Mentioning Correct provisions of law in SCN mandatory for invoking any charge against assessee – HC

CA Urvashi Porwal

Brief of the Case

In the case of The Commissioner of Central Excise Vs. M/s. Super Spinning Mills Ltd., it was held that non-mentioning of Section 72 of the Customs Act, 1962 along with Section 28 of the Customs Act, 1962 would render the Show-Cause Notice outside the purview of Section 72. Wrong mention of provision of law in the show cause notice is sufficient to invalidate the exercise of that power, when the power exercised is available under a different provision.

Facts of the Case

The respondent/assessee is a 100% Export Oriented Undertaking and holders of Central Excise Registration and Customs Licence for undertaking manufacturing activity under bond. The assessee is engaged in the manufacture of cotton yarn falling under Chapter Heading 52.05 of the Schedule to both Central Excise Tariff Act, 1985 and Customs Tariff Act, 1975 and procure raw materials viz., cotton indigenously and also through imports. They were exporting cotton yarn as well as clearing under DTA sales in the domestic market. The assessee had imported cotton from various countries without payment of Customs Duty claiming exemption under Notification No.53/97 (Cus) dated 3.6.97 as amended for use in the manufacture of cotton yarn. One of the conditions stipulated in the said Notification was that the imports, clearance, export, transfer and usage of goods and goods manufactured there from and the net foreign exchange earnings as a percentage of export shall be subject to the conditions of Export and import policy for 1^st April 1997 to 31^st March 2002 notified by the Government of India under the Ministry of Commerce Notification No.1/97 dated 31.3.1997. The norms were fixed for waste and scraps, fixed for an export product by an Export Oriented Unit as per Sl.No.100 of Appendix 41 of Hand Book of Procedures, EXIM Policy 1997-02 vide Public Notice No.34(RE-01)/97-02 effective from 1.12.1999 in the following manner:

In terms of Notification No.53/97 dated 3.6.97 as amended that in case of imported cotton, permissible wastage is 25% when used in the manufacture of combed cotton yarn below 40’s count. If the waste exceeds 25%, no benefit of duty free import under the said notification would be available in the cotton imported and used in such excess waste. The assessee has been regularly corresponding with the jurisdictional authorities on the quantum of waste collected and some of the correspondences referable to the instant case were dated 02.02.2000, 16.10.2000, 06.10.2000, 10.11.2000 and 11.10.2001. These correspondences relate to excess generation of waste in respect of the imported cotton. However, on scrutiny, the Department was of the view that the cotton waste generated in the Course of manufacture of combed cotton yarn out of the imported cotton, exceeded the prescribed norms on several occasions, which the importer did not declare to the Department; consequently, statements were recorded from the person concerned and a show cause notice was issued on 16.12.2003

In response to the said notice, the assessee filed a reply denying the allegations made in the Show Cause Notice. After due process of law, the Adjudicating Authority adjudicated the matter and passed an order holding that there was no suppression by the assessee. After considering the entire issue, the Adjudicating Authority came to the conclusion that the waste generated was well within the knowledge of the jurisdictional Central Excise Officers and there is no question of suppression of facts regarding the cotton waste generated.

Accordingly, the Adjudicating Authority passed the order in favour of the assessee. As against the order of the Adjudicating Authority, the Department filed an appeal before the Commissioner (Appeals) contending that that the time limit specified under Section 28(1) of the Customs Act was not applicable to the case and that the applicable provisions were those of Section 72(1) of the Customs Act, which did not specify any time limit. The Commissioner (Appeals) rejected the contention of the Department and held that Section 72 of the Customs Act was not applicable to the facts of the case and it was not open to the Department to change their stand after having invoked Section 28 of the Customs Act for demanding duty.   The Commissioner (Appeals) further held that the Department had no basis to sustain the duty in terms of Section 72 as they proceeded entirely on the basis of proviso to Section 28 of the Customs Act.   Accordingly, the Commissioner (Appeals) upheld the order of the Adjudicating Authority.

