1994 (1) TMI 90 - HC - Central Excise

Summary

Issues Involved:
1. Propriety of claiming Modvat Credit on inputs purchased from the open market without complying with Rule 57G of the Central Excise Rules.
2. Constitutionality of the first proviso to Rule 57G(2) of the Central Excise Rules, 1944.
3. Validity of the show cause notices and orders seeking to recover Modvat Credit.
4. Jurisdiction to issue show cause notices or pass orders for recovery of credit.
5. Applicability of the limitation period under Rule 57-I and Section 11A of the Central Excises and Salt Act.

Detailed Analysis:

1. Propriety of Claiming Modvat Credit:
The petitioners, manufacturers of patent or proprietary medicines, claimed Modvat Credit for excise duty paid on inputs. They contended that they had filed the necessary declarations and obtained acknowledgments as required under Rule 57G. However, they did not produce gate-passes or other specified documents for certain inputs purchased from the open market. The petitioners argued that small-scale manufacturers like themselves could not directly buy from manufacturers and thus could not produce gate-passes or A.R. 1 forms. They asserted that the proviso to Rule 57G should be read down to not insist on these documents in all cases.

2. Constitutionality of the First Proviso to Rule 57G(2):
The petitioners challenged the constitutionality of the first proviso to Rule 57G(2), arguing it was unreasonable and discriminatory. They claimed it was unreasonable to expect small manufacturers to prove that the inputs had suffered excise duty under cover of a Gate Pass or A.R. 1 form. The court rejected this argument, stating that the proviso was essential to prevent the cascading effect of excise duty and ensure the proper implementation of the Modvat scheme. The court held that the proviso was neither unconstitutional nor arbitrary.

3. Validity of Show Cause Notices and Orders:
The court noted that the petitioners had availed of Modvat Credit without producing the required documents and without obtaining permission under Rule 57H. The respondents issued show cause notices and orders seeking to recover the credit. The court upheld these actions, stating that the petitioners' failure to comply with the mandatory requirements justified the recovery proceedings.

4. Jurisdiction to Issue Show Cause Notices or Pass Orders:
The petitioners argued that the respondents lacked jurisdiction to issue show cause notices or pass orders for recovery of credit. This argument was based on Rule 57-I, which allows recovery of credit taken on account of an error, omission, or mis-construction within six months. The court found that the petitioners had availed of the credit without any permission, and therefore, the question of limitation did not arise. The court held that the respondents had jurisdiction to issue the notices and orders.

5. Applicability of Limitation Period:
The petitioners contended that the demand for recovery was time-barred under Rule 57-I and Section 11A of the Central Excises and Salt Act, which prescribe a six-month limitation period. The court rejected this argument, noting that the assessments were provisional pending verification of the Modvat records. The court concluded that the limitation period did not apply, as the petitioners had availed of the credit without fulfilling the mandatory requirements.

Conclusion:
The court dismissed all the writ petitions, holding that the petitioners were not entitled to any relief. The court affirmed the validity of the show cause notices and orders, upheld the constitutionality of the first proviso to Rule 57G(2), and confirmed the jurisdiction of the respondents to recover the wrongly availed Modvat Credit. The court emphasized the importance of complying with the mandatory requirements of the Central Excise Rules to prevent the cascading effect of excise duty.