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TMI Blog2012 (5) TMI 210X X X X Extracts X X X X X X X X Extracts X X X X ..... to issue an appropriate writ, direction or order under Article 226 of the Constitution of India declaring that the Notification No.14/97 is ultra vires and unconstitutional in so far as it is sought to be applied to the 1st petitioner in respect of import of its non-APM products; (B) That Your Lordships may be pleased to issue a Writ of Mandamus or a Writ in the nature of Mandamus or any other appropriate Writ, direction or order holding and declaring that the case of the petitioners is covered under Rule 57b of Central Excise Rules, 1944 and consequently, the provisions of Notification No.14/97-Central Excise (NT) dated 03.05.97 and Section 87 of the Finance Act, 1997 are not applicable in the petitioners case; (C) That Your Lordships may be pleased to issue a writ of mandamus or a writ in the nature of mandamus or any other appropriate writ, direction or order setting aside the demand raised by the respondents, their servants and agents on the ground that the petitioners were entitled to take credit of duty paid on Paraffin wax only to the extent of 10% ad valorem from 23.07.96 (Annexure- F"); (D) That Your Lordships may be pleased to issue a Writ of Mandamus or a Writ of p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , is unconstitutional and ultra vires. 3.2 Record reveals that the Central Government in exercise of powers conferred by Rule 57(A) of the Rules issued Notification dated March 1, 1994 bearing No.5/94-CE (N.T.) specifying various inputs and final products and thereby allowing the Modvat credit to the extent of payment of specified duty. The specified inputs and final products are described in the table attached to the notification, which includes paraffin wax covered under heading 27.12 of the Customs Tariff. 3.3 The then Finance Minister delivered a speech on July 22, 1996 proposing reduction in the customs duty of crude oil from 35% to 25% and hike in excise duty from 10% to 15% on oil petroleum products, except LPG and kerosene. Thus, in the budget for the year 1996-1997, 15% duty came to be imposed on the petroleum products. 3.4 On July 27, 1996, the Government of India issued instructions to the Public Sector Refineries that the said refineries shall pay 15% excise duty on petroleum products and they should recover only 10% from their customers. It was clarified that shortfall of 5% of duty borne by the refineries will be reimbursed from the Oil Pool Account of the refineri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent within a period of 90 days, failing which the interest shall be payable at the rate of 18% per annum. Thus, by virtue of giving retrospective effect to the impugned Notification from July 23, 1996 with the aid of Section 87 of the Finance Act, 1997, the credit taken in excess of 10% ad valorem was required to be paid by the manufacturer within 90 days from the date of enactment of Finance Bill i.e. from May 14, 1997. 3.8 Record reveals that the Central Government after some point of time realised that restriction of 10% Modvat for imported inputs was not in accordance with Rule 57(A) of the Rules contained in the Modvat scheme and was also not in accordance with the fact that full duty at rate of 15% was paid on such imported inputs. Therefore, further amendment was effected in the Modvat scheme by Notification No.60/97 dated November 27, 1997 and thereby restriction of 10% Modvat credit was deleted for inputs imported directly by the manufacturer for his own use. However, this amendment was made effective only from November 27, 1997. When the Central Government realised in May, 1997 that the manufacturers producing inputs from public sector refineries were actually paying dut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al petitioners approached the Commissioner (Appeals), Central Excise, Ahmedabad. The Appellate Commissioner vide Order-in-Appeal No.27/2004(27-A-III)Ce/Commnr(A) dated December 24, 2004, upheld the the demand of duty of Rs.5,12,693/- along with interest determined by the adjudicating authority in the Order-in-Original and partly allowed the appeal by setting aside the order of the adjudicating authority imposing penalty of Rs.5 lac in view of the explanation of sub-clause (2) of Section 87 of the Finance Act, 1997. It appears that the petitioners did not challenge the Order-in-Appeal before the Appellate Tribunal (CESTAT). II. CONTENTIONS OF THE PETITIONER: 4. The learned counsel Mr.P.M.Dave appearing for the petitioners vehemently submitted that the impugned Notification insofar as it restricts admissibility of Modvat credit for the goods imported into India is concerned, deserves to be struck down as ultra vires Articles 14, 19(1)(g) and 265 of the Constitution of India and also ultra vires Rule 57(A) of the Rules itself under which the impugned Notification is issued. 4.1 Mr.Dave submitted that by the impugned Notification (i.e. Clause (ii) of the Notification), the Governmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... import duties from the Oil Pool Account. Therefore, such persons who imported petroleum products directly on payment of actual duty of 15% ad valorem and used such inputs for manufacture of other goods constitute another class of buyers. This class would comprise of importers/ manufacturers who imported such inputs on their own on payment of full duty of 15% ad valorem . 