2017 (4) TMI 332 - HC - Central Excise

Valuation - Section 3A of CEA, 1944 - Zarda - Chewing Tobacco - The Central Government in exercise of the powers conferred under Section 3A of the Central Excise Act, 1944 published a Notification on 27th February, 2010 notifying Chewing Tobacco as notified goods. As a consequence of such Notification, the levy and collection of the excise duty was to be done in accordance with the provisions of Section 3A of the Excise Act. In terms of the Rules so notified, the levy and collection of the excise duty on the goods in question was to be done not on the basis of the actual production by the manufacturing unit, rather it was to be done on the basis of total manufacturing capacity of the unit - The grievance of the petitioner is that in terms of the earlier Notification, there was uniformity throughout the country with regard to levy of excise duty on production of the goods in question. The tax impact although was heavy but was bearable. But now, some States, including Bihar, have issued notifications whereby the Chewing Tobacco have been prohibited from being manufactured and treating them to be food products. Held that - Rule 6(5) of the Rules notified on 27th February, 2010 contemplates that the machines which the manufacturer does not intend to operate shall be uninstalled and sealed by the Superintendent of Central Excise and removed from the factory premises under his physical supervision. Rule 10 contemplates that in case a factory did not produce the notified goods during any continuous period of fifteen days or more, the duty calculated on a proportionate basis shall be abated in respect of such period provided the conditions specified in the said Rules are complied with. Rule 13 contemplates that in case a manufacturer does not intend to further operate a packing machine, he shall intimate to the authorities which shall then be uninstalled and sealed by the Superintendent of Central Excise and removed from the factory premises under his physical supervision. The primary challenge is to the amendments in the 2010 Rules is to the clause, wherein speed of manufacturing packing machines has been made the relevant consideration for determining the production capacity of a factory. We do not find that such factor is unreasonable. The different manufacturers may use packing machines having varied manufacturing speed. A manufacturer can have one packing machine with specific manufacturing speed whereas; another manufacturer can have another machine with another packing speed. The manufacturing speed is relevant for determining the production capacity of a factory. It is not unreasonable or arbitrary without any nexus of the objective to be achieved. The objective for compound levy is to avoid evasion of excise duty. A manufacturer choosing to suspend manufacturing for continuous 15 days has a liberty to seek abatement of the duty on fulfillment of the conditions. The manufacturer has the liberty to un-install any packing machine at any point of time, but subject to fulfillment of conditions. Even, liberty is given to manufacturer to suspend manufacturing for any other factor beyond the control of the manufacturer. The liberty has been given to manufacturer to seek abatement of excise duty if the unit is not producing the notified goods during any continuous period of fifteen days or when any packing machine is to be uninstalled, etc. In other words, if a packing machine is in working condition, then, its speed is a relevant consideration for imposition of excise duty. Such levy cannot be said to be arbitrary or unreasonable which may warrant intervention by this Court under power of judicial review. The levy of excise duty is on manufacturing of Chewing Tobacco or Unmanufactured Tobacco. The product is a marketable goods. Merely because that some States prohibited the manufacturing of tobacco, it will not cease to be marketable commodity if the manufacturing process in a factory is continuing. The compound levy of excise duty is on the condition of a working packing machine having a manufacturing speed to produce pouches of chewable tobacco or unmanufactured tobacco. Therefore, the capacity of a packing machine is the base of marketing chewing tobacco and unmanufactured tobacco. The legislative intent in terms of the World Health Organization is to discourage the consumption of tobacco progressively. Therefore, the levy of excise duty with the factor of manufacturing speed of packing machine cannot be said to be violative of fundamental rights enshrined under Article 19(1)(g) of the Constitution. Petition dismissed - decided against petitioner.

Summary

Issues Involved:
1. Quashing of the Chewing Tobacco and Unmanufactured Tobacco Packing Machines (Capacity Determination and Collection of Duty) Rules, 2010.
2. Amendment in the said Rules via Notification dated 1st March, 2015.
3. Violation of fundamental rights under Article 19(1)(g) of the Constitution of India.

Issue-wise Detailed Analysis:

1. Quashing of the Chewing Tobacco and Unmanufactured Tobacco Packing Machines (Capacity Determination and Collection of Duty) Rules, 2010:
The petitioner challenged the Rules notified on 27th February 2010, arguing that they were violative of its fundamental rights under Article 19(1)(g) of the Constitution of India. The Rules mandated that excise duty be levied based on the total manufacturing capacity of the unit, determined by the number of packing machines installed, rather than actual production. The petitioner contended that this method was arbitrary and unreasonable.

2. Amendment in the said Rules via Notification dated 1st March, 2015:
The Rules were amended on 1st March 2015, redefining the factors relevant to production to include not only the number of packing machines but also the maximum packing speed at which these machines could operate. The petitioner argued that this amendment created uncertainty in the trade and significantly increased the excise duty, making it unsustainable for manufacturers.

3. Violation of fundamental rights under Article 19(1)(g) of the Constitution of India:
The petitioner claimed that the increased excise duty and the method of its calculation were violative of their right to practice any profession, or to carry on any occupation, trade, or business, as guaranteed under Article 19(1)(g). They argued that the frequent changes in the parameters for levy and collection of excise duty brought uncertainty and could potentially put them out of business.

Court's Analysis and Judgment:

Regarding the Rules and their Amendment:
The court observed that Section 3A of the Central Excise Act, 1944 empowers the Central Government to charge excise duty based on the capacity of production for notified goods. The rationale for this method is to prevent evasion of duty, which is prevalent in the Pan Masala and Gutka industry. The court noted that the scheme provides safeguards, such as abatement of duty if production is suspended for more than 15 days.

On the Reasonableness and Arbitrariness of the Rules:
The court referred to the judgment in Indian Express Newspapers v. Union of India, which states that subordinate legislation can be questioned if it is manifestly arbitrary. However, the court found that the factors for determining the levy, such as the number of packing machines and their maximum speed, were not unreasonable or arbitrary. These factors were relevant for determining the production capacity and preventing duty evasion.

On the Violation of Article 19(1)(g):
The court held that the levy of excise duty based on the manufacturing capacity, including the speed of packing machines, did not violate the fundamental rights under Article 19(1)(g). The legislative intent was to discourage the consumption of tobacco due to its hazardous impact on health. The court found that the method of levy was a reasonable restriction in the interest of public health.

Conclusion:
The court dismissed the writ petition, upholding the validity of the Rules and their amendment. It found no merit in the arguments that the Rules were arbitrary or violative of the petitioner's fundamental rights.

Separate Judgment:
The judgment was concurred by another judge, who agreed with the analysis and conclusion.