Brief of the Case
In the case of Shri Dharampal Lalchand Chug Vs CCE, it was held by Bombay High Court that the period of limitation prescribed in section 11A of the Act cannot be enlarged. Once it is possible to scrutinise and verify the compliance of the terms and conditions on which the exemption has been issued in this case, then, it will not be possible to hold that a separate period is prescribed for recovery of duty in case of this nature or that the period of five years prescribed would have to be computed only when the breach or violation of the Exemption Notification has come to the knowledge of the Department subsequently. It may be that such fact is discovered or comes to the knowledge of the authorities subsequent to the clearance, however, when the Department desires to recover the amount of duty, then, it must adhere to the period prescribed. If the period is prescribed of five years and that has to be computed from the relevant date.
Facts of the case
The Appellant is a sole proprietor carrying on business in the name and style of M/s. Vibha Impex and claims that it is a 100% Export Oriented Unit (EOU). The factory was earlier located at Malegaon and later on it shifted to another village but within the same district, namely, Nashik. The Appellant is engaged in the manufacturing of various types of Polyester Yarn and Fabrics falling under Chapter 54 of the First Schedule to the Central Excise Tariff Act, 1985. The Appellant was availing the exemption benefit under Notification 1/95-CE dated 1st April, 1995. The Appellant procured the raw material without payment of duty on the condition that the same will be used in the manufacture of final products for export. The Appellant had submitted an application to the Development Commissioner, SEEPZ, Special Economic Zone, Ministry of Commerce and Industry, Andheri (East), Mumbai 400 096, in order to setup a 100% EOU unit. The said Development Commissioner granted the permission on 9th November, 2001. The annual capacity for manufacture of yarn and fabrics was estimated at 3048.64 metric tons and 33, 60,000 meters respectively. The Appellant also executed and submitted a letter of undertaking dated 26th March, 2002 in order to comply with the terms of the permission. The Appellant also obtained a Customs licence dated 28th January, 2002. The Appellant also executed a Bond in the sum of Rs. 80 lacs with the Deputy Commissioner of Central Excise and Customs, Division-III, Nashik in order to comply with the condition of manufacture under the Bond. The Appellant also requested the Development Commissioner, SEEPZ, Mumbai to change the name of the Appellant firm to M/s. Seven Star Tex Private Limited with new factory address. Accordingly, that permission was granted. Necessary changes were made in the licence and the permissions obtained earlier.
The period under consideration is April, 2002 to January, 2003. The Central Excise Department carried out a search of the Appellant’s factory premises. In the course of the same, the Central Excise Department seized various documents for scrutiny under a panchanama drawn on 10th October, 2002. In the course of the search, the Central Excise Department alleged that the Appellant installed certain machines and there was a short payment of duty amounting to Rs.94, 498/-. There are shortages noticed in the manufacture of Polyester Yarn. The Appellant paid a short payment of duty by Challan dated 11th January, 2002.
Thereafter, further investigations were carried out by alleging that the Appellant was clandestinely diverting the inputs, namely, Polyester Yarn procured which were intended to be used in manufacture of fabrics for export. These raw materials were procured without payment of Customs and Central Excise duties but came to be diverted. Thereafter as well, investigations were carried out. We are not concerned with the details of the investigations. Suffice it to note that every step of the above nature eventually led to issuance of show cause notice dated 27th November, 2009. That notice proposed to recover Central Excise Duty amounting to Rs.2,73,41,250/- for alleged diversion of inputs (Yarn), during the period April, 2002 procured without payment of duty under CT-3 procedure. The diversion into local domestic market is in utter violation of the terms and conditions of the Notification No. 1/95-CE dated 4th January, 1995 and the conditions of B-17 Bond executed. That is how the Central Excise duty and penalty was proposed to be recovered. The Tribunal in the present case has decided against the assessee and extended the period of limitation in case of exemption availed by the assessee.
