OCTOBER 30, 2009

By CA Pradeep Jain & CA Preeti Parihar

WHEN we talk of penalty under Section 11AC and a number of interpretations and pelothra of litigation comes to mind. Penalty u/s 11AC of the Central Excise Act, 1944 is the harshest penal provision prescribed in the Act and is mandatory provided the conditions prescribed in the section are satisfied. It has always been a matter of litigation since inserted in the Act. This article deals with the various issues arising in this section because of Court decisions and Board Circulars.

Section 11AC – An analysis

Section 11AC of the Central Excise Act, 1944 prescribes that in the cases of non/short levy/payment or erroneous refund due to fraud, collusion, misstatement or suppression of facts with intent to evade payment of duty; the penalty equal to amount of duty determined under section 11A(2) will be imposed on the assessee. However, if the duty alongwith interest is paid within 30 days of the communication of order of Central excise officer, the penalty will be 25% of duty. But for availing this relief it is necessary that the penalty should also be deposited within the stipulated time of 30 days referred hereabove. Further, if the Commissioner (Appeal) or hon'ble Tribunal reduces or increases the duty so determined u/s 11A(2), the reduced/increased amount will be considered for the purpose calculating the penalty. Finally, the fourth proviso to this section provides that where the duty payable u/s 11A(2) is increased by Commissioner (Appeals) or Tribunal, then also the benefit of reduced penalty under first proviso will be allowed if the incremental duty and penalty alongwith interest is paid within 30 days of the order of the Commissioner (Appeals) or Tribunal.

Duty paid before issue of show cause notice – whether attracts penalty?

Section 11A of the Central Excise Act, 1944 provides that the show cause notice is to be issued for non levy or short levy or non payment or short payment or erroneous refund of duty. In other words, if the duty and interest are paid before issue of show cause notice, there is no short levy/payment; therefore the conditions prescribed u/s 11A for issue of show cause notice are not satisfied and as such, the show cause notice cannot be issued. When show cause notice cannot be issued, the question of imposition of penalty also does not arise as it is dependent upon issue of show cause notice. There was conflict between department and assessees regarding this opinion and the litigation had undergone divergent decisions given by various appellate authorities. It was held by tribunal and even the various High Courts have also decided that the Section 11AC is not attracted when the duty is paid before the issue of show cause notice. The some of the decisions are quoted below:-

 CCE, Mangalore v. Shree Krishna Pipe Industries [ 2004-TIOL-09-HC-KAR-CX]

Rashtriya Ispat Nigam Ltd. v. CCE, Vishakapatnam [ 2002-TIOL-116-CESTAT-BANG] as affirmed by hon'ble Apex Court & reported at 2004 (163) ELT A53 (SC)

Union of India vs T.P.L. Industries Ltd. [2007 (214) E.L.T. 506 (Raj.)]

These decisions for some time settled the matter in favour of the assessees who have deposited the duty and interest prior to issuance of show cause notice.

Penalty u/s 11AC – Mandatory or Discretionary?

The decisions given by relying on the judgments referred above were as usual not acceptable to the department and inspite of High Court decisions in favour of the assessees, the litigation continued. Then, hon'ble Supreme Court of India gave the landmark judgment in the case of Union of India v. Dharmendra Textile Processors 2008-TIOL-192-SC-CX-LB . In this case, it was held that the penalty imposed u/s 11AC of the Central Excise Act, 1944 is mandatory and the authorities, tribunal or Court do not have any discretion to reduce the penalty. This decision seemed to blow away the expectations of the assessees who were relying upon the above referred decisions.

Demand should be issued by invoking “intent to evade payment of duty”

After the decision of Dharmendra Textiles, the department started invoking the penal provision of Section 11AC in every demand. It was contended that the penalty under Section 11AC is mandatory and it will be equal to duty. But the assesses are maintaining that the penalty under Section 11AC can be invoked only when there is wilful suppression, fraud, collusion etc. Unless and until, the demand is issued by invoking intent to evade payment of duty, the penalty under Section 11AC can not levied. Thus, the demand should be issued under proviso to Section 11A then the penalty under Section 11AC can be imposed. This is provided in the language of the Section 11AC itself. But the department is issuing show cause notice in each and every case by proposing penal action under 11AC.

