1. This writ petition has been filed for declaring Rule 12CC of the Central Excise Rules, 2002 (for short, “CE Rules, 2002”), Rule 12AA of the Cenvat Credit Rules, 2004 (for short, “CC Rules, 2004”) and Notification No.32/2006-CE (N.T.) dated 30.12.2006 (for short, “Notification”) issued by the Central Government ultra vires the provisions of the Central Excise Act, 1944 (for short, “C.E. Act”) and the Constitution of India and for striking off those two Rules and theNotification. The further prayer of the petitioner is to set aside the impugned order No.38/2010-M (CX)/DA dated 21st July, 2010 passed under above notification dated 30.12.2006 (Annexure-1).
2. Bereft of unnecessary details, the facts and circumstances giving rise to the present writ petition are that the Central Government by Notification No.30/2006-CE (N.T.) dated 30.12.2006 introduced Rule 12CC in CE Rules, 2002 enabling it to impose by notification certain restrictions and to withdraw facilities in certain types of cases of evasion of duty. By Notification No.31/2006-CE (N.T.) dated 30.12.2006, the Central Government also introduced Rule 12AA in CC Rules, 2004 enabling it to impose by notification certain restrictions in respect of misuse of Cenvat Credit. Consequently, a composite Notification No.32/2006-C.E. (N.T.) dated 30.12.2006 was issued in exercise of powers under the aforesaid Rules 12CC of CE Rules, 2002 and 12AA of the CC Rules, 2004 made under C.E. Act, 1944 listing out the type of facilities to be withdrawn, restrictions to be imposed and deterrent action to be taken, in case prima facie evidence of evasion of duty and violation of Cenvat Rules are found out and Procedure to be adopted before withdrawal of facilities.
3. On 04.11.2009, Officers of Central Excise, Bhubaneswar-II Commissionarate searched the factory and office premises of the petitioner which resulted in recovery and resumption of alleged incriminating documents. The officers conducted physical stocktaking of finished goods and recorded shortage of 220 M.T. of sponge iron. The petitioner deposited Rs.2.26 lakhs under protest towards duty liability on the alleged unaccounted stock of 220 M.T. of sponge iron. On the basis of scrutiny of seized documents it was alleged that petitioner had received unaccounted iron ore in the factory and on average, taking consumption production ratio as the basis, it was further alleged that there was suppression of production of 11089.73 M.Ts of sponge Iron during April, 2006 to December, 2007 which resulted in alleged evasion of Central Excise Duty to the tune of Rs.93 lakhs. The petitioner received notice dated 11.12.2009 under Annexure-4 from the office of the Commissioner, Central Excise, Bhubaneswar-II to appear for personal hearing on 21.12.2009 before Chief Commissioner, Central Excise, Customs & Service Tax in the matter of deterrent action proposed to be taken under notification No.32/2006-C.E.(NT) dated 30.12.2006. Pursuant to the said notice, the petitioner appeared before the Chief Commissioner and submitted an application praying therein that the petitioner may be made aware of the gravamen of the charges and copies of documents relied upon by the department constituting the basis for allegations/charges be supplied to enable the petitioner to make a representation in the matter.
A show cause notice dated 25.01.2010 was issued to the petitioner to submit a representation/reply, if any, to the proposal of Commissioner of Central Excise, Bhubaneswar-II contained in his letter dated 02.12.2009 to invoke the provisions of the notification 32/2006-CE (NT) dated 30.12.2006 and impose restrictions in terms of that notification. On 02.02.2010 the petitioner received another letter from opp. parties intimating him that the Chief Commissioner has permitted him to file his reply by 15.02.2010 and personal hearing was fixed to 18.02.2010. Opp. parties by letter dated 05.02.22010 (Annexure- 7) intimated the petitioner to collect photocopies of the seized records/documents. The petitioner submitted his representation to the Chief Commissioner on 15.02.2010 pointing out, inter alia that copies of the documents seized in course of search on 04.11.2009 as listed in Panchanama dated 4.11.2009 have not been supplied to the petitioner and the facts of the case do not warrant any action under notification no.32/2006. Personal hearing was conducted on 18.02.2010 by the learned Chief Commissioner, Central Excise, Bhubaneswar, who made some recommendation to the Board for imposing restrictions in terms of Notification No.32/2006-C.E.(NT).
4. While the matter stood thus, the Finance Bill, 2010 was placed in the Parliament on 26.02.2010 introducing an amendment to Section 37 of the Central Excise Act authorizing to make Rules to provide for withdrawal of facilities or imposition of restrictions in case of evasion of duty or misuse of Cenvat Credit. On 8.5.2010 Presidential assent was received to the Finance Bill, 2010 as Act No. 14 of 2010.