Contentions of the Assessee
The assessee contended that there is an error of law and apparent on the face of the record. Both, the adjudicating authority and the Tribunal lost sight of the fact that if there is a violation or breach of the condition of the Exemption Notification, whereby the duty demand arises and if that is not honoured, then, recovery proceedings can be initiated, but for that, there is a clear provision in the Central Excise Act, 1944. That provision ordinarily allows recovery of all duties which are found to have been levied but not paid, duties not levied or short levied or short paid or erroneously refunded. In the present case, if the breach and violation of the Notification attracts the situation where the duties levied are not paid, then, the legislature in terms of the statute permits the authorities to recover the amount of duty within one year. That is the ordinary and normal period of limitation. However, proviso to sub section (1) of section 11A clarifies that when any duty of excise has not been levied or paid or has been short levied or paid or erroneously refunded by reason of fraud, collusion or any wilful mis-statement 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 by such person or his agent, sub section (1) will have effect and for the words “one year” the words “five years” ought to be substituted. The Explanation in this case is not attracted. For, there is no stay against any recovery. In the present case, language of this provision postulates that the recoveries have to be made within the above period but from relevant dates. The assessee submitted that this case is covered by section 11A(3)(ii) (C) of the Central Excise Act, 1944. It was further submitted that in the case of excisable goods on which duty has not been levied or has been short levied or short paid, then, the relevant date is the date on which duty is to be paid under the Act or rules made thereunder. This provision has a direct nexus or connection with the date of payment and as postulated by the Act and the Rules. In the circumstances, the demand raised in the present case is ex-facie time barred.
Contentions of the Revenue
The Revenue submitted that the Tribunal’s view reflects the correct understanding of law. The Revenue submitted that sections 3, 4, 5 and 5A of the said Act should be read together. Reading of the same would disclose as to how, when there is Exemption Notification, the law postulates a inquiry into the violation or breach of the conditions upon which the exemption has been granted. If the breach or violation of the conditions of the Notification has to be probed and investigated, then, the duty liability would occur only after such probe or inquiry is complete. It is only thereafter that the fraud or wilful suppression would come to the notice of the Revenue. It is only then the demand can be raised for payment of duty. Therefore, the words “is to be paid” appearing in the definition of the term “relevant date” in sub clause (C) of section 3(ii) of section 11A of the said Act will have to be interpreted accordingly. Further, Revenue has also relied upon a Judgment of the Hon’ble Supreme Court of India in the case of Commissioner of Central Excise vs. Kalvert Foods India Pvt. Ltd. reported in 2011 (270) ELT 643. The revenue submitted that the limitation ought to be computed from the date of final removal of finished goods without payment of duty. Once the conditions of the Exemption Notification are not complied with then, the benefit of that Notification becomes unavailable. Then, the demand can be raised. In the present case, there is therefore no time limit. The provisions of section 11A of the Central Excise Act, 1944, in any event, would have to be construed and interpreted in this light.
Held by Hon’ble High Court of Bombay
The Hon’ble High Court stated that on perusal of the relevant section 11A would reveal that the same confers powers for recovery of duty not levied or not paid or short levied or short paid or erroneously refunded. Sub section (1) clarifies that when any duty of excise has not been levied or paid or has been short levied or short paid or erroneously refunded, whether or not such non levy or non payment, short levy or short payment or erroneous refund, as the case may be, was on the basis of any approval, acceptance or assessment relating to the rate of duty on or valuation of excisable goods under any other provisions of this Act or the rules made thereunder, a Central Excise Officer may, within one year from the relevant date, serve notice on the person chargeable with the duty which has not been levied or paid or which has been short levied or short paid or to whom the refund has erroneously been made, requiring him to show cause as to why he should not pay the amount specified in the notice. It is stated in the first proviso that where any duty of excise has not been levied or paid or has been short levied or short paid or erroneously refunded by reason of fraud, collusion or any wilful mis- statement 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, by such person or his agent, the provisions of this sub section shall have effect, as if, for the words “one year”, the words “five years” were substituted. There are two further provisions and which mandate that where the amount involved is Rs.1 crore or less, a notice under this sub-section shall be served by the Commissioner of Central Excise or with his prior approval by any officer subordinate to him and when it is more than 1 crore, no notice under this sub-section shall be served without the prior approval of the Chief Commissioner of Central Excise. The Explanation has no application to the present case. Various sub sections of this provision enable recovery of the amount after sub section (1) is complied with. Sub section (2A) enables determination of the amount of the duty within a period of one year in cases of fraud etc., whereas in other case it has to be within a period of six months. By sub section (2B), the person chargeable with the duty may pay the amount of duty before service of notice on him under sub section (1) in respect of the duty and inform the Central Excise Officer of such payment in writing, who, on receipt of such information shall not serve any notice under sub section (1) in respect of the duty so paid. And by proviso to sub section (2B), it is stated that the Central Excise Officer may determine the amount of short payment of duty, if any, which in his opinion has not been paid by such person and, then, the Central Excise Officer shall proceed to recover such amount in the manner specified in this section, and the period of “one year” referred to in sub-section (1) shall be counted from the date of receipt of such information of payment. Explanation 1 to sub section (2B) reads as under:-
“Explanation 1. Nothing contained in this sub-section shall apply in a case where the duty was not levied or was not paid or was short-levied or was short-paid or was erroneously refunded by reason of fraud, collusion or any wilful mis-statement 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.”
