By TIOL News Service

AHMEDABAD, JULY 18, 2014: THIS case has had a long and a tortuous journey.

On an optimistic note this decision of the CESTAT delivered two days ago should signal an end to the current proceedings.

Read further -

Appellants are engaged in manufacture of pharmaceutical products.

During the period July/December 1997 to 31.08.2001 appellants cleared inputs as such for job work to their sister concerns without reversal of MODVAT/CENVAT credit.

SCNs were issued in October/December, 2002 for recovery of the CENVAT along with imposition of penalty/interest.

In adjudication (order dated June, 2004), against M/s Darshak (now k/as Alembic) the demand of Rs.50,03,165/- was confirmed whereas in case of SCN related to demand on M/s Nirayu a demand of Rs.1,20,99,486/- was confirmed. Interest was held payable u/s 11AB of CEA, 1944. Equivalent penalty was imposed u/s 11AC of the CEA, 1944. Penalties were also imposed of Rs.1 lakh each u/r 209A of CER, 1944, 26 of CER, 2001

Tribunal vide orders dt. 12.07.2005 upheld the demands but allowed the recipient units to take the CENVAT credit. Equivalent Penalties imposed u/s 11AC were held to be unduly harsh and were reduced to Rs.2 lakh in case of M/s Darshak and Rs.5 lakh in case of M/s Nirayu. Penalties imposed u/r 209A, 26 were reduced to Rs.20,000/-.

Miscellaneous application was filed for modification of order dt. 12.07.2005 on the ground that in the said order the Tribunal considered it to be too harsh to impose penalty upon them and also allowed the credit to the recipient units thus clearly indicating that the issue was revenue neutral; that it is clear that the bonafide of the Appellant was not disputed by the Tribunal still demand for extended period was confirmed; that the material period involved is from August/December 97 to August 2001 and interest under section 11AB in such case can be demanded only for the period after 11.05.2001.

Agreeing with the Appellants that the order has not dealt with the interest issue, the Tribunal held that inasmuch as the demands stands confirmed and the penalties stands reduced by the order of the Tribunal, Vide order dt. 12.02.2007, directed the adjudicating authority to confirm the interest amount in accordance with law.

The Commissioner vide orders dt. 22.06.2007 confirmed the interest liability under Section 11AB on the ground that the demand was confirmed against the Appellants under proviso to section 11A (1) upholding the charges of willful suppression of facts and contraventions of provisions of central excise rules with intention to evade payment of duty and keeping in view this legal position the interest is legally chargeable for the period upto 11.05.2001 in terms of section 11AB.

Aggrieved, appellant filed appeals before the Tribunal.

Vide stay order dt. 23.08.2007 the Bench ordered for pre-deposit of 50% amount of the interest liability.

The Appellants filed application for modification of the stay order on the basis of the following new/ additional grounds -

a) Rule 57 I/57AH were not in existence in the statute book when the show cause notices were issued as the said rules have been substituted by rules 57AA to 57AK w.e.f.31/3/2000.

b) Section 37 of the Central Excise Act does not vest any power to levy interest in case of denial of modvat credit.

c) Whatever payment made by the applicants as duty earned as credit simultaneously and immediately by the receiving units of M/s Alembic group and hence the entire exercise is a revenue neutral one.

d) Interest is an appendage or an accessory to the principal w.e.f. 01/04/2000, as per the amended rules 57AC manufacturer has to pay an amount equal to the duty leviable on the inputs. Inasmuch as what has paid is neither duty nor Cenvat Credit, the question of charging interest on such amount under 11AB does not arise.

The Tribunal vide order dt. 22.10.2007 did not find merit in application for modification of stay, however, allowed the applications for introduction of additional grounds.

Vide Order No. dt. 10.10.2008 the issue was referred to the Larger Bench for reference as to whether the interest (on duty/cenvat credit demanded by applying proviso to section 11 A or Section 11A read with CCR, or under Rule 57I) is payable under section 11AB prior to 11.05.2001.

The Larger Bench (2013-TIOL-1429-CESTAT-AHM-LB) held thus -

"18. So far as the appeal filed by the revenue is concerned, the Tribunal has deleted the interest only on the ground that the demand relates to the period of 1997 to 2000 and on that count, it was held that no interest is leviable in respect of demand prior to 11-5-2001. It is, however, contended before us that while taking the said view, the Tribunal has only considered the provisions of sub-section (2) of Section 11AB brought on the Statute Book by the Act 14 of 2001 with effect from 11-5-2001. Prior to the said provision, Section 11AB was inserted by Section 76 of Finance (No.2) Act of 1996 with effect from 28-9-1996. It appears that the Tribunal relied on the non-applicable provisions, namely, amended Section 11AB. This amended Section 11AB would not apply to the cases where Section 11AB was inserted by Section 76 of Finance (No.2) Act, 1996, effective from 28-9-2006 and demand related to a period subsequent thereto, i.e. between the period from 28-9-1996 and 11-5-2001. Sub-section (2) of Section 11AB specifically states that the provision of Sub-section (1) of Section 11AB shall not apply to cases where the duty had become payable on the date on which Finance Act, 2001 received the assent of the President. It was, therefore, open and permissible to levy interest under Section 11AB for the period subsequent to 28-9-1996 under the un-amended provision of Section 11AB of the Act ."

