HIGH COURT OF ANDHRA PRADESH
SBQ Steels Ltd.
Commissioner of Customs, Central Excise & Service Tax
W.P. No. 14380 OF 2012
OCTOBER 15, 2012
M.S. Ramachandra Rao, J.
This writ petition is filed by the petitioner challenging the show cause notice date 14.12.2011 bearing No.C.No.V/72/15/181/2011-Adjn. O.R.55/2011-CEx issued by the respondent on the ground that the contents thereof indicate that the respondent had predetermined the liability of the petitioner company. The petitioner prays that the said show cause notice and all consequent proceedings thereto be set aside.
2. The brief facts of the case are that the petitioner is a Company registered under the Companies Act, 1956 engaged in the business of manufacturing steel products and catering to the needs of the automobile and engineering sectors in India and abroad. It is also registered under the Central Excise Act,1944 (for short “the Act”).
3. The petitioner availed for the period December, 2007 to March 2011, benefit of Cenvat Credit on the excise duty paid on goods such as cement, MS Angles, MS Channels, TMT/CTD bars, MS rounds, MS Squares, Joists, Beams etc., used in the course of manufacture of steel products which have been utilized in the manufacture of excisable products under Rule 3 of the CENVAT Credit Rules,2004 .
4. Basing on intelligence gathered that the petitioner company availed huge amounts of Cenvat credit on certain ineligible goods under the category of capital goods, contravening provisions of the said Rules and thereby availed/availing Cenvat Credit and making use of the Cenvat Credit so availed for discharging their duty liability on the finished products, Officers of the Headquarters, Preventive Unit, Guntur belonging to the Central Excise department (for short “the Department” ) visited the unit of the petitioner on 6.8.2010.
5. The Department officials enquired from Officials of the petitioner Company how the materials on which Cenvat Credit was claimed were utilized by the petitioner company. The Vice -President (Finance) of the petitioner company furnished some information to the Department. Not satisfied, the Department sought further information from the petitioner vide letter dt.30.8.2010. The petitioner replied on 22.9.2010 and 14.10.2010 and furnished details justifying it’s action.
6. In the meantime, the petitioner claims that under pressure from the Department, it was forced to reverse the credit taken on certain items to the tune of Rs. 3,36,47,289/-and Rs. 40,67,064/- on 28.8.2010 . The petitioner contends that it did so under protest.
7. Thereafter the impugned show cause notice was issued by the respondent asking the petitioner to show cause why Rs .21,77,71,399/- claimed by the petitioner company from December,2007 to March,2011 be not recovered from it along with amount already reversed by the petitioner apart from interest and penalty.
8. The petitioner contends
(a) the notice was issued because the petitioner company was insisting that it was eligible for claiming the Cenvat Credit and the Department should allow it to take back the credit reversed under protest.
(b) the notice determines the amount of Cenvat Credit to be reversed and proposes interest and penalty at the applicable rates thereon at the preliminary stage itself without affording an opportunity of hearing to the petitioner, in violation of S.11A(10) of the Act which requires an opportunity of being heard given to the assessee. (c) the notice indicates that the respondent had already made up it’s mind that the petitioner is not entitled to the Cenvat Credit claimed by it. The respondent’s prejudice against the petitioner is apparent from perusal of the contents of the notice wherein the respondent had given a finding that the Cenvat Credit claimed by the petitioner is irregular.
9. On 8.6.2012, this Court ordered notice before admission and granted an interim order restraining the respondent from taking any further action pursuant to the impugned show cause notice dated 14.12.2011.
10. The respondent filed counter affidavit and an application to vacate the interim order dated 8.6.2012 inter alia denying that the petitioner was not given reasonable opportunity of hearing and denying that the respondent already arrived at a definitive predetermined conclusion about the liability even before the issuance of the above show cause notice to the petitioner. After referring to various events which occurred prior to the issuance of the show cause notice, the respondent contended that several opportunities were given to the petitioner to put forth its submissions in support of its claim and that the petitioner failed to submit valid reasons in support of its claim. It also contended that the reversal of Cenvat Credit was done by the petitioner voluntarily on 28.8.2010 for Rs. 3,77,14,353/- but the subsequent reversal of Rs. 1,00,00,000/- in September 2010 was done under protest. It contended that writ jurisdiction cannot be invoked at the show cause notice stage and that the writ petition is premature. It also contended that the petitioner has not availed the alternative remedies available to it.
