Gujarat High Court
Sunland Metal Recycling Industries & vs Union Of India Through Secretary & 3 on 6 February, 2014
Author: Akil Kureshi
Bench: Akil Kureshi
C/SCA/2678/2013 JUDGMENT
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
SPECIAL CIVIL APPLICATION NO. 2678 of 2013
FOR APPROVAL AND SIGNATURE:
HONOURABLE MR.JUSTICE AKIL KURESHI
and
HONOURABLE MS JUSTICE SONIA GOKANI
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1 Whether Reporters of Local Papers may be allowed to see
the judgment ?
2 To be referred to the Reporter or not ?
3 Whether their Lordships wish to see the fair copy of the
judgment ?
4 Whether this case involves a substantial question of law as
to the interpretation of the Constitution of India, 1950 or any
order made thereunder ?
5 Whether it is to be circulated to the civil judge ?
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SUNLAND METAL RECYCLING INDUSTRIES & 1....Petitioner(s)
Versus
UNION OF INDIA THROUGH SECRETARY & 3....Respondent(s)
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Appearance:
MR KAMAL TRIVEDI, SENIOR ADVOCATE, AND MR UDAY JOSHI FOR M/S
TRIVEDI & GUPTA, ADVOCATE for the Petitioner(s) No. 1 - 2
MR GAURANG H BHATT, ADVOCATE for the Respondent(s) No. 1 - 4
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CORAM: HONOURABLE MR.JUSTICE AKIL KURESHI
and
Page 1 of 27
C/SCA/2678/2013 JUDGMENT
HONOURABLE MS JUSTICE SONIA GOKANI
Date : 06/02/2014
ORAL JUDGMENT
(PER : HONOURABLE MR.JUSTICE AKIL KURESHI)
1. In this writ petition, the petitioners have challenged the show cause notice dated 12.8.2008 calling upon the petitioners why CENVAT credit amounting to Rs.4.82 crores (rounded off) wrongly availed by them should not be recovered with interest and why penalty under rule 13 of the CENVAT Credit Rules, 2002 and under rule 25 of the Central Excise Rules, 2002 and section 11AC of the Central Excise Act, 1944 should not be imposed. The petitioners have also challenged the validity of rule 13(2) of the CENVAT Credit Rules, 2002 (hereinafter referred to as "Rules of 2002") and rule 15(2) of the CENVAT Credit Rules, 2004 (hereinafter referred to as "Rules of 2004") as ultra vires the Central Excise Act, 1944.
2. Brief factual background is as follows :
3. Petitioner no.1 is a partnership firm and was at the relevant time engaged in manufacturing of zinc, alloy ingots, copper wire bars, etc., In the course of its manufacturing activity, the petitioners cleared goods from Page 2 of 27 C/SCA/2678/2013 JUDGMENT time to time and also availed CENVAT credit on the inputs used in such manufacturing activity. The Excise department however, received intelligence that the petitioners were using non duty paid scrap for manufacturing the final product. In order to avail CENVAT credit, they were obtaining duty paid invoices/bills of different inputs and were thus wrongly availing CENVAT credit on the strength of such documents without actual receipt of the inputs against such documents. A search operation was carried out at the premises of the manufacturing unit. As per the department during such search, it was found that there was large scale infraction of rules and availment of CENVAT credit by creating false documents and entries. We are not concerned with the validity of such allegations. Suffice it to record, on the basis of such allegations in the impugned show cause notice, the petitioners were called upon to show cause why :
"(i) The CENVAT credit amounting to Rs.4,82,37,939/ (Rupees Four Crores Eighty Two Lakhs Thirty Seven Thousand Nine Hundred Thirty Nine Only) (Rs.4,76,32,463 as BET + Rs.6,05,476 as Education Cess) wrongly availed by them on remelted copper ingots, copper wire Bars, Brass ingots, copper profiles, as detailed in AnnexureA attached to this Show Cause Notice, should not be recovered from them under Rule 12 of the CENVAT Credit Rules, 2002 or Rule 14 of the Credit Rules, 2004, as the case may be, read with Section 11A of the Central Excise Page 3 of 27 C/SCA/2678/2013 JUDGMENT Act, 1944 by invoking extended period as per proviso to Subsection(1) of Section 11A;
(ii) Appropriate interest under Rule 12 of the CENVAT Credit Rules, 2002 or Rule 14 of the CENVAT Credit Rules, 2004, as the case may be, read with Section 11AB of the Central Excise Act, 1944, should not be charged and recovered from them;
(iii) Penalty under Rule 13 of the CENVAT Credit Rules, 2002 or Rule 15 of the CENVAT Credit Rules, 2004, as the case may be, read with Section 11AC of the Central Excise Act, 1944, should not be imposed upon them;
(iv) Penalty under Rule 25 of Central Excise Rules, 2002 and Section 11AC of the Central Excise Ac, 1944 should not be imposed upon them."
