C.E.A. NO. 24 OF 2008 -1- IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANIDGARH C.E.A. NO. 24 OF 2008 DECIDED ON : 12.08.2009 Commissioner of Central Excise ...Appellant versus M/S Maruti Udyog Limited ...Respondent A N D C.E.A NO. 122 OF 2005 The Commissioner ...Appellant versus M/S Maruti Udyog Limited ...Respondent CORAM : HON'BLE MR. JUSTICE M. M. KUMAR HON'BLE MR. JUSTICE JASWANT SINGH Present : Mr. Sanjeev Kaushik, Sr. Standing Counsel for Indirect Taxes, for the appellant. Mr. M. P. Devnath, Advocate, for the assessee. M. M. KUMAR, J. This order shall dispose of C.E.A No.24 of 2008 and C.E.A No. 122 of 2005 because common question of law and facts are involved. These appeals have been filed by the Revenue C.E.A. NO. 24 OF 2008 -2- under Section 35G of the Central Excise Act, 1944 (for brevity “the Act”). In C.E.A No.24 of 2008, the order dated 21.05.2007 (P-3) passed by the Customs, Excise and Service Tax Appellate Tribunal, New Delhi, is the subject matter of challenge. The Revenue has claimed that the following substantial question of law would arise for determination of this Court : “Whether mandatory penalty under Section 11AC can be imposed on the assessee and interest under Section 11AB can be levied in the case where duty has been paid after detection of the shortage by the department but before issuance of show cause notice in view of the facts and circumstances mentioned above?” Before answering the aforesaid question, few facts necessary for disposal of the appeal may first be noticed. M/S Maruti Udyog Limited (for 'brevity' dealer) are engaged in the manufacturing of motor vehicles and their parts falling under Chapter heading 8702 and 8708 respectively of the Central Excise Tariff Act, 1985. The dealer was also availing Modvat/ Cenvat credit of duty paid on the inputs used in the manufacturing of motor vehicles under Rule 57AB of the Act. They were served with a show cause notice dated 28.06.2001 alleging that a large number of parts manufactured by the dealer had been cleared without payment of central excise duty. In para 15 it was alleged that the dealer had removed/cleared IN HOUSE C.E.A. NO. 24 OF 2008 -3- parts worth over rupees one crore, without payment of duty amounting to Rs.16,53,011.73 during the period 1996-97 to 1999-2000. It was also alleged that the dealer had contravened provisions of Rule 52-A, 173-F and 173-G of the Act, because the IN HOUSE parts manufactured by the dealer were cleared without any valid invoice as those parts were not accounted for in the statutory record. The show cause notice also invoked the penal provision envisaged by Section 11AC read with Rule 173G. The show cause notice also raised demand under Section 11-AB of the Act. The Additional Commissioner adjudicated the matter and vide order in original dated 15.03.2002 (P-1), he raised various demands. (a) A sum of Rs.16,53,011.73 as duty was demanded under Section 11A, by extending limitation period to 5 years which had already been paid. Accordingly the amount was appropriated to the Revenue; (b) interest under Section 11AB and (c ) a penalty equal to the amount of duty was also demanded from the dealer under Section 11AC. It is, however, worth while to mention that the Assessing Authority did not anywhere record a finding that the dealer had committed any fraud or had suppressed facts with an intention to evade duty. The dealer preferred an appeal against the order dated 15.03.2002 (P-1) passed by the Assessing Authority only to the limited extent of imposition of penalty and interest under Section 11AC and Section 11AB of the Act respectively. The dealer claimed that it has discovered the discrepancies during the stock C.E.A. NO. 24 OF 2008 -4- checking and has paid the duty on its own much before the issuance of show cause notice. It is significant to notice in the process of stock checking and verification, the officers of the department were also joined. On finding of discrepancy the dealer had paid an amount of Rs.5,78,737/- in October 2000 and Rs.10,74,274/- on 05.06.2001. In that regard an intimation to the departmental authority was also sent. It is thus claimed that there was no suppression, mis-statement or fraud with an intention to evade payment of duty as contemplated by Sections 11 AC and 11AB. The dealer had contended on the basis of various judgments to the effect that if the duty has been paid before issuance of the show cause notice then no interest or penalty, as contemplated under Section 11AB and Section 11AC, would be attracted. The Appellate Authority, however, did