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Case Number

Central Excise Appeal No. 5 of 2005

Advocates

For the Appellant : K.C. Sinha For the Respondents : S.C.

Judges

Hon’ble Mr. Justice Sunil Ambwani
Hon’ble Mr. Justice Aditya Nath Mittal

Acts

sub-rule (3) of the Rule 96ZQ of the erstwhile Rule
Rule 96 ZQ (3) of the Central Excise Rules, 1944.
Rule 96ZP (3) of the Central Excise Rules, 1944.
Section 3A(2) of the Central Excise Act, 1944.
Rule 96 ZQ (5) (ii) of the Rules.
Sub-rule (5) of the Rule 96ZQ
Central Excise Rules, 1944
CENTRAL EXCISE ACT 1944
Rule 96 ZP (3),
sub-rule (3),
sub-rule (1)

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Smart Summary

Structured Summary of the Opinion

Factual and Procedural Background

This appeal under Section 35-G of the Central Excise Act, 1944 arises from an order of the Customs, Excise and Service Tax Appellate Tribunal (the Tribunal), New Delhi dated 25.6.2004 which dismissed an appeal and confirmed an order of the Commissioner (Appeals) that had set aside a penalty imposed on the respondent-assessee.

The respondent, M/s Webbing and Belting Pvt. Ltd., processed fabrics under Chapter Headings 52 and 54 and worked under the compounded levy scheme pursuant to Notification No. 43/98 (10.12.1998), for the period April 1999 to February 2001. The Commissioner, Central Excise, Meerut fixed the respondent's annual capacity of production provisionally and finally on dates in 1999 and 2001.

The respondent failed to pay excise duty by the due dates under Rule 96ZQ(3) of the Central Excise Rules, 1944 for the period April 1999 to February 2001, though the duty was subsequently paid with interest. The default rendered the respondent liable to a penalty equal to the amount of duty outstanding at the end of each month, amounting to Rs. 45,00,000/-. A show-cause notice was issued on 21.11.2001 under Rule 96ZQ(5)(ii).

The Dy. Commissioner adjudicated the matter, found significant business in years 1999-2000 and 2000-01 compared to earlier years, and by the original order dated 28.2.2002 confirmed the penalty of Rs. 45,00,000/-. The respondent appealed to the Commissioner (Appeals), who allowed the appeal on 14.11.2003 relying on a decision of CEGAT, Mumbai (holding Rule 96ZQ to be ultra vires). The Commissioner of Central Excise, Ghaziabad then appealed to the Tribunal, which dismissed the appeal. The present High Court appeal was admitted on a question of law concerning the Tribunal's power to set aside the penalty under Rule 96ZQ.

Legal Issues Presented

Whether the Appellate Tribunal, on the facts and circumstances of the case, could set aside the penalty provided under the erstwhile Rule 96ZQ of the Central Excise Rules, 1944.
Whether there is any judicial or adjudicatory discretion to reduce or vary the quantum of penalty specified by the impugned rule (i.e., whether the penalty equal to the duty outstanding is mandatory or whether the assessing/appeal authority may impose a lesser penalty).

Arguments of the Parties

Appellant's (Commissioner of Central Excise) Arguments

The Central Government is empowered by Section 3A(2) of the Central Excise Act, 1944 to make rules for determination of annual capacity of production (ACP); the proviso allows proportionate calculation where a factory operates only part of a year.
The respondent defaulted multiple times for periods ranging from 3 days to 111 days in depositing the compounded duty; the defaults were not due to any legitimate hardship.
The Commissioner (Appeals) did not directly rely on the Madras High Court's Beauty Dyers decision but on the Tribunal decision in Shree Sai Prasad Dyes & Ptg. Mills v. CCE (2002 (56) RLT 100), which referred to Beauty Dyers; notwithstanding that, the Tribunal erred in setting aside the penalty.
Production figures for 1999‑2000 and 2000‑01 showed the respondent had substantial business (figures in the order), so the asserted ground of default (financial hardship) was non-existent.
Reliance on PEE AAR Steels (All HC) where the Court held that a specified penalty under Rule 96 ZP(3) was the only penalty and mandatory — analogously, the Tribunal had no competence to reduce the statutory penalty.
Reliance on a Division Bench decision of this Court in Commissioner of Customs & Central Excise v. M/s Majestic Auto Ltd. (Central Excise Appeal No.142 of 2004, decided 6.7.2012), which held that where Section 11AC applied, the quantum of penalty equal to the duty was mandatory and there was no discretion to impose a different amount; thus the Tribunal could not reduce the penalty specified by statute/rule.

