By TIOL News Service

MUMBAI, MAR 25, 2015: FOR every complex problem, there is a solution that is simple, neat, and wrong. Explanations exist; they have existed for all time; there is always a well-known solution to every human problem - neat, plausible, and wrong. – Henry Louis Mencken

The issue appears to be simple case of payment of differential duty after clearance of goods to sister units but what transpired at the level of the Tribunal was perhaps what the appellant or for that matter the officers who booked the case may have never thought of.

On to the case -  

+ The appellant is engaged in manufacture of metallized films and are clearing the same to their other units situated at Silvassa and Hyderabad for further use in the manufacture of final products. The duty paid on clearances made by the appellant is available as CENVAT credit to their own recipient units. For the clearances of metallized films effected by the appellant during the period from April 2001 to March 2002 , the appellant had paid differential duty of Rs.3.01 lakhs on 30.06.2002 and Rs.1.62 lakhs on 06.12.2002 [total of Rs.4.63 lakhs].

+ The above duty payment was made without insistence or notice from the Revenue. There was also no issue of demand notice or confirmation of such notice under Section 11A (2) of the Act for the above differential duty paid by the appellants on their own.

+ On 21.10.2003 a SCN was issued for appropriation of the differential duty paid and to seek to recovery of interest of Rs.96,342/- besides proposing to impose penalty u/r 27 of the CER, 2002.

The lower authorities confirmed the demand of interest and also imposed penalty and, therefore, the appellant is before the CESTAT.

The appellant submitted -

(a) The SCN dated 21.10.2003 for recovery of interest is not tenable as issued beyond the normal period of limitation

(b) In the absence of demand notice or its confirmation, recovery of interest is bad in law.

(c) Due to revenue neutral situation, the ratio of the decision of the Tribunal in appellant's own case squarely applies to this case.

Reliance is placed on the decisions in Emco Ltd. v. CCE – 2011-TIOL-1585-CESTAT-MUM (affirmed by Bombay High Court in Central Excise Appeal (L) No. 116 of 2011 dated 11.04.2012) [recovery of interest has to be effected within the period of limitation as applicable to the duty on which interest is sought to be levied]; as there is no allegation of any suppression of facts or mis-statement therefore, extended period of limitation cannot be invoked - Kaur and Singh v. CCE – 2002-TIOL-724-SC-CX & no penalty is leviable; as it is a revenue neutral situation therefore, as held by the Tribunal in their own case 2012-TIOL-1416-CESTAT-AHM, demand of interest is not sustainable.

The AR submitted that it is an admitted fact that the appellant has paid duty on issuance of supplementary invoices at a later date and, therefore, theyare required to pay interest for the delayed payment. The AR relied on the apex court decision in SKF India Ltd. – 2009-TIOL-82-SC-CX to justify the department stand.

The Member (Judicial) adverted to the provisions of section 11A(2B) of the CEA, 1944 and after extracting the Tribunal decision in Emco Ltd. - 2011-TIOL-1585-CESTAT-MUM as affirmed by Bombay High Court in Central Excise Appeal (L) No. 116 of 2011 dated 11.04.2012 observed -

The appeal was allowed with consequential relief.

However, the Member (Technical) had a differing view.

When the case was heard on 12.11.2014 the Member (T) had asked the appellant as to whether they have got copies of the ER-1s filed indicating the payment of differential duty and the reasons thereof to which the appellant informed that there is no requirement of indicating such payments in the monthly returns and is irrelevant for deciding the issue.

To this submission, the Member (T) observed - In my view it is very important to know whether the payments made in the differential duty were indicated in the monthly returns and Revenue was informed about the same. If yes, then the ratio of judgement in the case of Emco (supra) would be applicable and period of one year from the date of filing the return indicating payment of differential duty would become applicable. However, as it appears no such entries were made in the ER-1 returns, the limitation of one year would not be automatically applicable and the ratio of the judgement in the case of Emco will also not be applicable.

The Member (T) also viewed that when the appellant was not in a position to determine the AV at the time of clearance to their own units located at Silvassa and Hyderabad, they should have opted for provisional assessment as available in terms of rule 7 of the CER and, therefore, the duty paid is to be considered as to be on a final value and final assessment and extended period of limitation was applicable, moreover, since the appellant had paid duty even for period beyond one year.

It was further observed - Thus the conduct of the appellant both for not following the provisional assessment procedure, payment of duty in June 2002 and December 2002 not indicating the same in monthly returns, and not paying the interest though specifically provided under Section 11A(2B) of the Central Excise Act, 1944 as also Rule 7 of the Central Excise Rules is not above board and cannot be considered as bonafide.