The Larger Bench also noted that the issue as referred is squarely decided by the High Court of Gujarat in the case of Exotic Associates [2010-TIOL-59-HC-AHM-CX] and hence opined that the reference to the several precedents by the counsel for the assessee would be only of academic interest.

Now, before the referral Bench, the appellants inter alia submitted that the Tribunal order dt. 12.07.2005 reducing the penalties and admission of additional grounds clearly shows that the whole issue is revenue neutral and does not fall under the category of cases of evasion of duty on account of fraud, suppression willful misstatement so as to invite interest under section 11AB before 11.05.2001 in view of the Gujarat High Court decision in Nirmala Dyechem 2012-TIOL-999-HC-AHM-CX.

It is also submitted that the judgment of Larger Bench in the case of Ramkumar Mills Pvt. Ltd. 2005-TIOL-354-CESTAT-DEL-LB is squarely applicable in the present case as the Larger Bench while deciding the issue of valuation of goods held that the interest under Section 11AB of the C.E.A., 1944 cannot be demanded prior to the date of introduction of the date of Section and the assessee is liable to pay interest w.e.f. 11.5.2001.

The appellant also submitted that the reference answered by the Larger Bench in their case is not related/applicable in the facts of the present case as the Larger Bench order is related to issue as to whether in cases involving fraud, collusion, suppression or mis-statement the liability under section 11AB for interest gets wiped out after 11.05.2001; that the Larger Bench held that in such nature of cases the liability arises even after 11.05.2001 and that even in the cases not involving fraud, collusion or misstatement etc. the Section 11AB shall be applicable after 11.05.2001; that the present case stands on different footing as though the demands are for the extended period were confirmed, but the Tribunal did not find it fit to impose penalty under section 11AC and also allowed the credit of duty to the recipients of the goods of the duty, paid by the Appellant, which clearly shows that the issue being of revenue neutrality, no interest can be imposed under section 11AB. It was also highlighted that the judgement of Gujarat High Court in the case of Exotic Associates (supra) also related to issue in which the ingredients of fraud, suppression and malafide intention were present.

The Revenue representative submitted that since the demands have been confirmed by invoking extended period and penalty was imposed by the adjudicating authority under section 11AC hence the interest under section 11AB is imposable.

The Bench observed -

++ We find that as the Tribunal in its order dt.12.07.2005 had allowed the credit of the duty paid by the Appellants to the recipients units which are sister concerns of the Appellants, we are of the view that the whole issue becomes revenue neutral and in such cases there is no reason to hold the non-payment of duty can be attributed to any fraud, collusion or willful misstatement.

++ Our views are also based upon the fact that the Tribunal in its order dt.12.07.2005 while allowing credit to the recipient of goods also reduced the penalties upon the Appellant and also recipient units considering the same to be too harsh. It is to be noted that against such an order of the Tribunal, High Court has admitted an appeal only on penalties and not on extending benefit of CENVAT Credit to recipient units.

++ Coming to the core issue as to whether in such circumstances whether there is interest liability under Section 11AB, we find that Section 11AB prior to 11.05.2001 was applicable only in cases where the duty was evaded on account of fraud, collusion or willful misstatement. However, after 11.05.2001 Section 11AB was made applicable to all cases where the duty payment was delayed whether on account of intended evasion or otherwise.

++ We concur with the submission that the issue before the Larger Bench was confined only to the question of applicability of Section 11AB after 11.05.2001 in cases involving fraud, collusion, suppression or misstatement and the Larger Bench held that in such nature of cases the liability stands even after 11.05.2001. The issue of applicability of Section 11AB in a revenue neutral case was not before the Larger Bench and hence the reference answered by the Larger Bench is not applicable to the facts of the present case.

++ In the present case looking to the revenue neutrality we are of the view that the interest under Section 11AB for the clearances made before 11.05.2001 cannot be demanded from the Appellants even though the demands were confirmed by invoking extended period. Our views are also based upon the judgment of the High Court of Gujarat in the case of Nirmala Dyechem 2012-TIOL-999-HC-AHM-CX wherein the Court held that in cases not involving fraud, collusion or willful misstatement, the interest liability under Section 11AB cannot be levied in the case of the incident which occurred prior to the said amendment.

Held:

++ In respect of the demands which are arising for the clearances prior to 11.5.2001, the interest under section 11AB shall be payable w.e.f. 11.05.2001 if the payments have been made on or after 11.5.2001 and for the clearances effected from 11.05.2001 the interest under section 11AB shall be paid from the date of duty payable on such clearances.

The appeals were disposed of in above terms.

(See 2014-TIOL-1282-CESTAT-AHM)