Respondent's (Assessee) Arguments

The respondent defended the Tribunal's order and relied on the Madras High Court decision in Beauty Dyers v. Union of India, which held that levy of interest at the rate prescribed under the Rule was not unreasonable and that the penalty provision in Rule 96ZQ should be taken as the maximum amount which could be levied; the assessing authority retains discretion to impose a lesser penalty depending on facts and circumstances.
It was submitted that if the Revenue had the advantage of keeping the tax amount without paying it to the exchequer, the penalty and interest were justified; the 36% interest under Rule 96ZQ was reasonable in that context.
Beauty Dyers had relied upon Supreme Court decisions such as State of Madhya Pradesh v. Bharat Heavy Electricals and Calcutta Jute Manufacturing Co. v. Commercial Tax Officer to support the view that discretion to impose a lesser penalty can exist under some statutory schemes.
It was admitted that the compounded amount was not deposited by the stipulated date and that the penalty was thus leviable; however, the question of discretion was (or had been) considered in other authorities such as Majestic Auto and Union of India v. M/s. Dharmendra Textile Processors.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Beauty Dyers v. Union of India (Madras High Court)	Held that interest under the Rule is not unreasonable; viewed the penalty in Rule 96ZQ as a maximum amount, permitting the assessing authority discretion to levy a lesser penalty depending on facts.	The Tribunal and Commissioner (Appeals) were said to have followed Beauty Dyers; the High Court, however, concluded the Tribunal's reliance on Beauty Dyers was misplaced for the present case.
Shree Sai Prasad Dyes & Ptg. Mills v. CCE, Surat, 2002 (56) RLT 100	Tribunal decision that referred to Beauty Dyers; used by the Commissioner (Appeals) in allowing the respondent's appeal.	The appellant submitted that Commissioner (Appeals) relied on this Tribunal decision (which in turn referred to Beauty Dyers); the High Court noted this reliance but held Majestic Auto covered the correct legal position.
PEE AAR Steels (P) Ltd. v. Commissioner of Central Excise, Meerut, 2004 (170) ELT 406 (All)	Interpreted Rule 96 ZP(3): held that the specified penalty in the fourth proviso is not merely a maximum but the only penalty, and therefore must be levied where conditions are fulfilled.	Appellant relied on this decision as analogous support that statutory penalty provisions may be mandatory and not subject to reduction by the Tribunal.
Commissioner of Customs & Central Excise v. M/s Majestic Auto Ltd., Central Excise Appeal No.142 of 2004 (6.7.2012)	Held that the quantum of penalty equal to the duty determined under Section 11AC is mandatory and there is no discretion in the adjudicating authority or Tribunal to impose a different amount; appellate tribunals cannot reduce such penalty.	The High Court treated Majestic Auto as determinative of the present question: the ratio was applied to hold that the Tribunal had no discretion to reduce the penalty under the relevant rule, and consequently set aside the Tribunal and Commissioner (Appeals) orders.
Union of India v. Rajasthan Spinning & Weaving Mills Ltd. (Supra) (Supreme Court)	Interpretation of Section 11AC: penalty under Section 11AC applies only when the conditions set out in that section exist; the proviso and section use identical expressions like fraud, collusion, wilful mis-statement or suppression to attract extended periods and penalty.	The High Court cited this authority for the proposition that penalty provisions (such as Section 11AC) apply only when their statutory conditions are satisfied; it formed part of the reasoning that statutory penalties are mandatory when their conditions are met.
Union of India v. M/s. Dharmendra Textile Processors, 2008 (231) ELT 3 (SC)	Dealt with levy of penalty under Section 96ZQ and Rule 96ZO; emphasized that various degrees of culpability cannot be treated identically and that Section 11AC cannot be construed to read in any discretion.	The High Court referenced this Supreme Court authority as part of its consideration of whether discretion exists to reduce penalties; it supported the view that Section 11AC and analogous statutory provisions do not allow judicial discretion in quantum once the conditions are fulfilled.
State of Madhya Pradesh v. Bharat Heavy Electricals (1998) and Calcutta Jute Manufacturing Co. v. Commercial Tax Officer, 1997 (93) ELT 657 (SC)	Authorities cited by the Madras High Court in Beauty Dyers to support the proposition that where statutory scheme contemplates a maximum penalty, the assessing authority may have discretion to levy less than the maximum in appropriate cases.	These decisions were relied upon by Beauty Dyers; the High Court in the present matter noted that Beauty Dyers relied upon these authorities but concluded the Tribunal's reliance on Beauty Dyers was incorrect in light of Majestic Auto and related authorities.