11. Heard Sri K. Vivek Reddy, Counsel for the petitioner and Sri Gopalakrishna Gokhale, Counsel for the Respondent.
12. The Counsel for the petitioner contends that the impugned show cause notice is violative of principles of natural justice as the respondent had already prejudged the issue and has come to the conclusion that the petitioner is not entitled to the Cenvat Credit availed by it. He also contended that the show cause notice suffers from bias as it confronts the petitioner with definitive conclusions. He contended that although the show cause notice purports to give opportunity to the petitioner to respond to the charges against it, in fact the said opportunity offered to the petitioner by the respondent is illusory as it is obvious that the respondent has not kept an open mind. Certain portions of the show cause notice were also pointed out by the Counsel for the petitioner in support of the above contentions. The Counsel for the petitioner in support of his contentions relied upon the decisions in Oryx Fisheries (P.) Ltd v. Union of India  13 SCC 427 and Siemens Ltd v. State of Maharashtra  12 SCC 33 and Rajam Industries (P.) Ltd v. Dy. CTO 2010 (178) ECR 95 (Mad.).
13. The counsel for the respondent Sri Gopalakrishna Gokhale, refuted the contentions of the counsel for the petitioner and contended that a challenge to a show cause notice like the one in the present case should not be entertained under Article 226 of the Constitution of India as the petitioner can respond to the show cause notice and prove that it’s claim of Cenvat Credit is valid. He also contended that the petitioner has been given reasonable opportunity to defend itself and that there is no violation of principles of natural justice. He relied upon the decisions in Shakti Me-Dor Ltd. v. CC, CE & ST 2011 (268) ELT 51 (AP), Asstt. Collector of Central Excise v. Dunlop India Ltd. 1985 (19) ELT 22 (SC), Union of India v. Bajaj Tempo Ltd. 1997 (94) ELT 285 (SC) Punjab Bone Mills v. Collector of Central Excise 2001 (135) ELT 1377 (Tri-Delhi), CC & CE v. Charminar Nonwovens Ltd 2004 (167) ELT 372 (SC) and Charminar Nonwovens Ltd v. CC & CE 1985 (19) ELT 22 (SC).
14. We have considered the pleadings of both the parties and the submissions made by the respective counsel.
15. A perusal of the impugned notice shows that at several places, the language used by the respondent suggests that he has already come to a conclusion that the petitioner is not entitled to avail Cenvat Credit. Some of these instances are given below :
“Detailed examination of the goods listed in the ‘Annexure’, revealed that none of the impugned goods fall under the category of ‘Capital goods’ as defined under Rule 2 (a) of cenvat Credit Rules, 2004.”
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“Further, the ‘impugned goods’ were stated to have been used in ‘Raw Material Handling Systems, Conveyor Systems, material Charging System, Material Handling System, Crushing systems, De-busting System, Utilities, Electrical Distribution System, Rehearing Furnace etc. in the factory. It is apparent that the above systems/machines as a whole, are actually systems or a net work of machines and they come into being upon assembly of their components. In such a situation, there is no manufacture of ‘goods’ as it is only a case of assembly of manufactured goods into systems and hence, such systems as a whole cannot be considered to be goods as clarified by the Board vide its Circular No. 58/1/2002-C.Ex., dated 15-01-2002. In view of the above, the above said goods cannot be considered as capital goods for extending the benefit of credit on the impugned goods. Further, the various plants erected/ assembled in the premises of the assessee involving supply of large number of components, machinery, equipments, pipes and tubes etc. for their assembly/ installation/ erection/ integration/ inter-connectivity on foundation/civil structures etc. are not to be considered as excisable goods for imposition of central excise duty. In other words, these plaints/systems are to be considered as exempted goods. In such a situation credit cannot be allowed on the goods used in the erection/assembly of such plants in terms of Rule 6 (1) of CCR 2004.”
