CESTAT Rules No Dishonest Intent: No Basis for Extended Time Limit or Penalty

Blue Mount Textiles Vs Commissioner of GST & Central Excise (CESTAT Chennai)

In a significant ruling, the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) Chennai has set a precedent in the case of Blue Mount Textiles Vs Commissioner of GST & Central Excise. This article provides an exhaustive analysis of the CESTAT’s order, highlighting its implications for the interpretation of the Customs Act, 1962, particularly concerning the extended time limit for issuing Show Cause Notices (SCN) and the imposition of penalties.

Background of the Case: Blue Mount Textiles, an entity engaged in the manufacture and export of terry towels and operating as a 100% Export Oriented Unit (EOU), faced allegations of contravening Exemption Notifications. The contention arose from the clearance of 22 looms imported without payment of duty, where duty was discharged at a concessional rate using CENVAT credit, deemed impermissible by the authorities. The original authority confirmed the demand along with interest by invoking the extended period of limitation and imposed a penalty, leading to an appeal by Blue Mount Textiles.

Legal Arguments and Tribunal’s Analysis: The appellant contended that the clearance of capital goods was done in good faith, under the belief that it was in compliance with Rule 17(1) of Central Excise Rules, 2002, and Notification 23/2003-CE. The crux of the appellant’s argument rested on the interpretation of customs duty payment through CENVAT credit and the applicability of the extended period for issuing SCN.

The tribunal scrutinized the timeline for issuing the SCN vis-à-vis the dates of duty payment and found that the notice was issued beyond the standard six-month window without a valid basis for invoking the extended period. The appellant demonstrated compliance with procedural norms, including seeking prior permission for goods clearance and accurately reporting in ER-II returns.

Findings and Conclusion: The CESTAT concluded that there was no dishonest or fraudulent intent from Blue Mount Textiles’ side, and the matter revolved around a legal interpretation of rules, where even judicial precedents showed variance. Notably, the tribunal emphasized the lack of willful suppression of facts by the appellant, rendering the invocation of the extended time limit and imposition of penalties unjustified.

The decision rested on the principle that adherence to procedural formalities and the absence of fraudulent intent precludes the application of punitive measures under the extended period doctrine. Consequently, the tribunal set aside the impugned order, allowing the appeal in favor of Blue Mount Textiles.

Implications for GST and Customs Law: This ruling underscores the importance of the bona fide belief of taxpayers in their compliance efforts and sets a boundary on the authorities’ discretion to invoke extended time limits and levy penalties. It highlights that:

• Legal Interpretation: Discrepancies in legal interpretation, especially concerning payment modalities and eligibility for exemptions, should not automatically lead to the assumption of malintent.
• Procedural Compliance: Taxpayers adhering to procedural norms and engaging transparently with authorities can expect leniency in instances where legal provisions are subject to interpretation.
• Judicial Precedents: The decision adds to the body of precedents that temper the authorities’ punitive measures with a consideration for the taxpayer’s intent and compliance efforts.

Conclusion: The CESTAT Chennai’s ruling in Blue Mount Textiles Vs Commissioner of GST & Central Excise offers clarity on the nuances of invoking extended time limits for SCN issuance and penalties under the Customs Act, 1962. It serves as a reminder for both taxpayers and authorities to navigate the complexities of customs and excise laws with a balanced approach, respecting the principles of natural justice and the intent behind compliance efforts. This case will undoubtedly be referenced in future disputes involving similar legal interpretations and procedural compliance issues.

FULL TEXT OF THE CESTAT CHENNAI ORDER

This appeal is filed by the appellant against Order-in-Appeal No. 3/2014-Cus dated 25.4.2014 passed by the Commissioner of Central Excise (Appeals), Salem). (impugned order)

2. Briefly the findings of the impugned order are that the appellant who are an 100% Export Oriented Unit engaged in the manufacture and export of terry towels had contravened the provisions of Exemption Notifications since they removed 22 looms that were imported without payment of duty, by discharging Basic Customs Duty (BCD) at a concessional 50% of the applicable duty amount that too by paying duty through CENVAT credit account which is not permissible. They should have cleared the looms on payment of applicable customs duty on the depreciated value thereof and at the full rate of duty in force on the date of such clearance. The total customs duty payable on the clearance of the said 22 looms worked out to Rs.9,58,783/- whereas the appellant removed the looms on payment of duty of Rs.6,31,584/- After due process of law, the original authority confirmed the demand along with interest by invoking the extended period of limitation and imposed penalty. Aggrieved by the order, appellant filed an appeal before Commissioner (Appeals) who vide the impugned order upheld the adjudication order. Hence this appeal.

2.1 No cross objection has been filed by the respondent department. 3.1 Shri S. Durairaj, learned counsel appeared for the appellant and Shri N. Satyanarayanan, learned AR appeared for the respondent.

3.2 The learned Counsel for the appellant has stated that they had cleared the capital goods on payment of duty of Rs.6,31,584/- through CENVAT credit as per Rule 17(1) of Central Excise Rules, 2002 and also by availing the benefit of Notification 23/2003-CE dated 3 1.3.2003. He stated that this procedure for payment of duty using CENVAT credit had found acceptance as per the decision of CESTAT [Single Member] in the case of CCE Vs Matrix Laboratories Ltd – 2012 (281) ELT 569 (Trib. Bang). However, he fairly admitted that subsequently the matter was decided against the appellants in the case of Continental Engines Ltd Vs CCE – 2018 (363) ELT 187 (Trib. De) and also in the case of Divis Laboratories Ltd Vs CCE – 2019 (370) ELT 457 (Tri. Hyd). However, they have a strong case on limitation. In terms of Section 28(3)(d) of Customs Act, 1962 the relevant date for issue of SCN is the date of payment of duty which is mentioned in Annexure-A of the SCN. In the normal course, without invoking the extended period, notice has to be issued within six months from the relevant period. The details of the notice issued in the impugned matter were furnished in their written submission.