Referring to section 11AB of the CEA, 1944, and after extracting the same, the Member (T) further noted –

The decisions in Pepsi Cola India Marketing Co. – 2007-TIOL-1417-CESTAT-AHM, Kanhai Ram Thekedar 2005-TIOL-76-SC-CT, International Auto Ltd. – 2010-TIOL-05-SC-CX, Citadel Fine Pharmaceuticals – 2002-TIOL-680-SC-CX were adverted to and it was further observed -

"…In the case before us explained earlier the appellants first of all did not follow the provisional assessment procedure when they were aware that the price has to be determined on Cost Construction Method and final price would be available after some period. Thereafter when they determined the final value and paid the differential duty (which was partly beyond the normal period of limitation) in my view they did not indicate the same in the monthly returns so as to make the revenue aware of the said facts and under the circumstances, the extended period of limitation of 5 years would be applicable. Appellant cannot be permitted to take advantage of their own wrong doings….there is no requirement of making such an allegation in the show-cause notice and it is for the adjudicating authority to take a view. In the present case undoubtedly the appellant has not followed the procedure of provisional assessment at the time of initial assessment and had paid duty as if it is final value. Later on, appellant paid duty even for the extended period of limitation but again kept hidden fact of differential duty payment in the monthly returns. In view of this particular situation, my considered view is that 5 years limitation period would be applicable and the demand notice has been issued within the reasonable period.

In the present case, differential duty has been paid on 30.6.2002 and 6.12.2002 and notice was issued on 21.10.2003. The demand is issued with reasonable period.

12. Even otherwise it is also noted that a part of the demand notice is within normal period of limitation i.e one year and therefore there cannot be any question for that part of the demand being time barred. This part of the demand has to be upheld and the appeal cannot be allowed unconditionally."

On the submission made by the appelant that in the absence of valid demand notice or its confirmation, recovery of interest is bad in law, the Member (T) commented - I find my learned Brother has not given any findings on the said issue. However, it would be seen from the show-cause notice that the said show-cause notice proposes to appropriate the amount paid by the appellant therefore it cannot be said that there was no valid demand notice or its confirmation. In any case, payment of interest is automatic and does not even require notice.

The concept of Revenue neutrality was also brushed aside by Member (T) by holding that –

"…The concept of revenue neutrality is not embedded either under Section 11A(2B) or in any other Section or the Central Excise Rules, 1944. The Hon'ble Supreme Court in para 8 which has been reproduced earlier very clearly stated that interest has to be paid under the circumstances. The fact, in their own case earlier the Tribunal has set aside the demand of interest, cannot be considered as goods law in view of Hon'ble Supreme Court's decision in the case of International Auto Ltd."

Penalty was also held to be imposable in view of the foregoing conclusions.

The appeal was dismissed.

But naturally, on account of difference in opinion, the matter came to be referred to the third Member for a Majority decision on a plethora of points.

This order was pronounced on 08.12.2004.

The third Member (T) on reference has passed an order recently.

And he has by relying upon the decision in Commissioner of Central Excise, Vishakhapatnam vs. Mehta & Co. – 2011-TIOL-17-SC-CX concluded thus - "…If one carefully peruses the Central Excise Act, it can be seen that whenever the legislature intended to lay down time limits, it has been specifically provided. In the absence of any time limits prescribed in Section 11AB, it would be improper to read into the said provision the time limits and the relevant date to compute such time limits from the provisions of some other section. If the legislature wanted to prescribe any time limits they would have done so. …Under the Central Excise Act, the normal period of limitation for demand of duty short levied or not levied, etc. is one year. Now the question is how does or from what date the said period of one year should be computed. The appellant herein was asked by the Regular Bench to file copies of the monthly excise returns so that it can be ascertained when and whether they had intimated the fact of short payment of duty; however, the appellant was unable to produce copies of the said returns. In the absence of any such evidence led by the appellant, it can be safely presumed that the fact of short payment of duty was brought to the notice of the department only in the monthly returns filed after payment of differential duty. In the present case, it is a fact on record that the short payments were made good only on 30-6-2002 and 6-12-2002 and therefore, these details would be available only in the returns filed in July, 2002 and January, 2003. The show cause notice having been issued in October, 2003, the demand in respect of payment made in December, 2002, is clearly within the normal period of limitation of one year and hence, the demand of interest in respect of this payment is clearly sustainable."

