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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 ..... the intervening period i.e. during the period of operation. The petition is accordingly allowed. It is hereby declared that the Notification No.14/1997 dated May 3, 1997 restricting admissibility of Modvat credit for all the petroleum products to the extent of 10% irrespective of the fact that whether the inputs were manufactured in India or the inputs were imported into India, being violative of Article 14 of the Constitution of India, is hereby quashed and set-aside. - Special Civil Application No. 8935 of 1998 - - - Dated:- 30-4-2012 - Bhaskar Bhattacharya, J B Pardiwala, JJ. For Appellant: Mr Paresh M Dave For Respondent: Ms Sejal K Mandavia JUDGEMENT Per: J B Pardiwala: 1. By way of present petition under Article 226 of the Constitution of India, the petitioner-Company engaged in the business of manufacturing of paraffin wax has prayed for the following reliefs: 8(A) 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 Section 87 of the Finance Act, 1997 is ultra-vires articles 14, 19(1)(g) and 265 as well as Entry 84 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for petitioner submitted that he is giving up the challenge so far as the constitutional validity of Section 87 of the Finance Act, 1997 is concerned. He submitted that he would like to confine his challenge only to the legality and validity of the Notification bearing No.14/97-CE (N.T.) dated May 3, 1997 (hereinafter referred to as 'the impugned Notification') issued by the Central Government, insofar as it restricts the admissibility of Modvat credit for inputs imported into India. 3. The facts relevant for the purpose of deciding the present petition can be summarised as under : 3.1 The petitioner-Company is engaged in the business of manufacture of paraffin wax, which is an excisable goods under the Central Excise Act, 1944 (hereinafter referred to as 'the Act') and the petitioner is using paraffin wax classifiable under the heading No.27.12 of the Customs Tariff as one of the inputs. The challenge is to the constitutional validity of Notification bearing No.14/97-CE (N.T.) dated May 3, 1997 on the ground that it is ultra vires Articles 14, 19(1)(g) and 265 of the Constitution of India and also Rule 57(A) of the Central Excise Rules, 1944 (hereinafter referred to as 'the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the extent of the amount of additional duty calculated by assuming as if the like input produced or manufactured in India is chargeable to excise duty @ 10% adv. 3.5 It appears that in March, 1997, the then Finance Minister while delivering speech to support proposals for the financial bill for the year 1997-1998 proposed to move official amendment in the financial bill by giving retrospective effect to the impugned Notification from July 23, 1996. 3.6 On May 14, 1997 the Finance Act, 1997 received the assent of the Hon'ble President. Section 87 of the Finance Act, 1997, gives retrospective effect to the impugned Notification with effect from July 23, 1996. Consequently, the users of specified petroleum products (Neptha, Funase Oil, Low Sulphar Heavy Stock, light diesel oil, bitumen and paraffin wax falling under Chapter 27 of Schedule to the Central Excise Tariff Act, 1985), who had taken Modvat credit at the rate of 15% instead of 10% were required to refund the excess amount of credit for the period from July 26, 1996 to May 3, 1997. 3.7 On June 23, 1997, the Deputy Commissioner (Tech.) Central Excise and Customs, Surat, issued Trade Notice No.63/97. Paragraph 2.3 of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... show cause notice bearing F.No.KLL-II/GPF/SCN-29/97-98 dated August 11, 1997 was issued to the petitioners calling upon them to show cause as to why : 1. They should not be disallowed the wrongly availed credit of Rs.5,12,693/-. 2. Penalty under Rule 173-Q(1)(bb) of the Central Excise Rules, 1944 should not be imposed on them and 3. Interest, if any, under Section 11-AB should not be collected from them. 3.10 On November 27, 1997 the Central Government issued a Notification bearing No.60/97-CE (N.T.) amending its earlier Notification bearing No.5/94 introducing substitution for the portion beginning with the figures and words : (II) in the case of input imported into India and ending with the words Ad valorem by the following substitution namely :- (ii) In the case of input imported into India (except when imported directly by a manufacturer of excisable goods for his own use and received in the factory of such manufacturer on or after 28 th day of November, 1997) to the extent of the amount of additional duty calculated by assuming as it the like input produced or manufactured in India is chargeable to excise duty at the rate of 10% ad valorem. 3.11 It ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herefore, restricting Modvat credit to the extent of 10% for such inputs domestically produced and sold was lawful since the Gate Passes or Invoices of Public Sector refineries indicated excise duty at the rate of 15% but the manufacturer purchasing such inputs from the Public Sector refineries actually suffered incidence of excise duty only at the rate of 10%. Therefore, the action of availing Modvat credit to the full rate of 15% ad valorem by the manufacturers for such domestically procured inputs was certainly illegal and not in accordance with the Modvat scheme. A manufacturer purchasing petroleum products as inputs from the local refineries i.e. the inputs of this nature produced in India, therefore, constitute a separate class; being a class of manufacturers who purchased 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. 