CWP No.18099 of 2009 IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH. CWP No.18099 of 2009 Date of decision: 8.11.2010 M/s Bansal Alloys & Metals Private Limited -----Petitioner Vs. Union of India and another ----Respondents CORAM:- HON'BLE MR JUSTICE ADARSH KUMAR GOEL HON’BLE MR. JUSTICE AJAY KUMAR MITTAL Present:- Mr. Jagmohan Bansal, Advocate and Mr. Vishav Bharti Gupta, Advocate. Mr. Gurpreet Singh, Standing Counsel for Union of India. Mr. HPS Ghuman, Standing Counsel for Union of India. 1. Whether reporters of local newspapers may be allowed to see the judgment? 2. To be referred to the reporters or not? 3. Whether the judgment should be reported in the Digest? Adarsh Kumar Goel,J. 1. This order will dispose of CWP Nos.18099, 19513 of 2009, 780, 943, 8555, 9412, 11752 of 2010, CEA Nos. 46 of 2004, 80, 81, 161, 164, 184 of 2005, 6, 16, 84, 172 of 2006 and 88 of 2007. 2. The appeals have been preferred by the revenue under section 35G of the Central Excise Act, 1944 (for short, ‘the Act’) against judgments of the Tribunal holding that penalty equal to the amount of duty was not mandatory under Rule 96ZO (3) of the Central Excise Rules, 1944 (in short, ‘the Rules’). The writ petitions seek declaration of Rules 96ZO, 96ZP, 96ZQ of the rules being ultravires the rule making power under the Act and also being arbitrary, discriminatory and confiscatory. 1 CWP No.18099 of 2009 Background 3. The appeals were earlier dismissed in the light of main judgment dated 3.8.2006 in Commissioner of C.Ex.Ludhiana v. K.C.Alloys & Steels Castings, 2006(206) ELT 1183 (P&H). It was held that penalty under rule 96ZO was different from penalty under section 11AC. Under Section 11AC, mens rea was the requirement for levy of minimum mandatory penalty and in absence thereof, under Rule 96ZO, either the requirement of mens rea had to be read therein or extent of penalty under the said rule should be held to be in the discretion of the concerned authority depending upon the period of delay in deposit and other circumstances. Such discretion had to be exercised judicially having regard to the principle of proportionality. Conclusions were summed up as under:- “23. i) Scheme of levy of penalty under rule 96ZO of the Rules is different from scheme of penalty under section 11AC of the Act, in as much as there is no requirement of proving fraud, collusion, willful misstatement or suppression of facts or intention to evade payment of duty. The object of penalty under rule 96ZO appears to be to emphasise loss of revenue on account of delay in deposit. ii) Since element of mens rea is not required to be provided for exercise of jurisdiction under rule 96ZO, quantum of penalty prescribed therein has to be read to be maximum and discretionary. iii) Where element of mens rea of the nature specified in Section 11AC is shown to exist, the quantum of penalty will be read as minimum. iv) Discretion to levy penalty under rule 96ZO has to be exercised judiciously having regard to fact situation of a given case. Amount of duty involved, extent of delay, reasons for delay and other relevant circumstances may 2 CWP No.18099 of 2009 have to be kept in view for exercising discretion for determining the quantum of penalty. v) Interference by this Court in appeal which is provided only on a substantial question of law, will be only where exercise of jurisdiction by the authorities is shown to be perverse or arbitrary, which has not been shown in the present case.” 4. After the judgment of this Court, the issue came up before the Hon’ble the Supreme Court in Union of India v. Dharamendra Textile Processors, 2008(231) ELT 3. The said judgment was delivered by larger bench of three Judges on a reference made to it on account of conflict of opinions. In Dalip N.Shroff v. Joint Commissioner of Income Tax, (2007) 6 SCC 329, the view taken was that mens rea should be held to be an essential ingredient for levy of minimum penalty under section 11AC of the Act. On the other hand, in SEBI v. Shriram Mutual Fund and another, (2006) 5 SCC 361, in the context of Sections 15D(b) and 15E of the Securities and Exchange Board of India Act, 1992 (SEBI Act), it was held that it was not necessary to read requirement of mens rea in a provision laying down minimum penalty. After referring to judgments in Director of Enforcement v. MCTM Corpn. (P) Ltd.