From the above, it is clear that the assessee by declaring the ‘said goods’ as ‘capital goods’ has manifestly indulged in the contravention of the cenvat credit Rules and claimed cenvat credit, on the impugned goods from time to time. When confronted by the officers, the assessee acted to a pre-conceived and an organized plan to twist the facts. By changing the stand in between from unconditional reversal of a partial amount of cenvat credit on Cement and TMT bars to the tune of Rs. 377.14 lakhs made on 28-08-2010 to making a consolidated debit of Rs. 100 lakhs under protest (on 22-09-2010) and by making some unfounded allegation of use of force by the department to that of laying claim for restoration of the entire amount of cenvat credit reversed (on 28-08-2010 and on 22-09-2010) in their favour, the assessee has been making so many claims bereft of any legal support.”…
“18.3. It is observed, that during the period from December 2007 to March 2011, the assessees availed CENVAT credit to the tune of Rs. 1,43,20,870/- on these goods viz., MS Beams, Rounds, Squares and Joists under ‘Capital goods’ (earlier). In as much as the said goods were used in the construction activities, and also admitted by the assessee to have been used in the construction/structural/civil works accordingly the goods mentioned in the Table below cannot be treated as ‘inputs’ and the eligibility of Cenvat credit on these items no longer available to the assessee.”
18.4.1 As verification of usage of the disputed items in the manufacture of capital goods at the factory premises, revealed that the impugned items were found to have been used for construction of platforms, buildings including factory sheds or laying of foundation or making of structures for support of capital goods and structural work of various plants in the factory such as coke oven, mini sinter plant, mini blast furnace, steel melting shop, DRI plant and rolling mill etc. And the said capital items manufactured/fabricated out of the usage of the impugned goods which by themselves do not fall under the definition of capital goods, the cenvat credit claimed by the assessee under ‘inputs’ cannot be available.”
18.4.3 From the above, it is clear that the assessee claimed that the items like Raw material handling Systems, Conveyor Systems and processing systems etc., and structure of Steel, Cement, Sheets etc., used in the fabrication of the Machinery are ‘capital goods’. But, these are basically systems comprising of various components and such systems as a whole cannot be considered to be excisable gods as clarified by the Board vide its Circular No. 58/1/2002-C, Ex., dated 15-01-2002. Therefore, it is clear that the assessee manufactured/fabricated certain structural items only but not capital goods and the reasons stated supra, the listed goods under this category stands debarred from the cenvat credit.”
18.4.4………….The absence of such details in the ERIs, invariably support/proves that the manufactured/fabricated items out of the usage of impugned goods are structural items only and hence, the assessee do not disclosed the details to the department in regard to the items/goods (structural items) manufactured out of the impugned goods.”
18.4.6. From the above narrations, it is clear that the items manufactured by the assessee out of the impugned goods are none other than structural items, but not capital goods as claimed by the assessee. Therefore, the cenvat credit of Rs. 8,07,62,973/- availed on the goods listed under the IIIrd category are also recoverable under appropriate provisions of CCR-2004 read with Central Excise Act, 1944 and the Rules made there under.
19. Therefore, the above items/goods shown under category, I, II &III above, are found to be neither capital goods nor inputs in terms of Rule 2(a) or Rule 2(k) of Cenvat Credit Rules 2004 respectively during the period from December 2007 to July 2010 and the CENVAT credit of Rs. 21,77,71,399/-availed on the goods listed under categories, I, II & III appear to be irregular.”…
20. The assessees have availed CENVAT credit of duty paid on the entire quantity of above items procured by them under capital goods during December 2007 to July 2010. However, these items are found to be not falling under the purview of the definition of capital goods defined under Rule 2(a) of CENVAT Rules, 2004. thereby, the assessee has contravened the provisions of Rule 2(a) of CCR 2004 by mis-declaring the impugned goods under ‘capital goods’ in terms of Rule 9(5) of CCR 2004 which cast the burden of proof regarding the admissibility of the CENVAT credit on inputs or capital goods on the manufacturer. Further, vide statement dated 27.7.2011, the assessee admitted that they are aware of the fact that in terms of Rule 9(5) of CCR 2004, the burden of proof regarding the admissibility of the CENVAT credit on capital goods/inputs (including classification of goods under capital goods or inputs) was cast on them. But they choose to misclassify the impugned goods under capital goods and thereby, willfully, contravened the provisions of Rules 2(a) and 9(5) of CCR 2004 in order to avail entire credit of duty paid on the entire quantity of impugned goods procured.
