SCA/8387/2003 1/29 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD SPECIAL CIVIL APPLICATION NO. 8387 OF 2003 With SPECIAL CIVIL APPLICATION NO. 9865 OF 2003 With SPECIAL CIVIL APPLICATION NO. 8391 OF 2003 With SPECIAL CIVIL APPLICATION NO. 8388 OF 2003 With SPECIAL CIVIL APPLICATION NO. 8389 OF 2003 For Approval and Signature: HONOURABLE MR.JUSTICE R.S.GARG HONOURABLE MR.JUSTICE M.R. SHAH ========================================================= 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the Civil Judge? ========================================================= MESSRS GOPAL IRON & STEEL CO. (GUJARAT) LTD. & ANR. - Petitioner(s) Versus UNION OF INDIA & ORS. - Respondent(s) ========================================================= Appearance : MR. PARESH M. DAVE for Petitioner(s). MR. PURVISH J. MALKAN for Respondent(s). ========================================================= CORAM : HONOURABLE MR.JUSTICE R.S.GARG and HONOURABLE MR.JUSTICE M.R. SHAH Date : 04/07/2006 SCA/8387/2003 2/29 JUDGMENT ORAL JUDGMENT (Per : HONOURABLE MR.JUSTICE R.S.GARG) The parties are heard at length. 2. Special Civil Application No.8387 of 2003 [Gopal Iron & Steel Co. (Gujarat) Ltd. vs. Union of India], Special Civil Application No.9865 [Shree Steel Industries vs. Union of India] and Special Civil Application No.8391 [Shree Laxmi Steel Rolling Mills vs. Union of India] are the petitions by Steel Rolling or Re-rolling Mills challenging the vires of Rule-3 of the Hot Re-rolling Steel Mills Annual Capacity Determination Rules, 1997 (“the Re-rolling Steel Rules” for short) brought into effect after exercise of the powers conferred upon the Central Government by Sub.section-(2) of Section-3A of the Central Excise Act, 1944 (“the Act” for short). Special Civil Application No.8388 of 2003 [Raghuvir Synthetics Ltd. vs. Union of India] and Special Civil Application No.8389 of 2003 [B. Santumal Textile Mills Pvt. Ltd. vs. Union of India] are the petitions by the Textile Industries, which are challenging the vires of Rule-3 of the Hot Air Stenter Independent Textile Processors Annual Capacity Determination Rules, 1998 SCA/8387/2003 3/29 JUDGMENT (“the Hot Air Stenter Rules” for short), the Rules framed under Section-3A of the Act. 3. The first three petitioners are engaged in the business of re-rolling of steel, while the other two are engaged in the manufacture of synthetic/textile fabrics. 4. The learned Counsel for the petitioners firstly submits that Section-3A of the Central Excise and Salt Act, 1944 is ultra vires the Constitution, especially, Entry 84 of the Union List of the Seventh Schedule of the Constitution. The submission is that levy can be effected on the goods produced or manufactured by an industry and not on hypothetical basis or on some formula, which does not relate to manufacture or produce. He submits that Section-3A provides levy of the duty on the basis of the capacity of production and as such, it is bad. It is further submitted that the rules framed on the authority conferred under Section-3A of the Act, referred to above, are consequently bad and in case Section-3A is held to be constitutionally valid, Rule-3 of the Re-rolling Steel Rules and the Hot Air Stenter Rules are ultra vires Section-3A of the Act. On the other hand, the learned Counsel for the Revenue has submitted that Section-3A of the Act is not ultra vires the Constitution, it was SCA/8387/2003 4/29 JUDGMENT within the legislative competence and a fair understanding of the set of the Rules would show that proper formula has been given to come to the decision on the production capacity. 5. Entry-84 of the Union List of the Seventh Schedule reads as under : “84. Duties of excise on tobacco and other goods manufactured or produced in India except- (a) alcoholic liquors for human consumption; (b) opium, Indian hemp and other narcotic drugs and narcotics, but including medicinal and toilet preparations containing alcohol or any substance included in sub-paragraph (b) of this entry.” From a perusal of the Entry, it would be clear that duty of excise can be levied on tobacco and other goods manufactured or produced in India except certain articles to which Entry-84 is not available. True it is, that excise is leviable to the production or manufacture by the industry, but, that Entry is to be understood in its proper perspective. 6. Section-3A of the Act, the vires of which has SCA/8387/2003 5/29 JUDGMENT been challenged, reads as under : “Section 3A. Power of Central Government to charge Excise duty on the basis of capacity of production in respect of notified goods.