(1996) 2 SCC 471, J.K. Industries Ltd. v. Chief Inspector of Factories and Boilers, (1996) 6 SCC 665, R.S. Joshi v. Ajit Mills Ltd. (1977) 4 SCC 98, Gujarat Travancore Agency v. CIT (1989) 3 SCC 52, Swedish Match AB v. SEBI, (2004) 11 SCC 641, SEBI v. Cabot International Capital Corpn, (2005) 123 Comp Cases 841 (Bom.), it was held that plea of concept of inbuilt discretion in Rules 96ZO and 96ZQ could not be accepted. The observations in the judgments relied upon included that provision of penalty was neither criminal nor quasi criminal but for failure or default of statutory civil obligation. In such 3 CWP No.18099 of 2009 situation, mens rea was not an essential element. Absolute or strict liability without proof of mens rea could also be created in a special beneficial social defence legislation such as statutes relating to economic crimes as well as in laws concerning industry, food adulteration, prevention of pollution etc. Absolute offences were not criminal offences in real sense but acts prohibited in the interest of welfare of public. Classical view “no mens rea no crime” stood eroded regarding economic crimes or departmental penalties. 5. In Union of India v. Krishna Processors, (2009) 237 ELT 641, after noticing the view taken in Dharmendra Textile, it was observed that challenge to vires of the rules will stand revived as by reading the requirement of mens rea, the rule was upheld by Gujarat High Court in Ambuja Synthetics Mills v. Union of India, (2004) 175 ELT 85 (Guj). Accordingly, the batch of appeals before the Hon’ble Supreme Court was remanded to respective High Courts. View taken in Ambuja Synthetics was identical to the view by this Court in K.C.Alloys. 6. Thus, the question which now arises for consideration is whether provision levying minimum penalty equal to the amount of duty involved without any requirement of mens rea and without any discretion in the concerned authority on the issue of quantum of penalty is permissible, is consistent with Articles 14, 19 and 21 of the Constitution, particularly when such provision has been incorporated by a subordinate legislation. 7. Before considering the said question, a brief reference may be made to the facts in the lead petition i.e. CWP No.18099 of 2009. Facts 8. The petitioner is manufacturer of non alloy steel ingots falling under Chapter Heading 72 of the First Schedule to the Central Excise Tariff 4 CWP No.18099 of 2009 Act, 1985. By Section 3A of the Act, compounded levy scheme was introduced providing for payment of lump sum amount of duty on the basis of capacity instead of actual production of goods. Rule 96ZO provided for discharge of duty liability by 15th and last day of each month. The petitioner could not fully discharge its duty of first fortnight of the month of April 1999 and instead deposited the same after one week i.e. on 22.4.1999 alongwith interest i.e. Rs.3521/-. For the said default, it was required to pay penalty equal to the outstanding amount of duty i.e. Rs.6,66,500/- under third proviso to Rule 96ZO(3) vide order dated 15.2.2005. On appeal, it was held that since duty had already been deposited and there was delay only of seven days, there was no justification for imposing minimum penalty. Accordingly, quantum of penalty was reduced to Rs.5000/- with the following observations:- “In the present case the differential duty was delayed only for 7 days and the appellant deposits the same alongwith interest as such the penalty of Rs.5000/- is imposed on them.” The above view has been upheld by the Tribunal following judgment of this Court in K.C.Alloys. Rival contentions 9. Learned counsel for the petitioner submits that even though it may be permissible to provide for penalty for breach of civil obligation without mens rea or even for absolute offences in strict liability without mens rea in certain cases, legislature could not act arbitrarily and provide for minimum heavy penalty for slightest default. Principle of proportionality was part of reasonableness and even a legislative measure has to pass the test of reasonableness. If a legislative measure is held to be arbitrary, the same can be struck down to enforce fundamental rights under Articles 14, 5 CWP No.18099 of 2009 19 and 21. The rules are beyond the scope of delegated legislation permitted under the Act. 10. Stand of the respondents on the other hand is that under Section 37(4) of the Act, the Central Government could make a rule providing for levy of penalty on contravention of rule with an intent to evade duty regarding removal of excisable goods, accounting for such goods, engaging in manufacture, production or storage of goods without registration. There being no compulsion to imply mens rea, minimum penalty was permissible and was neither arbitrary nor unreasonable and thus, there was no violation of fundamental rights nor the provision was beyond the scope of delegated legislation. Statutory provisions 11. We may now refer to the statutory provisions:- Section 37: Power of Central Government to make rules – (1)to (3) xx xx xx xx xx (4) Notwithstanding anything contained in sub section (3) and without prejudice to the provisions of section 9, in making rules under this section, the Central Government may provide that if any manufacturer, producer or licensee of a warehouse – a) removes any excisable goods in contravention of the provisions of any such rule, or b) does not account for all such goods manufactured, produced or stored by him, or c) engages in the manufacture, production or storage of such goods without having applied for the registration as required under section 6, or d) contravenes the provisions of any such rule with intent to evade payment of duty, then all such goods shall be liable to confiscation and the manufacturer, producer or licensee, shall be liable to a penalty not exceeding the duty leviable on such goods or two thousand rupees, whichever is greater.” 6 CWP No.18099 of 2009 Rule 96ZO: Procedure to be followed by the manufacturer of ingots and billets.—(1) A manufacturer of non-alloy steel ingots and billets falling under Sub-Headings 7206.90 and 7207.90 of the Schedule to the Central Excise Tariff Act, 1985 (5 of 1986), shall debit an amount calculated at the rate of Rs 750 per metric tonne at the time of clearance of ingots and billets of non-alloy steel from his factory in the account current maintained by him under sub-rule (1) of Rule 173-G of the Central Excise Rules, 1944, subject to the condition that the total amount of duty liability shall be calculated and paid in the following manner— I. Total amount of duty liability for the period from the 1st day of September, 1997 to the 31st day of March, 1998 (a) a manufacturer shall pay a total amount calculated at the rate of Rs 750 per metric tonne on capacity of production of his factory for the period from the 1st day of September, 1997 to the 31st day of March, 1998, as determined under the Induction Furnace Annual Capacity Determination Rules, 1997. This amount shall be paid by the 31st day of March, 1998; (b) the amount of duty already paid, together with on- account amount paid by the manufacturer, if any, during the period from the 1st day of September, 1997 to the 31st day of March, 1998, shall be adjusted towards the total amount of duty liability payable under clause (a); (c) if a manufacturer fails to pay the total amount of duty payable under clause (a) by the 31st day of March, 1998, he shall be liable to pay the outstanding amount (that is the amount of duty which has not been paid by the 31st day of March, 1998) along with interest at the rate of eighteen per cent per annum on such outstanding amount calculated for the period from the 1st day of April, 1998 till the date of actual payment of the outstanding amount: Provided that if the manufacturer fails to pay the total amount of duty payable under clause (a) by the 30th day of April, 1998, he shall also be liable to pay a penalty equal to the outstanding amount of duty as on the 30th day of April, 1998 or five thousand rupees, whichever is greater. II. Total amount of duty liability for a financial year subsequent to 1997-1998 (a) a manufacturer shall pay a total amount calculated at the rate of Rs 750 per metric tonne on the annual capacity of production of his factory as determined under the Induction Furnace Annual Capacity Determination 7 CWP No.18099 of 2009 Rules, 1997. This amount shall be paid by the 31st day of March of the financial year; (b) the amount of duty already paid, together with on- account amount paid by the manufacturer, if any, during the financial year shall be adjusted towards the total amount of duty liability; (c) if a manufacturer fails to pay the total amount of duty payable under clause (a) by the 31st day of March, of the relevant financial year, he shall be liable to,— (i) pay the outstanding amount of duty (that is the amount of duty which has not been paid by the 31st day of March of the relevant financial year) along with interest at the rate of eighteen per cent per annum on such outstanding amount, calculated for the period from the 1st day of April of the immediately succeeding financial year till the date of actual payment of the whole of outstanding amount; and (ii) a penalty equal to such outstanding amount of duty or five thousand rupees, whichever is greater. (l-A) If any manufacturer removes any of the non-alloy steel ingots and billets specified in sub-rule (1) without complying with the requirements of the provisions of that sub-rule, then all such goods shall be liable to confiscation and the manufacturer shall be liable to a penalty not exceeding three times the value of such goods, or five thousand rupees, whichever is greater. xxxx xx