Penalty u/s 11AC – whether dependent on demand u/s 11A(2) :-

Section 11A of the Central Excise Act, 1944 empowers the Central Excise Officer to issue a show cause notice in the cases where any duty is short levied/paid or not levied/paid or erroneously refunded. Sub section (2) to section 11A states that after considering the representation made by the notice as referred in sub section (1) of section 11A, the Central excise officer will determine the excise duty payable by that person, the amount of duty should not exceed the amount proposed in the show cause notice. The person shall be liable to pay the excise duty so determined. As such, the penalty imposable u/s 11AC is dependent upon the fact that the show cause notice should have been issued to the person and the duty so determined in consequence of that notice will be the base for calculating the amount of penalty u/s 11AC of the Central Excise Act, 1944. Some of the decisions given on this line are listed as follows:-

Union of India vs Perfect Thread Mills Ltd. [2007-TIOL-805-HC-RAJ-CX]

UOI vs. Rajasthan Spinning & Weaving Mills [2009-TIOL-63- SC-CX]

In both of the above cases, it was held that in case the duty is paid by the assessee prior to issuance of the show cause notice, there was no reason to issue any show cause notice to the assessee. When the show cause notice is not issued, there is no determination of duty u/s 11A(2) by the adjudicating officer as determination u/s 11A(2). Since the penalty u/s 11AC is dependent on the fact that the demand is issued u/s 11A(2), inapplicability of section 11A(2) will also lead to inapplicability of section 11AC.

All these decisions without any further ambiguity cleared the situation that there is positive correlation between demand issued u/s 11A(2) and penalty u/s 11AC of the Central Excise Act, 1944. It is the nature of law that as soon as one issue seems to be settled by judicial rulings, another issue arises out of the same provision. Same thing happens with section 11AC of the Central Excise Act, 1944. Conflicts of section 11A(2) viz a viz 11AC seemed to be settled by above discussed decisions, very soon, the litigation arose in the proviso to section 11A(2) pertaining to benefit of reduced penalty.

Benefit of 25% Penalty – whether available at Adjudication stage or also at Appellate stage :-

The new issue arising in the chain of litigation of section 11AC pertain to benefit of 25% penalty as provided in first proviso to section 11A(2) of the Act. This issue was regarding the question whether benefit of reduced rate of 25% penalty is available at adjudication stage only or this benefit may be availed at appellate stage also. The fire burst up with the decision of hon'ble Punjab and Haryana High Court in the case of Commissioner of Central excise Commissionerate, Rohtak vs JR Fabrics (P) Ltd. [2009-TIOL-259-HC-P&H-CX]. A detailed decision elaborating the various provisions related to section 11AC and section 11A(2) was given. The gist of this decision is produced as follows for the sake of convenience:-

In this case, the duty and interest were paid before issuance of show cause notice and the same was intimated to the department. But the show cause notice was issued and the case was adjudicated as follows: Duty and interest already paid were appropriated by the adjudicating authority. Penalty equal to amount of duty was imposed u/s 11AC and 38A and rule 25 of erstwhile Central Excise (No. 2) Rules, 2001. Penalty of Rs. 1 lacs was imposed on managing director of the company. On appeal being filed, Commissioner (Appeal) modified Order in original and removed the penalty on Managing director. The assessee reached Tribunal wherein it was held that the assessee was liable liable to pay only 25 percent of duty amount as penalty by placing reliance on a judgement of the Delhi High Court in the case of CCE v. Malbro Appliances Private Ltd. 2007(208) ELT 503 . Whereas, the revenue counsel relied on the decision of Union of India v. Dharmendra Textile Processors 2008-TIOL-192-SC-CX-LB and argued that a plain reading of 2nd proviso to Section 11 AC of the Act would make it clear that equal amount of duty found to be paid to the revenue is to be realised as penalty and therefore the amount of 25% imposed by the Tribunal as penalty is liable to be set aside.

It was contended by the counsel of the assessee that the first two provisos postulate a concessional rate of 25% penalty in case the amount of duty as determined under sub section 11 A (2) of the Act and the interest payable thereon stand paid within thirty dates from the date of communication of the order of the officer determining such duty. The second proviso further imposes an obligation that the benefits contemplated by first proviso are to be available if the amount of penalty so determined has also been paid within a period of thirty days. In other words, if the duty as determined under Section 11 A(2) of the Act by the Central Excise Officer is paid within thirty days then penalty equal to the amount of duty is not required to be paid and the amount contemplated in lieu of the penalty is 25 % of the total amount of excise duty determined the officer concerned. But since this benefit was not extended to the assessee – neither by the adjudicating authority or first appellate authority; Tribunal extended the same to the assessee.

The decision given as above was backed by good analysis of the provisions of section 11A(2) and section 11AC. It seemed to affirm the decisions given by the various appellate authorities on the previous issues arising in the section 11AC. The main outcome of the decision was that the benefit of reduced rate of penalty is also available at appellate stage if the same is not allowed at the adjudication stage to the assessees. Once again a favourable decision was given in favour of the assessees, but it seems that such decisions are not appreciated by the Revenue. The reason being issuance of Circular No. 898/18/09-CX dated 15.9.2009 which says benefit of reduced penalty is available only at adjudication stage.