not feel persuaded by the submissions made by the dealer and rejected the claim made in the appeal and upheld the imposition of interest and penalty imposed by the Assessing Authority under Sections 11AB and 11AC (P-2). The dealer went in appeal to the Tribunal and argued that there was no suppression or mis-statement of facts with an intention to evade the payment of duty as contemplated under Section 11AC. It was submitted that non-payment of duty was on account of : (a) incorrect accountal of the IN HOUSE parts transferred to spare parts' division, which lead to various discrepancies and (b) difference in book balance as compared to C.E.A. NO. 24 OF 2008 -5- the physical stock. The dealer submitted that consequent upon the transfer of their Modvat cell to the Finance Division in January, 1999, the dealer had undertaken physical stock verification which lead to discovery of discrepancies. Accordingly, a detailed verification drive was undertaken by the dealer to reconcile the discrepancy. It was found that there existed some mismatch on the IN HOUSE parts transferred to the spare parts' division. On finding the discrepancies, as already noticed, the dealer deposited the amount of duty in October 2000 and on 05.06.2001, under intimation to the departmental authorities. The Tribunal allowed the appeal by following the principles that if duty has been paid prior to the issuance of show cause notice, then the provisions of Sections 11AB and 11AC would not be attracted and various judgments on that issue were followed and applied. The observation of the Tribunal in para 4 of its order, reads as thus : “4. We find that the only issue in this appeal is whether the penalty under Section 11AC and interest under Section 11AB of Central Excise Act can be demanded in a case where duty has been paid prior to issuance of show-cause notice. We find that the Larger Bench of the Tribunal in the case of Machino Montell (I) Ltd. (supra) after considering the decision of the Tribunal in Rashtriya Ispat Nigam Ltd. vs. CCE reported in 2003 (161) E.L.T 285 (T)=2003 (54) RLT 317 against which the appeal filed by the Revenue C.E.A. NO. 24 OF 2008 -6- was dismissed by Hon'ble Supreme Court and the decision of this Tribunal in Karnataka High Court in the case of CCE, Mangalore v. Shree Krishna Pipe Industries reported in 2004 (165) E.L.T 508 (Kal.) =2004 (61) RLT 17 where the particular matter on this issue is answered in favour of the assessee by the Hon'ble High Court. In view of the above decision of the Hon'ble Supreme Court in the case of Rashtriya Ispat Nigam Ltd., we respectfully followed the ratio of the law laid down in the Larger Bench of the Tribunal in the case of Machino Montell (I) Ltd. (supra). The appellant had deposited whole of the duty prior to issuance of show cause notice, therefore, the imposition of penalty arid interest is not sustainable and is set aside. The appeal is allowed as indicated above.” The aforesaid order of the Tribunal was challenged before this Court in a writ petition. This Court has already preferred the view that merely because duty stood paid before issuance of show cause notice would not constitute a basis to conclude that no penalty or interest was imposable. Accordingly, the order of Tribunal was set aside with the following observation: “In view of judgment rendered, today, in C.E.A No.13 of 2005 (Commissioner of Central Excise, Delhi-III vs. M/S Machino Montell (I) Ltd. And another), we allow this appeal and set aside the order passed by the Tribunal to the extent the penalty and interest levied C.E.A. NO. 24 OF 2008 -7- on the assessee had been set-aside because the duty was deposited before issue of show cause notice and remand the case back to the Tribunal for fresh decision on merits and in accordance with law.” On the basis of aforesaid remand order, the Tribunal proceeded to decide the matter afresh and allowed the appeal once again. The Tribunal placed reliance on its own judgment rendered in the dealer's own case namely “Maruti Udyog Ltd. v. CCE, Delhi” 2004 (173) E.L.T 382. In the aforesaid order of the Tribunal, the facts were that “There was shortage of input noticed and the appellant could not show that the inputs on which the credits had been availed, were properly disposed of as per requirement of Rules.” The demand was on account of fact that there were some shortages which did not concile. The Tribunal also noticed that full reconciliation of the inputs used in the manufacturing was not possible and it was no ground to hold that the goods have been