AUGUST 30, 2024

By Sridharan P, Advocate, M2K Chartered Accountants

UPON reviewing the differences between the Finance (No.2) Bill, 2024 and the enacted Finance Act, 2024, it is evident that certain critical provisions, which were notably absent from the Finance Bill, have now been directly incorporated into the Customs Tariff Act through the Finance Act, 2024. These amendments pertain to the substitution of various provisions in the Tariff Act concerning the imposition of interest and penalties, which had been contentious issues. Through these amendments, it appears that the Government of India aims to conclusively address the disputes surrounding the applicability of interest and penalties on IGST demands.

Specifically, Sections 106, 108, 109, 110, 159, 160, 161, 163, 166(a), 166(b), 166(c), 167, 168(a), and 168(b) of the Finance Act, 2024 have introduced identically worded provisions that replace the existing provisions in the relevant legislations to resolve this matter.

For example, the existing Sub-section 3(12) of the Customs Tariff Act, 1975, as well as its substituted version under Section 106 of the Finance Act, 2024, are as follows:

Background of litigations

The Hon'ble Bombay High Court in the Mahindra and Mahindra case ¹, was dealing with a challenge to a demand for interest and penalty on a short-paid CVD, SAD and surcharge leviable respectively under Section 3(1), 3A of the Customs Tariff Act 1975 and Section 90 of the Finance Act, 2000.

The Hon'ble Bombay High Court, relying on the settled ratio laid down by Hon'ble Supreme Court in the matters of M/s. Khemka and Co. (Agencies) Pvt. Ltd ² and Apex Court in Collector of Central Excise, Ahmedabad V/s. Orient Fabrics Pvt. Ltd. 2003 (158) E.L.T. 545 (SC) = 2003-TIOL-32-SC-CX, and the Hon'ble Delhi High Court decision in the matter of Pioneer Silk Mills Pvt. Ltd. ⁴ (approved by the Hon'ble Supreme Court), rejected the demand for interest and penalty on a short paid on the ground that -

a) The interest and penalties being substantive levies, the statute that levies and charges these levies should make a substantive provision for the levies, and

b) In the absence of such a substantive charging provision for charging interest and penalty, any attempt to levy interest and penalties would be without jurisdiction.

The Kolkata Tribunal in the matter of M/s. TEXMACO RAIL ENGINEERING LIMITED ⁵ was dealing with the question of leviability of interest under Section 28AA of the Customs Act, 1962 on the confirmed demand for additional duty under Section 3 (1) of the Customs Tariff Act, 1975. The Tribunal held that interest was leviable on the following grounds:

a) the scope of the expression, 'includes' as already decided in many a rulings, should cover interest and penalty also;

b) the principle of automatic attraction of interest when duty is due;

c) the fact that Section 28AA starts with a non-obstante clause; and.

d) that interest is not penal but compensatory in nature.

The Tribunal did refer to the Hon'ble High Court decision in the Mahindra and Mahindra matter and also the other Hon'ble Supreme Court decisions relied upon by the Hon'ble High Court. But the Tribunal distinguished these decision holding as under:

Unless, it is shown that "levy of interest," is by way of an "additional tax", rulings of the Court delivered in the context of penalty cannot be applied ipso facto to environments and issues relating to imposition of interest. The context in the present matter being compensatory and not punitive action.

We therefore fail to derive any support from this ruling of the Hon'ble Court in favour of the appellants.

While the Kolkata Tribunal was deciding as above in January 2024, in April 2024, the Ahmedabad Tribunal in the matter of Chiripal Poly Films Ltd. ⁶ while dealing with the question of levy of interest, redemption fine on short-paid IGST, decided to follow the ratio laid down by the Hon'ble High Court in the Mahindra and Mahindra matter and also the ratio laid down by the Hon'ble Supreme Court relied upon by the Hon'ble Bombay High Court. The Kolkata Tribunal also relied upon a decision on a similar question by Chennai Tribunal in Acer India matter ⁷

This being the background, the action of Government of India to put the question beyond any doubt is understandable.

