By Sunil Achutan

THE Union Budget of 1996 saw the launch of new Sections 11AC and 11AB in the CEA’44. When they were enacted on 28.09.1996, the assessees “anointed” them as “draconian” provisions not seen before in Central Excise. As every one knows, section 11AC speaks of mandatory penalty payable by an assessee who evades central excise duty and against whom charges of fraud, suppression etc. have been invoked. Similar is the case with the mandatory interest provisions envisaged in Section 11AB.

The primary reason, it seems, in inserting Section 11AC was that the earlier rules 173Q, 9 and 209 of the erstwhile Central Excise Rules, 1944 “accommodated” a discretionary power to the adjudicating authority in the matter of imposition of penalty. Netizens may also refer to the Apex Court decision in the case of Z.B.Nagarkar (2002-TIOL-211-SC-CX) in this regard.

Old habits die hard !

It was presumed by the law makers that these potent provisions would “pre-empt” an assessee/manufacturer from indulging in such nefarious activities of evading Central excise duty given the fact that an equivalent penalty and interest would be required to be paid upon determination of the duty. Unfortunately, this was not to be. These manufacturers did not take things lying down, they continued in the same vein and felt that they could legally wrangle themselves out of the situation.

First time lucky

The CEGAT in the case of Escorts JCB Ltd (2002-TIOL-26-CESTAT-DEL) held that the limit of penalty equivalent to duty amount fixed under Section 11AC of Central Excise Act, 1944 is the maximum limit and it is not mandatory that in all cases such maximum should be imposed as penalty. In the said case, CEGAT reduced the penalty from Rs.30 lakhs to Rs.10 lakhs.

While setting aside the duty confirmed by the CEGAT, the Supreme Court (2002-TIOL-05-SC-CX), also held as under :-

Paragraph 14. In the result, the Civil Appeal no. 7230/1999 is allowed and judgement and order passed by the Commissioner of Central Excise and the CEGAT imposing duty and penalty is set aside. Consequently, Civil Appeal no. 1163/2000 preferred by the Revenue does not survive any more and is rendered infructuous. It is dismissed as such.

Earlier rulings on “mandatory penalty”

The Apex Court in the case of B.H.E.L v/s State of Madhya Pradesh (2002-TIOL-227-SC-MISC), while considering the provisions of Section 7 of the M.P. State Entry Tax Act, 1955 (which is pari materia with Section 11AC), held that the maximum penalty equal to ten times the tax is merely indicative of the upper limit of penalty imposable, that it is not necessary that in all the cases such penalty must be imposed by the authority and the assessing authority has the discretion to levy lesser amount, depending upon the facts and circumstances of each case.

Penal provisions in Rule 173Q of CER’44

In the context of the erstwhile rule 173Q of CER’44, it was held by the CEGAT {Hindustan Motors Ltd, 2002 (148) E.L.T. 203 (Tri. - Chennai)} and maintained by the Supreme Court [2003 (153) E.L.T. A304 (S.C.)], that no penalty can be imposed under the rule if the duty is paid before issue of the demand notice. A similar stand was taken in the case of UMS Radio Factory, 2004 (167) E.L.T. 87 (Tri. - Chennai) on 01.01.2004.

Here Cometh the hero

A similar view in the context of the new provisions 11AC and 11AB was taken in the case of M/s CCE, Delhi-III v/s Machino Montell (I) Ltd., (2004-TIOL-423-CESTAT-DEL-LB). The Larger Bench was constituted to answer the primordial question viz. “Whether penalty under section 11AC is liable to be imposed on the assessee or whether interest under section 11AB is liable to be levied on duty, in cases where the duty has been deposited by the assessee before issue of show cause notice ?”.

The CESTAT while following the Karnataka High Court decision in the case of Shree Krishna Pipe Industries (2004-TIOL-09-HC-KAR-CX) has answered the above question in the negative inasmuch as no penalty or interest is leviable if the assessee deposits the duty before issue of the show cause notice.

Incidentally, the petition before the Karnataka High Court (supra) filed by the department in terms of Section 35H of the CEA’44 seeking a direction to the Tribunal to refer the following questions of law to this Court viz. whether it was correct for the Tribunal to vacate the demand for penalty and interest made in terms of valid, mandatory and explicit legal provisions contained in the Act. The High Court while dismissing the petition came to the conclusion that the order of the Tribunal is a reasoned order and no question of law arises in regard to the said order.

No doubt, what may have heavily influenced such a decision was the fact that the departmental appeal filed against the decision of CESTAT in the case of M/s Rashtriya Ispat Nigam Limited (2002-TIOL-159-CESTAT-BANG) involving an identical issue, was dismissed by the Supreme Court on 07.05.2003, 2004(163)ELT A53(SC).

