LML Ltd. vs Union of India

The challenge in this petition by LML Ltd. is to the demand raised by the Central Excise Department (�Department�) consequent upon adjudication orders, confirmed by an order dated 27th June, 2000 passed by the Customs, Excise Gold (Control) Appellate Tribunal (CEGAT), holding that the petitioner had wrongly availed, during the period prior to 2nd March, 1998, of Modvat credit of the duty paid on High Speed Diesel oil (HSD) used both for generating electricity and as fuel which the petitioner considered as an eligible input for the manufacture of two-wheeler scooters. The petition also challenges the constitutional validity of Section 112 of the Finance Act, 2000, enacted with effect from 1st April, 2000, which validated the denial of credit of duty paid on HSD "at any time during the period commencing on and from the 16th day of March, 1995" and ending with the day the Finance Act, 2000 received the assent of the President.

The background facts are that the petitioner is a manufacturer two-wheeler scooters which are excisable goods. In the course of manufacture the petitioner uses as input High Speed Diesel oil (HSD) for the generation of electricity as well as fuel. The petitioner claimed Modvat credit for the duty paid on HSD under Rules 57A and 57B read with Rule 57D of the Central Excise Rules, 1944 (CE Rules).

By Notification No. 5/94-C.E. (N.T.), dated 1st March, 1994, issued in exercise of the powers conferred by Rule 57A of the CE Rules, the Central Government specified the final products described in column (3) of the Table set out therein in respect of which credit of duty under Modvat was made available. However, HSD, which fell under Tariff Entry 2710.31 of the Central Excise Tariff Act, 1985, was specifically excluded from the list of eligible inputs. Notification No. 5/94 was amended by Notification No. 8/95-C.E. (N.T.), dated 16th March, 1995 in terms of which also HSD was specifically excluded from the list of eligible inputs.

Simultaneously however, by Notification No. 11/95-C.E. (N.T.), dated 16th March, 1995, Rule 57D of the CE Rules was amended and a second proviso was inserted therein in terms of which the benefit of Modvat credit in respect of inputs used for generation of the electricity within a factory became admissible in addition to the inputs used as fuel. A further set of amendments were made by Notification No. 6/97-C.E. (N.T.), dated 1st March, 1997 whereby the proviso to Rule 57D was deleted. However, Rule 57B continued to provide credit of duty paid on �goods� used as fuel and in the generation of electricity. By a corrigendum dated 10th March, 1997 the word �goods� in Rule 57B was substituted by the word �inputs�. Another Notification No. 5/98-C.E. (N.T.), dated 2nd March, 1998 was issued whereby an explanation was added below Rule 57B to clarify that the term �inputs� used therein only referred to such inputs as may be specified in a notification issued under Rule 57A of CE Rules. The net result was that on and from 2nd March, 1998, Modvat credit on HSD was disallowed.

Since Modvat credit was nevertheless claimed by a large number of manufacturers in respect of duty paid on HSD used as fuel or for generating electricity, for the period from 16th March, 1995 to 1st March, 1998, Section 112 of the Finance Act, 2000 was enacted with effect from 1st April, 2000 to validate the denial of credit of duty paid on HSD from 16th March, 1995 onwards. Clause 108 of the Finance Bill, 2000 (corresponding to Section 112 of the Finance Act, 2000), explained its rationale as follows :

"Clause 108. - seeks to deny credit of the duty paid on high speed diesel oil when used in the manufacture of excisable goods with retrospective effect from the 16th day of March, 1995. It was never the legislative intention to permit credit of duty paid on high speed diesel oil. The clause also seeks to validate the action taken in the past on this basis. This amendment has become necessary to overcome certain judicial pronouncements."

A show cause notice (SCN) dated 10th June, 1998 was issued to the petitioner demanding the Modvat credit of Rs. 22,45,973/- availed on duty paid HSD during the period between December, 1997 and March, 1998. By an order-in-original dated 30th July, 1999 passed by the Deputy Commissioner of Central Excise Kanpur (Dy. CE), the petitioner was allowed Modvat credit to the extent of Rs. 9,31,904/-. The demand to the extent of Rs. 13,14,060/- was confirmed and a penalty of Rs. 2 lakhs imposed for violation of Rule 57A.

The appeal filed against the aforesaid order was disposed of by the Commissioner of Central Excise (Appeals) [CCE (A)] by an order dated 30th March, 2000 confirming the demand. The order of the Dy. CE allowing Modvat credit to the extent of Rs. 9,31,904/- was therefore, affirmed.

The further appeal filed by the petitioner before the CEGAT was disposed of by an order dated 27th June, 2000. The CEGAT confirmed the orders of the Dy. CE and CCE (A) but reduced the penalty to Rs. 10,000/-. The CEGAT too therefore, impliedly affirmed the order of the Dy. CE that the Modvat credit availed prior to 1st March, 1998 was permissible. This was despite the CEGAT taking note of Section 112 of the Finance Act, 2000 which validated the denial of Modvat credit in respect of duty paid on HSD from 16th March, 1995 onwards.

