NEW DELHI, JAN 28, 2013: THE appellant, an Export Oriented Unit (“ EOU ”), is engaged in the manufacture of all wool and poly-wool worsted grey fabrics. For interaction with the appellant, its sister unit, Uniworth Ltd., another EOU , engaged in the generation of power from a captive power plant, obtained an LOP dated 1.11.1994. The said LOP permitted usage of electricity generated by the captive power plant by both, Uniworth Ltd. and the appellant Uniworth Textiles Ltd. The appellant purchased electricity from Uniworth Ltd. under an agreement which continued till 1999.

Later, Uniworth Ltd. informed the appellant that it would require the arrangement for running the captive power plant for its own use, and hence, would be compelled to stop the supply of electricity to the appellant. Consequently, as a temporary measure, for overcoming this difficulty, the appellant, while availing the benefit of Notification No. 53/97- Cus , procured furnace oil from Coastal Wartsila Petroleum Ltd., a Foreign Trade Zone unit. It supplied the same to Uniworth Ltd. for generation of electricity, which it continued to receive as before.

Since the appellant was procuring furnace oil for captive power plant of another unit, it wrote to the Development Commissioner seeking clarification that whether duty on the supply and receipt of furnace oil and electricity respectively was required to be paid. The Development Commissioner, referring to a circular dated 12.10.1999 of the Ministry of Commerce, said as follows: -

“They are procuring surplus power from their sister concern M/s. Uniworth Ltd. (Unit- 1, LOP dated 31.01.1989) under Permission No. 248(93) dated 01.11.1994 and the unit transferred 2590.30 KL of furnace oil to M/s. Uniworth Ltd. (Unit- 1) for their captive power consumption. No permission is required from this office for duty free import/ procurement of POL products for captive power consumption. It is further to clarify as per the Exim Policy provision, one EOU may sell/ transfer surplus power to another EOU duty free in terms of Ministry of Commerce Letter No. 1/1/98-EP dated 12.10.1999 (sic)”

Yet, the appellant received a show cause notice from the Commissioner of Customs, Raipur, demanding duty for the period during which the appellant imported furnace oil on behalf of Uniworth Ltd . The show cause notice was issued on 02.08.2001, more than six months after the appellant had imported furnace oil on behalf of Uniworth Ltd . in January, 2001. This time period of more than six months is significant due to the proviso to Section 28 of the Act. The Section imposes a limitation period of six months within which the concerned authorities must commence action against an importer/assessee in case of duties not levied, short-levied or erroneously refunded. It allows the said limitation period to be read as five years only in some specific circumstances, viz. collusion, willful misstatement or suppression of facts. Since the said show-cause notice was issued after the elapse of six months, the revenue, for its action to be legal in the eyes of law, can only take refuge under the proviso to the section

Both the appellate authorities, viz. the Commissioner of Customs and Central Excise (Appeals) and the Tribunal, rejected the claims of the appellant and affirmed payment of duty and penalty. They reasoned that since the appellant procured the furnace oil not for its own captive power plant, but for that of another, it could not claim exemption from payment of duty; entitlement of duty free import of fuel for its captive power plant lies with the owner of the captive power plant, and not the consumer of electricity generated from that power plant. Little or no attention was paid to the issue of limitation, which was the primary question for consideration in this case.

Hence, the appellant is before the Supreme Court in this appeal.

The Supreme Court was not convinced by the reasoning of the Tribunal. The conclusion that mere non-payment of duties is equivalent to collusion or willful misstatement or suppression of facts is, in its opinion, untenable. If that were to be true, the Court failed to understand which form of non-payment would amount to ordinary default. Construing mere non- payment as any of the three categories contemplated by the proviso would leave no situation for which, a limitation period of six months may apply. The main body of the Section, in fact, contemplates ordinary default in payment of duties and leaves cases of collusion or willful misstatement or suppression of facts, a smaller, specific and more serious niche, to the proviso. Therefore, something more must be shown to construe the acts of the appellant as fit for the applicability of the proviso.

Section 28 of the Act clearly contemplates two situations, viz. inadvertent non-payment and deliberate default. The former is canvassed in the main body of Section 28 of the Act and is met with a limitation period of six months, whereas the latter, finds abode in the proviso to the section and faces a limitation period of five years. For the operation of the proviso, the intention to deliberately default is a mandatory prerequisite.

The Supreme Court observed, “In the present case, from the evidence adduced by the appellant, one will draw an inference of bona fide conduct in favour of the appellant. The appellant laboured under the very doubt which forms the basis of the issue and hence, decided to address it to the concerned authority, the Development Commissioner, thus, in a sense offering its activities to assessment. The Development Commissioner answered in favour of the appellant and in its reply, even quoted a letter by the Ministry of Commerce in favour of an exemption the appellant was seeking, which anybody would have found satisfactory. Only on receiving this satisfactory reply did the appellant decide to claim exemption. Even if one were to accept the argument that the Development Commissioner was perhaps not the most suitable repository of the answers to the queries that the appellant laboured under, it does not take away from the bona fide conduct of the appellant. It still reflects the fact that the appellant made efforts in pursuit of adherence to the law rather than its breach.”

The Supreme Court was not convinced with the finding of the Tribunal which placed the onus of providing evidence in support of bona fide conduct, by observing that “the appellants had not brought anything on record” to prove their claim of bona fide conduct, on the appellant. It is a cardinal postulate of law that the burden of proving any form of mala fide lies on the shoulders of the one alleging it. The Court observed in Union of India Vs. Ashok Kumar & Ors that “it cannot be overlooked that burden of establishing mala fides is very heavy on the person who alleges it. The allegations of mala fides are often more easily made than proved, and the very seriousness of such allegations demand proof of a high order of credibility.”

Supreme Court noted that the Court, through a catena of decisions, has held that the proviso to Section 28 of the Act finds application only when specific and explicit averments challenging the fides of the conduct of the assessee are made in the show cause notice, a requirement that the show cause notice in the present case fails to meet.

Hence, on account of the fact that the burden of proof of proving mala fide conduct under the proviso to Section 28 of the Act lies with the Revenue; that in furtherance of the same, no specific averments find a mention in the show cause notice which is a mandatory requirement for commencement of action under the said proviso; and that nothing on record displays a willful default on the part of the appellant, the Court held that the extended period of limitation under the said provision could not be invoked against the appellant.

The appeal is allowed and the decisions of the authorities below are set aside.

(See 2013-TIOL-13-SC-CUS)