4. While the adjudication of the said show cause notice was going on, the petitioners filed the present petition and challenged the show cause notice through the route of challenging the validity of rule 13(2) of Rules of 2002 and rule 15(2) of Rules of 2004. Pending the petition, the adjudication was allowed to proceed. Final order of adjudication was passed which was challenged by way of an amendment, We are however, informed that the said order was also independently challenged before the Customs, Excise & Service Tax Appellate Tribunal ("the tribunal" for short) and the tribunal by its order dated 28.11.2013 has remanded the proceedings back to the adjudicating authority. Learned counsel for the petitioners, therefore, stated that the challenge to the Page 4 of 27 C/SCA/2678/2013 JUDGMENT orderinoriginal passed by the adjudicating authority does not survive.
5. Counsel for the petitioners confined the challenge to the show cause notice only on the basis of validity of rule 13(2) of Rules of 2002 and rule 15(2) of Rules of 2004 and clarified that other aspects of the show cause notice would be raised in appropriate proceedings, if need so arises. In view of such facts, we have confined our focus to the validity of rule 13(2) of Rules of 2002 and rule 15(2) of Rules of 2004.
6. Learned senior counsel Shri Kamal Trivedi for the petitioners drawing our attention to the provisions contained in the Central Excise Act, 1944 and in particular, section 37 thereof, contended that the said rules are ultra vires the parent Act. He submitted that section 37 does not authorise the delegated legislation to frame any rules for recovering penalty. In absence of specific powers for framing rules for levying penalty, the delegated legislation acceded its limits of delegation in framing such rules. Counsel would contend that the penalty is also in the nature of compulsory exaction of tax ofcourse of penal nature. In view of Article 265 of the Constitution, there could be no levy of tax without the authority of law. It was contended that with introduction of Page 5 of 27 C/SCA/2678/2013 JUDGMENT CENVAT regime whenever found necessary, the legislation did make changes in section 37 itself.
6.1. In support of his contentions, counsel relied on the following decisions :
M/s. Khemka & Co.(Agencies) Pvt. Ltd. v. State of Maharashtra reported in (1975) 2 Supreme Court Cases 22, in which it was held that the Central Sales Tax Act did not contain any provision for imposition of penalty for delay or default in payment of tax under the State Sales Tax Act. It was further held that the provision for penalty for default in payment of tax in the State Act cannot be made applicable as incidental to and part of the process of payment and collection of tax under the Central Act. It was held that under the Central Act, it is only the tax as well as the penalty payable by a dealer under the State Act which can be assessed, reassessed, collected and enforced in regard to payment. The penalty under the State Act cannot be assessed, collected and enforced. The provisions of the State Act would apply only for the purpose of assessment, reassessement, collection and enforcement of tax. It was observed that :Page 6 of 27
C/SCA/2678/2013 JUDGMENT "25. Penalty is not merely sanction. It is not merely adjunct to assessment. It is not merely consequential to assessment. It is not merely machinery. Penalty is in addition to tax and is a liability under the Act.