4.4 Mr.Dave relying on the decision of the Supreme Court in the case of Kunnathat Thathunni Moopil Nair etc. v. State of Kerala and others, reported in AIR 1961 SC 552(1), contended that any taxing statute is not wholly immune from attack on the ground of violation of Article 14 of the Constitution of India and a power to tax does not mean that every person should be taxed equally. 4.5 Mr.Dave has also relied on the decision of the Supreme Court in the case of The Twyford Tea Co. Ltd. and another v. The State of Kerala and another, reported in AIR 1970 SC 1133 and submitted that to be able to succeed in the charge of discrimination, a person must establish conclusively that persons equally circumstanced have been treated unequally and vice versa . 4.6 Mr.Dave further submitted that unequals are treated equally ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at admittedly, non-APM products i.e. petroleum products imported by manufacturers directly for their own use had, therefore, suffered incidence duty at full rate of 15% and the importers had paid duty of 15% from their own pockets. Thus, according to Mr.Dave, the APM products and non-APM products constitute two separate classes of inputs and, therefore, they could not have been clubbed together by virtue of clauses (i) and (ii) of the impugned Notification for prescribing restriction of admissibility of Modvat credit of 10% for both these classes of products. 4.8 Mr.Dave further submitted that when the Government realised by November, 1997, that cases of direct imports of inputs in the nature of petroleum products were erroneously and unnecessarily covered under the impugned Notification because duty at the full rate of 15% was paid on such imported inputs by the concerned importers, the Government rectified this error only prospectively i.e. from November 27, 1997. The fact that the Modvat credit of full 15% is allowed for inputs imported directly by manufacturer for his own use from November 27, 1997 by making appropriate amendment under the main Notification No.5/94 issued unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and vide order dated February 24, 2004 passed by the Commissioner (Appeals). She submitted that the retrospective amendment made by the Parliament is not ultra vires or unconstitutional as the same is in the interest of the Revenue. 6.1 Ms.Mandavia contended that paraffin wax is covered under Notification No.5/94 falling under Chapter heading No.27.12 of the Central Excise Tariff Act, 1985 and paraffin wax manufactured by the petitioner's company is covered as finished products in the said Notification. She submitted that there is no merit in the contention of the petitioners that their input paraffin wax is not an 'Administered Price Mechanism' (APM) Product. She also submitted that the reference to decrease in Customs duty and in respect of petroleum products has no relevance to the issue on hand. 6.2 Relying on the decisions of the Supreme Court in the case of V.K. Industries v. Union of India, reported in 1993 (65) ELT 465 (SC), she submitted that the then Finance Minister's speech is of no consequence as it is not the law. According to her, exemption cannot be claimed merely on the strength of a speech delivered by a Finance Minister at the time of laying of a budget. She s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fit to lift the restrictions made applicable to non-APM products on which duty at the full rate of 15% was actually paid upon realising the Modvat credit at the rate of 15% ad valorem for importing a non-APM product made by various persons directly, then in that case, whether imposing restriction on allowing Modvat credit for the intervening period can be said to be violative of Article 14 of the Constitution of India. v. When the Central Government thought fit to make the restrictions applicable about the quantum of Modvat credit for non-APM products retrospectively, then whether lifting the restriction upon realising the error of restricting Modvat credit for non-APM products only prospectively can be said to be unreasonable, arbitrary and in violation of Article 14 of the Constitution of India. IV. ANALYSIS: 9. It appears that the petitioner-Company imported a consignment of paraffin wax on payment of customs duty including additional customs duty (also known as "Counter Vailing Duty" or "CVD"), and such inputs were used in relation to manufacture of the final finished products namely Paraffin Wax. There is no dispute to the fact that CVD was actually paid by the petitioner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnment under Administrative/Administered Price Regime because petroleum products produced by local refineries were APM products whose price in the domestic market was controlled and regulated by the Union Government through Oil Pool Account. On petroleum products paraffin wax produced by local refineries, excise duty at the rate of 15% ad valorem was leviable; but duty burden of 15% on locally produced petroleum products was considered to be very high. As a result of which the Union Government devised a scheme under APM Regime thereby directing the local refineries to charge excise duty at the rate of 10% only from the consumers whereas the remaining 5% duty was paid to such local refineries Oil Pool Account, thereby absorbing incidence of excise duty to the extent of 5% in the Oil Pool Account through the APM Regime Mechanism. As a result of this, though the local refineries used to show in its Gate Pass/Invoice the payment of excise