By TIOL News Service

AHMEDABAD, FEB 14, 2014: IN this writ petition, the petitioners have challenged the show cause notice dated 12.8.2008 calling upon the petitioners why CENVAT credit amounting to Rs. 4.82crores (rounded off) wrongly availed by them should not be recovered with interest and why penalty under rule 13 of the CENVAT Credit Rules, 2002 and under rule 25 of the Central Excise Rules, 2002 and section 11AC of the Central Excise Act, 1944 should not be imposed. The petitioners have also challenged the validity of rule 13(2) of the CENVAT Credit Rules, 2002 and rule 15(2) of the CENVAT Credit Rules, 2004 as ultra vires the Central Excise Act, 1944.

The senior counsel for the petitioners drawing attention to the provisions contained in the Central Excise Act, 1944 and in particular, section 37 thereof, contended that the said rules are ultra vires the parent Act. He submitted that section 37 does not authorise the delegated legislation to frame any rules for recovering penalty. In absence of specific powers for framing rules for levying penalty, the delegated legislation exceeded its limits of delegation in framing such rules. Counsel would contend that the penalty is also in the nature of compulsory exaction of tax of course of penal nature. In view of Article 265 of the Constitution, there could be no levy of tax without the authority of law. It was contended that with introduction of CENVAT regime whenever found necessary, the legislation did make changes in section 37 itself.

On the other hand, counsel for the department opposed the petition and contended that the said Rules of 2002 and Rules of 2004 have been framed in exercise of power under section 37 of the Central Excise Act and is within the scheme of the Act and the rules made thereunder.

"15 Confiscation and penalty:

(1) If any person, takes or utilises CENVAT credit in respect of input or capital goods or input services, wrongly or in contravention of any of the provisions of these rules, then, all such goods shall be liable to confiscation and such person, shall be liable to a penalty not exceeding the duty or service tax on such goods or services, as the case may be, or two thousand rupees whichever is greater.

(2) In a case, where the CENVAT credit in respect of input or capital goods or input services has been taken or utilized wrongly by reason of fraud, collusion or any willful mis­statement or suppression of facts, or contravention of any of the provisions of the Excise Act or the rules made thereunder with intent to evade payment of duty, then, the manufacturer shall also be liable to pay penalty in terms of the provisions of section 11AC of the Excise Act.

(3) In a case, where the CENVAT credit in respect of input or capital goods or input services has been taken or utilised wrongly by reason of fraud, collusion or any willful mis­statement or suppression of facts, or contravention of any of the provisions of these rules or of the Finance Act or of the rules made thereunder with intent to evade payment of service tax, then, the provider of output service shall also be liable to pay penalty in terms of the provisions of section 78 of the Finance Act.

(4) Any order under sub­rule (1), sub­rule (2), sub­rule (3) shall be issued by the Central Excise Officer following the principles of natural justice."

Rule 13 of the Cenvat Credit Rules, 2002 was similar.

The Central question is in framing rule 13(2) of Rules of 2002 and rule 15(2) of Rules of 2004, rule making authority exceeded its delegation under section 37 of the Central Excise Act.

The High Court observed,

"There is always a presumption of constitutionality of statutory provision. Such presumption is available also in cases of delegated legislation. A piece of delegated legislation does not enjoy the same level of immunity as the Act of State or Central legislature. However, there are well laid down parameters within which a delegated legislation can be questioned.

In the context of framing of a rule providing penalty, from the judgements cited, the following propositions can be noticed:

a) In absence of any specific provision in the Act, a delegated authority would have no power to make regulation levying any fee or charge on the basis of any implied, incidental or ancillary authority.

b)  Expropriatory or penal statute has to be strictly construed and power of imposing penalty or confiscation has to be specific, explicit and expressly provided.

c)  While delegating essential legislative function of choosing the legislative policy, only ancillary or subordinate function may be delegated.

