C.W.P. No. 4806 of 2005 [ 1] IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH (1) C.W.P. No. 4806 of 2005 Date of decision: August 21, 2008 M/s Malhotra Industrial Corporation, Mandi Gobindgarh. ... Petitioner v. The Customs, Excise and Service Tax Appellate Tribunal, New Delhi and others. ... Respondents (2) Central Excise Case No. 3 of 2006 Commissioner, Central Excise Commissionerate, Chandigarh. ... Petitioner v. M/s Malhotra Industrial Corporation, Mandi Gobindgarh and another. ... Respondents CORAM: HON'BLE MR. JUSTICE HEMANT GUPTA HON'BLE MR. JUSTICE RAJESH BINDAL Present: Mr. Balbir Singh, Advocate for the petitioner in C.W.P. No. 4806 of 2005 and for respondent No.1 in C.E.C. No. 3 of 2006. Mr. Gurpreet Singh, Advocate for the respondents in C.W.P. No. 4806 of 2005 and for the petitioner in C.E.C. No. 3 of 2006. .. Rajesh Bindal J. 1. This order will dispose of C.W.P. No. 4806 of 2005 and C.E.C. No. 3 of 2006, as common questions of law and fact are involved. 2. The facts have been noticed from C.W.P. No. 4806 of 2005. 3. The assessee herein is having a rolling mill and is engaged in manufacture of iron and steel products classifiable under Chapter 72 of the Central Excise Tariff Act, 1985. In the year 1997, the Central Government introduced Compounded Levy Scheme for payment of excise duty on certain goods. As a result thereof, Section 3A was introduced in the Central Excise Act, 1944 (for short, `the Act'). Under the scheme of compounded levy of duty, excise duty was payable on the capacity of production and not on the basis of actual production, as is provided for under Section 3 of the Act. The new system of payment of excise C.W.P. No. 4806 of 2005 [ 2] duty as per the compounded levy scheme came in force w.e.f. 1.9.1997. In addition to the insertion of Section 3A in the Act, corresponding amendments were carried out in the Central Excise Rules, 1944 (for short, `the Rules') by adding Rule 96ZP which provides the procedure required to be followed by the manufacturers of hot re-rolled products for payment of excise duty under the compounded levy scheme. As under the scheme, the duty was payable on the capacity of production, Hot Re- Rolling Steel Mills Annual Capacity Determination Rules, 1997 (for short, `the Capacity Determination Rules') were also framed. 4. As per Section 3 of the Act, the duty of excise is leviable on all excisable goods produced or manufactured in India at the rates provided for in First Schedule to the Central Excise Tariff Act, 1985. Section 3A of the Act conferred power on the Central Government to charge excise duty on the basis of capacity of production in respect of certain notified goods. As the language of the Section suggests, it started with a non obstante clause “notwithstanding anything contained in Section 3”, it was given effect over and above Section 3 of the Act providing for charging of duty on the basis of actual production. Section 3A of the Act provided that the Central Government may having regard to the nature of 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 and with a view to safeguard the interest of revenue, specify, by way of a notification the goods on which excise duty can be levied or collected in terms of the provisions of the Section. It also enabled the Central Government to frame rules for determination of annual capacity of production of the unit engaged in the manufacture of such products. Further, the authority was delegated to fix the rate of duty. As per the Capacity Determination Rules, annual capacity of production of a unit engaged in the manufacture of specified goods was to be determined in terms of Rule 3 thereof, which provided for certain parameters to be considered in the form of letters `d', `n', `i', `e', `w' alongwith the `speed of rolling' and `number of hours' the unit works. 5. As per the Capacity Determination Rules, the annual capacity is determined with the following formula: “Annual Capacity= 1.885x10 x (d) x (n) x (i) x (e) x (w) x Number of utilised hours (in metric tonnes)” It is further provided in the Capacity Determination Rules that in case the manufacturer proposes to make any change in the installed machinery or in part thereof which tends to change the value of either of the parameters, as mentioned above, an advance intimation of the proposed change was required to be given to C.W.P. No. 4806 of 2005 [ 3] the department at least one month in advance. Sub-rule (5) of the Capacity Determination Rules provided that in case the annual capacity determined by the formula provided for in sub-rule (3) of Rule 3 in respect of a mill is less than the actual production of the mill during the financial year 1996-97, then the annual capacity so determined shall be deemed to be equal to the actual production of the mill during the financial year 1996-97. 