Commissioner of Customs and Central Excise vs Sunder Ispat Ltd.

Challa Kodanda Ram, J.—In all these appeals, at the instance of the Department, the following common questions of law have been set out for consideration.

a) Whether the CESTAT is justified in reducing the penalty de hors the Clause (ii) of third proviso to sub-rule (3) of Rule 96ZO of the Central Excise Rules, 1944 which is in the nature of imposition of mandatory penalty and the adjudicating authority/appellate authority is bound to impose a penalty equivalent to outstanding amount of duty or Rs. 5,000/- whichever is greater?

b) Whether CESTAT can exercise discretion in the matter of imposing penalty and reduce the same without such discretion being conferred under relevant rules?

c) On the present issue, there is no authorization pronouncement of any High court or Supreme Court and which issue occurs regularly as such the substantial question of law as this aspect needs to be decided by this High Court in the present CEA?

For the purpose of disposal of this batch of cases, facts in C.A. No. 24 of 2006 may be noticed.

The assessee is a manufacturer of M.S. Ingots and a show cause notice came to be issued on 06-03-2003 alleging that it had defaulted on payment of duty on the specified dates during the period from April, 1998 to September, 1998 and the duty amount as fixed by the Commissioner was required to be paid in two equal installments. The first installment latest by 15th of each month and the 2nd installment by the last date of the said month. The verification of RT 12 returns for the months of April 1998 to September 1998 revealed that assessee has not paid duty due on the specified dates, but paid subsequently. On the above violation, Rule 96ZO of the Central Excise Rules, 1944 (as existing then) was invoked and assessee was directed to pay penalty of Rs. 4,99,666/- invoking Rule 96ZO(3), which mandates imposition of penalty equivalent to outstanding amount of duty or Rs. 5,000/- whichever is greater. On appeal being filed by the respondent herein, the Commissioner vide his order 31-12-2003 by placing reliance in 2002 (148) ELT 838 had reduced the penalty to Rs. 5,000/- while retaining the levy of interest as payable. The Department carried the matter in appeal before the Customs, Excise and Service Tax Appellate Tribunal (for short "the CESTAT"), South Zonal Bench, Bangalore, and the CESTAT vide its final order No. 250-258/2005, dated 18-02-2005, by referring the judgment of the Hon''ble Supreme Court in State of Madhya Pradesh and others Vs. Bharat Heavy Electricals, and the judgment of the Madras High Court in Beauty Dyers Vs. Union of India (UOI), had dismissed the appeal confirming the orders of the Commissioner (Appeals). In the above factual background, the substantial questions of law, which are set out above, said to have been arisen from the orders of the CESTAT are referred to this Court.

The sheet anchor argument of the learned counsel for the Department is that there is no dispute with regard to finding of fact that the respondent had defaulted in payment of duty and thereby violated the Induction Furnace Annual capacity Determination Rules, 1997 and thus, invited penalty under Rule 96ZO. By placing reliance on the judgment of the Supreme Court in Union of India (UOI) and Others Vs. Dharamendra Textile Processors and Others, , the learned counsel would submit that there is no requirement of mens rea for the purpose of imposition of penalty under Rules 96ZO and 96ZQ and there is no discretion given to the adjudicating authority to reduce the penalty on consideration of the facts. Imposition of penalty has been held to be mandatory by the Hon''ble Supreme Court as such, the judgment of the CESTAT is erroneous and requires to be set aside and the questions need to be answered in favour of the Department and against the assessee.

