MARCH 29, 2012

Rule 12AAA of CCRs & Rule 12CCC of CX Rules: Constitutional validity of Notfn 5/2012 in Doubt

By Pramod Kumar Rai, Advocate

THE HIGH COURT OF ORISSA at CUTTACK in Aryan Ispat and Power Pvt. Ltd. Versus Union of India and others as reported in (2011-TIOL-499-HC-ORISSA-CX) has held that Rule 12AA of the Cenvat Credit Rules, 2004 and Rule 12CC of the Central Excise Rules, 2002 are ultra vires the Central Excise Act, 1944 because in 2006 when these Rules were inserted central government was not authorized to make such Rules. Consequently, notification No.32/2006-CE (NT) dated 30.12.2006 issued under Rule 12AA of the CC Rules, 2004 and Rule 12CC of the CE Rules, 2002 was also struck down by the high court.

“15. In view of insertion of clause (xiiia) in sub-section (2) of Section 37 of the Act by the Finance Bill, 2010 assented to by the President on 08.05.2010, we should not detain ourselves any further to find out the intention of the legislature from sub-section (1) of Section 37 of the Act authorizing the Central Government to make Rule 12 CC of the CE Rules, 2002 and Rule 12 AA of the CC Rules, 2004 and notification No.32/2006-CE(NT) dated 30.12.2006 prior to insertion of clause (xiiia) in sub-section (2) of Section 37 of the Act. Had the legislature given such power under sub-section (1) of Section 37 of the Act, it should not have inserted clause (xiiia) in sub-section (2) of Section 37 of the Act by the Finance Bill, 2010.

16. In view of the above, we are of the considered view that the Central Government has made the Rules 12CC of the CE Rules, 2002 and Rule 12AA of the CC Rules, 2004 in the year 2006 without any authority of law which power was vested in the Central Government in the year 2010 by inserting clause (xiiia) in sub-section 2 of Section 37 and therefore, the two Rules are ultra vires the Central Excise Act, 1944. Consequently, notification No.32/2006-CE (NT) dated 30.12.2006 issued in pursuance of Rule 12CC of the CE Rules, 2002 and Rule 12AA of the CC Rules, 2004 is not sustainable in law.”

++ To overcome the situation now the government has substituted old Rule 12AA of the Cenvat Credit Rules, 2004 by a new Rule 12AAA vide Notification No. 3/2012 - Central Excise (N.T.) dated,12th March, 2012. Similarly old Rule 12CC of the Central Excise Rules, 2002 has been substituted by a new Rule 12CCC vide Notification No. 4/2012 - Central Excise (N.T.) dated, 12th March, 2012. Further notification number 32/2006(NT) dated 30.12.2006 has been replaced by Notification No. 5/2012 - Central Excise (N.T.) dated, 12th March, 2012 issued under new Rules 12AAA and 12CCC as referred above. Further notification No. 01/2007-Central Excise (N.T), dated the 19 th January 2007 has been replaced by notification No. 06/2012-Central Excise (N.T), dated the 13 th March 2012, authorizing the Member (Central Excise), Central Board of Excise and Customs to issue orders in terms of notification No.5/2012 referred above.

++ Except for the timing of issue, the new notifications are verbatim replica of old notifications. It is probably based on the understanding of Revenue that the Rules 12AA and 12CC referred above were struck down by the Orissa High Court just because prior to 8.5.2010 the central government was not competent to make such rules where as post 8.5.2010, it is competent to make such rules at present. What revenue has failed to understand that there were other infirmities in the said notifications which were though agitated but not gone into by high Court because on first ground itself the notifications were found to be ultra vires the CEA 1944. In my opinion, though revenue has removed the defect on which the notifications were struck down, yet even today there are other infirmities in the notification 5/2012 on account of which the vires of Notification 5/2012 can be successfully challenged before courts.

++ Notification 5/2012 prescribes issuance of notices in cases of evasion of central excise duty or misuse of CENVAT facility, at a stage much prior to issuance of demand SCN under Section 11A of the Central Excise Act 1944, asking the assessees to explain as to why the facility of monthly duty payment under Rule 8 of Central Excise Rules 2002 should not be stopped and why they should not be compelled to pay duty on every consignment at the time of clearance in cash only without utilizing the CENVAT Credit earned on the inputs and capital goods.

