shall be deemed to be the normal price, and the normal price is defined as the price at which the goods are ordinarily sold by the assessee. In the course of wholesale trade where the buyer is not a "related person" and the price is the sole consideration for the sale. The Third proviso to Section 4(1)(a) provides that where the assessee so arranges that the goods are generally not sold by him in the course of wholesale trade except to or through a related person, the normal price of the goods sold by the assessee to or through such related person shall be deemed to be the price at which they are ordinarily sold by the related person in the course of wholesale trade at the time of removal by the dealers (not being related person) or where such goods are not sold to such dealers, the dealers (being related person) who sold such goods in retail. Clause (e) of Section 4(4) defines the expression "related person" as stated earlier. The expression "related person" came up for consideration before the Apex Court of the Country in Union Bank of India and Ors. v. Bombay Tyre International Ltd. . In this judgment their Lordships made a comprehensive study of Section 4 of the Excise Act prior to amendment in the year 1973 and after the amendment. On behalf of the assessee it was contended before their Lordships that the definition of the expression "related person" was arbitrary as it included within that expression a distributor of the assessee. Their Lordships observed:
The challenge made on behalf of the assessee is powerful and far-reaching. But it seems to us unnecessary to enter into the question because we are satisfied that the provision in the definition of "related person" relating to a distributor can be legitimately read down and its validity thus upheld. In our opinion, the definition of related person should be so read that the words "a relative and a distributor of the assessee" should be understood to mean a distributor who is a relative of the assessee. It will be noticed that the Explanation provides that the expression "relative" has the same meaning as in the Companies Act, 1956. As regards the other provisions of the definition of "related person", that is to say," a person who is so associated with the assessee that they have interest, directly or indirectly, in the business of each other and includes a holding company, a subsidiary company....", we think that the provision shows a sufficiently restricted basis for employing the legal fiction. Here again, regard must be had, to the Explanation which provides that the expression "holding company" and "Subsidiary" have the same meanings as in the Companies Act, 1956. Reference in this connection may be made to Tata Engineering and Locomotive Co. Ltd. v. State of Bihar where the principle was approved by this Court that the corporate veil could be lifted where the companies shared the relationship of a holding company and a subsidiary company, and to Juggi lal Kamplapat v. Commr. of Income Tax U.P. , where this Court held that the veil of corporate entity could be lifted to pay regard to the economic realities behind the legal facade, for example, where the corporate entity was used for tax evasion or to circumvent tax- obligation (Emphasis is mine).
It was then observed:
On a proper interpretation of the definition of 'related person' in Sub-section (4) of Section 4, the words "a relative and a distributor of the assessee" do not refer to any distributor but they are limited only to a distributor who is a relative of the assessee within the meaning of the Companies Act, 1956. So read, the definition of 'related person 'is not unduly wide and does not suffer from any constitutional infirmity. It is within the legislative competence of parliament. It is only when an assessee so arranges that the goods are generally not sold by him in the course of wholesale trade except to or through such a related person that the price at which the goods are ordinarily sold by the related person in the course of wholesale trade at the time of removal to dealers (not being related persons) of where such goods are not sold to such dealers, to dealers (being related persons) who sell such goods in retail is liable to be taken as the excisable value of the goods under proviso (iii) to Sub-sections (1) (a) of Section 4.
11. The above judgment of the Hon'ble Supreme Court thus makes it clear that the words "a relative or distributor of the assessee" do not refer to any distributor but they are limited to only a distributor "who is relative of the assessee within the meaning of Companies Act, 1956". Applying the lest laid down by their Lordships in the above judgment "related person" includes:
(i) a person, who is so associated with assessee that they have interest, directly or indirectly, in the business of each other:
(ii) the holding company, subsidiary company, relative and a distributor, who is a relative of the assessee and any sub-distributor of such distributor.
Therefore, simply because the two above firms were distributors of entire products of the Company do not fall within the definition of a "related person" unless it is further shown that they were relatives of the assessee.