A perusal thereof would indicate as to how sub section (2B) will not apply in case where the duty was not levied or was not paid or was short levied or was short paid or was erroneously refunded by reason of fraud, collusion etc. Sub section (2C) states that the provisions of sub section (2B) shall not apply to any case where the duty had become payable or ought to have been paid before the date on which the Finance Bill, 2001 receives the assent of the President. For the purpose of section 11A, the term “relevant date” has been defined. Thus, a perusal of this section and carefully would denote that it enables recovery of duty not levied or not paid or short levied or short paid or erroneously refunded. The recovery is after issuance of a show cause notice within the meaning of sub section (1). The issuance of the show cause notice is permitted and within the period specified by sub section (1) and its proviso. However, the period has to be calculated and computed from the relevant date. The relevant date means in the case of excisable goods on which duty of excise has not been levied or paid or has been short levied or short paid and sub clause (A) of clause (ii) of sub section (3) states that whereunder the rules made under this Act a periodical return, showing particulars of the duty paid on the excisable goods removed during the period to which the said return relates, is to be filed by a manufacturer or a producer or a licensee of a warehouse, as the case may be, the date on which such return is so filed. Where no periodical return as aforesaid is filed, the last date on which such return is to be filed under the said rules and in any other case, the date on which the duty is to be paid under this Act or the rules made thereunder.
The Hon’ble further stated that if the goods and which are excisable have to be cleared on payment of duty, but if they are exempted from payment of such duty, it does not mean that there is no power in the authorities to verify and scrutinise the documents based on which the clearance is made. One of the documents at the stage of clearance refers to the Exemption Notification and thereafter the person clearing the goods or removing them urges that there is no duty liability, then, what terms and conditions have been prescribed or whether the exemption is absolute are matters which are to be checked and determined by the authorities.
Further, the terms and conditions of the Exemption Notification and the Bond would indicate as to how it is possible to ensure compliance of law at various stages. Thus, the Rules and Rule 173G(2A) read with the proviso thereto would indicate as to how goods which are exempted have to be removed and cleared. By recourse to that, the period of limitation prescribed in section 11A of the Act cannot be enlarged. Once it is possible to scrutinise and verify the compliance of the terms and conditions on which the exemption has been issued in this case, then, it will not be possible to hold that a separate period is prescribed for recovery of duty in case of this nature or that the period of five years prescribed would have to be computed only when the breach or violation of the Exemption Notification has come to the knowledge of the Department subsequently. It may be that such fact is discovered or comes to the knowledge of the authorities subsequent to the clearance, however, when the Department desires to recover the amount of duty, then, it must adhere to the period prescribed. If the period is prescribed of five years and that has to be computed from the relevant date.
The Hon’ble Court further stated that notice envisaged in sub-section (1) of S. 11-A of the Act can be issued under any one of the four conditions:
(i) when duty of excise has not been levied on the commodity;
(ii) when such duty has been short levied; or
(iii) When such duty, though levied, has not been paid;or
(iv) when such duty levied was only short paid.
If any one of the above conditions exists, the notice contemplated therein can be issued.
In view of the above it was held that the Tribunal’s order is ex-facie erroneous and unsustainable in law. It is vitiated by complete non application of mind as well. That the fraud is of great magnitude and that involvement or the act is admitted does not mean that recovery of duty because of such fraud or as a result of it can be made at any time under section 11A. This was clearly lost sight of by the Tribunal. Therefore, the appeals are allowed.