By TIOL News Service

NEW DELHI, MAY 26, 2016: THE Petitioner is engaged in the manufacture and sale of various chemicals. One of the items manufactured by the Petitioner is Phenyl Acetic Acid ('PAA'). It is stated that in the manufacture of PAA two intermediate products are manufactured which are captively consumed viz., Benzyl Chloride ('BeCL') and Benzyl Cyanide ('BeCN'). BeCN is used as an input for the manufacture two final products -PAA, which is exempt from payment of excise duty and its 'Aqueous Layer' which is classified under heading 38.23 of the CET and is subject to 15% adv.

A SCN dated 5th July 1990 was issued to the Petitioner stating inter alia that during the period 1st January to 31st March 1990, BeCL produced as an intermediate product and captively consumed for producing BeCN had been cleared at Nil rate of duty by availing exemption under Notification Nos. 176/86 dated 1st March 1986 and 217/86 dated 2nd April 1986 whereas such exemption was available only if the BeCN so produced was dutiable. Inasmuch as BeCN and thereafter PAA was also being cleared at Nil rate under Notification No. 217 dated 2nd April 1986, the Petitioner was asked to show cause why it should not be asked to pay BED &SED on the BeCL so cleared on payment of Nil duty. Likewise, the Petitioner was also asked to show cause why it should not be asked to pay BED &SED on the BeCN cleared on payment of Nil Duty as per Notification No. 217 dated 2nd April 1986 since such BeCN was used in the manufacture of PAA which was also cleared on payment of Nil duty under Notification No. 147/84 dated 18th June 1984.

The demand on BeCL was Rs.5,73,598.44 and that on BeCN was a total of Rs.10,58,415.75.

The Petitioner replied to the SCN by inter alia submitting that since BeCN and BeCL were used in a composite process to produce PAA and the Aqueous Layer, and the latter being cleared on payment of duty, the benefit of Notification No. 217/86-CE could not be denied. It was further pointed out that all the above facts were in the knowledge of the Department, having been brought to its notice by the Petitioner itself, and therefore, it could not subsequently raise demands on a whimsical basis.

On 19th February 1991, another SCN was issued by the CCE, Meerut to the Petitioner for suppressing the facts with an intent to evade payment of duty, with reference to the use of benzyl chloride and benzyl cyanide manufactured and used within the factory of production in the manufacture of PAA. This was for the period 1st March 1986 to 31st December 1989 and, therefore, was by way of invocation of the extended period of limitation. This SCN was adjudicated first by the CCE, Meerut by an order dated 12th August 1991 confirming the demand of Rs. 99,67,802.92 as far as BeCN used in the manufacture of PAA was concerned and imposing a penalty of Rs.20,00,000. However, the CCE agreed that in such event if BeCN was dutiable, then no duty could be demanded on BeCL used in its manufacture in terms of Notification No. 217/86.

Subsequently, on 24th October 1991, the ACCE passed an order-in-original in respect of the first SCN dated 5th July 1990. Incidentally, the discussion and findings in the said order were on the same lines as the order dated 12th August 1991 of the CCE passed in respect of the second SCN dated 19th February 1991. The ACCE, therefore, confirmed the demand of central excise duty on BeCN in the sum of Rs.10,58,415.75 and dropped the demand as far as BeCL was concerned.

The assessees' appeal against the above order dated 24th October 1991 was dismissed by the CCE (Appeals) by an order dated 8th April 1993.

In appeal against the above order of Commissioner (A) and that of the CCE, the Tribunal upheld the conclusions reached in the orders. Modvat credit was extended. The submission by the assessee that the Department was aware of the captive consumption of the above substances was held to be untenable.

Against the order (s), the assessee filed Writ Petitions before the High Court. The petitioner, nonetheless, did not press for the matter involved and covered by the SCN dated 05.07.1990.

The petitions were heard and decided yesterday.

A preliminary objection was raised by the Revenue regarding maintainability of the petition on the ground that there is an efficacious statutory remedy of an appeal before the Supreme Court in terms of s.35L of the CEA, 1944.