12. In Union of India and Ors. v. ATIC INDUSTRIES Ltd. , the definition of "related person" contained in Clause (c) of Sub-section (4) Section 4 of the Excise Act was again considered by their Lordships of the Supreme Court. In this judgment the first part of definition of "related person" came up for consideration. It was observed by their Lordships:
What the first part of the definition requires is that the person who is sought to be branded as a "related person" must be a person who is so associated with the assessee that they have interest, directly or indirectly, in the business of each other. It is not enough that the assessee has an interest, . direct or indirect, in the business of the person alleged to be a related person nor is it enough that the person alleged to be a related person has an interest, direct or indirect, in the business of the assessee. It is essential to attract the applicability of the first part of the definition that the assessee and the person alleged to be a related person must have interest, direct or indirect, in the business of each other. Each of them must have a direct or indirect interest in the business of the other. The quality and degree of interest which each has in the business of the other may be different; the interest of one in the business of the other may be direct, while the interest of the latter in the business of the former may be indirect. That would not make any difference, so long as each has got some interest, indirect or direct, in the business of the other.
(Emphasis supplied).
13. This question was again examined by their Lordships in Joint Secretary to the Government of India v. Food Specialities Limited . In that case the respondent manufactured certain goods for sale in India by M/s Nestle Products India Limited under certain trade mark in respect of which the latter was registered as the sole registered user in India. The goods were supplied to the said firm at wholesale price on rail at Moga and free on lorry at factory. The Excise Authorities included the value of trade mark while determining the value of the goods for the purpose of levy of excise duly. The assessee disputed the value of the goods determined by the Excise Authorities. Ultimately, a writ was filed in the High Court, which was allowed holding that the value of trade mark could not fall as a component of the value of the goods for the purpose of assessment of excise duly. In appeal, before the Supreme Court also it was contended that the value of the goods sold by the respondent to M/s Nestle Products India Limited, for the purpose of levy of excise duty, includes the value of the trade mark under which the goods sold in the market and the value of such trade marks should be added to the wholesale price for which the goods were sold by the respondent to the above company. This contention was rejected and it was held that what were sold and supplied by the respondent were goods manufactured by it with the trade marks fixed to them and it was the wholesale cash price of the goods that must determine the value for the purpose of assessment of excise duty. It was immaterial that the trade mark belonged to the above company.
14. From the above discussions I consider that true position under the Excise Act, as amended by the Act No. 2 of 1973, can be set forth as follows:
(i) the price at which excisable goods are sold by the assessee to buyer in the course of wholesale trade for delivery at the time and place of removal as defined in the Clause (b) of Sub-section (4) of Section 4 is the basis for determination of excisable value provided, of course, buyer is not a related person within the meaning of Clause (c) of Sub-section (4) of Section 4 and the price is the sole consideration for the sale. This provision is subject to the terms of three provisions to Clause (a) of Sub-section (1) of Section 4;
(ii) where the goods are sold in the course of wholesale trade by the assessee to or through related person, the normal price shall be the price at which the goods are sold by the related person in the course of wholesale trade at the time of removal of dealers (not being related person) or where such goods are not sold to such dealer to dealers being related person, who sell such goods in retail;
(iii) in the first part of the definition "related person" given under Clause (c) of Sub-section (4) of Section 4, includes person who is so associated with the assessee that they have interest, directly or indirectly, in the business of each other. The second part of the definition is inclusive clause and in that part distributors of the assessee is included, who is related to the assessee.
15. Applying the above test, I have no hesitation in holding that the demand of additional excise duty vide Demand Notice (Annexure 5) was based on an erroneous assumption that M/s Alchem Laboratory Ltd. and M/s Anglomad Pvt. Ltd., who used to purchase the entire products of the Company and acted as its distributors undertaking all post manufactured activity connected with sale, were covered in the definition of "related persons" and the value of the medicines for the purpose of levy of duty was the price at which they were sold by them in the course of wholesale trade. The above two firms in fact were wholesale buyers and the property in goods passed to them when they took the delivery of the same on payment of price. There was no material before the Committee, nor any material has been placed before the Court by the respondents to show that the above two firms were related to the assessee, to fall within the definition of "related persons". Hence, there remains no basis for the demand of additional excise duty and, as such, the notice of Demand deserves to be quashed on this ground alone.