On the other hand, Sri S. Ravi, learned senior counsel appearing on behalf of the respondent would submit that the law laid down by the 2-Judge Bench of the Hon''ble Supreme Court in Union of India (UOI) and Others Vs. Dharamendra Textile Processors and Others, is running contrary to a large number of earlier decisions of the larger Bench judgment of Hon''ble Supreme Court, wherein penalty proceedings have always held to be in the nature of quasi criminal proceedings and there is an element of discretion left with the authorities to impose proportionate penalty depending on the facts of the case. However, he would fairly submit that considering the fact that the Hon''ble Supreme Court was directly considering Rules 96ZQ and 96ZO, the Supreme Court judgment in Union of India (UOI) and Others Vs. Dharamendra Textile Processors and Others, need to be taken into consideration, leaving it open for the respondents to canvass about the correctness of the view taken in the above judgment. However, he would also point out that in Union of India (UOI) and Others Vs. Dharamendra Textile Processors and Others, the validity of Rule has not been decided and in fact the same was left open for the reason that the Hon''ble Supreme Court had noticed. Some of petitioners in the Batch had challenged the validity of Rule and it is pending consideration before the Court and also before various High Courts. He would further point out that this judgment of the Supreme Court was rendered on 29-09-2008 and thereafter, the Division Bench of Punjab and Haryana High Court in Bansal Alloys and Metals Pvt. Ltd. Vs. Union of India (UOI), had considered the vires of the Rule and had struck down the Rules by holding Rules 96ZO, 96ZP and 96ZQ are ultra vires the Act and the Constitution. Similar declarations were also made by the High Court of Uttarakhand in Commissioner, Customs and Central Excise, Meerut-I Vs. M/s Amrit Varsha Ispat (P) Ltd. Muni Ki Reti, Rishikesh and the High Court of Himachal Pradesh in Shubh Timb Steel Ltd. Vs. Union of India, . He would further submit that in the light of the law declared by the Constitutional Courts holding the rule to be ultra vires , the very demand of penalty equivalent to the duty amount even for a delayed payment of one day is totally unsustainable and would be totally unauthorized. He would also urge that this Court exercises the jurisdiction of the appellate court over the orders of the CESTAT and as an appellate court, it is strictly bound to apply the provisions of the Act and the Rules. He would further urge that there being no rule and Rules 96ZO, 96ZP and 96ZQ having been struck down by the Constitutional Court and even within the ratio laid down by the Hon''ble Supreme Court in Union of India (UOI) and Others Vs. Dharamendra Textile Processors and Others, , the levy of penalty under a non-existing rule would be illegal and viewed from that angle, the order of the CESTAT would be unexceptional.

Having considered the rival submissions, we find from the orders of the authorities below that in the present cases, the delay in payment of duty is only a maximum of 8 days and the reasons for delay are either due to holding or temporary financial crisis.

The authorities below had accepted the fact that there is an impossibility of compliance of payment of duty on due date on account of 15-11-1998 being a Sunday. In other wards, the authorities below had consistently found that there was imminent justifiable reason and there was a genuine cause for the respondent''s inability to pay the duty amount on the due date. Be that as it may, in view of the judgment of the Supreme Court that imposition of penalty in terms of Rule 96ZO is held to be mandatory, now, the question for consideration would be whether the demand in the present cases would be sustainable, when the relevant rule, which was the basis for demand, having been held to be ultra vires the Act and having been struck down is justifiable? It is well settled that High Court while exercising powers u/s 35(G) of the Act, exercises such power as a creature of the statute and exercises such power within the statutory scheme and administers the statutory provisions and cannot travel beyond the statute. In this connection, the judgment of the Hon''ble Supreme Court in K.S. Venkataraman and Co. Vs. State of Madras, may be noticed, wherein at paras 20 and 21 held as follows:-

The said machinery provisions cannot be construed in vacuum: they must be collated with the charging sections; that is to say, the Act provided for a machinery for deciding disputes that arise under the substantive provisions of the Act. To illustrate: suppose there is provision in the Act to the effect that the said Act does not apply to indivisible building contracts. Can the officer decide that the Act applies to such building contracts? Such a decision, if given, will not be under but outside the Act. Take another illustration: suppose this Court has held that a provision authorising the taxing of an indivisible building contract is ultra vires the power of the State Legislature and, therefore, void; in that event, how can an authority functioning under the Act tax such a contract on the basis of a provision declared to be ultra vires and, therefore, non-existent? If it does, it will be assessing not under the Act but outside it. The same legal position will flow though there is no such previous declaration by a competent court, but a charging provision is in fact and in law ultra vires the Legislature. Any assessment made on the basis of such a void provision cannot be a decision under the provisions of the Act. Briefly stated, the procedural machinery under the Act can be utilized only to decide disputes that arise under the substantive provisions of the Act which are not ultra vires.

The proposition that an authority constituted under the Act cannot, unless expressly so authorized, question the validity of the Act or any provisions thereof, is sound and is also supported by authority.

The issue raised in the present cases is directly answered in the above referred paragraphs by the Hon''ble Supreme Court.

In the light of the law laid down by the Hon''ble Supreme Court, referred to above, we do not find any illegality in the orders of the CESTAT and in the factual situation and in the light of the subsequent developments after the orders of the CESTAT in the year 2005, as a matter of fact, the substantial question of law really do not arise in the present cases for consideration of this Court.

Accordingly, the appeals are dismissed. No order as to costs.

As a sequel to the dismissal of the appeals, Miscellaneous Petitions, if any pending, shall stand disposed of as infructuous.