Penalty and interest go hand in glove with duty determination

Provisions of Section 11AC (and Section 11AB) come in to play in all those circumstances where duty of excise is short paid or not paid by reasons of fraud, collusion or any willful mis-statement or suppression of facts or contravention of any of the provisions/rules with intent to evade payment of duty. Obviously, in such instances, duty demands are raised under Section 11A of the CEA’44 by invoking the extended period. The fact that in such cases the assessee deposits the duty amount before issuance of the notice (thereby tacitly accepting the evasion) would merely reinforce the departmental stand to confirm the duty demand and consequently the provisions of s.11AB and s.11AC stand attracted.

Precedence Value

++ A precedent is an authority only for what it actually decides and not for what may remotely or even logically follow from it; and a decision on a question that has not been argued cannot be treated as a precedent – Goodyear India v State 188 ITR 402(SC), CIT v/s Ramakrishnan, 202 ITR 997; CIT v Kamla 213 ITR 177

++ Judgments must be read as a whole and observations in judgments should be considered in the context in which they are made and in the light of the questions that were before the court – CIT v Sun Engg 198 ITR 297(SC)

++ Reliance should not be placed on a decision without discussing how the factual situation fits in with the factual situation of the decision on which reliance is placed – Padmasundra Rao v State of TN 255 ITR 147(SC)

++ A decision of the Supreme Court takes its colour from the questions involved in the case in which it is rendered and, while applying the decision to a later case, courts must carefully try to ascertain the true principle laid down by the decision – CIT v Sun Engineering Works Pvt. Ltd, 198 ITR 297 (SC).

A different view has also been taken

It would not be out of place to mention that the decision in the case of Rashtriya Ispat Nigam Limited was distinguished in the case of Patiala Strips Pvt. Ltd. 2004(168)ELT267(Tri-Del) and the reasoning offered by the Member(J) was as under :-

“7. Appellants relied on the decision of Rashtriya Ispat Nigam Ltd. (supra). In this case, the assessee was manufacturing certain excisable goods which were used in the civil construction and maintenance purpose. On demanding duty by the Revenue, the appellant paid duty. In these circumstances, the goods were manufactured for the use of the civil construction and when the Revenue pointed out, the assessee paid duty. In this situation, the Tribunal held that penalty is not justified.

8. The facts of the present case are different. Here the appellant cleared the goods under six invoices on 23rd February, 2001 without entering into their daily stock register. It was also found that opening and closing balance in the daily stock register on 24-2-2001 was found to be rubbed. The reasons for this manipulation are best known to the appellant. In these circumstances, the ratio of the earlier decision relied upon by the appellant is not applicable to the facts and circumstances of the present case as the appellant contravened the provisions of Central Excise Rules, therefore, liable for penal action. In these circumstances, the appeal is dismissed.”

No doubt this decision was pronounced on 04.03.2004 before the Larger Bench decision (supra) came to occupy the scene on 26.04.2004. Be that as it may, the Larger Bench decision may not have a precedence value in view of the guidelines laid down by the Apex Court in the case of Padmasundra Rao v State of TN (supra).

The Sony Case

In the case of Sony India Ltd (2004-TIOL-43-SC-CX) delivered on 05.05.2004, although the appellant relied upon the decision of the Supreme Court in the case of B.H.E.L v/s State of Madhya Pradesh (supra), the same was distinguished by the Apex Court holding that the decision taken therein arose in the circumstances where certain actions had been taken in bona fide belief or the parties were under bona fide doubt as to under what tariff item they had to pay tax in question or where the assessee was under bona fide belief that his company was not required to be registered as a dealer under the Sales Tax Act. The Supreme Court upheld the equivalent penalty imposed under Section 11AC of the CEA’44.

It would be pertinent to note that in the said case the demand of Rs.2,07,64,870.16 was paid by the company under protest after the demand notice was served upon them.

It is within everyone’s knowledge that issuance of a demand notice and that too invoking extended period is a laborious job and sometimes takes months after completion of investigation.

Lessons to be learnt

It is not known whether the Larger Bench decision of the CESTAT has been appealed against. However, it would be prudent to learn the following lessons from the entire episode :-

1. Launch another KVSS scheme which does not compromise on duty but waives penalty and interest.

2. Advise such assesses who have paid up the duty to approach the Settlement Commission, Customs & Central Excise, and seek waiver of fine, penalty, interest in terms of Section 32K of the CEA’44.

Conclusion

The entire discussion boils down to one thing. If, following the Larger Bench decision, merely because the party paid the duty before the notice was issued, no penalty or interest is leviable, then these provisions would soon become redundant. This is not what the Finance Minister had in mind when he introduced the Finance Bill, 1996. In fact, the Finance Minister had asserted that such mandatory penalty provision is intended to deal sternly with persons who evade payment of tax.

Hope something is done in the forthcoming Union Budget before our country turns into a paradise for tax evaders.

(The views expressed are strictly personal)