16. The next contention urged by the learned Counsel for the petitioner is that the demand for the deficiency in duty was raised by District Excise Officer without making any proper determination and in utter disregard to the principles of natural justice. Learned Counsel contended that in a case of short payment of excise duty the assessee should be given an opportunity of being heard before an additional demand is raised. According to the learned Counsel, the act of determination of short payment of excise duty by the Excise Authorities is a quasi- judicial function and principles of natural justice are attracted. Mr. Rathore, learned Counsel for the revenue, though did not dispute the applicability of the principles of natural justice when additional demand is determined and raised for the deficiency in excise duty, contended that principles of natural justice were fully complied with in the matter. He drew my attention to various letters, which were written to the assessee by the Excise Inspector, Additional Excise Commissioner and the show cause notice (Ex.7) given by the Excise Commissioner. I have gone through these letters and the show cause notice on which reliance was placed by the revenue, and in my view they do not fulfill the requirement of the principles of natural justice. Letter Ex.1 is dated 31.7.1992, which was written by the Excise Inspector to the company demanding certain documents for verification of the sale-price of certain medicine manufactured by it. Similarly, vide Annexure 2 dated 31.7.1992, the Excise Inspector sought certain informations in regard to the medicine Aldamien-F-suspension manufactured and sold by the Company. The information was sought on the apprehension that the said medicine was sold without payment of excise duty Annexure 3 is a letter which was written by the Additional Excise Commissioner on 17.8.1992 to the District Excise Officer, Alwar whereby certain informations were sought from him in relation to, the payment of excise duty on ad valorem value of medicines prepared and sold by the Company. Similarly, letters Annexure 4 and 5 were written by the Additional Excise Commissioner, Jaipur to the Managing Director of the Company demanding certain informations and documents relating to calculation of excise duty. Annexure 6 is the report of the Committee addressed to the Special Secretary Finance (Excise), Government of Rajasthan, Jaipur. Annexure 7 is a show cause notice by the Excise Commissioner, Government of Rajasthan, Udaipur to the Company to show cause as to why its licence be not cancelled for certain irregularities mentioned in it. Thus, it is clear that at no point of time any notice was given to the assessee by the competent Excise Authority i.e. the District Excise officer or any other Authority that it had paid short excise duty or that the two firms, working as distributors were related to it, or otherwise fell within the definition of "related persons". In these letters it was never disclosed that the assessee had shown sale price at lower rates than the actuals or that any re-determination was being made in the matter by the Authority. The Committee appointed by the State Government or the Excise Commissioner to enquire into the affairs of the Company has no statutory status either under the Act or the Rules and at the most it could be said to be a fact finding committee. The Committee also did not, give any notice to the assessee Company, nor it was asked to participate in the proceedings before the Committee. Only some informations were demanded by the Excise Inspector. Even after the report of the Committee, no notice was given by the District Excise Officer asking any explanation on the basis of the report. The Company was never informed that re-determination of the excise duty was being made by him. It may also be stated that from the report of the Committee it appears that the petitioner had supplied most of the informations and documents demanded by it except the information of costing and the cost audit report, which according to the Company were not prepared by it. The petitioner has stated in its rejoinder that it came to know about the constitution of the Committee first time by Annexure R/7, which is dated 27.5.1991. All these facts clearly demonstrate that the principles of natural justice were not complied with before making any re-determination of the excise duty or raising demand for additional excise duty on the ground of short payment . In such cases, where the excise duty was collected by the competent Excise Authorities at the time of the removal of the goods, a further demand is raised .on the ground of short payment due to any reason, then, the principles of natural justice require that the asseesee should be given a proper notice stating the grounds of short payment and he should be given full opportunity to submit his explanation, any material or evidence in support of his defence and if a personal hearing is demanded, the same should also be provided to him. An assessee can challenge the demand of additional excise duly if the same is raised in violation of the principles of natural justice. In the instant case, the demand has been raised by the District Excise Officer in violation of the principles of natural justice, as such, it deserves to be quashed on this ground alone.
17. Another ground of attack urged by the learned Counsel for the assessee relating to limitation may also be examined, as the learned Counsel appearing for the parties, had made their submissions at length on the legal aspect. It was contested by the learned Counsel for the petitioner that the Company had paid the amount of duty as and when the medicinal preparations were taken out and the additional demand made by the revenue on the ground of short payment of excise duty squarely comes under Rule 11 and as it was made beyond the period of six months, the same is invalid and illegal. It was also pointed out that Rule 12 will apply in those cases where no specific provision for collection of duty or any deficiency in duly has been made by the Rules. Contrary to it, for the revenue it was submitted that Rule 11 deals with limited set of contingencies as mentioned therein. According to the learned Counsel for the revenue, in the present case the assessee had shown sale price of the medicine at the lower rates than the actuals at which they were sold to M/s Alchem Laboratory Ltd., and M/s Anglomad Pvt. Ltd., and it was a clear case of fraud where payment of excise duty has been evaded deliberately. At the out-set I may state here that the above ground argued before me by the learned Counsel for revenue was not the basis for raising additional demand of excise duty as additional demand was raised in the instant case on the ground that M/s Alchem Laboratory Ltd. and M/s Anglomad Pvt. Ltd., were the distributors of the petitioner Company and were 'related persons' and, as such, the value of the goods for the purpose of payment of excise duty was determinable under Clause (iii) of Section 4(1)(a) of the Excise Act. I have already held that simply because M/s Alchem Laboratory Ltd., and M/s Anglomad Pvt. Ltd., were the sole distributors of various medicines manufactured by the petitioner Company, they did not fall within the definition of 'related persons' in view of the judgments of the Supreme Court referred to above in the absence of necessary facts to show that these firms were related to the assessee Company or otherwise there was mutual interest in between them so as to fall within the ambit of "related persons" as described in Clause (c) of Sub-section (4) of Section 4 of the Excise Act. In the absence of necessary facts this Court had no option but to hold that the firms M/s Alchem Laboratory Ltd., and M/s Anglomad Pvt. Ltd., did hot fall within the ambit of "related persons" and for the purpose of excise duly the price charged by them from wholesale dealers cannot be the basis.