Reference may be made to section 28 of the Indian Incometax Act, 1922 where penalty is provided for concealment of income. Penalty is in addition to the amount of incometax. This Court in Jain Brothers & Ors. v. Union of India 77 I.T.R. 107 said that penalty is not a continuation of assessment proceedings and that penalty partakes of the character of additional tax."
Ahmedabad Urban Development Authority v. Sharadkumar Jayantikumar Pasawalla and others reported in (1992) 3 Supreme Court Cases 285, in which the Supreme Court held that Regulation levying development fees was ultra vires the Gujarat Town Planning and Urban Development Act. It was held that in absence of any specific provision under the Act, the delegated authority has no power to make such Regulations on the basis of any implied, incidental or ancillary authority derived from the words 'or otherwise'. It was emphasised that a fiscal provision of levying fees must be based on specific statutory provisions and not on any implied, incidental or ancillary authority.
Collector of Central Excise, Ahmedabad v. Orient Page 7 of 27 C/SCA/2678/2013 JUDGMENT Fabrics (P) Ltd. reported in (2004) 1 Supreme Court Cases, in which the Supreme Court observed that an expropriatory legislation or a penal statute has to be strictly construed. It was further held that the authority of law to levy or collect tax has to be specific and explicit and should be expressly provided.
Kunj Behari Lal Butail and others v. State of H.P. and others reported in (2000) 3 Supreme Court Cases 40, in which the Apex Court observed that the delegated power to legislate by making Rules circumscribed by the statute as being "for carrying out the purposes of this Act" is a general delegation without guidelines and cannot be used to bring within its net a subject excluded by the Act itself or to bring into existence substantive rights or obligations or disabilities not contemplated by the provisions of the Act.
Union of India and others v. S.Srinivasan reported in (2012) 7 Supreme Court Cases 683, in which it was held that the provisions of appellate tribunal for Foreign Exchange (Recruitment, Salary and Allowances and Other Conditions of Service of Page 8 of 27 C/SCA/2678/2013 JUDGMENT Chairperson and Members) Rules, 2000 which bring in the concept of part time member is ultra vires the Foreign Exchange Management Act, 1999, since existence of a part time member is conceptually absent under the said Act. It was held that if a rule goes beyond rulemaking power conferred by the parent statute or supplants any provision for which power is not conferred, it becomes ultra vires. Heavy reliance was placed on decision of Division Bench of this Court in case of Krishna Processors v. Union of India reported in 2012(250) ELT 186(Guj.), in which the Court quashed rule 96ZQ of the Central Excise Rules, 1944. The said Rules provided for procedure to be followed by an independent processor of textile fabrics and covered the situation where excise duty was being levied from the textile processor on the basis of annual production capacity instead of actual production. Subrule(5) of Rule 96ZQ provided for penalty equal to the amount of duty outstanding from an independent processor, if he failed to pay the duty or any part thereof by the date specified in subrule(3). This rule thus provided for a penalty equal to the entire amount of outstanding duty without any discretion to the Page 9 of 27 C/SCA/2678/2013 JUDGMENT authority and without reference to the extent of delay in depositing the duty. The Court therefore, was of the opinion that the penal provision was extremely harsh since in every case of delay even if it was of one day delay, the authority was duty bound to impose penalty equal to the full amount of duty unpaid without any power of reduction or waiver. It was therefore, the Court opined that such harsh penalty was not envisaged even in the parent Act and thus the delegated legislation travelled beyond the scope of its delegation, the rule otherwise also was unreasonable and therefore, violative of Article 14 of the Constitution.
Gaffar Kassam v Commissioner of Sales Tax, Orissa, Cuttack and another reported in 1974 (33) Sales Tax Cases 98 in which the Orissa High Court observed that unless a statute expressly or by necessary implication authorises the Rules to create a penal liability, the rule making authority has no jurisdiction to create such a liability. It upheld that there was no specific provision in the Central Sales Tax Act which authorises the making of a rule for levying of penalty for non payment of tax demand and rule 16(2) of the Central Sales Tax (Orissa) Rules, Page 10 of 27 C/SCA/2678/2013 JUDGMENT 1957 was struck down.