20.1 Further, the ‘impugned goods were stated to have been used in ‘various systems in the factory.’ It is apparent that the above systems/machines as a whole, are actually assembly of manufactured goods into systems or a net work of machines and in such a situation, there is no manufacture of ‘goods’ and hence, such systems as a whole cannot be considered to be goods as classified by the Board vide its Circular No. 58/1/2002-C.Ex.dated 15.1.2002. Further, various plants erected/assembled in the premises of the assessee are to be considered as exempted goods. In such a situation credit cannot be allowed on the goods used in the erection/assembly of such plants in terms of Rule 6(1) of CCR 2004. However, the assessee availed credit on the goods used for manufacture of the above systems, without knowing their admissibility of credit and thereby, contravened the provisions of Rule 9(5) of CCR 2004.
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20.4. Further, the assessees with a clear intention to avail the entire credit of duty paid on the impugned goods has first claimed the goods under capital goods category and later retracted and claimed the impugned goods used as inputs used for manufacture of capital goods and which shows their intention that to avail credit on the all the quantity of the impugned goods procured by them. This intention can be clearly seen in their letters submitted to the department from time to time.”
16. The above passages in the impugned notice indicate that there is a lot of substance in the contentions of the petitioner. No doubt, at some of the places in the show cause notice the respondent has also used the words “prima facie” and “appears” suggesting that his conclusion is only tentative but not final or conclusive but the overall impression one gets from a reading of the show cause notice is that the respondent has predetermined the issue.
17. It is settled principle of law that a quasi judicial authority, while acting in exercise of its statutory power must act fairly and must act with an open mind while initiating the show cause proceeding. A show cause notice is meant to give the person proceeded against a reasonable opportunity of making his objection against the proposed charges indicated in the notice. At the stage of show cause notice, the person proceeded against must be told the charges against him so that he can take his defence and prove his innocence. At that stage, the authority issuing the charge sheet/show cause notice, cannot, instead of telling him the charges, confront him with definite conclusions of his alleged guilt. If that is done, as has been done in the present case, the entire proceeding initiated by the show cause notice gets vitiated by unfairness and bias and the subsequent proceedings become an idle ceremony.
18. In Oryx Fisheries’ (P.) Ltd.‘s case (supra), the Supreme Court held:
“31. It is of course true that the show-cause notice cannot be read hypertechnically and it is well settled that it is to be read reasonably. But one thing is clear that while reading a show-cause notice the person who is subject to it must get an impression that he will get an effective opportunity to rebut the allegations contained in the show-cause notice and prove his innocence. If on a reasonable reading of a show-cause notice a person of ordinary prudence gets the feeling that his reply to the show-cause notice will be an empty ceremony and he will merely knock his head against the impenetrable wall of prejudged opinion, such a show-cause notice does not commence a fair procedure especially when it is issued in a quasi-judicial proceeding under a statutory regulation which promises to give the person proceeded against a reasonable opportunity of defence.
32. Therefore, while issuing a show-cause notice, the authorities must take care to manifestly keep an open mind as they are to act fairly in adjudging the guilt or otherwise of the person proceeded against and specially when he has the power to take a punitive step against the person after giving him a show-cause notice.
33. The principle that justice must not only be done but it must eminently appear to be done as well is equally applicable to quasi-judicial proceeding if such a proceeding has to inspire confidence in the mind of those who are subject to it.”
19. In Siemens Ltd.’s case (supra), the Supreme Court held:
“9. Although ordinarily a writ court may not exercise its discretionary jurisdiction in entertaining a writ petition questioning a notice to show cause unless the same inter alia appears to have been without jurisdiction as has been held by this Court in some decisions including State of U.P. v. Brahm Datt Sharma 1987 (2) SCC 179), Special Director v. Mohd. Ghulam Ghouse 2004 (3) SCC 440) and Union of India v. Kunisetty Satyanarayana 2006 (12) SCC 28), but the question herein has to be considered from a different angle viz. when a notice is issued with premeditation, a writ petition would be maintainable. In such an event, even if the court directs the statutory authority to hear the matter afresh, ordinarily such hearing would not yield any fruitful purpose. See K.I. Shephard v. Union of India 1987 (4) SCC 431. It is evident in the instant case that the respondent has clearly made up its mind. It explicitly said so both in the counter-affidavit as also in its purported show-cause notice.