The learned counsel stated that SCN was issued on 6.5.2013 by invoking the extended period. In the SCN, it is alleged that duty was paid by willfully availing the ineligible exemption under notification 23/2003-CE and by wrongly utilizing the cenvat credit. In the OIA (impugned order), extended period was invoked on the ground that the Appellants have not furnished sufficient details in the ER-2 returns. The learned Advocate stated that the extended period cannot be invoked for the following reasons. They obtained permission from the Assistant Commissioner vide letters dated 8.5.2008 & 8.9.2010 for the removal of capital goods in domestic area as per 6.15(b) of FTP and followed the procedure prescribed in Rule 17 of Central Excise Rules, 2002, which is a special rule to be followed by 100EOU for removal of goods in domestic tariff area. There is no allegation in the notice for contravention of Rule 17. Appellants removed the goods under Rule 11 invoices as per Rue 17(1). As per the SCN duty was paid through CENVAT credit on the same day of removal. Appellants have paid the duty through CENVAT credit on the bonafide belief that as per Rule 17(1) of Central Excise Rules, 2002 permits utilization of CENVAT credit for payment of duty on any goods removed by an 100%EOU. Appellants submitted monthly ER-2 returns as per Rule 17(3). ER-2 for May, 2008 was filed on 10.6.2008. ER-2 for Dec, 2008 was filed on 9.1.2009. ER-2 for Sep, 2010 was filed on 11.10.2010. The said returns were also scrutinized by the proper officers as per Rule 17(4) on 2 1.7.2008, 6.3.2009 and 25.11.2010 but no discrepancy was raised by them. All the relevant details were furnished in the invoices and ER-2 returns. There is no willful suppression of facts with intent to evade. The core issue is applicability of Rule 17(1) of CER, 2002 or Rule 3(4) of CCR, 2004. It is an interpretational issue. Further, all the details are furnished in the invoices and ER-2 returns. So, extended period cannot be invoked. Reliance was placed on the decision of Hon’ble Apex Court in the case of International Merchandising Company, LLC Vs CST – 2022 (67) GSTL 129 (SC) and Kaybee Tex Spin Ltd Vs CC – 2022 (381) ELT 407 (Trib. Ahmd). Apart from the issue of limitation he further stated that in the bill of entry, customs duty was assessed as 5% as per notification 21/2002-Cus [Sl.No:251(1) List 31-Item 9]. The said rate is applicable for these clearances also. But, in the SCN, tariff rate of 7.5% & 10% was adopted. For the same description of goods, the CVD is 8% till 6.12.2008 and 4% after that as per notification 6/2006- CE [Sl.No:3 List 2 – Item 37]. But, in the SCN, tariff rate of 14% and 10% was adopted. Therefore, while considering the effective rates, the demand would be only Rs.6,12,597/-. Amount paid through CENVAT credit is Rs.6,31,584/-. In the case of Divis Laboratories Ltd Vs CCE – 2019 (370) ELT 457 (Tri. Hyd), the Tribunal has allowed the re-credit once the demand is paid in cash. In the instant case, re-credit is not possible but refund by cash is allowed in terms of Section 142 of CGST Act, 2017. Therefore, the issue is revenue neutral. Reliance is placed on the decision of CESTAT, Chennai in the case of Hyundai Motor India (P) Ltd Vs CCE – 2019 (29) GSTL 452, which was also affirmed by the Hon’ble Apex Court – 2020 (32) GSTL J154(SC). He hence prayed that the impugned order be set aside and the appeal below allowed.

3.3 Learned AR stated on behalf of revenue that the appellant had contravened the provisions of Notification No. 53/1997-Cus dated 3.6.1997 read with Notification No. 52/2003-Cus dated 313.3.2003 inasmuch as they removed from their factory 22 looms imported under the above said notification during May 2008, December 2008 and September 2010 without payment of appropriate customs duty. The exemption under Notification No. 23/2003-CE dated 31.3.2003 is applicable only to goods manufactured in the EOU. As the looms were not manufactured by the appellant in the factory, the said exemption was not applicable for clearance of looms. As per the above notification, the capital goods imported by an EOU have to be cleared on payment of applicable customs duty on the depreciated value thereof at the rate in force on the date of such clearance. Therefore, at the time of removal of capital goods from the EOU, customs duty including CVD and additional duty of customs etc. leviable under sec. 12 of the Customs Act, 1962 r/w Customs Tariff Act, 1975 was payable. Hence the customs duty arrived at by the appellant under the above notification for discharging duty for the clearance of the said looms is not correct. Since the action of the appellant was done by suppressing the information from the department, the extended period for issue of SCN was correctly invoked hence the impugned order demanding duty with penalty may be upheld.

4. We have carefully gone through the appeal records and heard the rival parties. We find that the only point for discussion is whether the matter is hit by time-bar. We find that the appellant had sought permission from the department before clearing the goods. He had reported the matter in their ER-II returns. The issue also involves the interpretation of law with even a difference of opinion among the Tribunal Single Member Bench and its Division Bench on certain aspects of payment of duty. We hence find that the appellant has not acted with dishonest or fraudulent intent and suppression of facts is not involved. This being so, question of invoking the extended time limit or imposing penalty does not arise. We do not go into the merits of the issue, due to a lack of challenge on the said grounds, further the appeal on time bar is answered in favour of the appellant.

5. Since the Show Cause Notice has been issued beyond the normal time-limit, the impugned order is set aside and the appeal is allowed with consequential relief, if any, as per law.

(Pronounced in open court on 03.01.2024)