6. In terms of the Capacity Determination Rules, the assessee submitted application to the Commissioner of Central Excise on 8.9.1997 in the form of declaration under Rule 96ZP(4) of the Rules and Rule 3(2) of the Capacity Determination Rules. The details, as required in the Rules mentioned above, were furnished. It was further mentioned in the application that actual production of the assessee for the year 1996-97 was 15,796.150 metric tonnes. Vide order dated 16.10.1997, while considering the facts stated by the assessee in his application, the Commissioner while calculating the annual capacity of production of the unit at 7,786.153 metric tonnes on the basis of various parameters furnished by the assessee, however, determined the annual capacity of production at 15,796.150 metric tonnes, keeping in view the statement made by the assessee about its actual production being more in the previous financial year, in terms of Rule 5 of the Capacity Determination Rules. 7. Aggrieved against the order of capacity determination by the Commissioner, the assessee preferred appeal before the Customs, Excise and Gold (Control) Appellate Tribunal (now known as Customs, Excise and Service Tax Appellate Tribunal) (hereinafter referred to as `the Tribunal'). The plea set up by the assessee along with other appellants before the Tribunal was that proper opportunity of hearing was not afforded by the Commissioner while passing the order determining the capacity of production. The order was totally non-speaking and further that there was no evidence on record to show the actual production for the previous year on the basis of which the capacity of production was determined. 8. Accepting the contention raised by various appellants including the assessee, the Tribunal vide order dated 13.6.2000 remanded the case back to the Commissioner for re-determination of the annual capacity production in accordance with law. 9. During the pendency of the appeal filed by the assessee before the Tribunal, on a visit of the Preventive Staff of the department to the factory of the assessee on 30.1.1998, it was found that the unit was engaged in the manufacture of M.S. Angles of 65x5 mm size, approximately 65 feet long, falling under Sub- heading No. 7216.10. The rolling mill was found to have three pinion stands, C.W.P. No. 4806 of 2005 [ 4] which the partner of the assessee described as pinion stand `A', `B', `C' for easy identification. Pinion stand `A' was running the main part of the rolling mill having five rolling stands, which included the finishing stand through which the above finished product was found being rolled finally. Pinion stand `B' was running the middle portion of the mill having two rolling stands separately at the distant place and hot rolled pieces of steel in length were being fed from fourth stand of the first part of the rolling mills on conveyers into first stand of the second part of the rolling mills from where after rolling, it was going to second rolling stand for further rolling. From this stand, the hot rolled angle was directly being fed into finishing stand on conveyers for final rolling. After this, there was no rolling activity and the rolled angle was pushed aside for cooling. Pinion stand `C' was installed near the finishing stand but was found not connected with any rolling mill stand and was lying idle. The sketch diagram of the rolling mills as it was found at the time of visit by the staff on 30.1.1998 was also drawn in the hand of the partner of the assessee. 10. As narrated above, the finishing stand of the rolling mills was found coupled with fourth stand and running with pinion stand `A' and the above product was being rolled finally through this finishing stand. Pinion stand (declared by the assessee for determination of annual production capacity in declaration dated 8.9.1997) near the last (finishing) stand of the mill was found idle and not attached with the mills (finishing stand). In his statement dated 30.1.1998, Shri Surmukh Singh admitted that the mill was running with pinion stand `A and B' and pinion stand `C' was lying separated from finishing stand and was not working. As the factors mentioned by the assessee while filing the application for determination of annual capacity of production were quite different to what was found at the site and as the same could lead to substantial increase in the annual capacity of production of the assessee, a show cause notice was issued to the assessee on 31.3.1998 for re-determination of the annual capacity of production and also demanding differential duty. On the basis of parameters available at the site, it was found that the annual production capacity of the assessee was required to be determined at 22,033.499 metric tonnes, as compared to the capacity determined initially at 7,786.153 metric tonnes on the basis of the parameters declared by the assessee, whereas the actual production during the immediate preceding financial year 1996-97 was 15,796.150 metric tonnes. 