Rajasthan High Court - Jaipur
Shree Cement Ltd. vs Union Of India (Uoi) on 3 April, 2002
Equivalent citations: RLW2003(2)RAJ1358, 2002(4)WLC5, 2002(5)WLN507
Author: N.N. Mathur
Bench: N.N. Mathur
JUDGMENT Mathur, J.
1. In this group of petitions under Article 226 of the Constitution of India, disposed of by this common order, question involved is whether MODVAT credit is available on H.S.D. oil in terms of Rule 57-B of the Central Excise Rules, 1994 even after clarification made by adding Explanation under Notification No. 5/98 dated 2.3.1998 to the effect that "inputs" mentioned in Rule 57-B refers only to such inputs as specified in notification under Rule 57-A? Earlier and subsequent to Notification No. 5/98 dated 2.3.98, the CEGAT decided the issue in favour of the assessee. Thus, Section 112 of the Finance Act, 2000 has been enacted to validate denial of credit of duty paid on H.S.D. oil. This Validation Act has been challenged by way of amendment in the writ petitions. Thus, now the main question involved is the constitutional validity of Section 112 of the Finance Act 2000 and denial of credit of duty paid on H.S.D. oil used in Diesel Generating Set for generation of electricity for captive consumption i.e. manufacture of final product of cement.
2. For the convenience, we shall refer the facts of one of the petitions being D.B. Civil Writ Petition No. 3635/97 filed by M/s. Shree Cement Limited. The petitioner Company is engaged in the business of manufacturing and selling Portland cement and has installed a Diesel Generating Set for generation of electricity for captive consumption in its factory premises. It is averred that the petitioner Company purchases HSD Oil for generation of electricity from Indian Oil Corporation Ltd./Hindustan Petroleum Corppration Ltd. through their sales Office/Depots in Rajasthan, cleared in sub-heading 2710.90 on payment of Central Excise Duty and the same is used as inputs/goods in the said Diesel Generating Set for generation of electricity which is used in the manufacture of final product cement or for other purposes in the petitioner's factory of production.
3. The petitioner Company submitted a declaration in respect of the diesel as well as oil and lubricants under-Rule 57-G read with Rule 57-B of the Rules intending to avail the credit of duty on the said goods/inputs on 17/18.3.1997 with the Assistant Commissioner, Central Excise, Ajmer. The Assistant Commissioner informed the petitioner that after 1.3.1997, MODVAT credit was not available on HSD Oil and hence the declaration submitted by the Company has been filed. The Company submitted declaration under Rule 57H(1) of the Rules declaring the stock position of the HSD Oil as on 17.3.1997. The Company also prayed for condonation of delay in submitting the declaration. The Superintendent, Central Excise Range, Beawar vide letter dated 25.6.97 informed the petitioner Company that the MODVAT credit was not admissible on HSD as input under Rule 57-A of the Rules. Accordingly, the petitioner Company submitted month-wise details regarding the MODVAT credit on diesel required for generation of the electricity from time to time with the Assistant Commissioner of Central Excise, Ajmer. It is averred that the respondent No. 8 viz., Hindustan Petroleum Corporation Ltd. under the pressure of the fourth, firth and sixth respondents, has refused to issue Modvatable invoices to the petitioner Company in respect of the purchases made by it after 1.3.1997. Inspite of the denial of the MODVAT credit, the petitioner company tried to avail the credit of Rs. 17,04,588/-. During the month of September, 1997, petitioner Company was given a show cause notice by the Superintendent, Central Excise Range, Beawar as to why the said credit should not be disallowed to them. Thus, the petitioner filed the writ petition in the year 1997 seeking direction to quash the Trade Notice No. 26/97 (Annex.4), the entry regarding the explanation of the HSD Oil in the Notification No. 5/94 and also the order dated 2.9.1997 (Annex.18).
4. Before we proceed further, it would be convenient to acquaint with the relevant part of the MODVAT Scheme under the Rules of 1994. Chapter V of the Rules deals with the levy of excise duty on manufactured goods other than salt. Rule 43 to Rule 57 under Section-A of Chapter-V provides the general provisions. Rule 57 speaks of offences and penalties. Section-AA consists of set of Rule 57-A to 57-J substituted by Notification No. 6/97 dated 1.3.1997 prescribing the procedure for availing the credit of duty paid on the inputs. These rules deal with the applicability of the MODVAT scheme. According to these rules, the credit is available in respect of central excise duty, special excise duty and countervailing duty paid on inputs used in production of final product mentioned in the appropriate notification issued under the Central Excise & Tariff act. Rule 57-A provides for availment of MODVAT credit in respect of inputs used in the manufacture of the finished product. The rule empowers the Central Government to specify the final product by issuing Notification under the official gazette for the purpose of allowing MODVAT credit of any duty of excise paid on the goods i.e. inputs used in the manufacture of the said final products. The relevant Sub-rules (1) and (4) of Section 57-A read as under:
"57A. Applicability.--(1) The provisions of this Section shall apply to such finished excisable goods (hereinafter, in this section, referred to as the final products) as the Central Govt. may by notification in the official Gazette specify in this behalf for the purpose of allowing credit of any duly of excise or the additional duty under Section 3 of the Customs Tariff act, 1975 (51 of 1975), as may be specified in the said notification (hereinafter referred to as the specified duty) paid on the goods used in the manufacture of the said final products (hereinafter, in this section, referred to as the inputs).
(4) The credit of specified duty under this section shall be allowed on inputs used in or in relation to the manufacture of the final products whether directly or indirectly and whether contained in the final product or not."