Aryan Ispat and Power Pvt. Ltd. v. Union of India reported in 2012(281) ELT 15 (Ori), where the Division Bench of Orissa High Court struck down the validity of rule 12AA of Rules of 2004 and rule 12CC of Rules of 2002, on the ground that the Central Government had no power to make such rules.
7. On the other hand, learned counsel Shri Bhatt for the department opposed the petition and contended that the said Rules of 2002 and Rules of 2004 have been framed in exercise of power under section 37 of the Central Excise Act and is within the scheme of the Act and the rules made thereunder. He relied on the following decisions :
Om Prakash and others v. Union of India reported in AIR 1971 Supreme Court 771, in which it was observed that it is a well established proposition of law that where a specific power is conferred without prejudice to the generality of the general powers already specified, the particular power is only illustrative and does not in any way restrict the general power.Page 11 of 27
C/SCA/2678/2013 JUDGMENT The Assistant Collector of Central Excise v. M/s.
Ramakrishnan Kulwant Rai reported in AIR 1989 Supreme Court 1829, in which the Supreme Court reversed the decision of High Court which had declared rule 10A of the Central Excise Rules, 1944 as invalid. It was held that the said rule was not ultra vires the rule making power under section 37 of the Central Excise Act, 1944.
B.Prabhakara Rao v. Desari Panakala Rao and others reported in AIR 1976 Supreme Court 1803, in which the Supreme Court held that rule 15 of the A.P. State Transport Appellate Tribunal Rules(1971) was not ultra vires the provisions of the Motor Vehicles Act, 1939. It was observed that the said rule does not entitle the parties to the appeal or application to produce additional evidence but clothes the tribunal with discretionary power to allow such evidence.
Our attention was drawn to the decision of Division Bench of this Court in case of Dhariyal Chemicals v.
Union of India reported in 2009(234) ELT 208(Guj.), in which the Court upheld the validity of Rule 12CC of the Central Excise Rules, 1944. We are however, Page 12 of 27 C/SCA/2678/2013 JUDGMENT not concerned with the validity of the said rule in the present petition.
8. Having heard the learned counsel for the parties, we may advert to the provisions contained in the Central Excise Act, 1944 and the relevant provisions of the said two set of rules.
9. Central Excise Act, 1944, provides for charging and collection of central excise and related matters. ➢ ChapterII of the Central Excise Act,1944 pertains to levy and collection of duty. Section 3 contained therein pertains to duties specified in the First Schedule and the Second Schedule of the Central Excise Tariff Act, 1985, to be levied. Subsection(1) of section 3 provides that there shall be levied and collected in such manner as may prescribe various duties specified therein. Clause(a) of subsection(1) pertained to a duty of excise. With the advent of the central value added tax regime in the year 2000, the term 'a duty of excise' was substituted by the expression "a duty of excise to be called Central Value Added Tax (CENVAT)" in the said clause.
➢ Section 4 of the Central Excise Act, pertains to valuation of excisable goods for the purposes of charging excise duty. Page 13 of 27
C/SCA/2678/2013 JUDGMENT ➢ Section 11 of the Central Excise Act, pertains to recovery of sums due to Government and provides for a machinery and the manner in which such recovery can be effected. Section 11A of the Act provides for the procedure of recovery of duties not levied or not paid or shortlevied or shortpaid or erroneously refunded. Section 11AA and 11AB pertain to interest on delayed payment of duty. Section 11AC provides for penalty for shortlevy or nonlevy of duty in certain cases. Subsection(1) thereof provides for penalty for nonlevy or shortlevy or nonpayment or short payment or erroneous refund of the duty, particularly where as per clause(a) the same was by reason of fraud, or collusion or any wilful misstatement or suppression of facts, or contravention of any of the provisions of the Act or Rules made therein with intent to evade payment of duty and provides that the person who is liable to pay duty, shall also be liable to pay a penalty equal to the duty so determined.
➢ Section 11B of the Central Excise Act, governs a claim for refund of duty and interest. Section 11BB pertains to interest on delayed refunds.