xxx (3) Notwithstanding anything contained elsewhere in these Rules, if a manufacturer having a total furnace capacity of 3 MT installed in his factory so desires, he may, from the first day of September, 1997 to the 31st day of March, 1998 or any other financial year, as the case may be, pay a sum of rupees five lakhs per month in two equal instalments, the first instalment latest by the 15th day of each month, and the second instalment latest by the last day of each month, and the amounts so paid shall be deemed to be full and final discharge of his duty liability for the period from the 1st day of September, 1997 to the 31st day of March, 1998, or any other financial year, as the case may be, subject to the condition that the manufacturer shall not avail of the benefit, if any, under sub-section (4) of Section 3-A of the Central Excise Act, 1944 (1 of 1944):” xx xx xx xx xx Provided also that where a manufacturer fails to pay the whole of the amount payable for any month by the 15th day or the last day of such month, as the case may be, he shall be liable to i) Pay the outstanding amount of duty alongwith interest thereon at the rate of eighteen per cent per annum 8 CWP No.18099 of 2009 calculated for the period from the 16th day of such month or the Ist day of next month, as the case may be, till the date of actual payment of the outstanding amount and ii) a penalty equal to such outstanding amount of duty or five thousand rupees, whichever is greater.” Rules 96(ZP) and 96(ZQ) are identical. Scope of Rule Making Power 12. Reference to the above clearly shows that power to make rule for levying penalty equal to the outstanding amount of duty could be exercised only if the default was with intent to evade payment of duty. This was not under consideration before the Hon’ble Supreme Court in the said pronouncement. The rule making authority could not go beyond the Act and when the Act provides for requirement of mens rea, the rule could not dispense with the said requirement. For this settled position of law, reference may be made to judgments of the Hon’ble Supreme Court in State of TN and another v. P.Krishnamurthy and others, (2006) 4 SCC 517 and Bombay Dyeing & Manufacturing Company Limited (3) v. Bombay Environmental Action Group, AIR 2006 SC 1489. Reasonableness and Proportionality 13. Apart from above, only similarly circumstanced persons could be treated alike. Un-equals cannot be treated as equals. Reasonableness is omnipresent part of right to equality as held in Smt. Maneka Gandhi v. Union of India and another, AIR 1978 SC 597. Every enactment which lays down minimum sentence has to be tested on the touchstone of reasonableness. Doctrine of proportionality can be invoked where punishment provided is in outrageous defiance of logic and perverse or irrational. If a statute provides for disproportionate or excessive restriction on a fundamental right, the Court can go into the question whether there is 9 CWP No.18099 of 2009 proper balance in fundamental right and the restriction imposed. This aspect was discussed in Union of India v. G.Ganayutham, AIR 1997 SC 3387 wherein it was observed:- “22. State of A.P. v. McDowell & Co., (1996) 3 SCC 709 however makes it clear that so far as the validity of a statute is concerned, the same can be judged by applying the principle of proportionality for finding out whether the restrictions imposed by the statute are permissible and within the bounds prescribed by our Constitution. McDowell referred to this exception as follows: (SCC pp. 738-39, para 43) “43. ... It is one thing to say that a restriction imposed upon a fundamental right can be struck down if it is disproportionate, excessive or unreasonable and quite another thing to say that the Court can strike down enactment if it thinks it unreasonable, unnecessary or unwarranted.” (emphasis supplied) That a statute can be struck down if the restrictions imposed by it are disproportionate or excessive having regard to the purpose of the statute and that the Court can go into the question whether there is a proper balancing of the fundamental right and the restriction imposed, is well settled. [See Chintaman Rao v. State of M.P., AIR 1951 SC 118 State of Madras v. V.G. Row,AIRE 1952 SC 196; Indian Express Newspapers Bombay (P) Ltd. v. Union of India, (1985) 1 SCC 641.] (The principle of “proportionality” is applied in Australia and Canada also, Cunliffe v. Commonwealth, (1994) 68 Aust LJ 791 to test the validity of statutes.).” 