The Notification No. 5/94 dated 1.3.1994 was amended vide Notification No. 18/1995 dated 18.5.95 and No. 12/96 dated 23.7.1996. The material part of the Notification is extracted from Annex. 1 as follows:
"Goods notified for purposes of credit of duty under MODVAT. - In exercise of the powers conferred by Rule 57-A of the Central Excise Rules, 1944 and in supersession of the notification of the Government of India in the Ministry of Finance (Department of Revenue No. 177/86 - Central Excise, dated the 1st March, 1986, the Central Government hereby specifies the final products described in column (3) of the table hereto annexed and in respect of which -
(i) the duty of excise under the (Central Excise Act, 1944 (1 of 1944);
(ii) the additional duty of excise under Section 3 of the Additional Duties of Excise (Textiles and Textile Articles Act, 1978 (40 of 1978); and
(iii) the additional duty of excise under Section 3 of the Additional Duties of Excise (Goods of Special Importance) Act, 1957 (58 of 1957); and
(iv) the additional duty under Section 3 of the Customs Tariff act, 1975 (51 of 1975) equivalent to:-
(a) the duty of excise specified under (i) above;
(b) the duty of excise specified under (ii) above; and
(c) the duty of excise specified under (iii) above;
(hereinafter referred to as "Specified duty") paid on inputs, described in the corresponding entry in column (2) of the said Table, shall be allowed as credit when used in or in relation to the manufacture of the said final products and the credit of duty so allowed shall be utilised for payment of duty leviable on the said final products, or as the case may be, on such inputs, if such inputs have been permitted to be cleared under Rule 57-F of the said Rules.
TABLE S.No Description of inputs Description of final products (1) (2) (3)
1. All goods falling within the Schedule to the Central Excise Tariff Act, 1985 (5 of 1986) other than the following namely,-
All goods falling within the Scheduled to the Central Excise Tariff Act, 1985 (5 of 1986), other than the following namely,-
(i) goods classification under any heading of chapter 24 of the Schedule of the said Act;
(i) goods classification under any heading of chapter 24 of the Schedule of the said Act;
(ii) goods classification under any heading Nos.36.05 or 37.06 of the Schedule of the said Act;
(ii) goods classification under any heading Nos:36.05 or 37.06 of the Schedule of the said Act;
(iii) goods classification under any sub-heading Nos.2710.11, 2710.12, 2710.13 or 2710.19 (except Natural gasoline liquid) of the Schedule of the said Act;.
(iii) fabrics of cotton or man made fibres falling within Chapter 52, Chapter 54 or Chapter 55 of the Schedule to the said act;
(iv) high speed diesel oil classification under heading No.27.10 of the Schedule to the said Act.
(iv) fabrics of collon or man made fibres tailing within heading No. 58.01, 58.02, 58.06 (other than goods falling within sub- heading No. 5806.20) 60.01 or 60.02 (other than goods falling sub- heading No. 6002-10) of the Schedule to the Act)."
Thus, by the aforesaid Notification, HSD Oil classifiable under heading 27.10 from the list of eligible inputs under item (iv) of Column (2) of the Table has been specifically excluded.
5. At this stage, it would be relevant to mention that on 16.3.1995 by Notification No. 8/1995, the exclusion of Clause (iv) in the 'table' had included HSD Oil classifiable under heading No. 27.10. Thus, according to the department, the HSD Oil could not be regarded as specified input eligible for MODVAT credit but the difficulty arose as on the same day i.e. 16.3.95 by another Notification No. 11/95, a second proviso was added to the Rule 57A, which reads as under:
"Provided further that credit of specified duty shall be allowed in respect of the inputs which are used for generation o the electricity used within the factory of production for manufacture of final product or for any other purpose."
The proviso was construed as enabling credit to be taken for inputs used for captive generation of electricity. This provision was deleted on 1.3.97 and Rule 57-B was introduced vide Notification No. 6/97 dated 1.3.97. This rule starts with non-obstante clause "notwithstanding anything contained in Rule 57-A" and declared certain goods, which were later on termed as inputs vide corrigendum dt.10.3.1997 eligible for MODVAT credit. The material part of Rule 57-B is extracted as follows:
"57-B. Eligibility of credit of duty on certain goods:
(1) Notwithstanding anything contained in Rule 57A the manufacturer of final products shall be allowed to take credit of the specific duty paid on the following goods, used in or in relation to the manufacture of final products, whether directly or indirectly and whether contained in the final products or not, namely:
(i) goods which are manufactured and used within the factory of production;
(ii) paints;
(iii) inputs used as fuel;
(iv) inputs used for generation of electricity of final product or for any other purpose, within the factory of production;
(v) packing material and materials from which such packing material's are made provided the cost of such packing material is included in the value of the final product;
(vi) accessories of the final product cleared alongwith such final product, the value of which is included in the assessable value of the final product."
6. Now, we shall refer-to some of the decisions of the CEGAT wherein the question regarding the admissibility of the MODVAT credit in the context of Rule 57-B and/or Rule 57-B read with Rule 57-A of the Rules of 1944, has been considered.
