OCTOBER 24, 2014

By Prem Kumar Francis

Mutatis mutandis? This writer had a fairly good understanding of this Latin legal phrase. But what does it precisely mean? Could something deeply significant be lodged in its meaning and usage? Turning to Mittal's Law Dictionary the meaning became clear: "It means with necessary changes in point of detail." An enlarged meaning is evident from website uslegal.com: Mutatis mutandis is a Latin phrase that means ‘by changing those things which need to be changed.' The phrase can also mean ‘having substituted new terms.'

Equipped with the precise understanding of the useful tool of legal draftsmanship I gave a closer look at Rule 14 of the CENVAT Credit Rules 2004:

Rule 14. Recovery of CENVAT credit wrongly taken or erroneously refunded: -

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 the 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.

Something in the structure of the above CENVAT credit recovery provision intrigued me and made me ponder. Some simple questions arose that needed clarifications:

One: Who made the rules? The opening para of CENVAT Credit Rules make sit amply clear: "In exercise of the powers conferred by section 37 of the Central Excise Act, 1944, … the Central Government hereby makes the following rules, namely:"

Two: Where is Section 11A located? This alongwith other provisions mentioned in Rule 14, are provisions found inside statutes enacted by the Parliament of India: Section 11A of Central Excise Act, 1944.

Three: What is Section 11A meant for? Obviously, I remind myself, it is a statutory provision for recovery of duty of excise not paid to the Government. To be doubly sure, the recovery provision was read again: it is interesting to note that Section 11A does not contain any reference to CENVAT credit wrongly availed and utilised.

Perhaps the reader may be conscious of the direction he or she is being guided to. But hastening slowly we shall revisit Mittal's Law Dictionary : "The phrase ( mutatis mutandis ) is often used in legislation in applying or extending legislative provisions to same or similar circumstances of the same or similar subjects. It is nothing but a rule of adaption."Searching for an illustration we shall turn to Hon. Calcutta High Court's Himalaya Rubber Products Ltd 1992(61)ELT210(Cal). Referring to this interesting form of legislation, Hon Justice Ruma Pal, as she then was, said at para11 that Rule 4(2) of the Central Sales Tax (West Bengal) Rules, 1958 in terms "incorporates the provisions of the Bengal Sales Tax Rules, 1941 … into the 1958 Rules mutatis mutandis. "

In the same context Lord Esher is quoted:

"If a subsequent Act brings into itself by reference some of the clauses of a former Act the legal effect of that as has often been held, is to write those sections into the new Act just as if they had been actually written in it with the pen or printed in it and the moment you have those clauses in the later Act, you have no occasion to refer to the former Act at all."

The pattern is now clear at least to my mind: a subordinate legislation – that is rules – can incorporate a subordinate legislative provision on mutatis mutandis basis. Similarly a Parliamentary enactment adopts mutatis mutandis principle with reference to another enactment of the same body. An immediate reference of much interest would be Section 11A(15) of the Central Excise Act 1944: "The provisions of sub-sections (1) to (14) shall apply, mutatis mutandis, to the recovery of interest where interest payable has not been paid or part paid or erroneously refunded." (Note the words "shall apply" – they also appear in Rule 14. Thus by using those words the Parliament was applying itself to itself.)

Therefore, for the Government to resort to mutatis mutandis technique in a Circular is understandable. Like for example in the Circular dated 12.9.2001 concerning excise instructions, at para 21 the Board instructed, "Provision for Merchant Overtime has been specified. The Customs Regulation on this has been made applicable, mutatis mutandis in excise matters."But what hath the Government wrought in CENVAT Credit Rule 14?

The Central Government, being the Executive, in exercise of its rule making powers while framing Rule 14, left its humble terrain and entered into the exalted space of the Legislature and made "necessary changes" and "substituted new terms" in, among others, Section 11A of a Parliamentary enactment. Is this an act of administrative over-reach?

If we recollect Lord Esher we note that if a subsequent Act brings into itself by reference some clauses of a former Act the legal effect is "to write those sections into the new Act". In such a scenario there is a sort of level playing field: power and authority flows unhindered on a horizontal plane from one provision of one enactment into another provision of another Act. In other words, as noted earlier: the Parliament can "apply" itself to itself. But can the Government through subordinate legislation usurp power and authority from Parliamentary enactment and "apply" to itself statutory provision?