On the second point of reference as to Whether even for the demand of interest the Revenue is required to make specific allegations relating to suppression, fraud, willful mis-statement etc. as enumerated in proviso to Section 11A , the third Member (T) on reference concluded –

"3.1 … In the Kanhairam Thekedar case decided by the Apex Court, the apex court had held that since interest liability accrues automatically, separate written notice is not required for its recovery if it is not included in the assessment order. Therefore, it follows that only in a case where there is an assessment order determining the tax liability, interest would be liable to be recovered since it is consequential to the demand of tax. The said decision nowhere states that in a case where only recovery of interest is involved, no notice is required to be issued. In fact in the said order, it has been categorically held that if the assessment order does not include interest, demand for interest thereafter has to be made within a reasonable period. Therefore, I am unable to agree with the interpretation given by the Hon'ble Member (Technical) of the Apex Court's order in the Citadel Fine Pharmaceuticals case.

3.2 It is an implied principle of the rule of law that any order having civil consequences should be passed only after following the principles of natural justice. Otherwise, it will be a violation of Articles 14 and 21 of the Constitution of India. This principle has been lucidly explained by the Hon'ble Apex Court in Raghuanth Thakur v. State of Bihar [AIR 1989 SC 620] …"

Imposition of penalty u/r 27 when no interest is payable?

"4.1 In the facts of the present case, it is not in dispute that in respect of the goods removed during 2001-2002, there was short payment of duty which was made good in June and December, 2002. As per the provisions of Section 11AB, the appellant was required to pay interest on such delayed payment of duty. Further Rule 8(3) of the Central Excise (No.2), Rules 2001 as well as Central Excise Rules, 2002 also mandated that –

"(3) If the assessee fails to pay the amount of duty by due date, he shall be liable to pay the outstanding amount along with interest at the rate specified by the Central Government vide notification under Section 11AB of the Act on the outstanding amount, for the period starting with the first day after due date till the date of actual payment or the outstanding amount."

Therefore, the appellant was duty bound to pay interest on the delayed payment of duty. Further Rule 27 of both the Central Excise Rules, 2001 as well as 2002, provided that-

"Rule 27 General Penalty- A breach of these rules shall, where no other penalty is provided herein or in the Act, be punishable with a penalty which may extend to five thousand rupees and with confiscation of the goods in respect of which the offence is committed."

Therefore, the penalty of Rs. 5000/- imposed on the appellant is in accordance with law. …It should be remembered that the appellant is operating in a "self-assessment of tax" regime and therefore, a greater responsibility is cast on him to comply with the requirements of law. Rule 27 imposing general penalty does not require any mens rea on the part of the assessee and mere default will suffice to attract its provisions…."

Revenue neutrality:

"5.2 As regards the principle of revenue neutrality, in my considered view this has no relevance whatsoever. The law mandates that whenever there is a delayed payment of duty, interest liability would be attracted. The hon'ble Apex Court in the case of International Auto Ltd., the hon'ble Gujarat High Court in the case of Chloritech Industries, the jurisdictional hon'ble Bombay High Court in the case of Gammon India Ltd. and the hon'ble Madras High Court in the cases of Supreme Industries ltd. and Alstom T & D India Ltd. (cited supra) have clearly and categorically held that interest liability would accrue whenever there is a delay/default in payment of duty and such liability is absolute and the reasons for such short payment of duty are not germane. Therefore, in my considered view, there is absolutely no merit in this contention."

Conclusion by third Member (T) on reference:

"…I agree with the view of hon'ble Member (Technical) that the demand of interest on the duty payment made in December, 2002, is not barred by time limit and is sustainable in law. I also concur with his view that penalty is imposable under Rule 27 of Central Excise Rules, 2002, for default in payment of interest. The concept of revenue neutrality has nothing to do with the payment of interest on delayed payment of duty. However, I agree with hon'ble Member (Judicial) that a show cause notice should be issued for recovery of interest separately within a reasonable period if there is no demand for duty. If there is a notice for demand of duty, then no separate notice is required for recovery of interest. With these observations, I return the reference to the Original Bench for future necessary action…."

Majority decision:

The interest on the duty paid in December 2002 is upheld. Penalty imposed under Rule 27 is also upheld. As far as the interest on the duty paid in June 2002 is concerned, the same is set aside.

In passing: A hair-splitting exercise indeed! Perhaps in the coming days, we will hear more about this case from the precincts of the High Court…for example, see - 2015-TIOL-644-HC-MUM-CX.

(See 2015-TIOL-559-CESTAT-MUM)