7. In India Cements Ltd. v. CC & CE, Hyderabad (1), the credit was denied on the ground that as HSD Oil classifiable under heading 27.10 was excluded'from the coverage of goods eligible to the benefits of credit at item No. (iv) of the Table annexed to Notification No. 8/95. The Tribunal found contradiction between the two Notifications i.e. No. 8/95 and No. 11/95. While Notification No. 8/95 denied MODVAT credit benefit to HSD oil, without referring to purpose for which it was used, whereas by Notification No. 11/95, a second proviso was added to Rule 57-D allowing credit to specified duty in respect of inputs used for generation of electricity, used within the factory of production for manufacture of final products or for any other purposes. In the opinion of the Tribunal, second proviso to Rule 5 7-D has been incorporated with specific object of incorporating inputs for generating electricity within the ambit of the MODVAT Scheme, as such, it prevails over exclusion notification No. 8/95. The Tribunal held that MODVAT credit benefit shall be available on HSD oil subject to the satisfaction of the conditions provided under second proviso to Rule 57D. This decision was followed by another Bench of CEGAT in U.P. State Textile Corporation v. CCE, Meerut (2).
8. A learned Single Member of the Tribunal in Rama Vision Limited v. Commissioner of Central Excise, Meerut (3) expressed his disagreement with the view taken in India Cement Ltd.'s case (supra), but decided the matter in favour of the assessee and against the department falling in line with the dictate of the judicial discipline.
9. In Jindal Polymers v. Commissioner of C.Ex., Indore (4), the assessee pleaded that the credit taken by them was in terms of Rule 57-B which after its amendment on 1.3.97 speaks of 'inputs' and not of 'goods'. This rule was meant to extend the MODVAT credit facility to those inputs which obviously did not fit in the scheme prescribed under Rule 57-A and the notification issued thereunder but on which it was thought expedient for MODVAT credit to be extended. It was urged that in order to enable such credit to be taken, the non-obstante clause was incorporated in the said rule. The Tribunal held that where there was specific mention of a particular input in Rule 57-B, credit o duty thereon could be availed irrespective of the fact that the inputs specifically stood excluded from the coverage of Rule 57A. The Tribunal on the basis of said interpretation of Rule 57-B and following the decisions in India Cement Limited's case (supra) held that MODVAT credit was rightly taken by the assessee.
10. In Ester Industries v. Collector of Central Excise, Meerut (5), the Tribunal decided in favour of the assessee following its-decision in India Cement Limited's case (supra).
11. In B.P.L. Display Devices Limited v. C.C.E., Meerut (6), the department relied upon the Notifications No. 5/98 dt.2.3.98, whereby an explanation was added to Rule 57-B (1) clarifying that the terms 'inputs' in Rule 57-B refers only to such inputs which may be specified in a notification issued under Rule 57-A. For ready reference, explanation under Sub-rule (1) of Rule 57-B added by Notification No. 5/98 dt.2.3.98 is extracted as follows:
"Explanation.--For the purpose of this sub-rule, it is hereby clarified that the term 'inputs' refers only to such inputs as may be specified in a notification issued under Rule 57-A."
The Tribunal without examining that the defect pointed in India Cements case (supra) was cured by Notification No. 6/97 dt.1.3.97, deleting second proviso to Rule 57-D and introduced Rule 57-B and further by Notification No. 5/98 dt.2.3.98, clarifica-lion was made by adding explanation that the term "input" in Rule 57B refers only to such inputs which may be notified u/ Rule 57, followed the decision in India Cements case against the department. The Tribunal has also referred to decision in Jindal Polymer's case (supra). We have perused the judgment of the Tribunal in Jindal Polymer's case (supra). We find that the Tribunal has simply referred-to its earlier decisions in Ballarpur Industries Ltd. v. CCE (7) and India Cement Limited's case (supra). There is no detailed discussion with respect to the effect of amendment dated 1.3.1997.
12. In Sivakaami Mills Ltd. v. Commissioner of Central Excise, Madurai (8), while deciding the stay application seeking waiver of pre-deposit of duty following the decision in Jindal Polymer's case (supra), the Tribunal took the view that the MODVAT credit was also available during the period 1.3.97 to January, 1998. The Tribunal also placed reliance on its earlier decision in India Cements Ltd.'s case (supra).
13. In C.C.E., Shillong v. Vinay Cement Ltd. (9), the period involved was prior to 2.3.1998 i.e. the date when the explanation to Rule 57B was introduced. According to the department, the said explanation is retrospective in nature. The contention was rejected following the decision in Easter Industries's case (supra) and it was held that since the amending notification was clarificatory in nature, its effect was not retrospective. We have again perused the decision of the Tribunal in Easter Industries's case (supra). There is no effective discussion n the question raised in C.C.E., Shillong's case (supra). The said case has been decided following the decision in India Cements Lld.'s case (supra).
14. In Ferror Alloys Corporation Limited v. C.C.E. (10), a learned Single Member expressed the view contrary to the view taken by the CEGAT in India Cement's case (supra). However, it was held that since the amendment was clarificatory, it would have retrospective effect and the oil so used, would be barred from availing of credit. Another Single Member in Shree Raj Texchem Ltd. v. Collector of Central Excise (11) observed that the explanation seeks to exclude H.S.D. Oil from the ambit of the main provision. Thus, it is retrospective in application. However, he expressed his inability to proceed further, as sitting single it was not open for him to examine the effect of explanation added to Rule 57B as the same shall be required to be considered by a Division Bench.
15. It is, thus, evident that there is no decision of the CEGAT on the question whether the assessee will be entitled to modvat credit on HSD Oil used captively for generation of electricity, in turn used for production of final product, after the explanation was added to Rule 57B, which has equated the term 'inputs' used in Rule 57B with the meaning given to the said term in Rule 57A. No judgment of the CEGAT or any High Court or the Apex Court has been placed before us wherein the view taken by the CEGAT in India Cement Ltd.'s case (supra) has been approved or disapproved or the effect of the Notification No. 5/98 dt.2.3.98 has been examined.