➢ Chapter VI pertains to adjudication of confiscations and penalties. Chapter VIA of the Central Excise Act pertains to Page 14 of 27 C/SCA/2678/2013 JUDGMENT appeals and provides for a complete mechanism for filing appeals before the Appellate Commissioner, Tribunal, High Court and Supreme Court.
➢ Section 37 is contained in Chapter VII which pertains to supplemental provisions. It gives rule making power to the Central Government. Subsection(1) thereof provides that the Central Government may make rules to carry into effect the purposes of the Act. Subsection(2) provides that in particular and without prejudice to the generality of the foregoing power, such rules may provide for variety of situations enlisted in clauses(i) to (xxviii) of the said Rules. Subsection(4) of section 37 reads as under :
"(4) Notwithstanding anything contained in sub section (3), and without prejudice to the provisions of section 9, in making rules under this section, the Central Government may provide that if any manufacturer, producer or licensee of a warehouse --
a) removes any excisable goods in contravention of the provisions of any such rule, or
b) does not account for all such goods manufactured, produced or stored by him, or
c) engages in the manufacture, production or storage of such goods without having applied for the registration required under section 6, or
d) contravenes the provisions of any such rule with intent to evade payment of duty, Page 15 of 27 C/SCA/2678/2013 JUDGMENT then, all such goods shall be liable to confiscation and the manufacturer, producer or licensee shall be liable to a penalty not exceeding the duty leviable on such goods or two thousand rupees, whichever is greater;"
10. As is well known, the Excise was replaced by CENVAT. To usher in this new regime Rules of 2002 were framed. These rules were substituted by CENVAT Credit Rules, 2004. Though there are certain internal changes between the two sets of rules, the scheme of both rules being similar, for the purpose of our inquiry, we may advert to the Rules of 2004.
➢ Rule 3 thereof pertains to CENVAT credit. Subrule(1) provides that a manufacturer or producer of final products or a provider of output service shall be allowed to take CENVAT credit of various duties specified in clause(i) to (xi) paid on any input or capital goods or any input services received as manufacturer of final product. ➢ Rule 4 of the Rules of 2004 provides for conditions for allowing CENVAT. Subrule(1) provides that in CENVAT credit in respect of any input may be taken immediately on receipt of the inputs in the factory of the manufacturer or in the premises of the provider of output service. Sub rule(2) pertain to Cenvat credit in respect of capital goods Page 16 of 27 C/SCA/2678/2013 JUDGMENT received in a factory or in the premises of the provider of output service and broadly speaking provides for 50% of the credit to be taken in the same year. The rest being available the next year.
➢ Rule 5 pertains to refund of CENVAT credit in case of a manufacturer who clears a final product or an intermediate product for export.
➢ Rule 14 pertains to recovery of CENVAT wrongly taken or erroneously refunded. Rule 14 provides that where the CENVAT credit has been taken and utilised wrongly or has been erroneously refunded, the same along with interest shall be recovered from the manufacturer or provider of the output service and the provisions of sections 11A and 11AA of the Excise Act or sections 73 and 75 of the Finance Act, shall apply mutatis mutandis for effecting such recoveries.
➢ Rule 15 of the Rules of 2004 pertains to confiscation and penalty and reads as under :
"15 Confiscation and penalty :
If any person, takes or utilises CENVAT credit in respect of input or capital goods or input services, wrongly or in contravention of any of the provisions of these rules, then, Page 17 of 27 C/SCA/2678/2013 JUDGMENT all such goods shall be liable to confiscation and such person, shall be liable to a penalty not exceeding the duty or service tax on such goods or services, as the case may be, or two thousand rupees whichever is greater.
(2) In a case, where the CENVAT credit in respect of input or capital goods or input services has been taken or utilized wrongly by reason of fraud, collusion or any willful misstatement or suppression of facts, or contravention of any of the provisions of the Excise Act or the rules made thereunder with intent to evade payment of duty, then, the manufacturer shall also be liable to pay penalty in terms of the provisions of section 11AC of the Excise Act.
