NO PENALTY IN CASE OF CONTENTIOUS ISSUES.

[C.A. DEV KUMAR KOTHARI]

Complexity in legal provisions and tax laws:

Unfortunately laws are generally complex and require lot of studies to understand them .Even after proper understanding there can be mistake in understanding.  Legal provisions are manmade and are dependent on who made them, who read them and who is ultimately interpreting them. Legal provisions are not  like mathematics or natural science in which one can get a perfect answer. Understanding of law can be influenced even according to the person for whom a law is being read. For example, a petitioner will try to interpret law in his favor and the respondent in the same case will try to read it in his favor. We find difference of opinion between two judges so the matter is referred to larger bench. We find difference of opinion amongst Tribunal and Courts and due to such differences matter s are dragged in litigation. Even at the level of the Supreme Court we find many times different opinions amongst judges. In such cases majority prevails.

In case of tax Laws we find that they are much more complex than general laws. This is for the following reasons:

There are many amendments in tax laws. As a routine we find one occasion of  amendment through the Annual Finance Act and then there are many other amendments through other amending enactments. Then we find changes in legal provisions due to changes in Rules, clarifications and decisions of authorities and Courts.

 Even after judgment of the Supreme Court, many times doubts are expressed about correctness of judgment  by other benches, and it may be reviewed by a larger bench of the Supreme Court. Amendment of law after pronouncement of judgment by the Supreme Court or High Courts to nullify the judgments is also a regular feature and unfortunately Courts are also allowing such amendments even with retrospective effect. Therefore, it can be said that the laws are not only complex but are also uncertain. This is very unfortunate aspect of our legislation system.

Recent case in relation to Central Excise Duty:

In the case of Uniflex Cables Ltd. vs. C.C.E.  matter came before the Supreme Court about penalty on a demand which arose on a contentious issue. The Supreme court held that undoubtadely the issue is contentious or  of interpretational nature. In such case penalty cannot be levied. The supreme Court found that in this  case  the Commissioner  himself has found and recorded in  his order-inoriginal that the issue involved in the case is of interpretational nature. Keeping in mind the same  the Commissioner thought it fit not to impose harsh penalty and a penalty of an amount of Rs. 5 lakhs was imposed on the appellant while confirming the demand of the duty.

An appeal under Section 35-L (b) of the Central Excise Act, 1944 (the Act’), was preferred  against the Judgment and Order no A/1326/WZB/2005/C-iii dated 7.7.05 in Appeal No. E/1893/01, passed by the Customs, Excise and Service Tax Appellate Tribunal, West Zonal Branch, Mumbai.

Analysis of facts:

1. The appellant is engaged in the manufacture of insulated wires and cables falling under Central Excise Tariff Sub‑Heading No.8544.00.
2. The appellant had received orders from various wind mill manufacturers for specially designed electrical cables, which were to be used in the manufacture of wind mills.
3. Notification no. 205/88 – C.E. dated 25.05.88 as amended by Notification no. 57/95  grants exemption from payment of central excise duty in respect of manufacture of wind mills, parts of wind mills and any specially designed devices which run on wind mills.
4. The appellant claimed benefit under said  Notification and claimed  exemption from payment of central excise duty in respect of specially designed cables  manufactured and supplied to  wind mills manufacturers by considering the cable as , parts of wind mills
5. The appellant filed a declaration under Rule 173-B of the Central Excise Rules, 1944  claiming nil rate of duty so as to avail benefit under the aforestated notification for the insulated cables manufactured by it and supplied to the manufacturers of wind mills for using the same as part of wind mills for the period commencing from May, 1995 to February, 2006.
6. The appellant also reversed the modvat credit taken on inputs for Rs. 16,14,088.32 for availing the exemption benefit under notification no. 205/88. The appellant did not pay excise duty in accordance with the declaration filed by it.
7.   For nonpayment of duty as stated above, three show cause notices had been issued to the appellant by the Revenue -Authorities for recovery of total excise duty amounting to Rs.66,92,604/-. The revenue took view that the electric cables were neither parts nor specially designed devices, which were necessary for manufacturing or running wind mills. Therefore,  according to the authorities, benefit under the said notification could not have been availed by the appellant.
8. Ultimately, the Commissioner, Central Excise, Surat – II by an order dated 20.2.1998, confirmed the demand of excise duty amounting to Rs. 66,92,604 and imposed penalty under Rule 173Q(1) of the Rules. The said order was challenged before the Tribunal and the Tribunal allowed the appeal by remanding the matter to the Commissioner. After hearing the appellant, the Commissioner again took the same view by his order dated 22.3.2001.
9.  Again the appellant preferred an appeal before the Tribunal which was dismissed. The Tribunal relied on its earlier order passed in NICCO CORPORATION LIMITED v. COMMISSIONER OF CENTRAL EXCISE, CALCUTTA, whereby an analogous issue was adjudicated and decided against the concerned assessee. Aggrieved by the said order dated 7.7.2005, the appellant has preferred the appeal before the Supreme  Court.
10.   In case of  NICCO CORPORATION LIMITED  (supra) ultimately the  Supreme Court has  vide its order dated 22.3.06 dismissed the appeal and held that insulated electrical cables designed for use in wind mills would not be eligible for exemption under notification no 205/8 8 as amended vide  Nicco Corporation Ltd. v. Commissioner of  Central Excise, Calcutta 2006 -TMI - 722 – (SUPREME COURT OF INDIA)
11.  During the pendency of the proceedings, the Authorities had issued a notice of demand directing the appellant to pay central excise duty and penalty amounting to Rs 1, 33, 85,208.
12. The amount of penalty was not  paid as stay has been granted against the said demand.
13. The Supreme Court heard the learned counsel appearing for the concerned parties. It was  mainly submitted on behalf of the appellant that the electrical cables supplied to the manufacturers of wind mills were specifically designed for use in wind mills. They were special type of cables, without which the wind mills could not have been operated and, therefore, the revenue authorities ought to have granted exemption as stated in the notification referred to hereinabove. The learned counsel appearing for the appellant gave details as to how the electric cables were specially used for running the wind mills. He further stated that without use of the electric cables supplied by the appellant, functioning of the wind mills  would not have been possible. He, therefore, submitted that the appellant ought to have been given the benefit of the notification referred to hereinabove.
14.   Shri H.P. Raval, learned Additional Solicitor General appearing for the respondent-authorities relied upon the judgment delivered in Nicco Corporation Ltd. v. Commissioner of Central Excise,  Calcutta  (supra) and submitted that the electric cables manufactured and supplied by the appellant were not so indispensable that without which the wind mills could not have been operated. He further submitted that for the reasons recorded in the order passed by the Tribunal, the appellant is not entitled to exemption. He further submitted that the order imposing penalty is also just and proper as the appellant deliberately did not pay excise duty payable by it. Thus, he submitted that the impugned order is just and proper and, therefore, the appeal deserves to be dismissed.