improperly disposed of. It also accepted the factual position projected by the dealer that the dealer has been following a detailed and reliable system of accounting inputs which take into account all aspects, including pilferage and whenever the inputs have been disposed of by any other mode than in the manufacture and final products, the dealer has reversed Modvat credit. Apart from the aforesaid self- serving statements made by dealer the Tribunal felt persuaded by its self-harming statement. The dealer had stated that there C.E.A. NO. 24 OF 2008 -8- were unaccounted excess inputs which were worth more than Rs.17 crores inrespect which it had not claimed credit. That fact alone established an error in the accounts and physical verification. The Tribunal also quoted following important facts from its earlier order: “7. The appellants have a – huge and complex accounting problem. It is beyond manual tally. The appellants have put in place sophisticated computer based accounting systems to ensure accuracy and efficiency. The evidence on record does not indicate any diversion of inputs in contravention of rules relating to utilization of inputs. The demand is merely based on the shortages detected during physical tallying, that too without taking into account the excesses noticed. Since there is no evidence, that the excesses are not the result of clandestine receipt of inputs, the same view is required to be taken in regard to shortages also, that the shortages are not the result of any clandestine or unauthorized utilization of the inputs. The shortages thrown up also do not account for much. The appellant Management as well as its auditor have accepted the differences between the physical stocks and the procurement as normal and something to be put up with. It is very small (o.24%) fraction of the inputs received. It is well settled that Tax Authorities also should go by the normal commercial and professional practice. If the shortages are within the tolerance limits fixed by an efficient Management and certified to as within the norms by qualified accounting C.E.A. NO. 24 OF 2008 -9- professionals, it would be unreasonable and unfair for Tax authorities to take a different view. In these circumstances, we are of the view that there is no evidence to sustain a finding that this is a case of irregular or incorrect taking or utilization of credit. In such a situation, no demand can be raised under Rule 57-I. The demand is accordingly, set aside and appeal is allowed with consequential relief to the appellant. Amounts already deposited by the appellant, on account of this dispute, shall be returned to it.” On the basis of aforesaid view taken by the Tribunal in its earlier order, the Tribunal proceeded to determine the question “Whether the non-return of the credit relatable to inputs found short during the relevant years, was the result of fraud, suppression of facts etc. as contemplated by Section 11AC and Section 11AB?” The Tribunal reiterated its earlier view taken in the year 2004 in case of the dealer itself and concluded that once the findings are that certain shortages and excesses are normal in such a huge business concern, then no intention to evade the duty by playing fraud, mis-statement and suppression of facts could be imputed and inferred. Consequently, the interest, as envisaged by Section 11AB and penalty by Section 11AC of the Act, would not be applicable. The Revenue has challenged the aforesaid view of the Tribunal once again primarily by placing reliance on a recent judgment of the Hon'ble Supreme Court rendered in the case of C.E.A. NO. 24 OF 2008 -10- “Union of India & ors. v. Dharmendra Textiles Processors & ors.” 2008 (306) I.T.R 277 (S.C). Mr. Sanjeev Kaushik, learned counsel for the Revenue has argued that penalty under provisions of Section 11AC is a civil liability and therefore, willful concealment or dishonest intention would not constitute an essential ingredient for attracting civil liability. Placing reliance on the observation made in para 13 of the judgment, learned counsel has submitted that no mens-rea would be required as an essential ingredient to attract Section 11AC of the Act. According to learned counsel, the judgment in Dharmendra Textiles's case (supra) is an authority for the proposition that even in a case where there is absence of a finding concerning intention to evade payment of duty, Sections 11AC and 11AB of the Act would be applicable. Mr. M.P.Devnath, learned counsel for the dealer has, however, argued that the judgment of Hon'ble Supreme Court in