(3) In a case, where the CENVAT credit in respect of input or capital goods or input services has been taken or utilised wrongly by reason of fraud, collusion or any willful misstatement or suppression of facts, or contravention of any of the provisions of these rules or of the Finance Act or of the rules made thereunder with intent to evade payment of service tax, then, the provider of output service shall also be liable to pay penalty in terms of the provisions of section 78 of the Finance Act.
(4) Any order under subrule (1), subrule (2), subrule (3) shall be issued by the Central Excise Officer following the principles of natural justice."
11. The Central question is in framing rule 13(2) of Rules of 2002 and rule 15(2) of Rules of 2004, rule making authority acceded its delegation under section 37 of the Central Excise Act.
12. There is always a presumption of constitutionality of Page 18 of 27 C/SCA/2678/2013 JUDGMENT statutory provision. (See State of Jammu & Kashmir v. Triolki Nath Khosa and others reported in AIR 1974 Supreme Court 1). Such presumption is available also in cases of delegated legislation. (See St. Johns Teachers Training Institute v. Regional Director, National Council for Teacher Education and another reported in (2003) 3 Supreme Court Cases 321. We are conscious that a piece of delegated legislation does not enjoy the same level of immunity as the Act of State or Central legislature. However, there are well laid down parameters within which a delegated legislation can be questioned. We may in this context refer to the decision of the Supreme Court in case of Indian Express Newspapers (Bombay) Private Ltd. and others v. Union of India and others reported in (1985) 1 Supreme Court Cases 641, in which it was observed as under :
"75. A piece of subordinate legislation does not carry the same degree of immunity which is enjoyed by a statute passed by a competent legislature. Subordinate legislation may be questioned on any of the grounds on which plenary legislation is questioned. In addition it may also be questioned on the ground that it does not conform to the statute under which it is made. It may further be questioned on the ground that it is contrary to some other statute. That is because subordinate legislation must yield to plenary legislation. It may also be questioned on the ground that it is unreasonable, unreasonable not in the sense of not being reasonable, but in the sense that it is Page 19 of 27 C/SCA/2678/2013 JUDGMENT manifestly arbitrary. In England, the Judges would say "Parliament never intended authority to make such rules. They are unreasonable and ultra vires". The present position of law bearing on the above point is stated by Diplock. L.J. In Mixnam's Properties Ltd. v. Chertsey Urban District Council thus :
The various special grounds on which subordinate legislation has sometimes been said to be void...can, I think, today be properly regarded as being particular applications of the general rule that subordinate legislation, to be valid, must be shown to be within the powers conferred by the statute. Thus, the kind of unreasonableness which invalidates a byelaw is not the antonym of "unreasonableness" in the sense in which that expression is used in the common law, but such manifest arbitrariness, injustice or partiality that a court would say: "Parliament never intended to give authority to make such rules; they are unreasonable and ultra virese", ... if the courts can declare subordinate legislation to be invalid for "uncertainty" as distinct from unenforceable ... this must be because Parliament is to be presumed not to have intended to authorise the subordinate legislative authority to make changes in the existing law which are uncertain."
77. In India arbitrariness is not a separate ground since it will come within the embargo of Article 14 of the Constitution. In India any enquiry into the vires of delegated legislation must be confined to the grounds on which plenary legislation may be questioned, to the ground that it is contrary to other statutory provisions or that it is so arbitrary that it could not be said to be in conformity with the statute or that it offends Article 14 of the constitution"
13. In the context of framing of a rule providing penalty, from the judgements cited before us following propositions Page 20 of 27 C/SCA/2678/2013 JUDGMENT can be noticed :
a) In absence of any specific provision in the Act, a delegated authority would have no power to make regulation levying any fee or charge on the basis of any implied, incidental or ancillary authority. Ahmedabad Urban Development Authority v. Sharadkumar Jayantikumar Pasawalla and others(supra).
b) Expropriatory or penal statute has to be strictly construed and power of imposing penalty or confiscation has to be specific, explicit and expressly provided.
