Play safe – Amendment to section 37 of Central Excise Act as regards deterrent action contained in rules 12CC of CER, 2002/rule 12AA of CCR, 2004

By TIOL News Service

NEW DELHI, MAR 03, 2010: IN the case of Dhariyal Chemicals vs. Union of India 2008-TIOL-710-HC-Ahm-CX, the Gujarat High Court while dismissing the challenge to the vires of rule 12CC of the CER, 2002 and the notification issued thereunder observed -

“ 9. In so far as challenge to validity of Rule 12CC of the Rules and the Notification is concerned, it is not possible to accept the contention raised on behalf of the petitioner. Rule 12CC of the Rules grants power to the Central Government to issue a Notification whereunder specific restrictions may be placed on the specified category of persons having regard to the extent of evasion of duty, nature and type of offence or such other factors as may be relevant in order to prevent such evasion, default in payment of excise duty etc. In exercise of these powers Notification No. 32 of 2006 -C.E. (N.T.), dated 30-12- 2006 has been issued. The Notification provides for a summary scheme which is to act as a deterrent against tax evaders by withdrawal of facilities from such persons.

10. On a plain reading of Rule 12CC of the Rules and the impugned Notification it becomes apparent that the Rule and the Notification have been framed for a specified class of persons having reasonable nexus with the object sought to be achieved, and this becomes abundantly clear when one considers paragraph No. 3 of the Notification which lays down the monetary limit in which class of cases the Notification shall be made applicable. Therefore, there is no merit in the challenge to constitutional validity of the Rule and the Notification .”

In the case of Hiren Aluminium Ltd. vs. Union of India 2009-TIOL-83-HC-Mum-CX such an order issued by the CBEC Member was held to be arbitrary and hence stayed and in the case of Vinay Wires & Poly Products Pvt. Ltd. 2010-TIOL-102-HC-Del-CX the order was set aside as no effective opportunity of hearing was given.

Incidentally, a similar deterrent provision also exists in the Cenvat Credit Rules, 2004 in the form of rule 12AA.

However, it appears that the Central government fearing that the said rule may face the axe sooner or later on grounds of being ultra vires , has chosen to equip itself amply by amending section 37 of the Central Excise Act, 1944 by inserting the following clause (xiiia) in sub-section (2) and which reads –

“(xiiia) provide for withdrawal of facilities or imposition of restrictions (including restrictions on utilization of CENVAT credit) on manufacturer or exporter or suspension of registration of dealer, for dealing with evasion of duty or misuse of CENVAT credit.”

The above amendment is carried out by clause 67 of the Finance Bill, 2010. Is it prospective or retrospective?

As they say, better late than never.