14. In Om Kumar v. Union of India, AIR 2000 SC 3689,it was observed:- “28. By “proportionality”, we mean the question whether, while regulating exercise of fundamental rights, the appropriate 10 CWP No.18099 of 2009 or least-restrictive choice of measures has been made by the legislature or the administrator so as to achieve the object of the legislation or the purpose of the administrative order, as the case may be. Under the principle, the court will see that the legislature and the administrative authority “maintain a proper balance between the adverse effects which the legislation or the administrative order may have on the rights, liberties or interests of persons keeping in mind the purpose which they were intended to serve”. The legislature and the adminis-trative authority are, however, given an area of discretion or a range of choices but as to whether the choice made infringes the rights excessively or not is for the court. That is what is meant by proportionality. xx xx xx xxx xx (II) Proportionality and Legislation in UK and India 30. On account of a Chapter on Fundamental Rights in Part III of our Constitution right from 1950, Indian Courts did not suffer from the disability similar to the one experienced by English Courts for declaring as unconstitutional legislation on the principle of proportionality or reading them in a manner consistent with the charter of rights. Ever since 1950, the principle of “proportionality” has indeed been applied vigorously to legislative (and administrative) action in India. While dealing with the validity of legislation infringing fundamental freedoms enumerated in Article 19(1) of the Constitution of India — such as freedom of speech and expression, freedom to assemble peaceably, freedom to form associations and unions, freedom to move freely throughout the territory of India, freedom to reside and settle in any part of India, — this Court has occasion to consider whether the restrictions imposed by legislation were disproportionate to the situation and were not the least restrictive of the choices. The burden of proof to show that the restriction was reasonable lay on the State. “Reasonable restrictions” under Articles 19(2) to (6) could be imposed on these freedoms only by legislation and courts had occasion throughout to consider the proportionality 11 CWP No.18099 of 2009 of the restrictions. In numerous judgments of this Court, the extent to which “reasonable restrictions” could be imposed was considered. In Chintamanrao v. State of M.P. AIR 1951 SC 118 Mahajan, J. (as he then was) observed that “reasonable restrictions” which the State could impose on the fundamental rights “should not be arbitrary or of an excessive nature, beyond what is required in the interests of the public”. “Reasonable” implied intelligent care and deliberations, that is, the choice of a course which reason dictated. Legislation which arbitrarily or excessively invaded the right could not be said to contain the quality of reasonableness unless it struck a proper balance between the rights guaranteed and the control permissible under Articles 19(2) to (6). Otherwise, it must be held to be wanting in that quality. Patanjali Sastri, C.J. in State of Madras v. V.G. Row, AIR 1952 SC 196, observed that the Court must keep in mind the “nature of the right alleged to have been infringed, the underlying purpose of the restrictions imposed, the extent and urgency of the evil sought to be remedied thereby, the disproportion of the imposition, the prevailing conditions at the time”. This principle of proportionality vis-à-vis legislation was referred to by Jeevan Reddy, J. in State of A.P. v. McDowell & Co. (1996) 3 SCC 709 recently. This level of scrutiny has been a common feature in the High Court and the Supreme Court in the last fifty years. Decided cases run into thousands. 31. Article 21 guarantees liberty and has also been subjected to principles of “proportionality”. Provisions of the Criminal Procedure Code, 1974 and the Indian Penal Code came up for consideration in Bachan Singh v. State of Punjab (1980) 2 SCC 684 the majority upholding the legislation. The dissenting judgment of Bhagwati, J. (see Bachan Singh v. State of Punjab (1982) 3 SCC 24) dealt elaborately with “proportionality” and held that the punishment provided by the statute was disproportionate. 12 CWP No.18099 of 2009 32. So far as Article 14 is concerned, the courts in India examined whether the classification was based on intelligible differentia and whether the differentia had a reasonable nexus with the object of the legislation. Obviously, when the courts considered the question whether the classification was based on intelligible differentia, the courts were examining the validity of the differences and the adequacy of the differences. This is again nothing but the principle of proportionality. There are also cases where legislation