Dharmendra Textiles's case (supra) is an authority only for the proposition that no discretion vests in the Assessing or the Appellate Authority including Tribunal to reduce the amount of penalty, which as per language of statute has to be equal to the amount of duty. He has maintained that the aforesaid judgment of the Hon'ble Supreme Court is not an authority for the proposition that intention to evade duty would not be an essential ingredient of Section 11AC of the Act as has been convassed by the revenue. C.E.A. NO. 24 OF 2008 -11- In order to buttress his stand, learned counsel has placed reliance on a latest judgment of Hon'ble the Supreme Court rendered in the case of “Union of India & ors. v. Rajasthan Spinning & Weaving Mills” 2009 (238) E.L.T 3 (S.C.). He has drawn our attention to paras 18, 19, 20, 21 and 22 of the judgment and argued that the judgment of the Hon'ble Supreme court in Dharmendra Textiles's case (supra) did not hold that Section 11AC was applicable to every case of non- payment or short payment of duty regardless of the conditions expressly mentioned in that provision for its application. Having heard learned counsel at some length, we are of the view that the controversy raised in the instant appeals stand resolved by the judgment of Hon'ble Supreme court in Rajasthan Spinning and Weaving Mills' s case (supra). In short the judgment says that the penalty under Section 11AC and interest under Section 11AB of the Act is punishment for an act of deception by the assessee with an intent to evade duty by adopting any of the means mentioned in that provision. It would, therefore, be necessary to read Section 11AC which is as follows : “11AC. Penalty for short-levy or non-levy of duty in certain cases.- where any duty of excise has not been levied or paid or has been short levied or short-paid or erroneously refunded by reasons of fraud, collusion or any willful mis-statement or suppression of facts, or C.E.A. NO. 24 OF 2008 -12- contravention of any of the provisions of this Act or of the rules made thereunder with intent to evade payment of duty, the person who is liable to pay duty as determined under sub-section (2) of section 11A, shall also be liable to pay a penalty equal to the duty so determined: [Provided that where such duty as determined under sub-section (2) of section 11A, and the interest payable thereon under Section 11AB, is paid within thirty days from the date of communication of the order of the Central Excise Officer determining such duty, the amount of penalty liable to be paid by such person under this section shall be twenty-five percent of the duty so determined: Provided ......... Provided......... Provided.........” The aforesaid provision has been read with sub section (1) of Section 11A as the same expressions have been used in both the Sections. Accordingly, in para 18 and 19, the following conclusion has been reached by the Hon'ble Supreme Court : “18. One cannot fail to notice that both the proviso to sub-section 1 of Section 11A and Section 11AC use the same expressions: “....by reasons of fraud, collusion or any willful mis-statement or suppression of facts, or contravention of any of the provisions of this Act or of the Rules made thereunder with intent to evade payment of duty,...”. In other words the C.E.A. NO. 24 OF 2008 -13- conditions that would extend the normal period of one year to five years would also attract the imposition of penalty. It, therefore, follows that if the notice under Section 11A(1) states that the escaped duty was the result of any conscious and deliberate wrong doing and in the order passed under Section 11A(2) there is a legally tenable finding to that effect then the provision of Section 11AC would also get attracted. The converse of this, equally true, is that in the absence of such an allegation in the notice the period for which the escaped duty may be reclaimed would be confined to one year and in the absence of such a finding in the order passed under Section 11A(2) there would be no application of the penalty provision in Section11AC of the Act. On behalf of the assessee it was also submitted that Section 11A and 11AC not only operate in different fields but the two provisions are also separated by time. The penalty provision of Section 11AC would come into play only after an order is passed under Section 11A(2) with the finding that the escaped duty was the result of deception by the assessee by adopting a means as indicated in Section 11AC. 19. From the aforesaid discussion, it is clear that penalty under