11. The show cause notice issued for re-determination of the annual capacity production was still pending when the Tribunal passed the order setting aside earlier order dated 16.10.1997 determining the annual capacity of production C.W.P. No. 4806 of 2005 [ 5] of the assessee. The entire issue was decided vide order dated 22.12.2000 after affording due opportunity of hearing to the assessee. On the basis of the parameters, as were found at the time of visit of the Preventive Staff of the department, the annual capacity of production of the assessee was determined at 22,033.499 metric tonnes. In addition to this, demand of arrears of duty was raised besides levy of penalty. 12. Aggrieved against the order passed by the Commissioner, the assessee preferred appeal before the Tribunal who, vide order dated 6.9.2002, taking into consideration the stand of the assessee to the effect that at the time of visit of the Preventive Staff, in fact a part of the machinery was under repair and merely for non-utilisation of a part of the machinery for a short period, the annual capacity of production cannot be re-determined, disposed of the appeal with the following observations: “The only case where re-determination of capacity and revision of duty arises under the scheme is the event of change in the re-rolling capacity of the mill installed in the factory. In the present case, there is no dispute that the appellant had not made any change in the machinery, which brought about a change in the re-rolling capacity installed in the mill. In such a situation, it is of no relevance whether a particular pinion stand was non-functional for a short while and the rolling machinery was actually connected to another pinion stand. A mill working under the compounded scheme is entirely at liberty to arrange its production, repair of machinery etc. according to its best judgment, once he discharges duty liability at the compounded rate. That the last pinion stand was not connected at the particular time of verification is of no significance. The strength and weakness of compounded levy system is that what actually happened from day to day on the production front is not material to the payment of tax. The Revenue is not to ask for a higher levy based on the actual production. Nor is the assessee entitled to any remission for short period of dislocation. The exceptions to this arrangement is prolonged non-production or change in the installed capacity. The adjudication proceedings do not concern either type of case. It is also clear from a perusal of the Circular No. 331/47/97-CX dated 30.8.1997, that the `d' factor relevant for determining the capacity of production is “the pinion center distance of the pinion stand connecting the last rolling mill drive of the finishing mill excluding C.W.P. No. 4806 of 2005 [ 6] any pinch roll”. It is not in dispute that according to the lay out of the appellants mill, pinion stand `C' was the last. It was so at the time of filing of application for compounding, it remained so during the visit of the Central Excise Officers and the passing of the impugned order. Therefore, the original determination carried out by the Commissioner was done according to the rules for determination of annual capacity and the instructions of the Government on the subject. There was no justification for deviating from the annual capacity so determined. The impugned order was wholly misdirected in setting out to re-determine the annual capacity and in demanding Central Excise duty merely because pinion stand `C' was not functional for a short period.” 13. A perusal of the order passed by the Tribunal shows that the original determination of capacity of production was held to be carried out in accordance with the rules and it was further held that there was no justification for deviating from the annual capacity so determined. Thereafter, various notices were issued by the respondents to the assessee for payment of the balance amount of excise duty on the basis of the order passed by the Tribunal. While objecting to the notices for recovery of the amount, the assessee filed application dated 7.12.2004 before the Tribunal for clarification of the order passed by the Tribunal on 6.9.2002. 