J.P Devadhar, J. (Oral):— Whether Rule 12 CC of the Central Excise Rules, 2002.Rule 12 AA of Cenvat Credit Rules, 2004 and Notification No. 32 of 2006, dated 30-12-2006 issued by the Central Government are ultra vires the Central Excise Act, 1944 and whether the Member, Central Board of Customs & Excise (CBEC) in exercise of the powers vested in him in the above rules is justified in passing an order on 6-1-2009 by directing the petitioner to avail credit of duty paid on the inputs but restraining them from utilising the said credit in paying duty on final products manufactured out of the duty paid inputs during the period from 16-1-2009 to 15-7-2009, is the question raised in this petition.

2. The petitioner manufactures aluminium products falling under Chapter Heading 76 of the Central Excise Tariff Act, 1985. On 17/18th July, 2008 the factory premises of the petitioner was visited by the Officers of the Central Excise department wherein various records were withdrawn under a panchanama and statements of several employees of the petitioner were recorded.

3. On the basis of the said documents and the statements recorded, the excise officers were of the prima facie opinion that the petitioner had grossly undervalued the assessable value of the aluminium conductors manufactured and sold by them by showing lesser sale price and highly inflated freight charges. It was noticed that the declared sale price of the final product was less than the cost of production and the freight charges recovered by the petitioner was far in excess of the actual freight paid. Since the freight charges are not includible in the assessable value, the excise officers were of the prima facie opinion that the petitioner had attempted to evade duty by recovering part of the sale price as freight charges.

4. The excise officers were also of the prima facie opinion that the petitioner had wrongfully availed Cenvat credit of Rs. 1.59 crores by claiming that they had purchased duty paid inputs, namely aluminium stranding wire manufactured by JSK Industries Ltd. (sister concern of the petitioner) when in fact stranding wire was neither manufactured nor supplied by JSK Industries to the petitioner.

5. In these circumstances, the petitioner was called upon to show cause as to why the facility of paying excise duty on monthly basis should not be withdrawn and the petitioner should not be restrained from utilising the Cenvat credit for a period of 3 months in terms of Rule 12 CC of Central Excise Rules, 2002/12 AA of the Cenvat Credit Rules, 2004 (‘impugned rules’ for short). The petitioner objected to the aforesaid action proposed by the excise officers by filing a detailed reply.

6. Thereupon the Chief Commissioner forwarded his recommendation and on the basis of such recommendation, the member, CBEC passed an order on 24-11-2008 inter alia restraining the petitioner from utilising the credit of duty paid on inputs for a period of 6 months. As the said order was passed without hearing the petitioner/this Court by an order dated 18-12-2008 passed in Appellate Side Writ Petition No. 7828 of 2008 set aside the order of Member, CBEC dated 24-11-2008 and remanded the matter for de novo consideration.

7. Thereafter/the Member, CBEC in exercise of the powers vested in him under the impugned rules passed a fresh order on 6-1-2009 holding firstly, the facility granted to the petitioner to make payment of central excise duty payable for each consignment at the time of removal on monthly basis shall stand withdrawn during the period from 16-1-2009 to 15-7-2009 and secondly, during the above period the petitioner shall pay excise duty on clearances of the final products without utilising of Cenvat credit. It was further held that the petitioner is permitted to take Cenvat credit during the said period which can be utilised for payment of duty after the aforesaid period is over. Challenging the aforesaid order, the present petition is filed.

8. Mr. Shreedharan, learned counsel appearing on behalf of the petitioner has restricted his argument to challenge the validity of the impugned rules and the order dated 6-1-2009 to the extent it relates to restraining the petitioner from utilising the cenvat credit during the period from 16-1-2009 to 15-7-2009.

9. Mr. Shreedharan firstly submitted that the impugned Rules are ultra vires the Central Excise Act, 1944 because the said Rules are framed far in excess of the power conferred upon the Central Government under the Central Excise Act, 1944. He submitted that in the guise of regulating the provisions relating to the Cenvat credit, the Central Government cannot deny utilisation of the credit that too before completion of the investigation. In this connection, he relied upon the Judgment of the Apex Court in the case of Kunj Beharilal v. State of Himachal Pradesh reported in (2000) 3 SCC 40.

10. As regards the allegation of undervaluation, Mr. Shreedharan submitted that the sale price received as well as the freight charges recovered have been, properly recorded in the books of accounts maintained by the petitioner and, therefore, it cannot be inferred that the freight charges recovered by the petitioner includes sale price so as to constitute violation of the condition set out in Notification No. 32 of 2006, dated 30-12-2006. As regards the allegation of wrongfully availing the Cenvat credit, Mr. Shreedharan submitted that it is not in dispute that JSK Industries has in fact paid excise duty of Rs. 1.59 crores on aluminium stranding wires manufactured by them and sold to the petitioner. Therefore, the petitioner was justified in taking the Cenvat credit on purchasing the aluminium stranding wire from JSK Industries.