The High Court observed that the writ petition was admitted after the Division Bench considered the question of maintainability and which order was not challenged by the Department and, therefore, it was not appropriate to relegate the Petitioner to the alternate remedy of an appeal moreso since the Writ Petition was pending before the High Court for the past two decades.

The High Court, thereafter, adverted to the following question and observed thus -

Was the extended period of limitation available to the Department?

+ After the introduction of MODVAT Scheme, the Petitioner cleared PAA and BeCL without payment of any excise duty in terms of Notification No. 147/84-CE dated 18th June 1984.

+ There is no denial of the fact that by a letter dated 31st March 1986, the Petitioner was asked to reverse the MODVAT credit and that by a reply dated 28th April 1986 the Petitioner agreed to abide by that request. Thus, the Department cannot now say that it was not aware that the inputs in the manufacture of PAA were being cleared without payment of duty or that PAA itself was being cleared with payment of Nil duty.

+ Further, the Petitioner had placed on record copies of the serially numbered gate passes pre-authenticated by the proper officer of the Department indicating how much BeCN was captively consumed in the manufacture of PAA and the quantity that was cleared on payment of duty. These gate passes in turn formed the basis of making entries in the statutory RG 1. The Petitioner is right in its contention that the gate passes were pre-authenticated in September 1986 and were issued in October 1986.

+ The copies of the classification lists dated 7th March 1986, 7th May 1986 and 1st March 1989 reveal that the first entry under the column describing the products manufactured mentions PAA and the fact that it was being cleared upon payment of Nil duty in terms of Notification 147/84 dated 18th June 1984.

+ The CEGAT in its order dated 18th November 1999 corrected the error in the order dated 15th April 1998 and agreed that in the classification list dated 7th May 1986 "exemption is claimed on both the substances in terms of Notification 217/86 for captive consumption". With this correction, the CEGAT's conclusion that there was a deliberate suppression of information by the Petitioner in the classification lists was untenable.

+ The Department was aware of the factual situation and, therefore, was not justified in invoking the extended period of limitation. Further in the second SCN dated 19th February 1991, the entire facts on the basis of which suppression and wilful misstatement was alleged were not set out. [Uniworth Textiles Ltd. v. CCE - 2013-TIOL-13-SC-CUS refers]

+ In the instant case, however, the order dated 18th November 1999 of the CEGAT itself acknowledges that the relevant information about BeCL and BeCN that were captively consumed were being cleared on payment of nil duty and that PAA was also being cleared after availing exemption from payment of duty were disclosed in the Classification List.

+ As already noticed, the Department was indeed aware of the fact that the Petitioner was clearing PAA, made from captively consumed BeCN cleared by paying nil duty and further that PAA was also being cleared upon payment of nil duty. The fact that it asked the Petitioner to reverse the MODVAT credit on inputs purchased from outside and the Petitioner complied, belies the Department's case to the contrary. Secondly, a comparison of the two SCNs shows that the second SCN for the extended earlier period 1st March 1986 till 31st December 1989 is a virtual repeat of the first SCN dated 19th February 1991 except for one paragraph extracted hereinbefore. This merely sets out the language of the proviso to Section 11A(1) and makes no reference to material that was not already available with the Department when the first SCN was issued. In such circumstances, the ratio of the decision in Nizam Sugar Factory - 2006-TIOL-56-SC-CX applies.

+ For all of the above reasons, the Court holds that in the present case, the conditions for invoking the extended period of limitation in terms of the proviso to Section 11 A (1) of the CE Act were not fulfilled and that the demand raised in respect of the BeCN used in the manufacture of PAA for the extended period of 1st March 1986 till 31st December 1989 was barred by limitation.

Conclusion:

The impugned order of the CEGAT dated 15th April 1998/18th November 1999 to the extent it upholds the demand in respect of BeCN and the corresponding order dated 12th August 1991 of the CCE as regards the second SCN dated 19th February 1991 confirming the above demand are hereby set aside. The penalty of Rs. 20 lakhs imposed by the CCE by the aforementioned order dated 12th August 1991 is also set aside.

The Writ Petition was allowed.

(See 2016-TIOL-1010-HC-DEL-CX)