16. The Central Government considering that there was some confusion with respect to availability of the MODVAT credit on HSD Oil used for generation of electricity within the factory premises for the production of final product as cement, inspite of the clarification made from time to time by way of amendments and further the fact that there was reservation about the correctness of the judgment of the CEGAT in India Cements Ltd.'s case (supra) and Jindal Polymer's case (supra), a Finance Bill was introduced to validate the action taken to deny the credit of any duty paid on the HSD Oil from 16.3.1995. It appears from the explanatory notes to legislative changes that the Government never intended to allow such credit. Thus, both the Houses of Parliament passed a validating Act by Finance Bill 2000 and thereafter the Finance Act, 2000, which received the assent of the President of India on 12.5.2000. The Section 112 of the Finance Act reads as follows:
"112. Validation of the denial of credit of duty paid on high speed diesel oil.--(1) Notwithstanding anything contained in any rule of the Central Excise Rules, 1994, no credit of any duty paid on high speed diesel oil at any time during the period commencing on and from he 16th day of March, 1995 and ending with the day, the Finance Act, 2000 receives the assent of the President, shall be deemed to be admissible.
(2) Any action taken or anything done or purported to have been taken or done at any time during the said period under the Central Excise Act or any rules made thereunder to deny the credit of any duty in respect of high speed diesel oil, and also to disallow such credit to be utilised for payment of any kind of duty on any excisable goods shall be deemed to be, and to always have been, for all purposes, as validly and effectively taken or done, as if the provisions of Sub-section (1) had been in force at all material times and, accordingly, notwithstanding anything contained in any judgment, decree or order of any court, tribunal or other authority,-
(a) no suit or other proceeding* shall be maintained or continued in any court, tribunal or other authority for allowing the credit of the duty paid on high speed diesel oil and no enforcement shall be made by any court, tribunal or other authority of any decree or order allowing such credit of duty as if the provisions of Sub-section (1) had been in force at all material times;
(b) recovery shall be made of all the credit of duty, which have been taken or utilised but which would not have been allowed to be taken or utilised, if the provisions of Sub-section (1) had been in force at all material times, within a period of thirty days from the date on which the Finance Act, 2000 receives the assent of the President and in the event of non-payment of such credit of duty within this period, in addition to the amount of credit of such duty recoverable, interest at the rate of twenty four per cent per annum shall be payable, from the date immediately after the expiry of the said period of thirty days till the date of payment.
Explanation.--For the removal of doubts, it is hereby declared that no act or omission on the part of any personal shall be punishable as an offence which would not have been so punishable if this section had not come into force."
17. It is contended by Mr. S. Ganesh, Senior Advocate appearing for the petitioner that the petitioner is entitled to modvat credit under Rule 57-B as HSD Oil for generation of the electricity as fuel in D.G. Set, which is used for manufacture of the final product of cement within the factory being covered by Sub-clause (iii) and (iv) of Sub-rule (1). It is further submitted that anything contained in Rule 57A would not apply to the provisions of Rule 57B as both the provisions are mutually exclusive as Rule 57B starts with non-obstante clause. We are unable to accede-to the submission made by the learned counsel. Rule 57A and 57B have been extracted by us in the preceding paras. Rule 57A empowers the Central Government to specify final product by issuing the notification for the purpose of allowing the modvat credit of any duty of the excise paid on the goods i.e. the inputs used in the manufacture of the said final product. Under the Notification No. 5/94, goods for the purpose of modvat credit have been notified. Column No. 2 of the Table appended to the notification describes inputs. Column No. 3 specifies final product. Thus, the said notification excludes HSD Oil classifiable under heading 27.10 from the list of eligible inputs under item IV of Column No. 2 of the Table, as the HSD Oil is not used as input as raw material for the production of petitioner's final product i.e. cement. The main thrust of the argument of the learned counsel is that the exclusion under Rule 57A will not be applicable and cannot be read into Rule 57B as the said clause starts with non-obstante clause i.e. 'notwithstanding anything contained in Rule 57A'. Thus, the petitioner shall be entitled to modvat credit under Sub-clauses (iii) and (iv) of Sub-rule (1) of Rule 57B. !n our view, any controversy in that regard does not survive after the Notification No. 5/98 dt.2.3.1998 whereby an explanation has been added under Sub-rule (1) of Rule 57B. The explanation clearly speaks that for the purpose of Rule 57B, the term 'inputs' that is as used in Clauses (iii) and (iv) refers to such inputs as may be specified in the notification issued under Rule 57B. It is well settled that explanation is appended to a provision with a view to explain the words contained therein. It becomes a part and parcel of the enactment. An explanation is usually added to include something within or to exclude something from the ambit of the main enactment or the connotation of some words occurring in it. It is held by the Apex Court in Patel Roadways v. Prasad Trading Company (12) that when a section contains number of clauses and there is an explanation at the end of the section, it should be seen as to what clause, it applies and the qualification contained in it applies to that clause. The consistent view of the Courts in India right from the decision of the Privy Council in Abdul Lalit Khan v. Abbaji Beg (13) is that an explanation can be added in a declaratory from retrospectively to clarify a doubtful point in law and to serve as proviso to the main section. It is also well established that an explanation normally should be read as to harmonize and clear up any ambiguity in the main provision and should not be construed to widen the ambit of the provision. We are fortified in our view by a decision of the Apex Court in Oblum Electrical Industries Pvt. Ltd. v. Collector of Customs (14). It is also held therein that if no true reading, an explanation widens the scope of the main provision, effect must be given to it. The reference may be made to Hiralal Ratanlal v. Sales Tax Officer (15) and Aphali Pharma v. State of Maharashtra (16). The Apex Court in Sulochana Amma v. Narain Nair (17) construed the explanation (viii) of Section 11 of the CPC by the amendment in the year 1976 to promote the object for which it was inserted viz., that an issue once decided by the competent court, should not be litigated over again, though the court deciding it was a court of limited jurisdiction not competent to decide the subsequent suit. In para 7 of the judgment, the Apex Court noticed the settled position of law with respect to explanation as follows:
"It is settled law that explanation to a Section is not a substantive provision by itself. It is entitled to explain the meaning of the words contained in the section or clarify certain ambiguities or clear them up. It becomes a part and parcel of the enactment. Its meaning must depend upon its terms. Sometime, it would be added to include something within it or to exclude from the ambit of the main provision or condition or some words occurring in it. Therefore, the explanation normally should be so read as to harmonise with and to clear up any ambiguity in the same selection."