11. Mr. Shreedharan further submitted that the order passed by the Member, CBEC on 6-1-2009 is violative of the principles of natural justice, because, the said order has been passed without considering the statements of the employees which are in favour of the petitioner. Relying upon the judgment of this Court in the case of Kellogg India Pvt. Ltd. v. Union Of India reported in 2006 (193) E.L.T 385. (Bom.) : 2007 (8) S.T.R 84 (Bom.) and a decision of the Andhra Pradesh High Court in the case of Sunder Ispat Ltd. v. Commissioner of Customs reported in 2002 (141) E.L.T 24 (A.P), Mr. Shreedharan submitted that the member, CBEC could not have discarded the statements which are in favour of the petitioner as not relevant and purport to pass an order against the petitioner by relying upon the statement of the transporter which is against the petitioner.

12. Mr. Shreedharan further submitted that the impugned order dated 6-1-2009 is also bad in law because, no reasons are given as to why the petitioner is restrained from utilising the Cenvat credit for 6 months when the Chief Commissioner had recommended the restriction on utilisation of the Cenvat credit only for a period of 3 months. Mr. Shreedharan submitted that the impugned order is extremely harsh and if the petitioner is required to pay excise duty on aluminium conductors without utilising the Cenvat credit for 6 months, serious prejudice will be caused to the petitioner because it will be impossible for the petitioner to clear the goods on full payment of duty on inputs as well as the final products and on succeeding in the matter the petitioner will not be able to utilise the credit accumulated in 6 months even in a decade. On the other hand, if the petition fails, then the restriction regarding utilisation of Cenvat credit for 6 months can be enforced from the date of Judgment and in that case no prejudice would be caused to the respondents. Accordingly, Mr. Shreedharan submitted that it is a fit case for admission and grant of interim relief.

13. Mr. M.I Sethna, learned senior Advocate appearing on behalf of the respondents, on the other hand vehemently argued that the Writ Petition filed by the petitioner even before completion of investigation and the issuance of the show cause notice is totally premature and ought not to be entertained. He submitted that there is enough evidence on record to form a prima facie opinion that the petitioner had attempted to evade duty to the tune of Rs. 2 crores and had wrongfully availed Cenvat credit of Rs. 1.59 crores on inputs without actually receiving the inputs. In these circumstances pending investigation the member, CBEC is justified in passing the impugned order in exercise of the powers conferred under the impugned rules. After six months period is over the petitioner is entitled to utilise the accumulated credit and, therefore, no fault can be found with the impugned order.

14. Mr. Sethna submitted that the validity of the impugned Rules have already been upheld by the Gujarat High Court in its Judgment delivered on 11-7-2008 in the case of Dhariyal Chemicals v. Union of India in Spl. C.A No. 5769 of 2008 (unreported) [Since reported in 2009 (234) E.L.T 208 (Guj.)]. Hence there is no merit in the challenge to the validity of the impugned Rules.

15. Mr. Sethna submitted that the petitioner had attempted to evade duty is evidenced from the fact that the assessable value of aluminium conductors declared is less than the cost price and the freight charges recovered by the petitioner which is excessively high clearly shows that the petitioner had recovered the partial sale price as freight charges which are not includible in the assessable value and thereby evade payment of excise duty.

16. Similarly, the petitioner claims to have purchased aluminium stranding wires manufactured by JSK Industries during March-April, 2008 on which excise duty of Rs. 1.59 crores is paid by JSK Industries Ltd., the credit of which is taken by the petitioner. The evidence gathered during the course of investigation reveal that till July, 2008 there was no electric connection given to JSK Industries and, therefore, during March-April, 2008 no manufacturing activity could be carried out by JSK Industries during that period. Moreover, the claim of the petitioner that the inputs were transferred from JSK Industries to the petitioner by engaging a transporter is falsified by the statement of the transporter wherein he has categorically denied to have transferred the inputs from JSK Industries to the petitioner. In these circumstances, Mr. Sethna submitted that in view of the prima facie case made out no interference is called for in exercise of writ jurisdiction.

17. Having heard the counsel on both sides, we are prima facie of the opinion that the contention of the petitioner that the impugned rules framed by the Central Government are in excess of the powers conferred under the Central Excise Act, 1944 deserves consideration. Although the Gujarat High Court in the case of Dhariyal Chemicals (supra) has upheld the validity of the impugned rules, in our opinion, there are several issues to be considered which have not been considered by the Gujarat High Court.