Court's Reasoning and Analysis

The Court proceeded by first identifying the admitted question of law: whether the Tribunal could set aside the penalty specified in the erstwhile Rule 96ZQ. It reviewed the factual background: defaults in payment, subsequent payment with interest, show-cause, adjudication confirming penalty, allowance of appeal by Commissioner (Appeals) relying on precedents, and dismissal of the Department's appeal by the Tribunal.

The Court summarized the appellant's submissions that (i) the Central Government has rule-making power under Section 3A(2) to determine annual capacity of production; (ii) the respondent repeatedly defaulted in payment; (iii) the Commissioner (Appeals) and Tribunal were wrong to rely on Beauty Dyers; and (iv) binding or persuasive authorities (including PEE AAR Steels and the Division Bench decision in Majestic Auto) support the proposition that when a statute or rule prescribes a penalty equal to the duty, the adjudicating authority and Tribunal have no discretion to impose a lesser amount.

The Court examined the line of authorities dealing with statutory penalties (including Majestic Auto, Dharmendra Textile Processors and Union of India v. Rajasthan Spinning & Weaving Mills Ltd.). It noted that Majestic Auto held the quantum of penalty equal to the duty determined under Section 11AC is mandatory and not subject to reduction by the Tribunal or adjudicating authority once the statutory conditions are satisfied. The Court observed that the reasoning in Beauty Dyers — that the penalty was a maximum and that discretion to reduce existed — was not a correct guide for the present matter in view of the later authorities relied upon by the appellant.

Applying these principles, the Court concluded that the Tribunal's reliance on Beauty Dyers was erroneous and that the question of whether penalty can be levied and whether any discretion exists to reduce it had been correctly covered by the judgment of this Court in Majestic Auto and related Supreme Court decisions. Consequently, the Tribunal and Commissioner (Appeals) were not justified in setting aside the penalty imposed under Rule 96ZQ.

Holding and Implications

APPEAL ALLOWED.

Holding:

The High Court allowed the Central Excise appeal, set aside the order of the Customs, Excise and Service Tax Appellate Tribunal dated 25.6.2004 and set aside the order of the Commissioner (Appeals) which had allowed the respondent's appeal.
The question of law was decided in favour of the revenue and against the respondent-assessee.

Implications:

The practical effect for the parties is that the orders which had set aside the penalty are quashed and the central excise department is directed to proceed in accordance with this judgment (i.e., the penalty regime as applied by the original adjudicating authority stands restored insofar as permitted by the Court's ruling).
The Court relied on and applied existing precedents (notably Majestic Auto and related Supreme Court authorities) to hold that where a statutory provision or rule prescribes a penalty equal to the duty and the statutory conditions are satisfied, the adjudicating authority or Tribunal does not have discretion to reduce the quantum of penalty. The opinion did not purport to lay down a new principle beyond applying those precedents to the facts of this case.

Note: This summary is strictly confined to the content and reasoning contained in the provided opinion and does not introduce information not present in that text.

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Commissioner, Customs & Central Excise v. M/S. Webbing & Belting Pvt. Ltd.

1. We have heard Shri Ashok Singh for the appellant and Shri Sharad Malviya for the respondent-assessee. This Central Excise Appeal under Section35-G of the Central Excise Act, 1944 arises out of an order passed by the Customs, Excise and Service Tax Appellate Tribunal, New Delhi (the Tribunal) dated 25.6.2004 dismissing the appeal and confirming the order of the Commissioner of Appeals, by which he had set aside the penalty levied on the respondents in view of the judgment of Madras High Court in Beauty Dyers v. Union of India and others, 2002 (52) RLT 636 (Mad).

2. The facts giving rise to this appeal filed by the Commissioner, Customs and Central Excise are that M/s Webbing and Belting Pvt. Ltd. (the respondent company) is engaged in the processing of fabrics under Chapter Heading Nos. 52 and 54 of CETA 1985. The respondents were working under the compounded levy Scheme as per the provisions of Notification No. 43/98 dated 10.12.1998, as amended during the period April 1999 to February 2001. The annual capacity of production was fixed provisionally by the Commissioner, Central Excise, Meerut vide order dated 17.3.1999/3.5.1999 and finally on 8.3.2001.