-- (1) Notwithstanding anything contained in section 3, where the Central Government, having regard to the nature of the process of manufacture or production of excisable goods of any specified description, the extent of evasion of duty in regard to such goods or such other factors as may be relevant, is of the opinion that it is necessary to safeguard the interest of revenue, specify, by notification in the Official Gazette, such goods as notified goods and there shall be levied and collected duty of excise on such goods in accordance with the provisions of this section. (2) Where a notification is issued under sub-section (1), the Central Government may, by rules, provide for determination of the annual capacity of production, or such factor or factors relevant to the annual capacity of production of the factory in which such goods are produced, by the Commissioner of Central Excise and such annual capacity of production shall be deemed to be the annual production of such goods by such factory : Provided that where a factory producing notified goods is in operation only SCA/8387/2003 6/29 JUDGMENT during a part of the year, the production thereof shall be calculated on proportionate basis of the annual capacity of production. (3) The duty of excise on notified goods shall be levied, at such rate as the Central Government may by notification in the Official Gazette specify, and collected in such manner as may be prescribed : Provided that, where a factory producing notified goods did not produce the notified goods during any continuous period of not less than seven days, duty calculated on a proportionate basis shall be abated in respect of such period if the manufacturer of such goods fulfills such conditions as may be prescribed. (4) Where an assessee claims that the actual production of notified goods in his factory is lower than the production determined under sub-section (2), the Commissioner of Central Excise shall, after giving an opportunity to the assessee to produce evidence in support of his claim, determine the actual production and redetermine the amount of duty payable by the assessee with reference to such actual production at the rate specified in sub- section (3). (5) Where the Commissioner of Central Excise determines the actual production under sub-section (4), the amount of duty already SCA/8387/2003 7/29 JUDGMENT paid, if any, shall be adjusted against the duty so redetermined and if the duty already paid falls short of, or is in excess of, the duty so redetermined, the assessee shall pay the deficiency or be entitled to a refund, as the case may be. (6) The provisions of this section shall not apply to goods produced or manufactured, - (i) in a free trade zone and brought to any other place in India; or (ii) by a hundred per cent export-oriented undertaking and allowed to be sold in India. Explanation 1.- For the removal of doubts, it is hereby clarified that for the purposes of section 3 of the Customs Tariff Act, 1975 (51 of 1975), the duty of excise leviable on the notified goods shall be deemed to be the duty of excise leviable on such goods under the First Schedule and the Second Schedule to the Central excise Tariff Act, 1985 (5 of 1986), read with any notification for the time being in force. Explanation 2.- For the purposes of this section the expressions “free trade zone” and “hundred per cent export-oriented undertaking” shall have the meanings assigned to them in section 3.” Section-3A, in fact, is a contra-indication to SCA/8387/2003 8/29 JUDGMENT Section-3 of the Act as it provides for different mode and manner of levy of the duty. Sub.section-(1) of Section-3A starts with a non obstante clause by saying that notwithstanding anything contained in section 3, the Central Government, having regard to the nature of the process of manufacture or production of excisable goods of any specified description, the extent of evasion of duty in regard to such goods or such other factors as may be relevant, after opining that it has become necessary to safeguard the interest of revenue, specify, by notification in the Official Gazette, such goods as notified goods and excise would be levied on such goods in accordance with the provisions of Section-3A. 6.1 Sub.section-(2) provides that when a notification is issued under Sub.section-(1), the Central Government may, by rules, provide for determination of the annual capacity of production or such factor or factors relevant to the annual capacity of production of the factory in which such goods are produced and such annual capacity of production shall be deemed to be the annual production of such goods by such factory. This exercise of fixing the annual capacity is to be undertaken by the Commissioner of the Central Excise. SCA/8387/2003 9/29 JUDGMENT 6.2 According to Sub.section-(3), the duty of excise on notified goods shall be levied at such rate as the Central Government may by notification in the Official Gazette specify, and it may be collected in such a manner as may be prescribed. The proviso appended to Sub.section-(3) provides that where a factory producing notified goods did not produce the notified goods during any continuous period of not less than seven days, duty calculated on a proportionate basis shall be abated in respect of such period if the manufacturer of such goods fulfills such conditions as may be prescribed. 