14. Before the application could be decided, the assessee approached this Court by filing the present petition on account of the development that recovery of the pending excise duty was sought to be effected from the assessee by attachment and sale of property. It was during the pendency of the present petition and in terms of observations made by this Court on 15.9.2005 that the Tribunal decided the clarification application on 17.2.2006 by passing the following order: “Heard both sides. The applicant filed this application for clarification in the Final Order dated 6.9.02. In this case the appellant filed a declaration for determination of the Annual Capacity of their mill under Hot Re-rolling Steel Mills Annual Capacity Determination Rules, 1997. Commissioner of Central Excise vide order dated 19.3.97 fixed the annual capacity of their mill. That order was challenged by the appellant and the Tribunal remanded the matter to the adjudicating authority. The adjudicating authority again passed order redetermined annual capacity vide order dated 22.12.2000. The appellant filed present appeal against the order dated 22.12.2000. The appeal was decided in relation to the order dated 22.12.2000. C.W.P. No. 4806 of 2005 [ 7] The contention of the appellant is that revenue is asking for duty on annual basis in pursuance to the order dated 16.10.97 passed by the Central Excise. We find that order is already set aside by the Tribunal and matter was remanded in pursuance to the remand order. The Commissioner of Central Excise again passed a fresh order which is a subject matter of proceedings and appeal was allowed with consequential relief. In these circumstances, we find no clarification is required in respect of the final order passed by the Tribunal. Application is dismissed.” 15. It is in this factual matrix that the issue is before this Court for consideration in the writ petition filed by the assessee. 16. The Revenue is also aggrieved against the order passed by the Tribunal and in C.E.C. No. 3 of 2006 is seeking a direction for reference of the following question of law to this Court for opinion arising out of the order passed by the Tribunal on 6.9.2002: “ In the event of change in any of the parameters of Hot re-rolling Mills as prescribed in sub-rule 2 of Rule 4 of the Hot re-rolling Steel Mills Annual Capacity Determination Rules, 1997 (hereinafter referred to as HRSMACD Rules), the annual capacity will still not be determined in terms of Formulae as prescribed in the sub-rule 3 of Rule 3 of the HRSMACD Rules?” 17. Learned counsel for the assessee submitted that after setting aside of order dated 22.12.2000 by the Tribunal vide order dated 6.9.2002, the annual capacity of production determined by the Commissioner at 22,033.499 metric tonnes, was set aside and the original determination of capacity by the Commissioner was restored. He further submitted that the original capacity should be taken at 7,786.153 metric tonnes as even the capacity determined at 15,796.150 metric tonnes vide order dated 16.10.1997 was also set aside by the Tribunal earlier vide order dated 13.6.2000. Still further, the submission is that any demand of duty calculated on the basis of the annual capacity being more than 7,786.153 metric tonnes would be unauthorised and should be set aside. He further referred to and relied upon the order passed by the Tribunal in the clarification application, wherein it is mentioned that the Revenue was not right in asking for duty on the basis of the annual capacity of production as determined vide order dated 16.10.1997 passed by the Commissioner. 18. In response to the contentions raised by learned counsel for the assessee, learned counsel for the Revenue submitted that in fact, the Tribunal had C.W.P. No. 4806 of 2005 [ 8] misdirected itself in dealing with the issue raised by the assessee. Once at the time of visit of Preventive Staff, it was found that actual machinery installed in the factory was of much more capacity than what was declared by the assessee at the time of filing the application for determination of annual capacity, the Commissioner was right in determining the annual capacity of production to be 22033.499 metric tonnes. It is a case where the assessee had concealed material facts from the department with a view to avail of undue advantage of the compounded levy scheme. The assessee in the present case had been able to defeat the whole object of the scheme which inter alia was framed to check evasion of duty. Further, the submission is that the story put up by the assessee that when the Preventive Staff visited the factory of the assessee, pinion stand `C' was under repair and as a temporary measure, the production was being carried out from pinion stand `B' but such a plea cannot be accepted for the simple reason that if certain parameters were to be changed by the assessee, even if for a short duration, the same were going to have substantial effect on the production capacity of the assessee for which intimation in advance was required to be given to the department. He prays for dismissal of the writ petition and also a direction to the Tribunal to refer the question of law, as is claimed in the petition filed by the Revenue. 