In a significant decision, the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) Chandigarh has addressed the necessity of mens rea (guilty mind) for imposing penalties under Rule 25 of the Central Excise Rules. This verdict comes from the case of CCE-Jammu Vs. Khyber Industries (P) Ltd.
1. Background: The case involves an appeal by the Revenue against an order dated 27.11.2010 issued by the Commissioner of Central Excise, Jammu. The order confirmed a demand of Rs. 1,09,49,725/- against the respondent under Section 11A of the Central Excise Act, 1944, along with interest under Section 11AB. However, the Commissioner refrained from imposing penalties under Rule 25(1)(a), 25(1)(d), and 27 of the Central Excise Rules, and it’s these penalties that the Revenue has challenged in the appeal.
2. Facts of the Case: The respondent, M/s Khyber Industries (P) Ltd., Srinagar, is engaged in the manufacture of Cement and Clinker. They were availing the benefit of an exemption Notification dated 14/11/2002, which was subsequently amended. The dispute arose over the calculation of refunds for the months of April and May 2008, before and after the amendment.
3. Revenue’s Argument: The Revenue argued that the penalties under Rule 25 and 27 should have been imposed. They contended that the respondent misinterpreted the Notification for their convenience and failed to produce any written clarification from the CBEC regarding the retrospective effect of the amendment. The Revenue also asserted that the respondent contravened the rules and exemption notification with the intention to evade duty payment.
4. Respondent’s Defense: The respondent defended the impugned order, stating that they had informed the department about their intention to claim refunds. They argued that there was an inordinate delay in fixing the special rate, causing financial losses to them. They further emphasized that penalties under Rule 25 are subject to Section 11AC of the Central Excise Act, which requires mens rea, i.e., an intention to evade duty.
5. Legal Precedent: The decision cites various cases where it has been held that mens rea is a necessary ingredient for imposing penalties. It emphasizes that penalties under Rule 25 are subject to Section 11AC, which requires fraudulent intent, collusion, or willful misstatement for penalty imposition.
6. Impugned Order Justification: The impugned order justified the non-imposition of penalties by stating that the respondent acted under a bona fide mistake and had informed the department about their intention to claim refunds. It noted that there was a reasonable scope of doubt in interpreting the amendments, and malafide intent was not established. The order also highlighted that the respondent kept the department informed of all facts.
7. Conclusion: The CESTAT Chandigarh, in the case of CCE-Jammu Vs. Khyber Industries (P) Ltd., upheld the importance of mens rea for imposing penalties under Rule 25 of the Central Excise Rules. The decision emphasizes that penalties are subject to Section 11AC of the Central Excise Act, which requires fraudulent intent, collusion, or willful misstatement for penalty imposition. In light of the facts and legal precedents, the appeal of the Revenue was dismissed, and the impugned order was upheld. This ruling underscores the need for clear evidence of intent when imposing penalties in excise cases.
FULL TEXT OF THE CESTAT CHANDIGARH ORDER
The present appeal has been filed by the Revenue assailing the impugned order dated 27.11.2010 passed by the Ld. Commissioner of Central Excise, Jammu whereby the Ld. Commissioner has confirmed the demand of Rs. 1,09,49,725/- against the respondent under Section 11A of the Central Excise Act, 1944 along with interest under Section 11AB of the Act and the said amount has already been deposited by the respondent. However, the Ld. Commissioner has refrained from imposing any penalty on the respondent under Rule 25(1)(a), 25 (1) (d) and 27 of the Rules and the Revenue in the present appeal has only challenged the non-imposition of penalties under above said rules.
2. Briefly the facts of the case are that the Respondent M/s Khyber Industries (P) Ltd. Srinagar is engaged in the manufacture of Cement and Clinker and was availing benefit of exemption Notification No. 56/2002- CE dated 14/11/2002 and was availing self-credit facility under the provisions of the said Notification. The provisions of the said Notification were amended vide Notification No. 34/2008-CE dated 10/06/2008 whereunder extent of exemption on value addition was increased from 36% to 75% on Cement made from limestone and Gypsum. The respondent claimed refund as self-credit for the months of April and May, 2008 @36%, but after amendment to the Notification on 10/06/2008 as stated above they claimed refund as self credit of differential amounts of Rs. 30,06,458/- and Rs. 43,06,368/- (difference of 75% and 36% of value addition) for the months of April and May, 2008.