Section 11AC, as the word suggests, is punishment for an act of deliberate deception by the assessee with the intent to evade duty by adopting any of the means mentioned in the Section.” A perusal of the aforesaid paras from the Hon'ble Supreme Court makes it clear that if the notice under Section 11A (1) alleges that escaped duty was the result of any conscious C.E.A. NO. 24 OF 2008 -14- and deliberate wrong doing and in the order passed under Section 11A(2), there is legally tenable finding to that effect then alone the provisions of Section 11AC would be attracted and not otherwise. Hon'ble the Supreme Court then in para 20 proceeded to analyse the judgment in Dharmendra Textiles's case (supra). It noticed that the Revenue has been relying upon the aforesaid judgment as if in every case of non-payment or short payment of duty, the penalty envisaged by Section 11AC would automatically get attracted and that the authority had no discretion in the matter. It was observed that there was no reason to understand or read the judgment in Dharmendra Textiles's case in that manner. After referring to various paras of the judgment in Dharmendra Textiles's case, their Lordships observed in para 21 of the latter judgment that they could not see as to how “the decision in Dharmendra Textiles's case can be said to hold that Section 11AC would apply to the other case of non-payment or short payment of duty regardless of the conditions expressly mentioned in the Section for its application.” It was further observed that in Dharmendra Textiles's case even the Revenue has not taken that stand and in that regard, submissions made in para 5 of that judgment were noticed by their Lordships in Rajasthan Spinning and Weaving Mills's case (supra). The Hon'ble Supreme Court accordingly held as under : C.E.A. NO. 24 OF 2008 -15- “23. The decision in Dharmendra Textile must, therefore, be understood to mean that though the application of Section 11AC would depend upon the existence or otherwise of the conditions expressly stated in the section, once the section is applicable in a case the concerned authority would have no discretion in quantifying the amount and penalty must be imposed equal to the duty determined under sub- section (2) of Section 11A. That is what Dharmendra Textile decides. 24. It must, however, be made clear that what is stated above in regard to the decision in Dharmendra Textile is only in so far as Section 11AC is concerned. We make no observations (as a matter of fact there is no occasion for it!) with regard to the several other statutory provisions that came up for consideration in the decision.” When the facts of the present appeals are examined in the light of categorical findings recorded by the Tribunal, it becomes evident that the view taken by the Tribunal does not suffer from any illegality. The arguments raised by the Revenue are thus liable to be rejected. The Tribunal has recorded categoric findings that in the establishment of the dealer, full reconciliation of transactions concerning use of inputs was not possible. The shortages and excesses had been found to be normal. It was further found that that the establishment of the dealer is huge and complex which involved a complicated accounting problem. It cannot be controlled manually and they C.E.A. NO. 24 OF 2008 -16- have put in place sophisticated computer based accounting system in order to ensure accuracy and efficiency. The findings further are that there was diversion of inputs in contravention of Rules relating to utilization thereof. The demand was based merely on the shortage detected during physical tallying. The dealer had not taken any account of the excess use of inputs for which no credit was claimed. Accordingly, the Tribunal found that once the excesses were not clandestine receipt of input, then the same view was required to be taken with regard to shortage also, namely that the shortages are not a result of any clandestine or unauthorized utilization. The shortage has been found to be very small namely 0.24 per cent which is fraction of the input receipt. The shortages have been found within the tolerable limits expected by an efficient management. It was, therefore, rightly held that no demand could be raised under Rule 57(I) of the Rules. Accordingly, Section 11AC and Section 11AB of the Act would have no application to the facts of the present case. As a sequel to the above discussion, both the appeals fail and are dismissed. (M. M. KUMAR) JUDGE (JASWANT SINGH) AUGUST 12, 2009 JUDGE shalini C.E.A. NO. 24 OF 2008 -17-