2012 (5) TMI 210 - HC - Central Excise

Constitutional validity - Restriction on Cenvat / Modvat Credit on inputs when imported - petroleum products - restriction imposed retrospectively - but the same restriction was deleted prospectively - Constitutional validity of Section 87 of the Finance Act, 1997 and Section 11a of the Central Excise Act - Notification No.14/97-Central Excise (NT) - held that - It is a settled legal proposition that if initial action is not in consonance with law, subsequent proceedings would not sanctify the same. In such a fact situation, the legal maxim sublato fundamento cadit opus is applicable, meaning thereby, in case of foundation is removed, the superstructure falls. Similar principle of law, in our opinion, can be extended in the present case too. Though the restriction operated for about 16 months, the action of not allowing the Modvat credit of the actual amount paid as additional duty to the petitioner-Company is in violation of Article 14 of the Constitution of India because such a restriction was unreasonable and arbitrary even during the intervening period i.e. during the period of operation. The petition is accordingly allowed. It is hereby declared that the Notification No.14/1997 dated May 3, 1997 restricting admissibility of Modvat credit for all the petroleum products to the extent of 10% irrespective of the fact that whether the inputs were manufactured in India or the inputs were imported into India, being violative of Article 14 of the Constitution of India, is hereby quashed and set-aside.

Issues Involved:

1. Constitutional validity of Section 87 of the Finance Act, 1997.
2. Legality and validity of Notification No.14/97-CE (N.T.) dated May 3, 1997.
3. Admissibility of Modvat credit for inputs imported into India.
4. Retrospective effect of Notification No.14/97-CE (N.T.) and Section 87 of the Finance Act, 1997.
5. Classification of APM and non-APM products under the Modvat credit scheme.

Detailed Analysis:

1. Constitutional Validity of Section 87 of the Finance Act, 1997:

The petitioner initially challenged the constitutional validity of Section 87 of the Finance Act, 1997, claiming it was ultra vires Articles 14, 19(1)(g), and 265 of the Constitution of India. However, the petitioner later abandoned this challenge and focused solely on the legality and validity of Notification No.14/97-CE (N.T.) dated May 3, 1997.

2. Legality and Validity of Notification No.14/97-CE (N.T.) Dated May 3, 1997:

The petitioner contended that the impugned Notification, which restricted the admissibility of Modvat credit for inputs imported into India to 10% ad valorem, was ultra vires Articles 14, 19(1)(g), and 265 of the Constitution of India, as well as Rule 57(A) of the Central Excise Rules, 1944. The petitioner argued that the notification treated unequal manufacturers as equals, violating the equality clause of Article 14 by imposing the same restrictions on both imported and domestically produced inputs.

3. Admissibility of Modvat Credit for Inputs Imported into India:

The petitioner argued that the impugned Notification created an unjust classification by treating inputs imported into India, which had actually paid additional customs duty at 15% ad valorem, the same as domestically produced inputs, which effectively paid only 10% due to the APM regime. This classification was claimed to be arbitrary and discriminatory, violating Article 14 of the Constitution.

4. Retrospective Effect of Notification No.14/97-CE (N.T.) and Section 87 of the Finance Act, 1997:

The retrospective application of the impugned Notification from July 23, 1996, was challenged on the grounds that it was arbitrary and violated Articles 14 and 19(1)(g) of the Constitution. The petitioner argued that while the government rectified the restriction for imported inputs prospectively from November 27, 1997, it failed to do so retrospectively, thereby unjustly penalizing importers for the intervening period.

5. Classification of APM and Non-APM Products Under the Modvat Credit Scheme:

The petitioner highlighted that the APM regime applied only to domestically produced petroleum products, where the government absorbed 5% of the excise duty through the Oil Pool Account, effectively reducing the duty burden to 10%. In contrast, imported petroleum products paid the full 15% duty without any such adjustment. The impugned Notification's failure to distinguish between these two classes of products was argued to be irrational and discriminatory.

Judgment:

The court held that the impugned Notification No.14/97-CE (N.T.) dated May 3, 1997, was ultra vires Articles 14 and 19(1)(g) of the Constitution of India insofar as it applied to the petitioner in respect of import of its non-APM products. The court found that the notification treated unequally situated entities as equals, violating the principle of equality under Article 14. Consequently, the notification was quashed, and the demand raised by the respondents, along with the consequential order of penalty, was set aside.

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