3. Heard both the parties and perused the records.
4. Ld. DR appearing for the Revenue submitted that the impugned order dropping the penalties under Rule 25 and 27 of the Central Excise Rules, 2002 is not sustainable in law. He further submitted that the adjudicating authority has held in para 12 of the order that exemption Notifications including the amending Notifications are effective prospectively only unless it is specifically mentioned in the relevant Notification about its retrospective effect as provided under sub section 5 of Section 5A of the Central Excise Act, 1944. He further submitted that, in the present case, the Respondent has availed the benefit of value addition of 75% on Cement as well as Clinker w.e.f. 1.4.2008 vide Notification No. 34/2008-CE dated 10.6.2008 when the said items were manufactured from inputs lime stone and gypsum. He also submits that there was no mention in the Notification about the effectiveness of the Notification retrospectively w.e.f. 1.4.2008. He further submitted that the Respondent tried to interpret the Notification to their own convenience and interest and when this mistake was detected by the department, the respondent tried to camouflage their mistake by claiming that CBEC has clarified to them that the Notification No.34/2008- Central Excise dated 10.06.2008 was effective from 01.04.08 but they failed to produce any such written clarification from the CBEC. This indicates that they had malafide intention to avail the benefit of the notification when they were not entitled to the same. He further submitted that the value addition of 75% under Notification No. 34/2008-CE dated 10.6.2008 was available only in respect of Cement and Clinkers if manufactured out of inputs namely lime stone and gypsum both and the Respondent was manufacturing Cement by using both these inputs but were manufacturing Clinkers from limestone only and were eligible for the value addition of 75% in respect of Cement only and not in respect of Clinker. He further submitted that the law is well settled that a person who claims exemption or concession has to establish that he is entitled to that exemption or concession. He also submitted that the exemption Notification has to be construed strictly. In support of his submission, he relied upon the following decisions:-
> COMMISSIONER OF C. EX., NEW DELHI V/S HARI CHAND SHRI GOPAL reported as 2010 (260) E.L.T. 3 (S.C.)
> Commissioner of Customs (Import), Mumbai vs Dilip Kumar & Company reported as 2018(361) ELT577 (SC) in para 52
> Hon’ble CESTAT, WZ Bench, Mumbai in the case of M/S BPCL Vs CCE, Mumbai-II [reported as 2002(139) E.L.T.382 (Tri-Mumbai)]
> 2013 (296) E.L.T. 229 (Tri. Chennai) and reported as AMEX ALLOYS PVT. LTD. Versus COMMISSIONER OF CEX. & S.T.,COIMBATORE
> Hon’ble Madras High Court judgement in case cited as 2021 (378) E.L.T. 48 (Mad.)
He further submitted that the Ld. Commission in para 19 of the impugned order has observed that the Respondent has kept on informing the department about all the facts and their intention of taking refund. He further submitted that the Respondent has contravened the provisions of the rules and the exemption notification with intend to evade payment of duty and thus liable for the penal action under the above said rules.
5. On the other hand, the Ld. Counsel for the Respondent has justified the impugned order and submitted that the Ld. Commissioner has not imposed any penalty under rule 25 and 27 of the Rules, 2002 by giving detailed reasons in Para 19 of the impugned order wherein the Ld. Commissioner has observed that the respondent has duly informed the department before availing the benefit under the said notification. He further submitted that the Ld. Commissioner has observed in Para 19 of the impugned order that perusal of the record shows that the Respondent acted under a bonafide mistake and had informed the department about their intention to take refund vide their letter dated 23.06.2008 and again on 19.02.2009. He further submitted that in the impugned order, the Ld. Commissioner has observed the fact that when the respondent has filed application on 27.05.2008 then as per that condition, the competent authority was required to fix special rate within six months of such application. He also submitted that vide Notification No. 34/2008, the period of six months to fix the special rate was reduced to three months, but in the case of the respondent, special rate was fixed only on 12.08.2009 after the delay of more than one year and in contravention of the time limit given in the notifications.
6. He further submitted that the respondent informed the department about their intention to take the refund of differential refund amount vide letter dated 23.06.2008 and again on 19.02.2009. He further submitted that the penal provisions under Rule 25(1) of the Central Excise Rules, 2002 are subject to Section 11AC of the Central Excise Act and unless the Revenue proves that there was a fraud, suppression, collusion or wilful mis-statement of the facts with intend to evade payment of duty, penalty under Section 25 and 27 cannot be imposed.
7. Further, in order to impose penalty mens rea is a necessary ingredient for imposition of penalty as held in the following cases:> CCE Chandigarh Vs Valley Iron & Steel Co. Ltd. 2016(337) ELT 167(HP)
> CCE Delhi -II Vs Ganpati Rollings Pvt. Ltd . 2016(338) ELT587 (Delhi)
> CCE Delhi Vs Vee Gee Faucets Pvt. Ltd. 2015(329) ELT 76 (P&H)
> CCE VS. Steel Engineering Co. 2014(305) ELT 25 (ALL)
> CCE Hyderabad Vs Mahalakshmi Profiles Ltd. 2012(279) ELT 355 (AP)
> CCE VS Saurashtra Cement Ltd. 2010(260) ELT 71 (Guj)
8. He further submitted that the respondent has paid the duty alongwith interest and is not liable to pay the penalty because there was inordinate delay of one and a half year in fixing the special rate of value addition which was prejudicial to the interest of respondent and caused financial losses in as much as refund was reversed with interest to the revenue.