Collector of Central Excise, Ahmedabad v. Orient Fabrics (P) Ltd.(supra).
c) While delegating essential legislative function of choosing the legislative policy, only ancillary or subordinate function may be delegated. Kunj Behari Lal Butail and others v. State of H.P. and others(supra)
14. It can be seen from the Central Excise Act and the Rules of 2002 and Rules of 2004 that till the year 2000, the central excise duty was being charged from the manufacturer as per the Central Excise Act as provided in section 3 thereof. Sometime in the year 2000, CENVAT Page 21 of 27 C/SCA/2678/2013 JUDGMENT regime was ushered in which in essence permits the manufacturer of a final product to take the credit of the CENVAT paid on the inputs and input services utilised for manufacture of such final product and being ultimately saddled only with the liability of paying CENVAT on the value addition made by him. Rules also provide for availing CENVAT credit on capital goods used in the manufacturing process. Thus in essence, central excise was replaced by the concept of CENVAT. Nevertheless, CENVAT was nothing but a form of excise duty charged in terms of section 3 of the Central Excise Act, 1944. Quite obviously, because the new regime required machinery provisions for granting CENVAT credit, collection of duties and such other related issues, CENVAT credit rules were brought into existence. The initial Rules of 2002 were quickly replaced by Rules of 2004.
15. We have noticed that these rules made provisions for availment of CENVAT credit, its refund and recovery of duties not paid. In particular, rule 14 pertains to recovery of CENVAT credit wrongly taken or erroneously refunded and rule 15 provides for confiscation and penalty. Sub rule(2) of Rule 15 which is under challenge, provides that in a case, where the CENVAT credit in respect of input or capital goods or input services has been taken or utilized wrongly by reason of fraud, collusion or any willful mis Page 22 of 27 C/SCA/2678/2013 JUDGMENT statement or suppression of facts, or contravention of any of the provisions of the Central Excise Act or the rules made thereunder, with intention to evade payment of duty, then, the manufacturer shall also be liable to pay penalty in terms of the provisions of section 11AC of the Central Excise Act.
16. Section 37(1) of the Central Excise Act empowers the rule making authority i.e. the Central Government to make any rules to carry into effect the purpose of the Act. It is in exercise of these powers that the Rules of 2004 have been framed. Such rules provide for mechanism for allowing CENVAT credit and recovering of CENVAT from the manufactures and other agencies. We may also recall that clause(d) of subsection(4) of section 37 provides that notwithstanding anything contained in subsection(3) and without prejudice to the provisions of section 9, in making rules under this section, the Central Government may provide that if any manufacturer, producer or licensee of a warehouse contravenes the provisions of any such rule with intent to evade the payment of duty, then all such goods shall be liable to confiscation and the manufacturer, producer or licensee shall be liable to a penalty not exceeding the duty leviable on such goods or ten thousand rupees (as it existed at that time now substituted by two thousand rupees) whichever is greater.
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C/SCA/2678/2013 JUDGMENT
17. Thus in terms of section 37(1) and 37(4) of the Central Excise Act, 1944, the rule making authority had ample powers not only for providing for mechanism for collection of CENVAT and matters connected therewith but also to provide for penalties for breach of payment of such duty. We have already discussed that CENVAT is nothing but a form of excise duty charged in terms of section 3 of the Central Excise Act, 1944. Section 37(4) of the Central Excise Act, 1944 permitted the rule making authority to provide for confiscation and penalty not exceeding the duty liability on the goods, if any manufacturer, producer or licensee of a warehouse contravenes the provisions of any such rule with intent to evade the payment of duty. This precisely was provided in subrule(2) of rule 15 i.e. for penalty in terms of section 11AC when CENVAT credit has been taken or utilised wrongly by reason of fraud, collusion, or any wilful misstatement or suppression of facts or contravention of any of the provisions of the Excise Act or rules made therein. We may also recall that section 11AC itself provides for penalty from a person liable to pay duty if such duty has not been levied or shortlevied or short paid or erroneously refunded, by reason of fraud or collusion or any wilful misstatement or suppression of facts, or contravention of any of the provisions of the Act, or of the rules made thereunder with intent to evade Page 24 of 27 C/SCA/2678/2013 JUDGMENT payment of duty. In such cases the penalty would be equal to the duty so determined.