19. We have heard learned counsel for the parties and perused the paper book. 20. It may be noticed here that vires of Section 3 of the Act was challenged before this Court and various other High Courts. The matter went up to Hon'ble the Supreme Court, where the same was upheld vide judgments reported as Commissioner of C. Ex. & Customs v. Venus Castings (P) Ltd., 2000 (117) ELT 273 and Sathavahana Steels & Alloys (P) Ltd. v. Government of India, 1999 (114) ELT 787. The same view was expressed by this Court in C.W.P. No. 11718 of 2005 –M/s Punjab Bearing Industries Ltd. v. Union of India and others, decided on 8.5.2006. 21. The undisputed facts on record are that the assessee is a unit engaged in the manufacture of re-rolling products. After the introduction of the compounded levy scheme, he filed application for determination of annual capacity of production on 8.9.1997 providing particulars about certain factors relevant for determination of the annual capacity in terms of the Capacity Determination Rules. It was further mentioned in the application that actual production of the assessee for the year 1996-97 was 15,796.150 metric tonnes. Vide order dated 16.10.1997, while considering the facts stated by the assessee in C.W.P. No. 4806 of 2005 [ 9] his application, the Commissioner while calculating the annual capacity of the unit at 7,786.153 metric tonnes on the basis of various parameters furnished by the assessee, however, determined the annual capacity of production at 15,796.150 metric tonnes, keeping in view the statement made by the assessee about its actual production being more in the previous financial year, in terms of Rule 5 of the Capacity Determination Rules. Aggrieved against the order of capacity determination by the Commissioner, the assessee preferred appeal before the Tribunal. 22. The appeal filed by the assessee was accepted along with a bunch of other petitions and the case was remanded back. After remand of the case and proceedings initiated in pursuance to notice issued to the assessee after the unit of the assessee was visited by the Preventive Staff, the matter was finally decided with the determination of annual capacity of production of the assessee at 22,033.499 metric tonnes. Again in appeal, the matter went to the Tribunal where order dated 22.12.2000 determining the capacity of the assessee at 22,033.499 metric tonnes was set aside and it was directed that the original determination of capacity by the Commissioner was according to the rules. In appeal against the order dated 22.12.2000, no dispute was raised by the assessee regarding determination of capacity at 15,796.150 metric tonnes and the entire challenge was to the capacity determined at 22,033.499 metric tonnes. 23. A perusal of the impugned order passed by the Tribunal shows that there has been total non-application of mind as far as grant of relief to the assessee is concerned. The order impugned before the Tribunal was 22.12.2000 whereby the annual capacity of production of the assessee was determined at 22033.499 metric tonnes. This was on the basis of material collected at the time of visit by the Preventive Staff. The Commissioner, while determining the capacity, had not accepted the explanation of the assessee that it was for a short duration that pinion stand `C' was not working and was under repair and merely on that basis, higher capacity of production could not be determined. The Tribunal accepted the contention of the assessee finding the same to be reasonable and set aside the order of the Commissioner. However, finally it was held that the original determination of the capacity by the Commissioner was according to rules. It did not specify as to which original determination was being referred to by the Tribunal. Even on an application by the assessee, the issue was not clarified, rather was made more complex. 24. As per the Capacity Determination Rules, there are two methods vide which the annual capacity of production can be determined, namely, by applying C.W.P. No. 4806 of 2005 [ 10] the formula after taking into consideration various factors provided for in the Capacity Determination Rules which had direct relations with the machinery installed in the factory and in case it was found that actual production of the unit during the immediately preceding year 1996-97 was more than the capacity of production arrived by application of the formula, then higher of the two figures was to be