6.3 Sub.section-(4) provides that where an assessee claims that the actual production of notified goods in his factory is lower than the production determined under Sub.section (2), he can apply to the Commissioner of Central Excise and the Commissioner, after giving an opportunity to the assessee to produce evidence in support of his claim, determine the actual production and redetermine the amount of duty payable by the assessee with reference to such actual production at the rate specified in Sub-section (3). SCA/8387/2003 10/29 JUDGMENT 7. The learned Counsel for the petitioners submits that Sub.section-(2) of Section-3A runs contrary to Entry 84 of the Union List of the Seventh Schedule of the Constitution because it proposes to charge levy on hypothetical basis and not on the actual production. 8. The very same argument has been considered by the Supreme Court in the matter of Commissioner of Central Excise & Customs vs. Venus Castings (P) Ltd., 2000 (117) E.L.T. 273 (S.C.). There, the question was in relation to appreciation of Section-3A(4) vis-a-vis Rule 96ZO(3) of the Central Excise Rules, 1944. Though the question was that if the manufacturer or purchaser opts for the scheme provided under Rule-96ZO(3) whether he would be still entitled to claim benefits under Section- 3A(4) of the Act or having opted for the scheme floated under Rule-96ZO(3), is debarred from exercising the option under Section-3A(4) and his right would stand closed. The Supreme Court considered the entire matter and observed that application of Section-3A(4) would stand excluded once Rule-96ZO(3) is opted for by the manufacturer. The Supreme Court also made observations that Section-3A(4) is a section which levies the duty on the production and the duty is relatable to the SCA/8387/2003 11/29 JUDGMENT production and not otherwise. Despite these observations made by the Supreme Court, the learned Counsel for the petitioners repeatedly contended that correctness, validity and constitutional validity of Section-3A(2) of the Act is required to be considered by this Court. In paragraph-11 of the said judgement, the Supreme Court has observed as under : “.... However, in our opinion, all these decisions, either arising under the Income Tax Act in relation to special mode of collection of tax or excise duty on timber dealers or other enactments have no relevance. What can be seen is that the charge under the Section is clearly on production of the goods but the measure of tax is dependent on either actual production of goods or on some other basis. The incidence of tax is, therefore, on the production of goods. It cannot be said that collection of tax based on the annual furnace capacity is not relatable to the production of goods and does not carry the purpose of the Act. In holding whether a relevant rule to be ultra vires it becomes necessary to take into consideration the purpose of enactment as a whole, starting from the preamble to the last provision thereto. If the entire enactment is read as a whole indicates the purpose and that purpose is carried out by the rules, the same cannot be SCA/8387/2003 12/29 JUDGMENT stated to be ultra vires of the provisions of the enactment. .... “ These observations made by the Supreme Court are clear in terms when they say that Section-3A of the Excise Act is a mode of charging the duty in a different manner. The observations of the Supreme Court that the charge under the Section is clearly on production of the goods but the measure of the tax is dependent on either actual production of goods or on some other basis, which are to be understood in their true spirit and for the reasons for which those have been laid. Once the Supreme Court says that Section-3A proposes levy on actual production and not on hypothetical basis or otherwise, then, it cannot be said that the section is ultra vires the Constitution. 