Does the amendment actually put the dispute to rest

The question that arises is whether the substituted provisions introduced by the Finance Act, 2024, will conclusively resolve the issues at hand. In this context, it is essential to consider the underlying principle consistently upheld by the courts. Article 265 of the Constitution of India mandates that no tax shall be levied or collected except by the authority of law. This authority must be specific, explicit, and expressly provided for within the statute.

The Apex Court, in the case of J.K. Synthetics Ltd. v. Commercial Taxes Officer (1994 SCC (4) 276) = 2002-TIOL-736-SC-CT-CB, established that any statutory provision for the charging or levying of interest on delayed tax payments must be construed as substantive law, rather than adjectival law. Furthermore, in India Carbon Ltd. & Ors. v. State of Assam (1997 (6) SCC 479) = 2002-TIOL-2656-SC-CT, the Court, referencing the decision in J.K. Synthetics Ltd., affirmed that interest can be levied and charged on delayed tax payments only if the statute imposing the tax includes a substantive provision for such interest. Absent such a provision, authorities cannot impose interest merely for the purpose of enforcing tax collection.

This brings us to the critical question: What constitutes a specific, explicit, and express provision for the imposition of interest or penalties?

The Hon'ble Delhi High Court, in Pioneer Silk Mills Pvt. Ltd., which was affirmed by the Hon'ble Supreme Court, observed:

"When penalty is additional tax, the constitutional mandate requires a clear authority of law for its imposition. If extensive argumentation is required to interpret whether an Act, through referential legislation or incorporation, imposes a penalty, it is prudent for the court to lean in favor of the taxpayer. There is no room for presumption in such cases. The levy of penalty, which is an additional tax, must be under the authority of law that is clear, specific, and explicit."

The Hon'ble Bombay High Court, in the Mahindra and Mahindra case, echoed these sentiments, emphasizing that the imposition of a penalty, being in the nature of additional tax, requires clear legal authority. The Court held that where legislation relies on referential provisions or incorporation to levy penalties, it is preferable to resolve doubts in favor of the taxpayer, as presumptions have no place in such matters.

The amendments introduced through the Finance Act, 2024, appear, at best, to be referential legislation and do not seem to meet the threshold of specific, explicit, and express legislation required by Article 265 of the Constitution. The existing provisions, before their substitution, did not constitute substantial, specific, or express provisions that could legitimately impose interest or penalties. The government's reliance on the phrases "including" and "but not limited to" has resulted in the wholesale incorporation of the machinery provisions of the Customs Act, 1962, along with interest and penalty provisions, into the respective legislations.

The substituted provisions seem to fall short of the substantial charging provisions required to satisfy the specific, explicit, and express characteristics necessary for the imposition of interest or penalties under any legislation that has a substantial provision for imposing levies, such as the Customs Tariff Act, 1975, or the Finance Acts of 2001, 2002, 2003, 2005, and 2018.

In conclusion, it appears that the final word on this issue has not yet been spoken, and the recent substitutions introduced by the Finance Act, 2024, may still be subject to legal challenge. The matter remains unresolved, and the legal debate continues.

[The views expressed are strictly personal.]

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¹ Mahindra & Mahindra Ltd. (automotive sector) Vs The Union of India, - 2022 (10) TMI 212 - BOMBAY HIGH COURT = 2022-TIOL-1319-HC-MUM-CUS

² M/s. Khemka and Co. (Agencies) Pvt. Ltd. V/s. State of Maharashtra (1975) 2 SCC 22 = 2002-TIOL-2659-SC-CT-CB,

⁴ Pioneer Silk Mills Pvt. Ltd. V/s. Union of India 1995 (80) E.L.T. 507 (Del.) = 2003-TIOL-45-HC-DEL-CX,

⁵ 2024 (1) TMI 902 - CESTAT KOLKATA M/S. TEXMACO RAIL ENGINEERING LIMITED VERSUS COMMISSIONER OF CUSTOMS (PORT), KOLKATA = 2024-TIOL-71-CESTAT-KOL

⁶ Chripal Polyfilms Ltd Vs Commissioner of Customs, Ahmedabad in the Final Order No.11628 11630/2024

⁷ Acer India (Pvt.) Ltd reported in 2024(5) TMI 478-CESTAT Chennai, the Tribunal Chennai vide Final Order No.40534/2024 dated 08-05-2024