Thus another dimension of Rule 14 becomes evident. Through the mutatis mutandis via-media what the framers of the rule may have intended was to elevate the proceedings for recovery of wrongly availed CENVAT credit to a statutory proceeding. No, they have not done that: what was done was merely copy the text of Section 11A but not the authority of that statutory provision. In computer parlance – it is a simple copy-paste job. The executive cannot "apply" a statutory provision to its subordinate legislation unless the statute provides it. The result is that while proceedings under Section 11A for recovery of duty of excise not paid are sanctified by the law of Parliament and become a statutory proceeding, on the other hand the recovery of wrongly availed credit under Rule 14 remains an administrative dispute resolution.

As the CENVAT Credit Rules have been framed by the Government "in exercise of the powers conferred by section 37 of the Central Excise Act, 1944" it would be useful to explore that provision. Section 37 does not give powers to the Government to change and suitably substitute the provisions of the Excise Act in furtherance of Government's objectives. Section 37(1) enjoins "The Central Government may make rules to carry into effect the purposes of this Act." In this particular context if we again peruse Section 11A, we would find that when it stands on its own pedestal (without the support of mutatis mutandis reference in Rule 14) there is no reference in this statutory provision (or perhaps in the entire Excise Act) to recovery of CENVAT credit wrongly availed and utilised. Now, would it be correct to conclude that purpose of the Excise Act does not include recovery of CENVAT credit wrongly availed and utilised? If that be so, is Rule 14 ultra vires the enactment?

Going a step further, we can note the significance of sub-section (2) of Section 37: "In particular, and without prejudice to the generality of the foregoing power, such rules may -

"then one pertinent phrase comes up again and again in the sub-clauses that follow sub-section (2): provide for … Like in clause (ib) " provide for … recovery of duty not paid; " A closer look would reveal clause (ib) is not the source of recovery powers: the font of that power and authority is located in Section 11A. Section 37(2)(ib) merely empowers the Government to provide an administrative platform for recovery of excise duty not paid which is recoverable under Section 11A. For recovery of wrongly availed CENVAT credit unfortunately the font of such recovery powers appears to be absent in the Central Excise Act, 1944 itself.Thus, merely making rules under Section 37 cannot be of assistance to the Government for such recovery proceedings: because Section 37 cannot grant any recovery power and authority to the Central Government in respect of wrong availment and utilisation of CENVAT credit.

It is interesting to note that whereas Section 37 provides for recovery of duty not paid, there does not appear to be any similar provision for recovery of CENVAT credit wrongly availed.

In Government's defense it can be argued that the words and phrase "duty of excise" in Section 11A in particular and Excise Act in general can take within its embrace the concept of CENVAT credit. Under Section 3(1) what is levied and collected is duty of excise. And what is physically collected could be in form of cash or through cashless credit debits – but it is duty of excise.

But an important distinction between the above two modes of payment of duty of excise needs to be noted. The entire Excise Act is not concerned with how and from where an assessee obtains cash for payment towards his duty liability. But, for how CENVAT credit is obtained or availed and utilised a whole paraphernalia has been set up – providing much food for feasting an army of officers, consultants, CAs, advocates, and vexing the minds of our judges.

Thus if Section 11A is not concerned as to how the assessee obtains cash for payment of duty of excise, the provision cannot be modified through mutatis mutandis process to cover how an assessee obtains and utilises CENVAT credit. Accordingly, if Section 11A is to adequately cover wrong availment and utilisation of CENVAT credit, cosmetic application of mutatis mutandis rule would be insufficient; much overhauling is necessary in the section itself: a task better left to Parliament rather than tinkering by the gnomes in the Ministry of Finance.

In conclusion, to my mind at the moment, as the complexity of the whole gamut of wrong availment and utilisation of CENVAT credit cannot be incorporated into Section 11A merely by application of mutatis mutandis rule, and as the Central Excise Act, 1944 happens to be silent on such wrongful availment and utilisation, to that extent Rule 14 of the CENVAT Credit Rules, 2004 is bereft of authority of law to recover such CENVAT credits.

Is this writer outrageously right or terribly wrong? Let the debate begin…