++ The procedure prescribed under new notification 5/2012 is as under.

++ The Commissioner or additional director general of DGCEI as the case may be, as far as possible within 30 days of detection of case, after examination of records and after prima facie satisfying himself regarding fraudulent evasion of duty or availment of Cenvat Credit, at a stage much before issuance of demand SCN may forward a proposal to the chief Commissioner or director general as the case may be. The proposal will include the facilities to be withdrawn or restrictions to be imposed including the period of such restrictions/withdrawals, preferably within 30 days of the detection of the case as far as possible.

++ The chief Commissioner/DG after giving an opportunity of being heard to affected party and after satisfying himself that an offence falling under one of those seven categories has been knowingly committed may forward the proposal along with his recommendations to CBEC.

++ Member(Excise) of CBEC will further examine the recommendations received from the chief Commissioner/DG and after satisfying himself will issue an order specifying the type of facilities to be withdrawn or restrictions to be imposed along with the period for such restriction/withdrawal.

++ The grounds on which the notification 5/2012 dated 12.03.2012 is liable to be struck down by courts in Due Course.

++ Violation of Section 11A: If revenue is prima facie satisfied based on its investigation that any particular tax payer has evaded duty or availed irregular credit, the revenue is required to serve a notice alleging evasion of taxes or availment of irregular credit as required under Section 11A of the Act and thereafter after getting representation of tax payer and after following principles of natural justice by a speaking order the revenue is required to conclude whether evasion has taken place or not under Section 11A(10) of the act. No order confirming taxpayers' liability can be passed, including in the cases of fraud under any other section of the act. Thus any order passed under notification 5/2012 concluding evasion of duty or availment of irregular credit and consequential stoppage of monthly duty payment or restrictions on use of Cenvat Credit much before issuance of notice under Section 11A of the Act is derogatory to the provisions of Section 11A of the Act. Any provision made under rules in derogation to provisions of the act is bound to be struck down as held by supreme court in the case of LAGHU UDYOG BHARATI Versus UNION OF INDIA - (2002-TIOL-162-SC-ST).

++ Mockery of adjudication under Section 11A(10): The order under notification 5/2012 shall by Passed by CBEC and thereafter the demand SCN shall be adjudicated by an officer directly subordinate to CBEC under Section 11A(10) of the act. Once CBEC takes a stand that evasion or availment of irregular credit has taken place irrespective of the merits of the case or irrespective of the submission of the tax payor, the subordinate officer shall be prejudiced and shall definitely follow the stand taken by CBEC. Therefore the proceedings under notification 5/2012 shall interfere with adjudication proceedings under Section 11A(10) of the act and adjudication proceedings shall be no longer independent.

++ Double Jeopardy: The Action contemplated under notification 5 /2012 amounts to double jeopardy as for the same offence independent Action shall be taken by the department at a later stage by issuing show cause notices under Section 11A of the act and proposing imposition of Penalty under Section 11AC and recovery of interest under Section 11AA of the act and is thus voilative of Article 20 of Constitution of India. There cannot be two parallel proceedings based on same facts under the same act i.e. Central Excise Act 1944 before two different authorities.

++ Final order based on prima facie finding: The order passed by Member (Excise) is not going to be an interim order, rather it will be a final and non appealable order under the law based on Prima facie finding. No substantive right or even a procedural benefit can be taken away on the basis of prima facie finding. Further final and non appealable orders cannot be passed based on prima facie finding. No court will approve passing of a final order based on a prima facie finding.

++ No hearing by adjudicating authority: It is cardinal principle of natural justice that the person, who decides the case and who passes the order, must hear both parties to the case. Under notification 5/2012, the hearing shall be given by an officer of Chief Commissioner Rank and the order shall be passed by his superior namely, a Member of CBEC. Thus the officer who is going to conduct hearing is not going to decide or pass order. Therefore the hearing proceedings are voilative of principles of natural justice.

++ No right of Appeal: Though the Action contemplated under notification 5/2012 affects substantive rights of taxpayers, yet under the scheme of notification 5/2012, there is no right of appeal to affected parties.