18. Under the circumstances, we do not find that the rule making authority flows only from subsection(1) of section 37 and can therefore, be stated to be general in nature without clothing the rule making authority with the power to levying penalty. As noticed section 11AC provides for penalty in case of unpaid duty by reason of fraud or collusion or any wilful misstatement, etc., Such duty in terms of CENVAT Credit Rules, 2004, would be the central value added tax. Subsection(1) of section 37 permits the Central Government to make rules to carry into effect the purpose of the Act which would include collection of duty and penalty when the occasion so arises. Clause(d) of sub section(4) of section 37 authorises the rule making body to frame rules for confiscation and collection of penalty when it is found that any manufacturer, producer or licensee of warehouse has contravened the provisions any provisions of such rule with intent evade payment of such duty.
19. In case of The Assistant Collector of Central Excise v. M/s. Ramakrishnan Kulwant Rai (supra), the Supreme Court upheld Rule 10 of the Central Excise Act, 1944, which provided for residuary power for recovery of sums due to the Government. Subrule was challenged on the Page 25 of 27 C/SCA/2678/2013 JUDGMENT ground that same was ultra vires the rule making authority. The Supreme Court repelled the challenge making the following observations :
"19. We may now examine the contention that at the relevant time Rule 10A was not covered by the rule making power conferred on the Central Government by Section 37. Section 37 dealt with power of Central Government to make Rules. Subsection (1) said: "The Central Government may make rules to carry into effect the purposes of this Act." Subsection (2) enumerated the matters the rules might provide for 'in particular' and "without prejudice to the generality of the foregoing power."
Thus, the section did not require that the enumerated rules would be exhaustive. Any rule if it could be shown to have been made "to carry into effect the purposes of the Act" would be within the rule making power. Chapter II of the Act dealt with the levy and collection of duty. Section 3 as it stood at the relevant time provided that duties specified in the First Schedule were to be levied. We have quoted Subsection (1).
20. The First Schedule contained Item Nos. description of goods and rates of duty. Section 3 has subsequently been amended by the Finance Acts of 1982 and 1984, and the Central Excise Tariff Act of 1985. This section, it would be seen, expressly empowered the levy and collection of duties of excise on all excisable goods as provided in the Act including its First Schedule. It could not, therefore, be said that Rule 10A was not covered by the above provision.
21. It is an accepted principle that delegated authority must be exercised strictly within the limits of the authority. If rule making power is conferred and the rules made are in excess of that power the rules would be void even if the Act provided that they shall have effect as though enacted in the Act as was ruled in State of Kerala v. K.M. Charia Page 26 of 27 C/SCA/2678/2013 JUDGMENT Abdullah & Co., [1965] 1 SCR 601. Therein the High Court having declared rule 14A of the Madras General Sales Tax Rules, 1939 as ultra vires, on appeal, this Court by majority held that the validity of the rule, even though it was directed to have effect as if enacted in the Act, was always open to challenge on the ground that it was unauthorised. The validity of the delegated legislation is generally a question of vires, that is, whether or not the enabling power has been exceeded or otherwise wrongfully exercised. Scrutinising the provisions of Rule 10A in the light of the above principles and pronouncements of this Court, we have no doubt that Rule 10A of the Rules, as it existed at the relevant time, was valid and not ultra vires the rule making power. Demand notices lawfully issued under the rule by the competent authority could not, therefore, be challenged on the ground of the rule 10A itself being ultra vires. Whether those could be challenged on any other ground must necessarily depend on the facts and circumstances of the case."
20. In the result, we do not find any substance in the challenge raised by the petitioner to the rule 13(2) of the CENVAT Credit Rules, 2002 and rule 15(2) of the CENVAT Credit Rules, 2004. The petition is therefore, dismissed.
(AKIL KURESHI, J.) (MS SONIA GOKANI, J.) raghu Page 27 of 27