In the instant case, the HSD Oil used by the petitioner Company captively for generation of electricity which, in turn, was used for production of the final product viz; cement stood specifically excluded, if not under the Notification issued under Rue 57A, by the explanation added to Rule 57B vide Notification No. 5/98. The effect of explanation added to Rule 57B by virtue of Notification No. 5/98 dated 2.3.1998 equated the term "inputs" used in the said rule with the meaning given to the said term in Rule 57-A. As the amendment by way of explanation is clarificatory in nature, it would have retrospective effect.
18. Though in the instant case, the controversy is only with respect to availability of modvat credit of post January 1997 period, as such not governed by the decision of the CEGAT in India Cement Ltd., but it has been erroneously relied upon in subsequent decisions. The said case was decided by the CEGAT in favour of the assessee on the ground that proviso added to Rule 57 will have an overriding effect over the specific exclusion of HSD Oil from the inputs under the notification No. 5/94. A reading of judgment shows that the CEGAT has not taken into account the whole scheme pertaining to the modvat credit under Section AA Chapter V of Excise Rules, 1994. Rule 5.7A sets out the basic features regarding the applicability of the modvat credit. If any final product or 'input' is not covered by a notification under Rule 57A, the modvat credit rules cannot be said to have set in motion. Subsequent rules in the said section i.e. AA of Chapter V lay down the specific circumstances, situations, areas and conditions for operation of the credit of duty paid on eligible inputs. Thus, while credit admissible to eligible inputs used in or in relation to the manufacture of eligible final product is subject to the provisions of subsequent Rules 57B to 57J, none of the subsequent rules in the said Section AA of the Central Excise Rules, 1944 makes or can make ineligible input or final product as eligible. With utmost respect, it appears that the learned Members of the CEGAT while deciding the case of India Cement Ltd., lost sight of this basic feature of the modvat credit scheme. Rule 57D is workable with the ineligible inputs under the Notification No. 5/94. There are eligible inputs i.e. furnace oil, which is used for generation of the electricity. Suffice it to say that the purpose of the proviso under Rule 570 is not to make an ineligible input as an eligible one.
19. It is next argued that while modvat credit benefit has been made available on the petroleum products like lubricating oil, grease, cutting oil and coolants, it has been denied on HSD Oil, which is also a petroleum product. It is further submitted that the fuel oil is a substitute of HSD Oil, which is also a petroleum product. The modvat credit has been made available on the fuel oil. There is no justification for discriminating to single out HSP Oil from the list of input. Thus, according to the learned counsel, it is clearly a case of discrimination. Learned counsel has heavily placed reliance on a decision of the Apex Court in Ayurveda Pharmacy v. State of Tamil Nadu (18) for the proposition that while it is open to the legislature or the State to select different rates of tax for different commodities but where the commodities belong to the same class or category, there must be a rational basis for discriminating between two commodities and another for the purpose of imposing tax. In the said case, ayurvedic medicines containing alcohol namely arishtamas and asavas were placed in different separate group imposing sales tax at higher rate than the other medicinal preparations. The question arose as to whether two medicines attracted different considerations from those applied to other medicinal preparations. The State tried to justify the separate categories on the ground of their high contents of the said alcohol i.e. the said medicines attract a class of customers, who purchase them for their alcoholic contents rather than their medicinal value. The Apex Court found that the two preparations arishtamas and asavas are medicinal preparations and even though, they contain high alcohol contents. So long as they continue to be identified as medicinal preparations, they must be treated for the purpose of sales tax in like manner as medical preparations generally including those containing a lower percentage of alcohol. The court found it to be a case of discrimination and quashed and levy of high rate of sales tax. On careful consideration, we are of the view that this case does not advance the case of the petitioner. Here the lubricating oil, grease, cutting oil and coolant are petroleum products so as H.S.D. Oil different in nature and use. While one is used for smooth functioning of the capital goods as provided u/Rule 57Q, the other is used for power generation, may it be automobile, Railway engine or power set.
As per the Encyclopedia Britanica, the principal use of the diesel oil is as fuel for powering automobile, a truck, bus a railway engines etc. in a diesel engine, combustion is induced by the heat of compression of the air in the cylinder under compression. A good diesel fuel starts to burn at several locations within the cylinder after the fuel is injected whereas fuel oil consists largely of residues from crude oil refining. These are blended with other suitable gas oil fractions in order to achieve the viscosity required for convenient handling. As a residue product, fuel oil is the only refined product of significant quantity that commands a market price lower than the cost of crude oil. With the advent of more stringent exhaust emission controls, however, diesel fuel qualities have come under the increased scrutiny. The limitation of aromatic compounds requires a much more demanding scheme of processing individual gas oil components that was necessary for earlier highway diesel fuels. Thus, the contention raised is rejected.