Issues considered by the Supreme Court:

Suprem Court considered that two issues arise for adjudication:

1. Whether the insulated electrical cables manufactured by the appellant would be eligible for exemption under the above mentioned exemption notification.

2. Whether imposition of penalty is justified in view of the facts and circumstances of the case.

The  first issue  is no more res integra in view of the judgment delivered by this Court in the case of Nicco Corporation Ltd. v. Commissioner of Central Excise, Calcutta  (supra). The facts in the said case as well as in the present case are similar and, therefore, we need not consider the said issue again. In the circumstances, the first issue is decided in favour of the Revenue.

 As regards the imposition of penalty, The supreme Court opined that the said order cannot be justified in the facts of the case because  the Commissioner, himself in his order-in­original has stated that the issue involved in the case is of interpretational nature. Keeping in mind the said factor, the Commissioner thought it fit not to impose harsh penalty and a penalty of an amount of Rs. 5 lakhs was imposed on the appellant while confirming the demand of the duty.

About facts it is also evident from the said order that the Commissioner also found that except for the statement of the Excise Executive Director and Excise Clerk of the assessee company there was no other evidence pointing out any accusing finger at them in dealing with offending goods knowingly.

A clear finding has been recorded by the Commissioner that it was difficult to hold that the appellant knowingly dealt with excisable goods which were cleared without payment of duty. Nor the department itself took it as a formal case of offence.

On consideration of the aforesaid facts and also the fact that the Commissioner himself found that it is only a case of interpretational nature, The Supreme Court held that

1. “in our considered opinion, no penalty could be and is liable to be imposed on the appellant herein”.  
2. “therefore, in the facts and circumstances of the present case we are of the view that penalty should not have been imposed upon the appellant”.
3.  Consequently, we quash the order of the Commissioner imposing penalty as also the order of the Tribunal so far as it confirms imposition of penalty upon the appellant.

Learning from the judgment:

Author will try to write another article on the issue of specially designed cables. Prima facie it appears that the case of specially designed cable was not properly prepared. This is because cables as such , even if specially designed or prepared cannot be considered as a component or part of component of any machine. However, a set of cables and fittings to serve circuiting and controlled electrical movement can definitely be considered as components or accessories of   any machine. Therefore, apparently the case was considered by manufacturers of cable in a very simple manner to treat cables as component of wind mills.

Whenever, there is a contentious issue, it is always desirable that the basis of treatment given should be disclosed, and for the adopted basis, there should be technical reports about facts and circumstances , technical and legal opinion should also be obtained from experts, if any order passed in any case, even by lower ranking authorities  is available, that can also be relied on. These will make that one has taken proper care and found his basis of claim on certain contentions which are possible contentions. This situation will definitely help in waiver of penalty.