Even prior to the above order of the CEGAT, letters were issued by the Superintendent of Excise, Kanpur to the petitioner on 30th May, 2000 and 12th June, 2000 seeking to recover the demand raised on it in terms of the orders of the Dy. CE and CCE (A). The petitioner has in the present petition challenged the aforementioned demands apart from seeking a declaration that Section 112 of the Finance Act, 2000 is ultra vires the Constitution.

At this stage it must be noted that in two decisions, Sangam Spinners Ltd. v. Union of India - (2011) 11 SCC 408 and Union of India v. Maharaja Shree Umaid Mills - (2014) 13 SCC 783 = 2013 (298) E.L.T. 641 (S.C.) the Supreme Court applied Section 112 of the Finance Act, 2000, and interpreted the notifications referred to herein above to hold that denial of Modvat credit in respect of duty paid on HSD with effect from 16th March, 1995 was legally justified.

Mr. Santhanam, learned counsel for the petitioner, however contends that in the above decisions the Supreme Court was not called upon to decide the constitutional validity of Section 112 of the Finance Act, 2000. The Supreme Court proceeded on the basis that it had retrospective operation. According to him the Supreme Court overlooked the fact that in CCE v. Associated Cement Co. Ltd. - (2011) 11 SCC 420 = 2005 (180) E.L.T. 3 (S.C.), the Supreme Court had left open the question concerning the constitutional validity of Section 112. Further according to him, Section 112 to the extent it takes away the vested rights of the petitioner with retrospective effect would be unconstitutional. However, Mr. Santhanam states that in view of the developments subsequent to the filing of the present writ petition, the petitioner will not press for a decision on the constitutional validity of Section 112 as long as it is clarified that no coercive steps will be taken by the Department to recover the Modvat credit availed by the petitioner on HSD prior to 2nd March, 1998.

Reverting to the facts of the present case, it is pointed out that although in terms of the order dated 27th June, 2000 passed by the CEGAT, a sum of Rs. 13,14,060/-, being the Modvat credit wrongly availed of by the petitioner for period subsequent to 2nd March, 1998, was recoverable from it, the Department recovered the entire demanded sum of Rs. 22,45,973/- together with interest of Rs. 3,28,735/- by appropriating various refund claims filed by the petitioner. This was challenged by the petitioner by filing 19 appeals before the CCE (A). By a common order dated 17th November, 2002, the CCE (A) upheld the recovery of the entire amount.

For the second time, the petitioner went before the CEGAT against the above order of the CCE (A). By an order dated 25th February, 2003 [2003 (162) E.L.T. 719 (Tribunal)], the CEGAT allowed the petitioner�s appeals and held that the only Rs. 13,14,060/- and Rs. 10,000/- as penalty was recoverable from the petitioner. It was held that an aggregate amount of Rs. 9,31,904/- that had been allowed by the Dy. CE by the order dated 30th July, 1999 cannot be recovered since that order had not been challenged by the Department and had, therefore, attained finality.

Against the above order dated 25th February, 2003 of the CEGAT, the Department filed Civil Appeal Nos. 6555-6573/2003 in the Supreme Court. On 15th September, 2003 [2004 (163) E.L.T. A40 (S.C.)], the said appeals were dismissed by the following order :

"In view of the fact that the refund has already been given to the respondent as appears from the affidavit affirmed by the respondent on 11-9-2003 the appeals are not pressed by the appellant. As such the appeals are dismissed. The quest on of law is accordingly left open."

When the present appeal was heard on 1st March, 2016, it was submitted by Mr. Santhanam that in view of the above statement made by the Department before the Supreme Court, the demands sought to be enforced by the letters dated 30th May, 2000 and 12th June, 2000 do not survive. At that stage, Mr. Rahul Kaushik, learned counsel for the respondent Department sought time to obtain instructions.

Today, Mr. Kaushik informs the Court that as regards the above order dated 15th September, 2003 of the Supreme Court, he has no instructions. The Court, therefore, proceeds on the basis that the said order records the considered stand of the Department in the matter. In other words the statement made by the Department before the Supreme Court that "refund has already been given" to the petitioner holds good and reflects the position that the Department has accepted the orders of the Dy. CE and CCE (A) which were affirmed by the order dated 25th February, 2003 of the CEGAT. By the last mentioned order, the CEGAT re-affirmed the earlier orders to the effect that an aggregate amount of Rs. 9,31,904/- being the Modvat credit allowed to the petitioner for the period prior to 1st March, 1998 by the Dy. CE by the order dated 30th July, 1999 cannot be recovered by the Department. Consequently, the Department cannot, at this stage, seek to enforce any demand viz-à-viz the Modvat credit availed on HSD by the petitioner prior to 1st March, 1998.

In the light of the above subsequent development and in view of the statement made by the Department before the Supreme Court as recorded in its order dated 15th September, 2003, the respondent is restrained from seeking to recover from the petitioner the Modvat credit on HSD availed by it for the period prior to 1st March, 1998. The impugned demand notices to that effect are, accordingly, set aside.

It is clarified that the above directions have been issued in the peculiar facts of the present case and will not constitute a precedent as regards the constitutional validity or applicability of Section 112 of the Finance Act, 2000.

The writ petition is disposed of in view of the above terms.