3. The respondent did not pay the excise duty during the period April 1999 to February 2001, on the due dates under Rule 96 ZQ (3) of the Central Excise Rules, 1944. Thereafter the respondent paid the duty alongwith due interest on the late payment. It was found that the respondent had contravened the provisions of rule 96zq (3), of the then applicable Central Excise Rules, 1944 and rendered itself liable to penalty equal to the amount of duty outstanding at the end of each month amounting to Rs. 45,00,000/- (Rupees Forty Five Lacs), which was not paid within the stipulated time limit. On 21.11.2001 a show-cause notice was issued to the respondents as to why the penalty be not imposed equal to the amount of duty outstanding at the end of each month under Rule 96 ZQ (5) (ii) of the Rules.

4. The Dy. Commissioner, Central Excise, Division Ghaziabad passed an order adjudicating the matter, after giving personal hearing and going through the reply. He found that the respondent had sound business in financial years 1999-2000; 2000-01, as compared to Financial Year 1997-98 and 1998-99. By the order in original dated 28.2.2002 the penalty of Rs. 45,00,000/- was confirmed.

5. The respondent filed an appeal before the Commissioner (A), Central Excise, Ghaziabad. He allowed the appeal on 14.11.2003 relying upon the decision of CEGAT, Mumbai, by which the provisions of Rule 96ZQ for levy of penalty were held to be ultra vires. Aggrieved the Commissioner of Central Excise, Ghaziabad filed an appeal in the Tribunal, which has been dismissed.

6. This central excise appeal was admitted on the question of law as follows:

Whether the appellate Tribunal on the facts and circumstances of the case could set aside the penalty in erstwhile Rule 96ZQ of Central Excise Rules, 1944?

7. It is submitted by Shri Ashok Singh appearing for the Commissioner, Central Excise, Ghaziabad, that the Tribunal failed to appreciate that the Central Government is empowered to make the rules for determination of annual capacity of production (ACP) under Section 3A(2) of the Central Excise Act, 1944. The proviso to sub-section provides that where a factory producing the notified goods is in operation only during a part of the year its production shall be calculated on proportionate basis of the annual capacity of productions. The respondent had defaulted many times for a period ranging from 3 days to 111 days, on the plea of financial hardships in depositing the compounded duty.

8. It is submitted that he Tribunal's observation that

"the Commissioner (Appeals) after following the decision in the case of Beauty Dyers v. Union of India (Supra) set aside the penalty"

does not appear correct to the extent that the Commissioner (Appeals) did not make direct reference to the said High Court order, instead the ratio of the decision of the Tribunal given in the case of Shree Sai Prasad Dyes & Ptg. Mills v. CCE, Surat, 2002 (56) RLT 100, wherein the case of Beauty Dyers was referred to. The respondent had done extremely good business in the financial year 1999-2000 and 2000-01. The production in metric tonnes in these two years was 2378551.5 q.mtrs. in 1999-2000 and 2374220.82 q.mtrs. in the year 2000-01, as compared to 36740.32 q.mtrs. in 1997-98 and 405292.50 q. mtrs. in 1998-99, and the ground of default was non-existing.

9. The sub-rule (3) of the Rule 96ZQ of the erstwhile Rule reads as follows:

The amount of duty payable under sub-rule (1) shall be paid by the 5th of each calendar month.

10. Sub-rule (5) of the Rule 96ZQ reads as under:

If any independent processor fails to pay the amount of duty or any part thereof by the date specified in sub-rule (3), he shall be liable to-

(a) Pay the outstanding amount of duty alongwith interest at the rate of thirty six percent per annum calculated for the outstanding period on the outstanding amount; and

(b) A penalty equal to an amount of duty outstanding from him or rupees five thousand, which ever is greater.

11. It is submitted that in similar parallel provisions under rule 96ZP, meant for manufacture of Hot Rolled products, this Court in PEE AAR Steels (P) Ltd. v. Commissioner of Central Excise, Meerut, 2004 (170) ELT 406 (All), held that the penalty mentioned in the fourth proviso to Rule 96 ZP (3), is not the maximum penalty but the only penalty, and hence such penalty has to be levied whenever there is failure to pay the duty by 10th of the month. The Tribunal was thus not competent to reduce the penalty under the Proviso to Rule 96ZP (3) of the Central Excise Rules, 1944.