10. The said principle has been followed by this Court in V.C., Banaras Hindu University v. Shrikant (2006) 11 SCC 42 , stating: (SCC p. 60, paras 48-49)
“48. The Vice-Chancellor appears to have made up his mind to impose the punishment of dismissal on the respondent herein. A post-decisional hearing given by the High Court was illusory in this case.
49. In K.I. Shephard v. Union of India 1987 (4) SCC 431 this Court held: (SCC p. 449, para 16)
‘It is common experience that once a decision has been taken, there is a tendency to uphold it and a representation may not really yield any fruitful purpose.’ “
11. A bare perusal of the order impugned before the High Court as also the statements made before us in the counter-affidavit filed by the respondents, we are satisfied that the statutory authority has already applied its mind and has formed an opinion as regards the liability or otherwise of the appellant. If in passing the order the respondent has already determined the liability of the appellant and the only question which remains for its consideration is quantification thereof, the same does not remain in the realm of a show-cause notice. The writ petition, in our opinion, was maintainable.”
20. In Rajam Industries (P) Ltd.’s case (supra), the Chennai High Court followed the above decisions and held that where a show cause notice quantified the amount of Central Excise duty not paid by the petitioner therein under various heads and also stated that the petitioner therein was liable to pay penalty and interest, the said show cause notice has to be set aside insofar as it relates to the quantification of the amount liable to be paid by the petitioner therein towards the difference of the excise duty and the observations made therein that the petitioner had clandestinely removed the goods. It held that when the respondents had arrived at the quantum of excise duty stated to have been evaded by the petitioner in the show cause notice by misusing the SSI exemption obtained by it, nothing remains for them to determine after the petitioner filed its response to the show cause notice.
21. In Shakti Me-Dor Ltd.‘s case (supra), Bajaj Tempo Ltd.‘s case (supra), Punjab Bone Mills case (Supra) and in Charminar Nonwovens Ltd’s cases (supra), cited by the respondent’s counsel, it has been held that at the stage of show cause notice, a writ petition should not be entertained where such show cause notice is not without jurisdiction. It was held that the contentions in the show cause notice should be accepted as true and after the petitioner submits its reply thereto, the adjudicating authority would decide the matter. It was also held that the High Court or the Supreme Court should be approached only after exhausting the remedies provided under the statute. Similar view has also been expressed in Dunlop India Ltd.’s case (supra). However, these cases did not deal with a situation like the present one where the show cause notice issued by the respondent is challenged on the ground that it is issued with premeditation. In Siemens Ltd.’s case (supra), the Supreme Court has clearly clarified that although ordinarily a writ Court may not exercise its discretionary jurisdiction in entertaining a writ petition questioning a notice to show cause unless the same inter alia appears to have been without jurisdiction, when the notice is issued with premeditation, however, a writ petition would be maintainable.
22. In our view, the impugned show cause notice by use of the words “it is clear” at various places as pointed out above clearly suggests predetermination by the respondent of the liability of the petitioner. The fact that it even quantified the amount of Cenvat Duty wrongly availed of by the petitioner allegedly, corroborates this view.
23. Following the judgments of the Supreme Court in Oryx Fisheries’s (P.) Ltd.’s case (supra), Siemens Ltd.’s case (supra) and Rajam Industries (P.) Ltd.’s case (supra), we therefore set aside the impugned show cause notice issued by the respondent with a direction to the respondent to issue a fresh show cause notice clearly indicating the issues on which prima facie the petitioner appears to have availed of the Cenvat Credit allegedly without justification . While issuing such show cause notice, the respondent should ensure that it does not indicate any premeditation or prejudgment by the respondent. In case any such fresh show cause notice is issued by the respondent, the respondent shall also furnish the material on the basis of which the show cause notice is issued and give reasonable opportunity to the petitioner to file its objections with supporting material apart from personal hearing (if sought by the petitioner) and then pass a reasoned order in accordance with law.
24. The writ petition is allowed to the above extent. No costs.