Aggrieved by the order of the Commissioner (Appeals), the Department once again pursued the matter before the Tribunal. The Tribunal, concurred with the view of the Commissioner (Appeals), dismissed the appeal holding as follows:

“After giving careful consideration to the submissions, I have found valid point in the submissions made by the counsel. The SCN invoked Section 28 read with Section 72 of demanding duty of Customs from the respondents on a certain quantity of the imported raw material. It invoked the extended period of limitation under the proviso to Section 28(1) of the Act on the ground that the notice had deliberately suppressed the generation of excess cotton waste before the department. The entire drift of the SCN was in the direction of a demand of duty under the proviso to Section 28. The notice also contains peripheral mention of section 72. In the present appeal, the department says that Section 72(1) (d) was invoked in the SCN. This is not factually correct. No fact was pleaded, nor any allegation raised, against the notice by the department purporting to demand duty under Section 72. According to Section 72(1) (d), the proper officer of Customs may demand duty on any goods in respect of which a bond has been executed under Section 59 and which have not been cleared for home consumption or exportation (or) are not duly accounted for to the satisfaction of the proper officer. For such a demand of duty, the ingredients of clause (d) of sub-section (1) of section 72 should be alleged and proved. This has not been done in the present case. As already observed, the tenor of the SCN is for demand of duty under the proviso to Section 28(1) of the Customs Act. Therefore, the claim of the appellant that Section 28 was erroneously mentioned in the SCN and that it was Section 72 which was intended to be pressed into service cannot be accepted. The findings of the ld. Commissioner (Appeals) are eminently sustainable. The appeal gets dismissed.”

Aggrieved by the order of the Tribunal, the Department is before this Court in this appeal.

Contentions of the Assessee

 The assessee contended that there is no allegation or material to support the invocation of Section 72 of the Customs Act. The claim of the Department to demand duty was not in terms of Section 72 of Customs Act. The assessee contended that a passing reference to Section 72 will not cure the defect because the assessee or the importer was not put on notice in respect of the charge or demand for duty in terms of Section 72 of the Customs Act.

Contentions of the Revenue

The Department contended that the question of law raised by stating that the mere wrong mentioning of provision of law would not render the entire exercise futile. In this regard, revenue relied on the decision in the case of Collector of Central Excise, Calcutta V. Pradyumna Steel Ltd. reported in 1996 (82) ELT 441 (SC).

Held by Hon’ble High Court of Madras

The Hon’ble High Court stated that It is not the case of the Department that the provision has been wrongly quoted. Factually, there is no allegation or material to support the invocation of Section 72 of the Customs Act. The claim of the Department to demand duty was not in terms of Section 72 of Customs Act. The entire exercise of the Department was on the question of invoking the extended period of limitation. A passing reference to Section 72 will not cure the defect because the assessee or the importer was not put on notice in respect of the charge or demand for duty in terms of Section 72 of the Customs Act.

The stand of the Department before the Supreme Court was that the mere mention of an incorrect provision of law in the show cause notice was not sufficient to invalidate the same. In the instant case, it is not the case of the Department that the provision has been wrongly quoted. In the present case, the relevant provision, namely, Section 72 of the Customs Act was not invoked and there was no charge or show cause notice in support of such a demand. Hence, the assessee or the importer cannot be asked to answer the charge, which is not specifically raised.

Assuming that Section 72(1) (d) of the Customs Act would apply, there is no material to support such a plea in the show cause notice. As the exact nature of the contravention for invoking Section 72 is absent, on facts, the Original Authority, the Appellate Authority as well as the Tribunal have correctly came to the conclusion that the allegation of the Department against the first respondent/importer is only in respect of wilful suppression, which has been found against the Department and in favour of the assessee There is also a finding that there is no case for demand of duty in terms of Section 72 of the Customs Act. As the Original Authority held that when the jurisdictional Officers have knowledge with regard to the issue of waste generated, which was confirmed by the Appellate Authority, there is no question of suppression of fact by the assessee.

In the light of above, the appeal is dismissed.