18. In any case, the legal question of limitation and the applicability of Rule 11 or 12 in the light of submission made by Mr. Rathore, the learned Counsel for the revenue, requires consideration for its importance. A perusal of Rule 11, which was extracted earlier, would show that it deals with same contingencies as stated there in. The first contingency is where there has been a short-levy because of inadvertence, error, collusion or misconstruction on, the part of the Excise Officer, the second contingency arises where there is a mis-statement on the part of the owner as to the quality or description of such goods. The third contingency is of erroneous refund. A reading of Rule 11 makes it clear that if short payment of excise duty is alleged due to mis-statement by the owner as to the price of the goods than the actual the same is not covered by Rule 11 so as to limit the period of limitation by six months for the recovery of the deficiency. In such a situation Rule 12 will come in operation for which no period of limitation is prescribed. Rule 12 confers residuary power and it expressly provides that where the rules do not make any specific provision for the collection of duty or of any deficiency in duty if the duty has for any reason been short-levied under the Act or the Rules, such duty or deficiency in duty shall on written demand made by the proper officer, be paid to such person and at such time and place, as the proper officer may specify.
19. In Government of India v. Citedal, Fine Pharmaceuticals Madras and Ors. , the scope and ambit of Rule 12 was considered by the Hon'ble Supreme Court. The relevant paragraph 5 may be stated:
As already noted rules contained in Chapter III of the Rules particularly Rule 6, 9, 10 and 11 provide for payment and recovery of duty and also the time and manner of its payment. Rule 12 is designed to confer residuary power for recovery of duty if unpaid on account of short levy or deficiency or for any reason it remains unpaid. If recovery of duty or any amount of sum payable to the Government under the Act is not covered by any specific rule, additional supplementing provision is made for its recovery by Rule 12. Rule 12 provides for recovery of duty, as well as any other sum payable to the collecting government under the Act if the same is not paid on account of short levy or deficiency or for any reason. In substance Rule 12 contains additional safeguard for recovery of duty, it does not create any additional charge or liability on the manufacture for the payment of the duty. The liability to pay tax is created by the charging Section 3 and Rule 12 confers, on the authorised officer to recover duty if the same has not been paid on account of any short levy or deficiency or any other reason. Rule 12 is referable to Section 19(2)(i) of the Act. The rule carries out the purposes of the Act as it seeks to provide for recovery of duty as contemplated by Section 3(3) of the Act. The High Court committed error in holding that the rule provides of recovery of escaped duty although the Act is silent on the question of escaped assessment and therefore Rule 12 is ultra vires the Act.
In this very judgment, the argument urged by the assessee that the absence of any prescribed period for the recovery of duty as contemplated by Rule rendered it arbitrary, was repelled by saying:
While it is true that Rule 12 does not prescribe any period within which recovery of any duty as contemplated by the rule is to be made, but that by itself does not render the rule unreasonable or violative of Article 14 of the Constitution. In the absence of any period of limitation it is settled that every authority is to exercise the power within a reasonable period. What would be reasonable period, would depend upon the facts of each case.