20. Challenging the constitutional validity of the impugned validating Act (Section 112 of the Finance Act, 2000), it is strenuously argued by Mr.S. Ganesh, Sr. Advocate, appearing for the petitioner that it is not open for the legislature to undo the effect of the rules and the judgment interpreting such rules, that too retrospectively. It is submitted that the validating provisions tend to interfere with the vested right and reopen concluded transactions in wholly arbitrary and unreasonable manner. It is further submitted that the respondent department has accepted the legal position with respect to availability of modvat on HSD Oil used in D.G. Set for generation of the electricity as laid down in various decisions of the CEGAT. The department has not challenged any of the judgments of the CEGAT either before jurisdictional High Court or the Apex Court and, as such, all those judgments decided against the department have attained finality. Thus, it is not open for them to argue contrary. The learned counsel has placed reliance on a decision of the Apex Court in 249 ITR p. 219 (19). Challenging the constitutional validity, it is submitted that impugned purported amendment and validation provision is ultravires, illegal and unconstitutional being arbitrary and mala fide", inasmuch as the only object of the provision is to nullify the judgments rendered by the CEGAT allowing modvat credit of HSD on interpretation of the relevant rules. Putting on the well known three tests for judging the validity of the validation Act, it is submitted that it deserves to be struck down on the single ground that by the impugned validating act, the legislature has not removed the defect which the Tribunal found in its various judgment. It is further submitted that the impugned validation Act deserves to be declared ultravires on the ground of its being unreasonable and arbitrary.
21. Section 112 has been inserted in the Finance Act, 2000 providing that notwithstanding anything contained in the rules of Central Excise, 1994, no credit of any duty paid on HSD for the period 16.3.95 to 12.5.2000 shall be deemed to be admissible. Thus, by Sub-clause (i) of Section 112, the legislature has excluded the HSD Oil from the benefit of modvat credit. By specifying the period 16.3.95 to 12.5.2000, the validating, provision has been made effective retrospectively. Thus, according to the department by the validating Act, the legislature has cured the technical ground regarding the non- inclusion/non-specification of the HSD in Notification No. 8/95 inasmuch as the CEGAT quashed the demand only on technical grounds regarding the non- inclusion/non-specification of the HSD in Notification No. 8/95. By amendment, the Finance Act seeks to overrule the final judgment of the CEGAT interpreting the relevant rules holding that the modvat credit or duty paid on HSD in admissible. It will be useful to read the explanatory note to the impugned legislative changes, which reads as under:
"Clause 108 of the Bill seeks to validate the action taken to deny credit of any duty paid on high speed diesel oil (HSD) from the 16th March, 1995 as it was never the intention of the Government to allow such credit. It also empowers the Government to recover the credit, if any, taken on HSD, on account of any judgment or order in any Court, Tribunal etc. These provisions come into force on the enactment of the Finance Bill and the credit becomes recoverable within a period of 30 days from the date of enactment, failing which interest at @24% p.a. will also be payable."
The crucial question, therefore, is whether the impugned validating Act can be supported on any constitutional principle of law. It is well settled that a validating Act may make judgments and orders of the competent court ineffective by providing retrospective legislation removing the cause of invalidity or the basis, which has led to those judgments.
22. In a leading judgment Shri Prithvi Cotton Mills v. Brouch Municipality (20), the Constitution Bench of the five judges unanimously upheld the power of legislature to validate the acts done in a particular provision, particularly of fiscal matters. The Apex Court held that legislature can exercise its undoubted powers of re-defining the 'rate' so as to equate it to a 'tax' on capital value and convert the tax purported to be collected as a 'rate' into a 'tax' on land and building. The ratio in the said case has been followed by the Apex Court and other High Courts in number of decisions. In I.N. Saksena v. State of Madhya Pradesh (21), a Constitution Bench of the Apex Court held that the distinction between the legislative act and the judicial act is well known. The Court further observed that the adjudication o the rights o the parties is a judicial function. The legislature has to lay down the law prescribing the norms or conduct, which will govern the parties and transactions, to require the Court to give effect to that law. In the opinion of the Apex Court, the validating legislation, which removes the norms of invalidity of action or providing remedy cannot be said to be an encroachment on judicial power. In that case, the State Government amended its memorandum to compulsorily retire a Government servant on attaining the superannuation age of 58 years. However, it empowered the Government to retire a government servant on his attaining the age of 55 years. Subsequently, statutory rules under proviso to Article 309 of the Constitution were framed. However, the clause to retire a government servant on attaining the age of 55 years was not incorporated, though the superannuation was retained at 58 years. A judicial officer was compulsorily retired on his completion of 55 years. The order of retirement was quashed, as there was no provision in the rules to retire a government servant on his attaining the age of 55 years by way of compulsory retirement and ordinance followed by an act of legislature was made validating the retirement of such government servant despite of judgment of the Court. The validating act empowered the Government to retire a Government servant on his attaining the age of 55 years. The validating act was upheld by the Supreme Court.