9. Section-3A (2) of the Central Excise Act provides for determination of the annual capacity and levy of the duty on such annual capacity. Sub.section-(2) of Section-3A in itself is not complete, certain rules are to be framed for determination of the capacity and Sub.section-(4) provides that if a manufacturer/producer proves to the satisfaction of the Commissioner that his production was less than the capacity, then, the duty SCA/8387/2003 13/29 JUDGMENT shall be redetermined and in case he has paid less, further levy would be recovered and in case, he has paid more, he would be entitled to refund. If such is the clear provision of law and there is no ambiguity in it, then, simply because challenge is thrown to the constitutional validity, the Court would not readily accept the argument. Even otherwise the Courts are required to uphold the validity of law unless those are shown to be ultra vires. 10. The Supreme Court's judgement in the matter of Venus Castings (supra) has been followed by the Supreme Court in the matter of Union of India vs. Supreme Steels & General Mills, 2001 (133) ELT 513 (SC). 11. The learned Counsel for the petitioners next contended that the Rules made under Section-3A, where those governed the Steel Mills or the Textile Mills, are ultra vires Section-3A of the Act because these Rules do not provide correct guidelines for determination of the capacity of the Textile Mills or the Steel Mills. Strong reliance was also placed on a single Bench judgement of the High Court of Madras in the matter of Beauty Dyes vs. Union of India, 2004 (166) E.L.T. 27 (Mad.). In the matter of Beauty Dyes (supra), Rule-3 of the Hot Air SCA/8387/2003 14/29 JUDGMENT Stenter Independent Textile Processors and Annual Capacity Determination Rules, 1998 were under challenge and the learned single Judge of the Madras High Court observed that Rule-3 of the Rules cannot be sustained as the same was ultra vires Section-3A of the Act. Taking the clue and cue from the said judgement, the learned Counsel submits that the Re-rolling Steel Rules, namely, Hot Re-rolling Steel Mills Annual Capacity Determination Rules, 1947 are ultra vires Section-3A because they do not provide correct procedure for determination of the annual capacity. Rule-3 of the Re-rolling Steel Rules reads as under : “3. The annual capacity of production referred to in rule 2 shall be determined in the following manner, namely :- (1) a hot re-rolling mill shall declare the values of `d', `n', `i' and `speed of rolling', the parameters referred to in sub-rule (3, to the Commissioner of Central Excise (hereinafter referred to as the Commissioner), with a copy to the Assistant Commissioner of Central Excise or Deputy Commissioner of Central Excise; (2) on receipt of the information referred to in sub-rule (1), the Commissioner SCA/8387/2003 15/29 JUDGMENT shall take necessary action to verify their correctness and ascertain the correct value of each of the parameters. The Commissioner may, if he so desires, consult any technical authority for this purpose; (3) the annual capacity of production of hot re-rolled products of non-alloy steel in respect of such factory shall be deemed to be as determined by applying the following formula:- Annual Capacity = 1.885 x 10 4 x d x n x i x e x w x Number of utilised hours (in metric tonnes) xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx” 12. According to Rule-2 of the said Rules, the rule shall apply to non-alloy steel hot re-rolled products falling under sub-heading Nos.7211.11, 7211.19, 7211.30, 7211.52, 7211.59, 7211.60, 7211.92, 7211.99, 7213.90, 7214.90, 7215.90, 7216.10 and 7216.90 of the Schedule to the Central Excise Tariff Act, 1985 for determining the SCA/8387/2003 16/29 JUDGMENT annual capacity of production of a factory if such goods are manufactured or produced with the aid of the hot re- rolling mill. 13. According to Rule-3, the capacity of production referred to in Rule-2 has to be determined in the manner as prescribed in Rule-3. The hot re-rolling mill is obliged to declare the values of `d', `n', `i' and `speed of rolling', the parameters referred to in sub-rule (3), to the Commissioner of Central Excise. On receipt of the information referred to in sub-rule (1), the Commissioner would take necessary action to verify the correctness of the information and shall ascertain the correct value of each of the parameters. If the Commissioner is doubtful about the correctness and authenticity of the information supplied, then, he may consult any technical authority for the said purpose. The annual capacity of production of hot re-rolled products of non alloy steel in respect of such factory shall be deemed to be as determined by applying the formula given below : Annual capacity = 1.885 x 10-4 x d x n x i x e x w x Number of utilised hours (in metric tons). SCA/8387/2003 17/29 JUDGMENT `d' denotes nominal centre distance of the pinions in the pinions stand in millimetres; `n' denotes nominal rotations per minute (RPM) of the drive; `i' denotes reduction ratio of the gear box or of the pulley system or combination