2009 (1) TMI 51 - HC - Central Excise

Evasion - Cenvat credit restriction even before issue of SCN - Whether Rule 12 CC of the Central Excise Rules 2002/Rule 12AA of CCR 2004 are valid - whether the Member CBEC is justified in passing an order 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 16-1-2009 to 15-7-2009 petition is admitted by this HC

Summary

Issues Involved:
1. Validity of Rule 12CC of the Central Excise Rules, 2002/Rule 12AA of Cenvat Credit Rules, 2004 and Notification No.32 of 2006.
2. Justification of the order dated 6-1-2009 passed by the Member, CBEC.
3. Allegation of undervaluation of assessable value and inflated freight charges.
4. Allegation of wrongful availment of Cenvat credit.
5. Compliance with principles of natural justice in the order dated 6-1-2009.
6. Harshness and arbitrariness of the impugned order.

Detailed Analysis:

1. Validity of Rule 12CC and Rule 12AA:
The petitioner challenged the validity of Rule 12CC of the Central Excise Rules, 2002, and Rule 12AA of the Cenvat Credit Rules, 2004, arguing that these rules are ultra vires the Central Excise Act, 1944. The petitioner contended that these rules exceed the powers conferred upon the Central Government under the Act and cannot deny the utilization of Cenvat credit before the completion of the investigation. The court found this contention worthy of consideration, noting that the Gujarat High Court had upheld the validity of these rules but several issues remained unaddressed.

2. Justification of the Order Dated 6-1-2009:
The petitioner argued that the order dated 6-1-2009, which restrained them from utilizing Cenvat credit from 16-1-2009 to 15-7-2009, was unjustified. The court observed that the order had serious civil consequences and questioned whether such a restriction could be imposed before the completion of the investigation and issuance of a show cause notice. The court noted that the petitioner had paid excise duty on inputs and final products, making the restriction excessively harsh.

3. Allegation of Undervaluation:
The excise officers alleged that the petitioner had undervalued the assessable value of aluminium conductors by showing lesser sale prices and highly inflated freight charges. The petitioner countered that the sale price and freight charges were properly recorded in their books of accounts. The court found that the evidence presented by the revenue indicated a prima facie case of undervaluation.

4. Allegation of Wrongful Availment of Cenvat Credit:
The excise officers also alleged that the petitioner wrongfully availed Cenvat credit of Rs.1.59 crores by claiming purchases of aluminium stranding wire from JSK Industries, which had not actually manufactured or supplied the inputs. The petitioner argued that JSK Industries had paid excise duty on the inputs, justifying their Cenvat credit claim. The court noted that the evidence gathered during the investigation suggested that JSK Industries could not have manufactured the inputs due to a lack of electric connection during the relevant period.

5. Compliance with Principles of Natural Justice:
The petitioner argued that the order dated 6-1-2009 violated the principles of natural justice as it did not consider statements from employees favorable to the petitioner. The court observed that the member, CBEC, had not provided reasons for disregarding these statements and had relied on the statement of the transporter, which was against the petitioner.

6. Harshness and Arbitrariness of the Impugned Order:
The petitioner contended that the impugned order was excessively harsh and arbitrary, as it restrained them from utilizing Cenvat credit for six months without adequate justification. The court noted that the Chief Commissioner had recommended a restriction for only three months, and the member, CBEC, had not provided reasons for extending it to six months. The court found the decision prima facie arbitrary and deserving of interim relief.

Conclusion:
The court admitted the petition and granted interim relief, staying the impugned order dated 6-1-2009 in so far as it restrained the petitioner from utilizing Cenvat credit during the specified period. The petitioner was required to deposit Rs.65 lakhs under protest and maintain a minimum credit balance of Rs.2 crores in the Cenvat credit account until the disposal of the petition. The court expedited the hearing of the petition and directed the petitioner to cooperate with the investigation.