12. Shri Ashok Singh has relied upon the recent decision of a Division Bench of this Court in Commissioner of Customs & Central Excise v. M/s Majestic Auto Ltd., Central Excise Appeal No. 142 of 2004 decided on 6.7.2012 in which this Court considering Section 11AC, which provides for levy of penalty as a successor of Rule 76ZP (3) held as follows:

From the proposition as laid down in above cases, the ratio deducible is that the quantum of the penalty equal to the duty determined as contemplated by Section 11AC is mandatory and there is no discretion in the adjudicating authority or the Tribunal to impose different amount of penalty. In a case where penalty is leviable under Section 11AC on fulfilment of the conditions as enumerated in Section 11AC, the penalty equal to the amount of duty determined is mandatory and there is no discretion in the Tribunal to reduce the said penalty. However, as laid down by the Apex Court in Union of India v. Rajasthan Spinning and Weaving Mills (supra), the penalty under Section 11AC can be imposed only when conditions mentioned in Section 11AC exist. The authorities have no discretion in fixing the quantum of penalty and penalty equal to the duty must be imposed once Section 11AC is made applicable.

In view of the foregoing discussions, the question of law is answered in favour of the revenue in following manner.

"The appellate Tribunal had no discretion to reduce the amount of penalty as specified under Section 11AC"

The appeal is allowed. Parties shall bear their own cost.

13. Shri Sharad Malviya appearing for the respondent has defended the order of the Tribunal. He submits that in Beauty Dyers v. Union of India (Supra) the Madras High Court held that levy of interest on penalty under the Rule is not unreasonable. If the appellant had advantage of keeping the amount of tax without paying it to the State exchequer, the penalty was leviable. In that case the petitioners had filed writ petitions only on the basis that the authorities were informed that if the amount is not paid, they will levy charges as per Rule 96ZQ. As regards panel interest at 36% under Rule 96ZQ, it is reasonable as the party had the advantage of keeping the tax without paying it to the State exchequer and that they would earn good profit from the amount. As regards penalty the Madras High Court observed that the penalty mentioned in Rule 96ZQ should be taken as the maximum amount which would be levied and the assessing authority has discretion even to levy lesser amount of penalty depending upon the facts and circumstances of each case. The Madras High Court relied upon State of Madhya Pradesh v. Bharat Heavy Electricals, 1998 (99) ELT 33 (SC), and Calcutta Jute Manufacturing Co. v. Commercial Tax officer, 1997 (93) ELT 657 (SC). In both these cases the provisions of law other than Section 96ZQ were under consideration. The judgment in State of Madhya Pradesh v. Bharat Heavy Electricals (Supra) was based upon the concession in which learned counsel for the State submitted that the State can levy penalty equal to ten times amount of entry tax as maximum limit and has not fixed any amount of penalty leaving no discretion for imposition of lesser penalty. The Supreme Court found that the State itself conceded that the assessing authority is not bound to levy fixed penalty equal to ten times.

14. In the present case it is admitted that the penalty was leviable as the compounded amount was not deposited by 10th of the month on which the penalty was leviable equal to the amount of excise duty. The question whether there is any discretion to levy penalty was considered by this Court in Commissioner of Customs and Central Excise v. M/s Majestic Auto Ltd. (supra). After referring to Union of India v. M/s. Dharmendra Textile Processors, 2008 (231) ELT 3 (SC), which dealt with the question of levy of penalty under Section 96ZQ and Rule 96ZO and had held that various degrees of culpability cannot be placed on the same pedestal, Section 11AC cannot be construed in a manner by reading into it any discretion; that would be the proper way to give effect to the statutory intention.

15. This Court also considered the ratio of the decision in Union of India v. Rajasthan Spinning & Weaving Mills Ltd., 1998 (99) ELT 33 (SC), in which the provisions of section 11ac had come up for consideration, and the judgment of the Apex Court in Dharmendra Textile Processors. The Supreme Court held in para 18 as under:

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 wilful 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 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 Section 11AC of the Act. On behalf of the assessees it was also submitted that Sections 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.

16. On the above discussion, we are of the view that the Tribunal wrongly relied on the ratio of Beauty Dyers v. Union of India (Supra) decided by the Madras High Court. The question whether the penalty can be levied and whether there is any discretion in levy of penalty, stand covered by the judgment of this Court in Commissioner of Customs & Central Excise v. M/s Majestic Auto Ltd. (Supra). The Central Excise Appeal is allowed. The order passed by the Customs, Excise and Service Tax Appellate Tribunal, New Delhi dated 25.6.2004 and the order of the Commissioner (Appeals) are set aside. The question of law is decided in favour of the revenue and against the respondent-assessee. The central excise department will proceed accordingly.

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Commissioner, Customs & Central Excise v. M/S. Webbing & Belting Pvt. Ltd.

Structured Summary of the Opinion

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Appellant's (Commissioner of Central Excise) Arguments

Respondent's (Assessee) Arguments

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Commissioner, Customs & Central Excise v. M/S. Webbing & Belting Pvt. Ltd.

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