duty on petroleum products at the rate of 15% ad valorem , the amount recovered from the consumer was 10% whereas the balance 5% was being adjusted under APM through Oil Pool Account. Consequently, any person purchasing inputs in the nature of petrole ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... actual payment of excise duty by them at the rate of 10% continued taking Modvat credit at the rate of 15% on the ground of "duty paid on inputs" was 15% though they had paid only 10% whereas the balance 5% was being paid from the Oil Pool Account. This situation was not applicable in the cases like that of the petitioners where the petroleum products were imported by them directly and the imports not being controlled by APM, such importers paid additional customs duty at full rate of 15% ad valorem without taking any benefit from the Oil Pool Account. 15. The combined effect of the impugned Notification and Section 87 of the Finance Act, 1997, is that all the users of petroleum products as inputs could take Modvat credit of such petroleum products only to the extent of 10% ad valorem as such petroleum products were produced by them from local refineries, in which case the excise duty paid by them actually was only at 10% ad valorem and also in respect of imported petroleum products in which case additional customs duty was actually paid at the rate of 15% ad valorem by them. It appears that when APM and non-APM petroleum products i.e. cases of petroleum products purchased from lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... valorem . 17. We find considerable force in the submissions of the learned advocate for the petitioner that a manufacturer purchasing petroleum products as inputs from the local refineries i.e. the inputs of the nature produced in India and the persons/manufacturers purchasing inputs from the local refineries, therefore, constitute a separate class as such a class of manufacturers are those who produced petroleum products from local refineries on payment of excise duty of 10% because the balance 5% was not paid or borne by such class of buyers. We find substance in the contention of the learned advocate for the petitioner that by the impugned Notification No.14/97, the Government has treated unequal manufacturers as equal for restricting the credit to the extent of 10% for both these classes of manufacturers, which can be termed as violative of Article 14 of the Constitution of India inasmuch as unequals have been treated equally by virtue of the equality clause of Article 14 of the Constitution of India. 18. We shall now look into the decisions which have been relied upon by the learned advocate appearing for the petitioner. 19. In Kunnathat Thathunni Moopil Nair (supra), the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and authorising the collection thereof and, secondly, the tax must be subject to the conditions laid down in Art. 13 of the Constitution. One of such conditions envisaged by Art. 13(2) is that the Legislature shall not make any law which takes away or abridges the equality clause in Art. 14, which enjoins the State not to deny to any person equality before the law or the equal protection of the laws of the country. It cannot be disputed that if the Act infringes the provisions of Art. 14 of the Constitution, it must be struck down as unconstitutional. For the purpose of these cases, we shall assume that the State Legislature had the necessary competence to enact the law, though the petitioners have seriously challenged such a competence. The guarantee of equal protection of the laws must extend even to taxing statutes. It has not been contended otherwise. It does not mean that every person should be taxed equally. But it does mean that if property of the same character has to be taxed, the taxation must be by the same standard, so that the burden of taxation may fall equally on all persons holding that kind and extent of property. If the taxation, generally speaking, imposes a simi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e were subjected to sales tax in respect of sales of waists and underwears of knitted fabric for the assessment period April 01, 1961 to October 31, 1965. The appellants challenged the validity of the notification by way of writ petitions in the High Court under Article 226 of the Constitution of India. The High Court dismissed the petitions. On appeal, the Supreme Court observed in paragraph 3 as under : "3. The principal attack on the impugned notification was based on Article 14 of the Constitution. It was urged before the High Court as it has been contended before us that there was no rational basis for classification between garments as such and knitted garments like Baniyans and Chaddies. In the affidavit which was filed by the State no reason was given why particular kind of garments were exempted whereas others of the same value were not given the benefit of exemption. It is well settled that although a taxing statute can be challenged on the ground to infringement of Art. 14 but in deciding whether the law challenged is discriminatory it has to be borne in mind that in matters of taxation the legislature possesses the large freedom in the matter of classification. Thus wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts in brief were that the respondents before the Supreme Court were working as Lower Division Clerks (LDC) in the Registration Department of the State Government. For promotion to Upper Division Clerk (UDC) in that department