5. On 21.07.2010 Member (CX) authorized by the Board passed the impugned order under Annexure-1. By the said order the facility of monthly payment of excise duty provided under Rule 8(1) of the CE Rules, 2002 was withdrawn and the petitioner was required to pay excise duty for each consignment at the time of removal of goods from 26.07.2010 to 31.12.2010. Payment of excise duty by utilization of Cenvat Credit as provided under Rule 3(4) of the CC Rules, 2004 was ordered to be stopped during that period. The petitioner was directed to maintain the records of receipt, disposal, consumption and inventory of the principal inputs on which Cenvat credit has not been taken with effect from 26.07.2010 to 31.10.2010. The petitioner was also directed to intimate the jurisdictional Superintendent or the Central Excise within 24 hours of the receipt of the principal inputs in the factory on which Cenvat credit has or has not been taken and the same should be kept available for verification for the next 48 hours and this restriction was applicable for the period 26.07.2010 to 31.10.2010. Hence, the present writ petition.
6. Mr. Pangari, learned Counsel appearing for the petitioner submits that Rules 12CC of C.E. Rules, 2002 and 12AA of the CC Rules, 2004 and notification No. 32/2006-CE (NT) dated 30.12.2006 are ultra vires the Act. Prior to Finance Bill 2010 bringing Amendment to Section 37 of the Central Excise Act enabling the Central Government to make Rules for deterrent action/withdrawal of facilities granted under the Central Excise Act and the Cenvat Credit Rules, the Central Government did not have power to introduce Rules 12CC of the CE Rules, 2002 and 12AA of CC Rules, 2004.
The rule making power was given to the Central Government only by the Finance Bill, 2010 which was introduced in Parliament on 26.02.2010 and assented to by the President on 08.05.2010. The said amendment is intended to be prospective. There is no other Section in the Central Excise Act which authorizes the Central Government to introduce the said Rules having effect of taking away substantive rights granted under the Act or the CE Rules, 2002, or the CC Rules, 2004. The notification no.32/2006 dated 30.12.2006 affects the substantive right of tax payers. The said notification has not been notified under the Central Excise Act, rather it has been notified under Rules 12CC of Central Excise Rules, 2002 and 12AA of the CC Rules, 2004 which are ultra vires the provisions of the Act. The notification no.32/2006 dated 30.12.2006 suffers from various fundamental defects and violates the substantive statutory rights of the petitioner and other manufacturers.
In case the Revenue is prima facie satisfied on the basis of investigation that any particular tax payer evades a duty, the Revenue is required to proceed for determination of evasion as provided under Section 11A(1) of the Act. Therefore, any order passed under Notification No.32 of 2006 concluding evasion of duty and consequential stoppage of monthly duty payment or restrictions on use of Cenvat Credit before issuance of notice under Section 11A(1) of the Act is derogatory to the provisions of Section 11A of the CE Act. Hence, any provision made under Rules in derogation to the provisions of the Act is bound to be struck down. In support of his contention Mr. Pangari placed reliance in the case of Laghu Udyog Bharati v. Union of India, AIR 1999 SC 2596. The CE Rules, 2002 and CC Rules, 2004 have been notified under Section 37 of the Act to carry out the provisions of CE Act, 1944.
They can regulate the procedural aspects, but they cannot take away the substantive rights conferred under the CE Act. Thus notification No.32/2006 notified under the Rules and affecting the substantive rights of the tax payers is not sustainable. The notification no.32/2006 infringes substantive statutory rights given under Rule 8(1) of the C.E. Rules, 2002 and Rule 3(4) of the CC Rules, 2004. Action contemplated under the said notification No.32/2006 amounts to double jeopardy as for the same offence independent action shall be taken by the department by issuing show cause notice under Section 11A(1) of the Act and proposing imposition of penalty under Section 11AC and recovery of interest u/s. 11AB of the Act and is thus violative of Article 20 of the Constitution. There cannot be two proceedings basing on same facts under the same act. The action contemplated under the said notification is not based on final finding of any authority rather it is based on prima facie finding of the department. No substantive right or even a procedural benefit can be taken away on the basis of prima facie finding.
Under the notification No.32 of 2006, the hearing shall be given by an officer of Chief Commissioner’s rank and the order shall be passed by his superior, namely, a Member of CBEC. Learned counsel for the petitioner placing reliance in the case of G. Nageswar Rao and others vs. A.P.S.R.T. and another, AIR 1959 SC 308 submitted that as the person who is going to conduct hearing does not pass the order and therefore, the said hearing is violative of the principles of natural justice. The proceedings under Notification No.32 of 2006-CE (NT) shall interfere with the adjudication proceedings under Sec.11A(2) of the Act and thus adjudication proceedings shall be no longer independent. The provision contained in the Notification is extremely harsh, excessive, oppressive, unreasonable and thus violates the letter and spirit of Art. 19(1)(g) of the Constitution. The action contemplated under Notification No.32/2006 affects the substantive rights of tax payers as under the scheme of the notification there is no right of appeal.