18. Under the excise law a manufacturer of the final product is entitled to utilise the credit of duty paid on inputs while paying the excise duty on the final products. Section 37 of the Central Excise Act empowers the Central Government to frame rules to implement the provisions of the Act. The question therefore to be considered is, whether the rule framed by the Central Government to restrain a manufacturer from utilising the Cenvat credit on a prima facie opinion formed by the Member, CBEC regarding evasion of duty or wrongful availment of the Cenvat credit, even before completion of investigation and even before issuance of a show cause notice can be said to be a rule framed for implementing the provisions of the Central Excise Act? Whether denying the right of a manufacturer to utilise the credit of duty paid on inputs under the impugned rules amounts to imposing penalty even before adjudication? Can penalty be imposed on a manufacturer even before he is found to be guilty in the adjudication proceedings? Can it be said that the manufacturers who are prima facie found to have attempted to evade duty form a separate class so that they can be penalised even before adjudication?

19. Restraining a manufacturer from utilising the Cenvat credit has serious civil consequences, because where a manufacturer purchases duty paid inputs and utilises the same in the manufacture of final product, then the said manufacturer under the Central Excise law is entitled to take credit of duty paid on the inputs and utilise the same in payment of excise duty payable on the final product. To illustrate, if Rs. 100/- is the duty paid on the inputs, then the manufacturer of the final, product, who purchases such duty paid inputs is entitled to take credit of Rs. 100/-. If the excise duty payable on the final product is Rs. 120/-, then the manufacturer is entitled to clear the said final product by paying cash amount of Rs. 20/- as excise duty and pay the balance amount by Rs. 100/- by debiting the Cenvat credit account. If the manufacturer is restrained from utilising the credit for a period of six months, then during the said period the manufacturer would be required to pay Rs. 100/- on purchase of inputs and further pay Rs. 120/- at the time of clearance of the final product which may virtually make the manufacturer impossible to bear. In such a case the question to be considered is whether the punishment sought to be imposed even before completion of investigation is excessively harsh and whether such punishment can be said to have been imposed with a view to prevent any attempt to evade duty? All these questions have not been considered by the Gujarat High Court. Hence the petition deserves admission.

20. As regards the interim relief is concerned, in the present case according to the revenue, the petitioner has undervalued the final products with a view to evade duty to the extent of Rs. 2 crores. Admittedly, the petitioner has paid a sum of Rs. 1.35 crores during the pendency of the petition and learned counsel for the petitioner after taking instructions, has offered to pay to the respondents a further sum of Rs. 65 lakhs under protest within a week from today.

21. The question then to be considered is, whether the petitioner has availed Cenvat credit of Rs. 1.59 crores without actually receiving the inputs from JSK Industries Limited? In the present case, it is not in dispute that the basic raw material required is aluminium ingots. Admittedly, duty has been paid on the aluminium ingots purchased from National Aluminium Co. to the rune of Rs. 1.40 crores. Although there is serious dispute regarding the movement of the said aluminium ingots from the petitioner to JSK Industries Ltd. and back, the undisputed fact is that the final product namely, aluminium conductors manufactured by the petitioner has been cleared on payment of excise duty. Thus, prima facie, it appears that in the present case, the duty has been paid on the inputs as well as the final product. According to the revenue JSK Industries could not manufacture aluminium stranding wires during March-April, 2008 because there was no electric connection. According to the petitioner, the manufacture was carried out with the help of D.G sets. Assuming that the JSK Industries could not have manufactured the intermediate product during the period from March April, 2008, it may still be a case of the revenue neutral because admittedly JSK Industries has paid duty of Rs. 1.59 crores on the inputs allegedly sold by them to the petitioner. As noted earlier, it is not in dispute that duty paid aluminium ingots were purchased by the petitioner/JSK Industries. Thus, excise duty actually paid on aluminium ingots is Rs. 1.40 crores. Excise duty actually paid on aluminium stranding wires is Rs. 1.59 crores and admittedly aluminium conductors manufactured by the petitioner has been cleared on payment of excise duty. In these circumstances, it would not be proper to infer that the aluminium conductors have been manufactured by the petitioner by utilising inputs on which no duty has been paid. Apart from the above, the member, CBEC has not given any reason as to why the petitioner is restrained from utilising the Cenvat credit for a period of six months when the Chief Commissioner of Central Excise has recommended that the petitioner should be restrained from utilising the Cenvat credit for a period of three months. The impugned decision prima facie suffers from arbitrariness.

22. For all the aforesaid reasons, the petition is admitted and interim relief is granted in the following terms:—

(a) Pending the hearing and final disposal of the Writ Petition, the impugned order dated 6-1-2009 passed by the Member, CBEC shall remain stayed in so far as it relates to restraining the petitioner from utilising the Cenvat credit during the period from 16-1-2009 to 15-7-2009, subject to the condition that the petitioner shall deposit under protest a sum of Rs. 65 lakhs with the respondents within a period of one week from today and shall maintain minimum credit balance of Rs. 2 crores in the Cenvat credit account till the disposal of the petition.

(b) If the petitioner fails to deposit the amount of Rs. 65 lakhs within the time stipulated hereinabove, the petition shall stand dismissed.

(c) The petitioner shall cooperate with the Respondents in completing the investigation expeditiously.

23. Respondents waive service.

24. Hearing of the petition is expedited.