23. The Apex Court in Indian Aluminium Co. v. State of Kerala (22), considering a large number of authorities, held that when the legislature enacting the act has competence over the subject matter and when the said encroachment is consistent with the provisions of Chapter III of the Constitution and the defects pointed out by the Court have been removed by the legislature then the encroachment is valid piece of legislation and cannot be struck down by the courts on the ground that it encroaches upon the judicial sphere. The Apex Court from he resume of the various decisions culled out the principles as extracted from para 56 as follows:
"(1) The adjudication of the rights of the parties is the essential judicial function. Legislature has to lay down the norms of conduct or rules which will govern the parties and the transactions and require the court to give effect to them;
(2) The Constitution delineated delicate balance in the exercise of the sovereign power by the legislature, executive and judiciary;
(3) In a democracy governed by rule of law, the legislature exercises the power under Articles 245 and 246 and other companion articles read with the entries in the respective lists in the Seventh Schedule to make the law which includes power to amend the law.
(4) Courts in their concern and endeavour to preserve judicial power equally must be guarded to maintain the delicate balance devised by the Constitution between the three sovereign functionaries. In order that rule of law permeates to fulfil constitutional objectives of establishing an egalitarian social order, the respective sovereign functionaries need free play in their joints so that the march of social progress and order remains unimpeded. The smooth balance built with delicacy must always be maintained;
(5) In its anxiety to safeguard judicial power, it is unnecessary to be overzealous and conjure up incursion into the judicial preserve in validating the valid law competently made;
(6) The court, therefore, needs to carefully scan the law to find out: (a) whether the vice pointed out by the Court and invalidity suffered by previous law is cured complying with the legal and constitutional requirements; (b) whether the legislature has competence to validate the law; (c) whether such validation is consistent with the rights guaranteed in Part III of the Constitution.
(7) The Court does not have the power to validate an invalid law or to legalise impost of tax illegally made and collected or to remove the norms of invalidation or provide a remedy. These are not judicial functions but the exclusive province of the legislature. Therefore, they are not encroachment on judicial power.
(8) In exercising legislative power, the legislature by mere declaration, without anything more, cannot directly overrule, revise or override a judicial decision. It can render judicial decision ineffective by enacting valid law on the topic within its legislative field fundamentally altering or changing its character retrospectively. The changed or altered conditions are such that the previous decision would not have been rendered by the Court, if those conditions had existed at the time of declaring the law as invalid. It is also empowered to give effect to retrospective legislation with a deeming date or with effect from a particular date. The legislature can change the character of the tax or duty from impermissible to permissible tax but the tax or levy should answer such character and the legislature is competent to recover the invalid tax validating such a tax on removing the invalid base for recovery from the State ineffectual. It is competent for the legislature to enact the law with retrospective effect and authorise its agencies to levy and collect the tax on that basis, notwithstanding he declaration by the Court or the direction given for recovery thereof.
(9) The consistent thread that runs through all the decisions of this Court is that the legislature cannot directly overrule the decision or make a direction as not binding on it but has power to make the decision ineffective by removing the base on which the decision was rendered, consistent with the law of the Constitution and the legislature must have competence to do the same."
24. The ratio laid down in the aforesaid decisions has been followed in AIR 1985 SC 1683 (23), 1997(2) SCC 453 (24), 1997(1) SCC 326 (25), 2001(5) SCC 212 (26) and 2001(7) SCC 358 (27). All the case prior to 1997 have been dealt with in great detail in the leading case viz; S.S. Bola v. B.D. Sardana (28). It is not necessary to traverse the law nor to go into the facts of all the cases. Suffice to say that all relate to fiscal encroachment.
25. Now, we may advert-to some of the decisions referred by the learned counsel for the petitioner. In D. Cawasji & Co., Mysore v. State of Mysore (29), the High Court held that the State Government exceeded the power under Section 19 of the Sales Tax Act to collect the sales tax and excise duty, which is not a part of the selling price, A mandamus was issued for the refund of the amount collected. The State brought an amendment in the Sales Tax Act thereby not only validating the levy of the sales tax but also enhanced the same from 6-1/2% to 45% with retrospective effect. The Apex Court struck down the amendment, so far as it related to the retrospectivity pointing out that the lacuna pointed out by the Court was not cured and the judgment could not be nullified by legislative amendment.
26. In S.R. Bhagwat v. State of Mysore (30), the employees working in the Forest Service as Dy. Conservator of Forests were governed by the Mysore State Civil Services (Regulation of Promotion, Pay and Pension) Act, 1973. They challenged violation of their right on the basis of Section 115 of the Reorganisation Act. Since they were employees of the former State of Hyderabad, they claimed that their right arose in Hyderabad Civil Service Regulations. The High Court upheld their right. However, the Karnataka Civil Service Rules were amended with retrospective effect to invalidate the decision of the Court. The Apex Court found that a bare look of the third and fourth paragraph of the preamble shows that the legislative extent was to bypass the final directions contained in the Division Bench judgment. Thus, the Apex Court declared the law invalid holding that the order of amendment was sought to be nullified by the impugned legislation, which is clearly an impermissible legislative exercise. Thus, this case is of no help to the petitioners.
27. In Delhi Cloth & General Mills Co. Ltd. v. State of Rajasthan (31), the State Government issued a notification extending the limits of the Kota Municipality with a view to include the village Raipura. The High Court found that the requirement of the law was not met in dealing with the municipalities and extending the limits of Kota Municipality under the Act. Subsequently, Kota Municipality Limits (Continued Existence) Validating Act was passed. Section 3 of the Validating Act with a non-obstante clause contained in Sections 4 to 7 took away the effect of any judgment, decree or order or direction of any other court tn the matter of extension of the limits of Kota Municipality to include Raipura and Ummedganj so that they could be deemed always to have been continued to exist within the limits of Kota Municipality. The Apex Court held that the defect pointed out by the Court was not validly removed by the validating Act which is an essential requirement of the Validation Act.