7. It is further argued that the impugned order passed under Annexure-1 is not sustainable in law as there is no material on record to prima facie indicate that the petitioner has evaded payment of Central Excise duty up to Rs.10 lakhs. Rs.2,26,000/- was paid under protest and not paid voluntarily. The petitioner was not supplied with all documents seized in Panchanama to enable him to make effective representation. The impugned order is too harsh, excessive and punitive and has the effect of temporary closure of industry of the petitioner inasmuch as 80% of the duty is paid by using Cenvat Credit.
Stoppage of use of Cenvat Credit has seriously affected the working capital of the petitioner. The rule and notification do not provide any time limit for which restriction has to be imposed. The Central Excise Officer, who exercises power u/s.11A of the Act is subordinate to the Members of the Board and shall be prejudiced against the petitioner in view of the finding of the Chief Commissioner and action of the Member of the Board. Placing reliance in the case of Hiren Aluminium Ltd. V. Union of India, 2009 (234) ELT 578 (Bom), it is argued that the Bombay High Court has stayed the operation of an order passed by the Member (CX) under notification No.32/2006-CE (NT) pending examination of the issue whether the said Rules 12CC and 12AA are ultra vires the provisions of the Act.
8. Per contra, Mr. P.K. Ray, learned Senior Advocate appearing on behalf of the opp. party–Excise Department vehemently argued that the restrictions as per order dated 21.07.2010 (Annexure-1) are only for the period from 26.07.2010 to 31.10.2010 which has already expired. A reading of the notification No.32/2006 dated 30.12.2006 in Explanation (i), it is clarified that a person, against whom the order under sub-para (3) of para 4 has been passed, may continue to take CENVAT Credit. However, he would not be able to utilize the credit for payment of duty during the period specified in the said order.
Thus, the substantive statutory right which the petitioner enjoys under Rule 3 of the CC Rules, 2004 is not abrogated or taken away as alleged. The credit is not denied nor is the order denying the petitioner his right to take such credit. Therefore, there is no permanent injury. It is only a temporary restriction of the facilities he enjoys under the Rules. The injury, if any, is only temporary in nature and as is implicit from the Explanation (i), there is no perpetual denial of the benefit as he continues to take the Cenvat Credit. This restriction might affect his fund flow or interest cost temporarily for evading Central Excise Duty on detection. It is a summary scheme with an object to act as a deterrent against tax evaders by withdrawal of facilities from such persons so as to bring the erring assessee on correct track and to compel it to make statutory compliance in future. By way of amendment in Section 37, sub-section (2), after clause (xiii), clause (xiiia) was inserted, which provides for withdrawal of facilities on imposition of restriction etc.
This amendment was to be brought into force after the enactment of the Finance Bill, 2010. After the said Bill was introduced in the Finance Budget in the year 2010 and got the President’s assent on 08.05.2010 it was incorporated in Section 37(2) of the Act. Section 37 deals with general power of the Central Government to make rules under sub-section (1) to carry into effect the purpose of this Act. Sub-section (2) enumerates the matter providing for “in particular and without prejudice to the generality of the foregoing power”.
Thus, this section did not require that the enumerated rules would be exhaustive. Any rule, if it could be shown to have been made to “carry into effect the purpose of the Act” would be within the rule making power. Chapter-2 of the Act deals with “Levy and Collection of Duty” i.e., Sections 3 and 3A categorically states notwithstanding anything contained in Section 3 as may be relevant it is of the opinion that it is necessary to safeguard the interest of revenue specify by notification in the Official Gazette. Amendment to Section 37 by the act of Parliament received the assent of the President on 08.05.2010. The operational period of restriction being from 26.07.2010 limiting it to five months has commenced much after the notification i.e. 08.05.2010 and the restrictions operate after the incorporation of the same into the Act having the force of law.
Therefore, the action of the Board cannot be questioned on the ground that the Board was unauthorized to impose such restrictions under Rule 12 CC of the CE Rules, 2002 and Rule 12 AA of the CC Rules, 2004 and cannot be challenged on the ground of being ultra vires. In support of his contention, Mr. Ray placed reliance on the judgment of the apex Court in the case of Asst. Collector of Central Excise v. Ramakrishna Kulwant Rai, 1989 (41) ELT 3 (SC).
