By TIOL News Service

MUMBAI, JULY 23, 2015: IN the Central Excise appeals filed by the assessees, the following substantial questions of law are involved -

(a) Whether under the facts and circumstances, the Appellate Tribunal erred in confirming demand for period even beyond extended period of limitation i.e. five years from the date of issuance of the show cause notice?

(b) Whether the Appellate Tribunal is correct to hold that relevant date for the purpose of computing period of limitation should be date of knowledge to the Central Excise Department under section 11A of the Central Excise Act, 1944?

The case of the department is that the Appellant was clandestinely diverting the inputs, namely, Polyester Yarn procured without payment of duty under CT-3 procedure and intended to be used in manufacture of fabrics for export. Inasmuch as diversion into local domestic market is in 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. Vide SCN dated 27th November, 2009, CE duty of Rs.2,73,41,250/- was proposed for recovery. The period involved is April 2002 to January 2003.

The duty demand was confirmed by the adjudicating authority and upheld by the Tribunal.

The adjudicating authority noted that the SCN is neither issued under section 11A(1) of the CEA, 1944 nor under section 28 of the Customs Act, 1962, wherein, there is limitation prescribed for issuance of show cause notice; that the show cause notice had been issued for violation of the conditions of Notification No. 1/95-CE and the Bond. Upon such conclusion, the adjudicating authority held that the demand is not time barred.

The Tribunal concluded that the documents prepared by the Appellant were found to be fake and ultimately in the year 2006, the evidence collected was put to the proprietors and they admitted the clandestine clearance of the goods without payment of duty. Therefore, the show cause notices were issued within five years from such development. The Tribunal also held that as the Appellants are not disputing the demands on merits before the adjudicating authority nor in the Appeals, there is no substance in their contention that the demands are time barred. Concluding thus, the Appeals were dismissed.

The primary argument canvassed by the appellant before the High Court is that the Tribunal, while confirming the order of the adjudicating authority lost sight of the fact that the demand raised in the show cause notice is barred by limitation prescribed in section 11A of the CEA, 1944. In the sense the demand is time barred as even the extended period of five years was over and the SCN was issued after a long gap of six years.

The appellant inter alia submitted that the judgments relied upon by the lower authorities have been completely misread and misapplied. Inasmuch as in none of these decisions the Supreme Court had concluded that irrespective of what has been prescribed by law, the cause of action would be the determinative factor or the knowledge or detection of fraud would be the starting point. Reliance is placed on the decisions in J. K. Spg and Wvg Mills Ltd. vs. Union of India - 2002-TIOL-559-SC-CX-LB, Ahmedabad Manufacturing and Calico Printing Co., Ltd. v. S.G. Mehta, (1963) 48 ITR 154 and S. S. Gadgil vs. Lal and Co. (1964) 53 ITR 231 to submit that the order deserves to be quashed and set aside.

The counsel for the Revenue relied upon the judgment of the apex court in the case of Kalvert Foods India Pvt. Ltd. - 2011-TIOL-76-SC-CX and submitted that in the present case it was the intimation from the Development Commissioner on 28th December, 2006 which triggered the inquiry or investigation; that there is an admission of the proprietor in his deposition dated 6th December, 2009 that Polyester Yarn has not been utilised or used in the manufacture of export goods;that once the conditions of the Exemption Notification are not complied with then the benefit of that Notification becomes unavailable and the demand can be raised without any time limit under the provisions of the said Act, Rules, Notification and Bond. Reliance is also placed on the decisions in Wockhardt Hospital and Heart Institute; Grant Medical Foundation - 2006-TIOL-115-HC-MUM-CUS. & S. P. Chengalvaraya Naidu vs. Jagannath 1994 AIR (SC) 853.

The High Court extracted the provisions of s.11A of CEA, 1944 and after elaborating the contents of the same inter alia observed -

+ Reliance on para (d) of the Exemption Notification No. 54 and the Form B17 (General Surety/Security) is entirely misplaced. 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, then, we cannot read into this definition of the words "relevant date" something more as urged.

+ The Assessing Officer merely assesses and recovers the duty on the goods and when they are removed. Therefore, the Assessing Officer and who is obliged to ensure compliance of the terms and conditions of the Notification, if the Notification is claimed in this case is conditional, then, it is not for him either to grant or withdraw the exemption. Therefore, there is no question of withdrawal of Exemption Notification by him on breach or violation of the conditions thereof. If he notices such breach, then, what is to be done by him is then provided by the Act and we find that the logical consequence of all this is that the goods then do not enjoy exemption but become liable to payment of duty and the duty can be recovered. That power of recovery is conferred by section 11A.

+ Equally, if there is any condition to furnish a Bond and in that behalf it is prescribed that in the event the terms and conditions on which the bond has been given and accepted are breached and violated, a demand can be raised, then that stipulation will not mean that the mandate of section 11A is any way diluted or can be interpreted with the aid of such term or condition of the Bond. Thus, the terms and conditions of the Exemption Notification or of the Bond cannot be of any assistance. That only would enable recovery of duty and further levy of interest, recovery thereof and equally of penalty.

+ We do not find any provision which would enable us to conclude that the date of knowledge or the date of discovery of the fraud by the Revenue will be the determinative and decisive date. If that is beyond the period of five years, then, section 11A will have to be interpreted accordingly is the express stand and which we find cannot be accepted because the plain language of the statute or the words of the section cannot be brushed aside or ignored.

The case laws cited by the counsel for the Revenue were distinguished and those cited by the appellant were subscribed to.

Conclusion: 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. We do not find that this approach of the Tribunal can be sustained in law.

The impugned orders were quashed and set aside and the appeals were allowed.

(See 2015-TIOL-1657-HC-MUM-CX)