9. After considering the submissions of both the parties and perusal of material on record, it is relevant to reproduce the provisions of Rule 25 and 27 of the Central Excise Rules, 2002 which are reproduced herein below:-
“Rule 25. Confiscation and penalty. – (1) subject to the provisions of section 11AC of the Act, if any producer, manufacturer, registered person of a warehouse or a registered dealer,-
(a) removes any excisable goods in contravention of any of the provisions of these rules or the notifications issued under these rules; or
(b) does not account for any excisable goods produced or manufactured or stored by him; or
(c) engages in the manufacture, production or storage of any excisable goods without having applied for the registration certificate required under section 6 of the Act; or
(d) contravenes any of the provisions of these rules or the notifications issued under these rules with intent to evade payment of duty, then, all such goods shall be liable to confiscation and the producer or manufacturer or registered person of the warehouse or a registered dealer, as the case may be, shall be liable to a penalty not exceeding the duty on the excisable goods in respect of which any contravention of the nature referred to in clause (a) or clause (b) or clause (c) or clause (d) has been committed, or [rupees two thousand], whichever is greater.
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.”
10. Further, we find that the revenue in the present appeal is only aggrieved by non-imposition of penalty under the above said rules. Here, we note that the penal provisions under Rule 25(1) of the Central Excise Rules, 2002 are subject to Section 11AC of the Central Excise Act, 1944 which shows that penalty is imposable if there is intention to evade payment of duty as mens rea is a necessary ingredient before imposition of penalty under Rule 25.
11. This issue has been considered by various High Courts and the Hon’ble Gujarat High Court in the case of Commissioner of Central Excise & Customs vs. Saurashtra Cement Ltd. has held in Para 17 as under:-
“It is also to be borne in mind that Rule 25 starts with the word “Subject to the provisions of Section 11AC” ………… ”. Section 11AC of the Central Excise Act deals with penalty for short levy or non-levy of duty in certain cases. It says that where any duty of excise has not been levied or paid or has been short levied or short paid or erroneously refunded by reasons of fraud, collusion or any wilful misstatement or suppression of facts, or contravention of any of the provisions of this Act or of the Rules made thereunder with intent to evade payment of duty, the person who is liable to pay duty as determined under sub-section (2) of Section 11AC, shall also be liable to pay a penalty equal to the duty so determined. For the purpose of invoking Section 11AC of the Act, the condition precedent is that the duty has not been levied, or paid or short-levied or short- paid or the refund is erroneously granted by reasons of fraud, collusion or any wilful misstatement or suppression of facts. If these ingredients are not present, penalty under Section 11AC cannot be levied. Since Rule 25 can be invoked subject to the provisions of Section 11AC of the Act, as a natural corollary, the ingredients mentioned in Section 11AC are also required to be considered while determining the question of levying of penalty under Rule 25 of the Central Excise Rules.”
12. Further, we find that the Ld. Commissioner in Para 19 of the impugned order has given the reasons for non-imposing the penalty. The Para 19 of the impugned order are reproduced here below:-
19. The Noticee have stressed upon the point that they took excess refund with bonafide impression that the amendments vide Notification No. 34/2008-CE dated 10.06.208 and Notification 52/2008-CE dated 03.10.2008 were retrospective i.e. w.e.f. 01.04.2008. They had duly informed the department before availing this benefit. The Noticee have mentioned that before taking additional refund in view of the above stated amendment, they even sought clarification from CBEC authorities. I observe that there is nothing on record that CBEC have clarified that these Notifications will be effective retrospectively. But the facts on record indicate that their act was based upon bonafide mistake. The Noticee had informed the department about their intention to take refund vide their letter dated 23.06.2008 and again intimated the department about it vide their letter dated 19.02 2009. The Noticee in their reply have referred to Trade Notice No. 07/2008 dated 07.11.2008 where under clarification on the retrospective application of the said amendment was given. In the circumstances of the case where there had been reasonable scope of doubt in the interpretation of vires of amending Notification, malafide of the Noticee are not otherwise established. There is nothing on record which may warrant invocation of the provisions of Section 11AC of the Act. Further, I observe that the Noticee have kept the department informed of all the facts. In view of the above facts, the Noticee are not liable to penalty under Rule 25(1)(a), 25(1)(d) and 27 of the Rules. I observe that recovering or erroneous refund alongwith interst under Section 11AB of the Act, shall meet the end of justice.
13. It is also a fact that the appellant has applied for the fixation of special rate vide his application dated 27.05.2008 whereas the revenue has approved the special rate after more than one and half year which has caused loss to the respondent and they had to refund the amount with interest which is appropriated in the impugned order.
14. In view of these facts and circumstances and considering the ratio of the decision in the case of Saurashtra Cement Ltd. cited (supra), we find no infirmity in the impugned order passed by the Ld. Commissioner and therefore, we dismiss the appeal of the revenue by upholding the impugned order.
(Pronounced on 06.09.2023)