Circular No. 898/18/09-CX dated 15.9.2009:-

This latest circular is issued in consequence of a decision given by Commissioner (Appeals) wherein the benefit of reduced rate of penalty u/s 11AC is allowed within 30 days of the communication of the Order in Appeal. In this circular it is clarified that benefit of reduced penalty is available only at the adjudication stage and the period of 30 days as prescribed in proviso to section 11AC is to be calculated from the date of passing order in original. The circular says Commissioner (Appeal) cannot allow this benefit at appellate stage.

Analysis of Circular:-

The analysis of Circular viz a viz first and second proviso to section 11AC makes it clear that mere plain reading of these provisos can derive the interpretation drawn by the Circular. The first and second provisos ibid are reproduced as follows:-

“Provided that where such duty as determined under sub-section (2) of section 11A, and the interest payable thereon under section 11AB, is paid within thirty days from the date of communication of the order of the Central Excise Officer determining such duty, the amount of penalty liable to be paid by such person under this section shall be twenty-five per cent. Of the duty so determined:”

“Provided further that the benefit of reduced penalty under the first proviso shall be available if the amount of penalty so determined has also been paid within the period of thirty days referred to in that proviso:”

The analysis of above makes it clear that the first proviso talks of reduced amount of penalty if the duty so determined u/s 11A(2) alongwith interest is deposited within 30 days of communication of that order. In other words, it affirms the fact that the benefit of reduced penalty will be available if duty and interest are deposited within prescribed limit of 30 days. The second proviso says that the benefit of reduced penalty will be available if the penalty is also deposited within the period of thirty days referred to in the first proviso. However, this interpretation taken in the Circular would fail in case where the duty and interest are paid before the issue of show cause notice and the order appropriates the duty and interest but imposes penalty equal to amount of duty. In such cases, the first condition is duly satisfied as the duty and interest so paid before issue of show cause notice, come within the time limit prescribed under first proviso. However, it is clear that benefit of reduced rate of penalty is allowable to such assessees as per first proviso. But since the order in original has imposed the 100% penalty, the assessee would have no option but to go to Commissioner (Appeal) for availing this benefit. As such, the interpretation taken by the Circular is not considering all the aspects pertaining to the scheme of section 11AC of the Central Excise Act, 1944.

Circular vs P & H High Court decision :-

The circular no. 898/18/09-CX dated 15.9.2009 says that the Commissioner (Appeal) cannot allow the benefit of reduced rate of penalty under proviso to section 11AC. Is this Circular contrary to the decision of hon'ble Punjab & Haryana High Court in the case of Commissioner of Central excise Commissionerate, Rohtak vs JR Fabrics (P) Ltd. [2009-TIOL-259-HC-P&H-CX] as discussed above? Let's recall – in this case, the benefit of reduced rate of penalty was allowed at Tribunal stage. Hon'ble High Court has affirmed this act of Tribunal by saying that if the duty and interest are paid within 30 days of communication of order, then the benefit of reduced penalty to the extent of 25% of duty should be extended to the assessee. It was decided that where the duty and interest are paid within 30 days of communication of order, then the benefit of reduced rate of penalty is available to the assessee. Given in the facts and circumstances of the case, the duty and interest were deposited prior to issue of show cause notice. It was held that it is an obligation on the adjudicating authority that he allows this benefit to the assessee by passing order in original imposing reduced rate of penalty. Since the adjudicating officer as well as Commissioner (Appeal) failed to do so, hon'ble Tribunal allowed the same which was affirmed by hon'ble Tribunal. It was further held that the benefit of reduced rate of penalty is not at the discretion of any adjudicating or appellate authority, it is by virtue of provisos inserted in the section 11AC. In the Circular, the clarification so given is contradicting this decision. The clarification says that the Commissioner (Appeal) cannot extend the benefit of reduced rate of penalty to the assessee whereas the detailed decision so given by hon'ble P&H High court has held that once the mandatory conditions of paying duty and interest within 30 days of passing of order are satisfied, the benefit of reduced rate of penalty is to be allowed to the assessee. The prime authority to allow this benefit is the Adjudicating officer, if he fails to do so, Commissioner (Appeal) has right to do so.

Beginning of a new litigation:-

Once again, the Board has brought up a Circular that is contradictory to the decisions given by the Appellate authorities. The Circular no. 898/18/09-CX dated 15.9.2009 and the decision of hon'ble Punjab & Haryana High Court in the case of Commissioner of Central excise Commissionerate, Rohtak vs JR Fabrics (P) Ltd. [2009-TIOL-259-HC-P&H-CX] are contradictory to each other. There is no doubt that department will take shelter of Circular and the assessees would go in shed of this decision, as a result, a new battle would commence. There are a lot of decisions which state that the decisions of High Court or any other appellate authority are binding on the Revenue. But, looking to the increase in contradictory Board Circulars and judicial pronouncements, further clarification is required as to which one will prevail over the other in case of contradiction. Still awaited...