thereof; and, `w' denotes weight in kilogramme per metre of the re-rolled product. The value of `e' in the formula is to be deemed to be 0.30 in case of low speed mills and 0.75 in case of high speed mills. The value of `w' factor in the formula for the high speed mills shall be deemed to be 0.45 and for the low speed mills shall be deemed to be as given in Rule-3. The Rule also provides as to which mill shall be a high speed mill and which shall be taken to be a low speed mill. 14. The learned Counsel for the petitioners submitted that the formula given in sub.rule-(3) of Rule- 3 is not intelligible and it leaves scope for discrimination. According to him, the annual capacity cannot be decided in the air, but, it must be decided on the foundational facts. His submission is that Rule-3, specially, sub.rule-(3) of Rule-3, does not take into consideration various aspects relating to the production, specially, old mill and new mill, old machine and new machine, old technology and new technology and so. He submits that if the original capacity of a twenty years' SCA/8387/2003 18/29 JUDGMENT old machine was similar to a new machine, then, the annual capacity cannot be decided on the strength of the basic capacity of the said machine, but, still have to be decided after taking into consideration various factors such as age of the machine, the manner in which it is placed and at what rate, it is producing the goods. 15. When we asked the learned Counsel that if `n' denotes nominal rotations per minute of the drive, then, such rotations per minute in the new and old machine would be different and if the informations are to be supplied by the manufacturer himself, then, how the rule is not workable, the learned Counsel went on repeating that the formula is vague, the nominal rotations in old and new machines are different, therefore, the same would obviously affect the production. When we again asked the learned Counsel that if the facts and figures or the full details are to be supplied by the manufacturer himself and if the manufacturer knows that the old machine's production capacity is worn out or is reduced or is decreased by lapse of time, and such facts are found to be correct, then, obviously, the Commissioner would decide that the annual production capacity is low, then, how the petition would be occasioned and why the rule would not be workable, the learned Counsel said that he SCA/8387/2003 19/29 JUDGMENT does not have any answer to the question, but, he has instructions to say that the rule is not workable. 16. We are surprised to hear this argument. Challenge to the validity of the Act is not in the air, challenge to the Act can be made on foundational grounds. A rule can be challenged on the ground of non-workability or unworkability by producing relevant material before the Court. A challenge simply in the name of challenge, in howsoever high pitch it is, would not make the provisions of law ultra vires. It is also to be seen that after receiving the information from the concerned producer/manufacturer, the Commissioner has to take necessary action, verify the correctness and ascertain the correct value of each of the parameters. If he finds that the details supplied by the manufacturer/producers are correct, then, he would make necessary order and determine the annual capacity, but, in case he finds difficult to decide or finds that the annual capacity shown by the producer/manufacturer is something different than what is submitted by the manufacturer/producer, then, he can consult any technical authority for the purpose. The technical authority would only mean a person who knows the technical know-how in a particular subject. The technical authority if says that particular would be SCA/8387/2003 20/29 JUDGMENT the annual production capacity, then, obviously, nobody would be allowed to say something contrary to it unless it is shown that he has committed basic mistakes. If a technical expert comes to the conclusion that the capacity is particular one, then, the Commissioner if relies upon the said technical opinion, it cannot be said that the Commissioner was acting contrary to law. It is also to be seen that the formula provided in Sub.rule-(3) of Rule-3, prima facie, appears to be intelligible, it can only be challenged if something concrete is brought before the Court. The learned Counsel simply said that the formula is bad. We do not know that why the learned Counsel says so when he himself does not know and there is nothing in the petition to this effect. Even otherwise, Rule-3 of the said Rules, prima facie, does not appear to be ultra vires Section-3A. 17. So far as the judgement of the learned single Judge in the matter of Beauty Dyes (supra) is concerned,