FEBRUARY 21, 2009

By Pramod Kumar Rai, Advocate & IRS (Rtd)

IN recent past under notification 32/2006-CE(N.T) dated 30.12.2006, notices have been issued to a number of manufacturing units against whom cases of evasion of central excise duty or misuse of CENVAT facility is being investigated, at a stage much prior to issuance of SCN under Section 11A(1) of the Central Excise Act 1944, asking them to explain as to why the facility of monthly duty payment under Rule 8 of Central Excise Rules 2002 should not be stopped and why they should not be compelled to pay duty on every consignment at the time of clearance in cash only without utilizing the CENVAT Credit earned on the inputs and capital goods. The notices are being processed without giving copies of any relied upon documents. If confirmed the working capital requirement of these units increases many fold because in most of the units more than 80% duty is being paid through CENVAT Account.

Though the said notification affects substantive right of tax payers, it has not been notified under the Act, rather it has been notified under Rule 12 CC of central excise Rules 2002 and Rule 12 AA of the CENVAT credit Rules 2004. The procedure prescribed under notification 32/2006-CE(N.T), dated 30.12.2006 is as under.

++ The Commissioner or additional director general of DGCEI as the case may be after examination of records and after satisfying himself may forward a proposal to the chief Commissioner or director general as the case may be. The proposal will include the facilities to be withdrawn or restrictions to be imposed including the period of such restrictions/withdrawals, preferably within 30 days of the detection of the case as far as possible.

++ The chief Commissioner/DG after giving an opportunity of being heard to affected party and after satisfying himself that an offence falling under one of those six categories has been knowingly committed may forward the proposal along with his recommendations to CBEC.

++ An officer authorised by the board will further examine the recommendations received from the chief Commissioner/DG and after satisfying him self will issue an order specifying the type of facilities to be withdrawn or restrictions to be imposed along with the period for such restriction/withdrawal.

The notification 32/2006-CE(N.T), dated 30.12.2006 suffers from many lacunas and is bound to be struck down by courts in Due Course. The following lacunas are note worthy.

++  Violation of Section 11A : If revenue is prima facie satisfied based on its investigation that any particular tax payer has evaded duty, the revenue is required to serve a notice alleging evasion of taxes as required under Section 11A(1) of the Act and thereafter after getting representation of tax payer and after following principles of natural justice by a speaking order under Section 11A(2) of the act, the revenue is required to conclude whether evasion has taken place or not. No order confirming evasion can be passed, including in the cases fraud under any other section of the act. Thus any order passed under notification 32/2006-CE(N.T) concluding evasion of duty and consequential stoppage of monthly duty payment or restrictions on use of Cenvat Credit much before issuance of notice under Section 11A(1) of the Act is derogatory to the provisions of Section 11A of the Act. Any provision made under rules in derogation to provisions of the act is bound to be struck down as held by supreme court in the case of LAGHU UDYOG BHARATI Versus UNION OF INDIA 1999 (2002-TIOL-162-SC-ST).

++  Notification under Rules cannot affect substantive rights : Further Central Excise Rules 2002 and Cenvat Credit Rules 2004 have been notified under Section 37 of the act to carry out the provisions of Central Excise act 1944. They can regulate the procedural aspects, but they cannot take away the substantive right conferred under the Act. Thus notification no 32/2006-CE(N.T) notified under Rules and affecting substantive rights of tax payers is not sustainable.

++ Double Jeopardy : The Action contemplated under notification 32 /2006 amounts to double jeopardy as for the same offence independent Action shall be taken by the department at a later stage by issuing show cause notices under Section 11A(1) of the act and proposing imposition of Penalty under Section 11AC and recovery of interest under Section 11AB of the act and is thus voilative of Article 20 of Constitution of India. There cannot be two proceedings based on same facts under the same act i.e. Central Excise Act 1944.

++ Final order based on prima facie finding : The Action contemplated is not based on final finding of any authority rather it is based on prima facie finding of the department. No substantive right or even a procedural benefit can be taking away on the basis of prima facie finding. No court will approve passing of a final order based on a prima facie finding.

++ No hearing by adjudicating authority : It is cardinal principle of natural justice that the person, who decides the case and who passes the order, must hear both parties to the case. Under notification 32/2006-CE(N.T), the hearing shall be given by an officer of Chief Commissioner Rank and the order shall be passed by his superior namely, a Member of CBEC. Thus the officer who is going to conduct hearing is not going to decide or pass order. Therefore the hearing proceedings are voilative of principles of natural justice.

++ Mockery of adjudication under Section 11A(2): The order under notification 32/2006-CE(N.T) shall by Passed by CBEC and thereafter the demand of duty shall be adjudicated by an officer directly subordinate to CBEC under Section 11A(2) of the act. Once CBEC takes a stand that evasion has taken place irrespective of the merits of the case or irrespective of the submission of the tax payor, the subordinate officer shall be prejudiced and shall definitely follow the stand taken by CBEC. Therefore the proceedings under notification 32/2006-CE(N.T) shall interfere with adjudication proceedings under Section 11A(2) of the act and adjudication proceedings shall be no longer independent.

++ No right of Appeal : Though the Action contemplated under notification 32/2006-CE(N.T) affects substantive rights of taxpayers, yet under the scheme of notification 32/2006-CE(N.T), there is no right of appeal to affected parties.

On 28.1.2009, the Aurangabad Bench of Bombay High Court precisely for above reasons admitted WP no. 26 of 2009 in the case of Shree Om Rolling Mills Pvt Ltd Vs. Union of India = (2009-TIOL-83-HC-MUM-CX) challenging the validity of Notification No. 32/2006-CE(N.T) dated 30.12.2006 on above grounds and has stayed the order passed by Member CBEC stopping the facility of monthly duty payment and stopping utilization of CENVAT credit in exercise of powers conferred under notification 32/2006-CE(N.T) on him.

(The author is B.Tech (IIT Kanpur ), LLB (Gold Medal), LLM ( USA ) and former SDR (JC), CESTAT)