on the basis of seniority, the Lower Division Clerks had to pass (1) Account Test (Lower), (2) Kerala Registration Test and (3) Test in the manual of office procedure. The respondent's grievance was that in view of certain concessions given to members of Scheduled Castes and Scheduled Tribes, they were able to obtain promotions earlier than the respondent, though the members of the Scheduled Castes and Scheduled Tribes who were promoted had not passed the tests. In this context, the Supreme Court by a majority view made some important observations with regard to discrimination and Article 14 of the Constitution of India in paragraphs 24 and 31, which are quoted as under : "24. Discrimination is the essence of classification. Equality is violated if it rests on unreasonable basis. The concept of equality has an inherent limitation arising from the very nature of the constitutional guarantee. Those who are similarly circumstanced are entitled to an equal tre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heir yield is arbitrary. According to the petitioners of that case, some of the plantations may not make enough profit to be able to pay tax and in their case the tax became confiscatory. They also complained of discrimination and questioned the legislative competency of the Kerala Legislature to impose tax. Upholding the contentions of the petitioners as regards treating the persons equally circumstanced unequally, the Supreme Court held in paragraph 18 as under : "18. What is meant by the power to classify without unreasonably discriminating between persons similarly situated, has been stated in several other cases of this Court. The same applies when the legislature reasonably applies a uniform rate after equalising matters between diversely situated persons. Simply stated the law is this: Differences in treatment must be capable of being reasonably explained in the light of the object for which the particular legislation is undertaken. This must be based on some reasonable distinction between the cases differentially treated. When differential treatment is not reasonably explained and justified the treatment is discriminatory. If different subjects are equally treated there mu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Supreme Court on behalf of the petitioners was that the Budget Speech of the Finance Minister delivered on the floor of the Lok Sabha constitutes an enforceable and effective decision upon which the petitioners were entitled to act. It is also submitted that the said decision was exemplified and implemented by way of a communication from the Directorate of Vanaspati, Vegetable Oils and Fats referred to above. In view of such communication, the petitioners of that case did not pass on the burden of the said cess to their purchasers on and from March 1, 1986. It was contended before the Supreme Court that it was not open to the Government to go back upon the said decision and demand cess for the period subsequent to March 1, 1986. The Supreme Court while dismissing the writ petitions took the view that the Finance Minister's Speech is not the law and that the Parliament may or may not accept his proposal. The Supreme Court in paragraph 9 held as under : "9. We find it difficult to agree. It is not brought to our notice that the budget proposals contained in the Finance Minister's speech were accepted by the Parliament. The cess having been imposed by a Parliamentary enactment c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re the High Court as it has been contended before us that there was no rational basis for classification between garments as such and knitted garments like Baniyans and Chaddies. In the affidavit which was filed by the State no reason was given why particular kind of garments were exempted whereas others of the same value were not given the benefit of exemption. It is well settled that although a taxing statute can be challenged on the ground to infringement of Art. 14 but in deciding whether the law challenged is discriminatory it has to be borne in mind that in matters of taxation the legislature possesses the large freedom in the matter of classification. Thus wide discretion can be exercised in selecting persons or objects which will be taxed and the statute is not open to attack on the mere ground that it taxes some persons or objects and not others. It is only when within the range of its selection the law operates unequally and cannot be justified on the basis of a valid classification that there would be a violation of Article 14. " (Emphasis supplied) 27. In Chhotabhai Jethabhai Patel (supra ), the appellants before the Supreme Court were tobacco merchants and manufact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rospectivity in the imposition of the tax cannot per se render the Law unconstitutional on the ground of its infringing the right to hold property under Art. 19(1) (f) or depriving the person of property under Art. 31(1). If on the one hand, the tax enactment in question were beyond the legislative competence of the Union or a State necessarily different considerations arise. Such unauthorised imposition would undoubtedly not be a reasonable restriction on the right to hold property besides being an unreasonable restraint on the carrying on of business, if the tax in question is one which is laid on a person in respect of his business activity." 