It can be seen from the Central Excise Act and the Rules of 2002 and Rules of 2004 that till the year 2000, the central excise duty was being charged from the manufacturer as per the Central Excise Act as provided in section 3 thereof. Sometime in the year 2000, CENVAT regime was ushered in which in essence permits the manufacturer of a final product to take the credit of the CENVAT paid on the inputs and input services utilised for manufacture of such final product and being ultimately saddled only with the liability of paying CENVAT on the value addition made by him. Rules also provide for availing CENVAT credit on capital goods used in the manufacturing process. Thus in essence, central excise was replaced by the concept of CENVAT. Nevertheless, CENVAT was nothing but a form of excise duty charged in terms of section 3 of the Central Excise Act, 1944. Quite obviously, because the new regime required machinery provisions for granting CENVAT credit, collection of duties and such other related issues, CENVAT credit rules were brought into existence. The initial Rules of 2002 were quickly replaced by Rules of 2004.

These rules made provisions for availment of CENVAT credit, its refund and recovery of duties not paid. In particular, rule 14 pertains to recovery of CENVAT credit wrongly taken or erroneously refunded and rule 15 provides for confiscation and penalty. Sub­rule(2) of Rule 15 which is under challenge, provides that in a case, where the CENVAT credit in respect of input or capital goods or input services has been taken or utilized wrongly by reason of fraud, collusion or any willful mis­statement or suppression of facts, or contravention of any of the provisions of the Central Excise Act or the rules made thereunder, with intention to evade payment of duty, then, the manufacturer shall also be liable to pay penalty in terms of the provisions of section 11AC of the Central Excise Act.

Section 37(1) of the Central Excise Act empowers the rule making authority i.e. the Central Government to make any rules to carry into effect the purpose of the Act. It is in exercise of these powers that the Rules of 2004 have been framed. Such rules provide for mechanism for allowing CENVAT credit and recovering of CENVAT from the manufactures and other agencies. Clause(d) of sub­section(4) of section 37 provides that notwithstanding anything contained in sub­section(3) and without prejudice to the provisions of section 9, in making rules under this section, the Central Government may provide that if any manufacturer, producer or licensee of a warehouse contravenes the provisions of any such rule with intent to evade the payment of duty, then all such goods shall be liable to confiscation and the manufacturer, producer or licensee shall be liable to a penalty not exceeding the duty leviable on such goods or ten thousand rupees (as it existed at that time now substituted by two thousand rupees) whichever is greater.

Thus in terms of section 37(1) and 37(4) of the Central Excise Act, 1944, the rule making authority had ample powers not only for providing for mechanism for collection of CENVAT and matters connected therewith but also to provide for penalties for breach of payment of such duty. Section 37(4) of the Central Excise Act, 1944 permitted the rule making authority to provide for confiscation and penalty not exceeding the duty liability on the goods, if any manufacturer, producer or licensee of a warehouse contravenes the provisions of any such rule with intent to evade the payment of duty. This precisely was provided in sub­rule(2) of rule 15 i.e. for penalty in terms of section 11AC when CENVAT credit has been taken or utilised wrongly by reason of fraud, collusion, or any wilful mis­statement or suppression of facts or contravention of any of the provisions of the Excise Act or rules made therein. Section 11AC itself provides for penalty from a person liable to pay duty if such duty has not been levied or short­levied or short paid or erroneously refunded, by reason of fraud or collusion or any wilful mis­statement or suppression of facts, or contravention of any of the provisions of the Act, or of the rules made thereunder with intent to evade payment of duty. In such cases the penalty would be equal to the duty so determined."

Under the circumstances, the High Court did not find that the rule making authority flows only from sub­section(1) of section 37 and can therefore, be stated to be general in nature without clothing the rule making authority with the power to levying penalty. As noticed section 11AC provides for penalty in case of unpaid duty by reason of fraud or collusion or any wilful mis­statement, etc., Such duty in terms of CENVAT Credit Rules, 2004, would be the central value added tax. Sub­section(1) of section 37 permits the Central Government to make rules to carry into effect the purpose of the Act which would include collection of duty and penalty when the occasion so arises. Clause(d) of sub­ section(4) of section 37 authorises the rule making body to frame rules for confiscation and collection of penalty when it is found that any manufacturer, producer or licensee of warehouse has contravened the provisions any provisions of such rule with intent evade payment of such duty.

So, the High Court did not find any substance in the challenge raised by the petitioner to the rule 13(2) of the CENVAT Credit Rules, 2002 and rule 15(2) of the CENVAT Credit Rules, 2004. The petition is therefore, dismissed.

(See 2014-TIOL-192-HC-AHM-CX)