20. If short payment of excise duty was due to mis-statement of price of the goods by the owner then the actuals, such contingency would not be covered by Rule 11. In that situation Rule 12 shall be applicable which contains additional safeguard for the recovery of duty or any deficiency in duty. However, it shall not render any assistance to the respondents in the present case. As stated earlier, the additional demand for the deficiency in duty was raised in the present case on a different ground i.e., the value of the goods for the purpose of excise duty should have been determined as per proviso (iii) to Section 4(1)(a) as the firms M/s Alchem Laboratory Ltd., and Anglomad Pvt. Ltd., fell within the definition of related person. At no point of time it was the case of the revenue for the purpose of additional demand of excise duty that the Company had made mis-statement as to the actual price of the goods sold to the above two firms and that the prices were shown at lower rates than the actuals. No material has been placed by the revenue before this Court also to substantiate the above argument. In the absence of requisite fuels no finding can be given that the assessee Company had mis-stated the price of the goods than the actuals charged from M/s Alchem Laboratory Ltd., and M/s Anglomad Pvt. Ltd. This Court would have examined the facts, it the same had been placed to find out if these was a tax evasion or a fraud was committed by the assessee in the light of the judgment in McDowell & Co. Limited v. Commercial Tax Officer . In this judgment Chinappa Reddy J., in his separate but concurring judgment has observed:
We think that time has come for us to depart from the Westminister principle as emphatically as the British Courts have done and to dissociate ourselves from the observations of Shah, J. and similar observations made elsewhere. The civil consequences of tax avoidance are manifold. First there is substantial loss of much needed public revenue, particularly in a welfare State like ours. Next, there is the serious disturbance caused to the economy of the country by the piling up of mountains of black money, directly causing inflation. Then there is "the large hidden loss" to the community (As pointed out by Master Sheatcroft in 18 Modern Law Review 209) by some of the best brains in the country being involved in the perpetual war waged between the tax-avoider and his expert team of advisers, lawyers and accountants on one side and the tax gatherer and his perhaps not so skilled advisers on the other side. Then again there is the 'sense of injustice and inequality which tax avoidance arouses in the breasts of those who are unwilling or unable to profit by it. Last but not the least is the ethics (to be precise, the back of it) of transferring the burden of tax liability to the shoulders of the guileless-good citizens from those of the 'artful dodgers'. It may, indeed, be difficult for lesser morals to attain the state of mind of Mr. Justice Homes, who said, "Taxes are what we pay for civilized society. I like to pay taxes. With them I buy civilization." But, surely, it is high time for the judiciary in India too to part its ways from the principle of Westminister and the alluring logic of tax avoidance, we now live in a welfare State whose financial needs, if backed by the law have to be respected and met. We must recognise that there is behind taxation laws as much moral sanction as behind any other welfare legislation and it is a pretence to say that avoidance of taxation is not unethical and that it stands on no less moral plane than honest payment of taxation. In our view, the proper way to construe a taxing statute, while considering a device for avoid tax, is not to ask Whether the provisions should be construed literally or liberally, nor whether the transaction is not unreal and not prohibited by the statute, but whether the transaction is a device to avoid tax, and whether the transaction is such that the judicial process may accord its approval to it. A hint of the approach is to be found in the judgment of Desai J. in Wood Polymer Ltd., and Bengal Hotels Limited (1977) 46 Com. Case 597 (Guj.) where the learned Judge refused to accord sanction to the amalgamation of companies as it would lead to avoidance of tax.
The aforesaid view was agreed to by other judges also and this fact was mentioned specially in para 46 of the judgment. In Commissioner of Wealth Tax, Gujarat II, Ahmedabad v. Shri Arvind Narottam (Ind.) the same view was expressed that tax evasion should not be condoned.
21. The above two judgments reflect judicial attitude towards the tax avoidance device or the tax evasion cases. If proper and requisite material had been brought on record by the revenue to establish the plea that the assessee deliberately mis-stated less price of the goods than the actuals charged from M/s Alchem Laboratory Ltd. and M/s. Anglomad Pvt. Ltd. and by this device it avoided payment of full excise duty, the same would have been examined by this Court and relief might have been refused to the petitioner in case that situation was found to exist. However, no such facts are on the record except the oral argument made by Mr. Rathore that it was a case of mis-statement of the price than the actuals charged by the assessee at the time of sale of the goods and by this device it paid less excise duty. If the revenue feels that the present case is of this type, it shall be free to make necessary enquiry in the matter, if it so desires, in accordance with law.
22. The net result of the above discussions that the additional demand of excise duty raised by the respondents has no legal sanction behind it and the same deserves to be quashed. Consequently, the demand, as well as, the Notice (Annexure 5) issued by the District Excise Officer, Alwar, are hereby, quashed. Costs made easy, in the facts and circumstances of the case.