According to Mr. Ray, modern State in exercising its sovereign power of taxation has to deal with complex factors relating to the object to be taxed and restrictions to be imposed. Further placing reliance on the decision of the apex Court in the case of Bhavesh D. Parish and others v. Union of India and another, (2000) 5 SCC 471, (para-23, 24 and 30), it is argued that the machineries of the State would not work if it were not allowed a little play in its joints.
Concluding argument, Mr. Ray submits that 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 are not ultra vires either the CE Act or Constitution of India, therefore, he has prayed for dismissal of the writ petition.
9. On the above rival contentions the questions that fall for consideration by this Court are as under:
(i) Whether Rule 12CC of the CE Rules, 2002, Rule 12AA of the CC Rules, 2004 and notification No.32/2006- CE(N.T.) dated 30.12.2006 are ultra vires the provisions of the Central Excise Act, 1944 and the Constitution of India?
(ii) Whether the impugned order No.38/2010-M(CX)/DA dated 21.07.2010 (Annexure-1) passed pursuant to the aforesaid notification is sustainable in law?
10. To deal with the first question, it is necessary to know what is contemplated in Section 37 of the C.E. Act with regard to power of the Central Government to make rules. The relevant portions of Section 37 of the C.E. Act are reproduced below:
“37. Power of Central Government to make rules:
(1) Central Government may make rules to carry into effect the purposes of this Act.,
(2) In particular, and without prejudice to the generality of the foregoing power, such rules may- (i) xxxx”
The Central Government is authorized by Section 37 of the C.E. Act to make rules for proper and smooth implementation of the provisions of the Act. Sub-section (1) of Section 37 while giving a power in general to make rules, the function of sub-section (2) of Section 37 is merely illustrative and not restrictive (see Om Prakash and others v. Union of India and others, AIR 1971 SC 771). The rules referred to in Section 37(2) of the C.E. Act are authorized by and/or made under the provisions of Section 37(1) of the C.E. Act. The provisions of Section 37(2) are not restrictive.
11. Admittedly, in the present case by the Financial Bill, 2010, an amendment was brought to sub-section (2) of Section 37 of the Act, after clause (xiii) and the following clause was inserted which runs as follows:
“(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.”
12. According to the petitioner, prior to insertion of clause (xiiia), the Central Government had no power to make Rule 12 CC of the CE Rules, 2002 or Rule 12AA of the CC Rules, 2004 and issue subsequent notification No.32/2006-CE(NT) dated 30.12.2006. The contention of the opposite parties-department is that by exercising power under subsection (1) of Section 37 of the Act, the above two Rules were framed and the said notification was issued. If this contention of Mr.Ray is accepted then there is no need at all to insert clause (xiiia) in sub-section (2) of Section 37 of the Act by the Finance Bill, 2010. Insertion of clause (xiiia) in sub-section (2) of Section 37 itself shows that the legislature has never vested such power in the Central Government under sub-section (1) of Section 37 of the Act.
13. The apex Court in the case of B. Pravakar Rao vs. Desari Panakala Rao and others, AIR 1976 SC 1803, held that the rules cannot go beyond the sections of the Act. In Laghu Udyog Bharati (supra), the Apex Court held that a provision made under the Rules in derogation to the provisions of the Act is bound to be struck down. In the case of M.K. Papiah & Sons v. Excise Commissioner and another, [1975] 35 S.T.C 537 (S.C.), the apex Court held that the legislature in conferring power upon another authority to make subordinate or ancillary legislation must lay down policy, principle, or standard for the guidance of the authority concerned.
Delegation is not the complete handing over or transfer of a power from one person or body of persons to another. Delegation may be defined as the entrusting, by a person or body of persons, of the exercise of a power vested in that person or body of persons, to another person or body of persons, with complete power of revocation or amendment remaining with the grantor or delegator. Delegation often involves the granting of discretionary authority to another, but such authority is purely derivative.
The ultimate power always remains with the delegator and is never renounced. This Court in the case of Goffar Kassam v. Commissioner of Sales Tax, Orissa, Cuttack, (1974) 33 STC 98, held that unless a statute expressly or by necessary implication authorizes the Rules to create a penal liability, the rule making authority has no jurisdiction to create a penal liability.
14. In the instant case power was only vested in the Central Government by way of inserting clause (xiiia) in sub-section (2) of Section 37 of the Act by the Finance Bill, 2010, to make rules in the matters as enumerated in Rule 12 CC of the CE Rules, 2002 and Rule 12 AA of the CC Rules, 2004.
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.
17. In view of our above findings, the impugned order No. 38/2010-M (CX)/DA dated 21 st July, 2010 passed pursuant to notification dated 30.12.2006 (Annexure-1) is not sustainable and the same is quashed.
18. In the result, the writ petition is allowed. No order as to costs.