28. In B. Krishna Bhat v. State of Karnataka (32), the collection of service tax by Bangalore Development Authority was quashed. The High Court gave specific finding that in lieu of fees collected, no service has been rendered. A Validation Act as Bangalore Development Authority (Amendment) Act, 1993, whereby Sections 28A, 28B and 28C were incorporated, was challenged. On challenge of the Validation Act, the Apex Court observed that when a legislature sets out to validate a tax declared by a court to be illegally collected, it is not sufficient for the legislature to merely declare that the decision of the court shall not be binding because that would amount to reversing the decision rendered by a court in exercise of judicial power which authority the legislature does not possess. The Court also observed that when invalidity of collection of levy is pointed out by the court based on non-existence of certain necessary facts, it is not open to the legislature to merely controvert that finding of the Court and validate such collection by proceeding on the basis that such finding of the court was incorrect. Thus, in the opinion of the Apex Court, the collector made prior to coming into force of the amending Act being a collection without any service rendered, the same cannot be validated even by introducing the validating amending provisions. However, with respect to Section 28C, the validity was upheld, having observed that once Bangalore Development Authority is declared as deemed local authority with retrospective effect, there can be no difficulty in accepting the validity of the collection. Both the cases referred i.e. Delhi Cloth & General Mills Case & B. Krishna Bhat Case, do not help the petitioner as in the instant case defect pointed out in the judgment of the CEGAT has been cured by Section 112(1) of the Finance Act, inasmuch as that HSD Oil has been made inadmissible for credit of duty of any kind.
29. From the aforesaid discussion, following three tests can be culled out for examining the validity of a Validation Act;
(i) Whether the legislature enacting the Validation Act has competence over the subject matter?
(ii) Whether by legislation, the legislature has cured or removed the defect which the Court has found in the existing law?
(iii) Whether the validating law is inconsistent with any of the provisions contained in Chapter III of the Constitution of India inter alia that the law is not unreasonable and arbitrary?
30. As far as the first test is concerned, the competence of the legislature to enact the validation Act has not been challenged by the petitioner. Regarding the second test, it is submitted by the learned counsel that the CEGAT has held that the modvat credit is available on the HSD under Rule 57B of the Rules inasmuch as by Sub-clause (i) of the Validating Act, HSD Oil has been excluded from the benefit to modvat credit. As the period 16.3.95 to 12,5.2000 has been given, it has been made retrospective. As regards the third test, particularly on the question of unreasonableness and arbitrariness, we have already discussed this aspect in detail in preceding paras. In fact, in our view, the impugned Validation Act is mere clarificatory in nature. The Apex Court in M/s. Hiralal Ratanlal's case (supra), while observing that there is a distinction between the encroachment of the judicial power and the nullification of the effect of judicial decision by changing the law retrospectively reading the statement of objects and reasons, approved the amending Act being clarificatory in nature.
31. Lastly, it is contended by the learned counsel the petitioner has availed the MODVAT credit in terms of the rules and in the light of the judgment of the CEGAT, which have attained the finality. On availing such credit, the petitioner has priced its finished goods after taking into account such credit and, therefore, did not pass-on the burden i.e. duty on the HSD Oil to its consumer. Thus, if the validity of the amendment imposing the levy on HSD Oil is upheld, it will result in harshness to the petitioner company, it is urged that on he said ground alone, the impugned validation Act deserves to be declared unreasonable and arbitrary and struck down. Reliance is placed on a S.B. judgment of the Calcutta High Court in Sheo Bhagwan Goenka v. C.T.O. (33), and Anr. D.B. decision of the same court in Bengal Paper Mills v. C.T.O. (34). We have gone through both the judgments. Both the cases have no application to the facts of the case. In the subsequent D.B. judgment, it is held that a distinction ought to be made between a validating Act, where acts in respect of which the legislature is competent to legislate or validate by the subsequent legislation to cure the defects of the former legislation under which those acts have been done and a statute by which fresh impositions are levied on the citizens retrospectively on the other hand. It was realised that for a dealer, it is not possible to recover the sales tax which have become liable to pay under the impugned section. The Division Bench of the Calcutta High Court found the validating Act with retrospective effect harsh in the peculiar facts of the case where the definition of the business was amended leading to recovery of tax for a larger period. The Calcutta High Court tried to distinguish the decision of the Apex Court in Krishna Murti v. State of Madras (35), wherein the Apex Court upheld the validity of the Act by which an amendment introduced in the Madras Sales Tax Act was given retrospective operation but Khanna J. speaking for the Court pointed out that period from 1.4.64 to 30.9.65 during which the sales tax authorities charged tax on sale of furnace oil at the rate of 2% was very short and did not give rise to some kind of vested right in favour of the appellant. In the instant case, the inconsistent view of the department has been that the modvat credit is not available on the HSD Oil used in D.G. Set for generation of the electricity. There have been conflicting decisions of the CEGAT. The period of recovery of duty is not large. Thus, both the Calcutta cases are of no help to the petitioner. Thus, we find no substance in this contention as well as the same is rejected.
32. Thus, we have no hesitation in holding that the impugned Validation Act is intravires of the Constitution or to say, we uphold the constitutional validity of the impugned Act.
33. Consequently, we find no merit in this group of writ petitions. All the writ petitions are dismissed. No order as to costs.