28. In J.K. Spinning and Weaving Mills Ltd. (supra), the issue before the Supreme Court was with regard to the constitutional validity of amendment in Rules 9 and 49 of the Central Excise Rules, 1944 with retrospective effect by virtue of Section 51 of the Finance Act, 1982. In this context, more particularly, the hardship which would be caused to the appellants due to length of the retrospective operation of the amendments, the Supreme Court held in paragraph 29 as under: " 29. It is not disputed that the Legislature is competent to mak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Empire Industries Ltd. (supra), the same principle has been reiterated so far as retrospective operation of imposition of tax is concerned. The Supreme Court in paragraph 45 observed as under: " 45. The question whether the impugned Act is covered by entry 84 can be looked at from another point of view namely the actual contents of entry 84. In the case of Aluminium Corporation of India Ltd. v. Coal Board, AIR 1959 Cal 222, a Division Bench of Calcutta High Court had to consider this question in the context of Coal Mines (Conservation and. Safety) Act, 1952. The objection of the petitioner in that case was that although coal might be a material or a commodity, it was not something which was produced and therefore the entry which applied to the goods produced in India could not apply to coal. No question of manufacture obviously arose. It was submitted that the coal produced itself. This was rejected. The word 'produced' appearing in Entry No. 84 of List I of the Seventh Schedule is used in juxtaposition with the word 'manufactured' according to the Division Bench and used in connection with duty of excise and consequently it would appear to contemplate some expenditure of human s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve of differences of circumstances. It only means that all persons similarly circumstanced shall be treated alike both in privileges conferred and liabilities imposed. Equal laws would have to be applied to all in the same situation, and there should be no discrimination between one person and another if as regards the subject-matter of the legislation their position is substantially the same. (7) The classification must not be arbitrary and must be rational, that is to say, it must not only be based on some qualities or characteristics which are found to be in all the persons grouped together and not in others who are left out but those qualities or characteristics must have a reasonable relation to the object of the legislation. In order to pass the test, two conditions must be fulfilled, namely, (1) that the classification must be founded on an intelligible differentiation which distinguishes those that are grouped together from others and (2) that the differentia must have a rational relation to the object sought to be achieved by the Act. (8) The differentia which is the basis of the classification and the object of the Act are different things and what is necessary is tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roducts, and the private importers like the petitioners were not covered within APM. It is also clear from paragraph 5 of the reply that the object of creating APM was to compensate the oil companies for difference between their revenue from domestic sales and cost of procuring crude oil from international market. From the averments in the reply, it is abundantly clear that the respondents have accepted that the petitioner being a private importer was not covered under APM regime and that the petitioner belong to a different class of the importer than the public sector refineries covered under APM. For this reason, we do not find any merit in the contention of Ms.Mandavia that there is nothing like APM products and non-APM products. 36. We are of the view that the fact that Modvat credit of full 15% is allowed for inputs imported directly by manufacturer for his own use from November 27, 1997 by making appropriate amendment under the main Notification No.5/1994 issued under Rule 57A is suggestive of the fact that the Government took cognizance of the error of restricting Modvat credit to 10% ad valorem in cases of imported inputs. When the amendment for restricting Modvat credit w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e it to the objects sought to be achieved. If this cannot be shown by the Government, then the departure was arbitrary, irrational, unreasonable and discriminatory. The only objective sought to be achieved by restricting Modvat credit to the extent of 10% for inputs in the nature of petroleum products was to allow manufacturers purchasing such petroleum products from public sector refineries the credit of that amount which was actually paid by them as excise duty. Since duty only to the extent of 10% was recovered from such manufacturers by refineries whereas 5% was paid to the refineries from Oil Pool Account fright from July 23, 1996, the restriction under the Notification No.14/1997 was made for allowing Modvat credit to the extent of only 10% and this Notification issued on May 3, 1997 was given retrospective effect from July 23, 1996 onwards. By virtue of the clarifications made vide various Trade Notices, the objective of restricting Modvat credit to only 10% right from July 23, 1996 in case of APM products i.e. petroleum products purchased from public sector refineries was clarified by the Government itself. The objective of the amendments so made vide Notification No.14/199 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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