4.3 He submitted that on the other hand, the persons/ manufacturers like the petitioner company have imported such petroleum products directly on their own for their own use, and such importers have paid additional customs duty equal to the excise duty at the ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such payment or adjustment was allowed in case of imported petroleum products. He, therefore, submitted that the action of the Government in issuing the impugned Notification thereby restricting credit to 10% for inputs produced or manufactured in India as well as inputs imported into India is in the nature of treating unequals equally by clubbing unequals together for uniform treatment of allowing only 10% uniform rate of Modvat credit irrespective of the fact that importers had actually paid higher duty on such inputs is in violation of Article 14 of the Constitution. 4.7 Mr.Dave also contended that by virtue of the impugned Notification, the APM as well as non-APM products are clubbed together, which is violative of Article 14 of the Constitution of India. He submitted that there is no dispute to the fact that the petroleum products manufactured by public sector refineries were governed by APM regime because this fact was stated even on the floor of the Parliament by the then Finance Minister while presenting the Union Budget on July 23, 1996 and, therefore, it is an admitted fact that the purchasers of such APM products from local refineries actually paid only 10% towards exc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 15% from November 27, 1997, there is no reason as to why 15% Modvat credit should not be allowed to such importers for the past period also. 4.9 Mr.Dave lastly contended that his main plank of submission is that the action of imposing restriction with retrospective effect and withdrawing the restriction for cases like the present one only prospectively, is in violation of Articles 14 and 19(1)(g) of the Constitution of India and restriction for imported inputs is also ultra vires Rule 57-A under which the Notification was issued. 5. Mr.Dave in support of his contentions has relied upon the following decisions of the Supreme Court : (i) Shri Ramkrishna Dalmia, reported in AIR 1958 SC 538. (ii) D.S. Nakara, reported in (1983) 1 SCC 305. (iii) Smt. Maneka Gandhi v. Union of India, reported AIR 1978 SC 597. (iv) The Twyford Tea Co. Ltd. and another v. The State of Kerala and another, reported in AIR 1970 SC 1133. (v) New Manekchawk Mills, AIR 1967 SC 1801. (vi) The State of Kerala v. N.M. Thomas and others, reported in (1976) 2 SCC 310. (vii) Onkar Lal Bajaj and others v. Union of India and another, reported in (2003) 2 SCC 673. (viii) Kunnat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (iii) Jaipur Hosiery Mills (P) Ltd., Jaipur v. The State of Rajasthan and others, reported in 1970(2) SCC 2. (iv) Chhotabhai Jethabhai Patel and Co. v. Union of India, reported in 1999 (110) ELT 118 (SC) (v) J.K. Spinning and Weaving Mills Ltd. and another v. Union of India and others, reported 1987 (32) ELT 234 (S.C.) (vi) N. Rahmath and others v. Union of India and others, reported in 1988 (38) ELT 425 (Mad.) 8. Having heard the learned counsel appearing for the respective parties and having perused the materials on record, we are of the view that the following questions fall for our determination in this petition : i. Whether persons importing inputs in the nature of petroleum products on payment of full duty and persons purchasing such petroleum products on payment of such duty at a reduced rates from local refineries can be considered to be the persons belonging to the same class. ii. Whether restriction on quantum of admissible Modvat credit to 10% ad valorem for persons purchasing petroleum products from local refineries on actual payment of 10% excise duty could be extended and made applicable to persons importing such petroleum products as in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the scheme of allowing Modvat credit of various types of duty paid on inputs used in relation to manufacture of final products is contained under these Rules. Modvat credit of duty paid on the inputs was allowed as credit for paying excise duty leviable on the final products for avoiding cascading effect of duty under the Modvat credit scheme. 11. Rule 57-A(1) specifies that the Central Government was empowered to issue a notification for specifying duty for which credit was allowed and also the goods i.e. inputs and final products for which the credit scheme was applicable. Additional duty leviable under Section 3 of the Customs Tariff Act, 1975 was specified under Rule 57-A(1) for allowing its credit and the expression paid on occurring under Rule 57-A(1) also clarified that the amount of additional duty actually paid was allowed as Modvat credit. 12. Notification No.5/94 dated March 01, 1994 was issued under Rule 57-A; and it was specified at Clause (iii) in the first paragraph of this Notification that the additional duty under Section 3 of the Customs Tariff Act, 1975 was allowed as Modvat credit for imported inputs, and the expression paid on inputs occurring unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red in India was levied and collected at 15% ad valorem and, therefore, the importers like the petitioner had actually paid additional duty at the rate of 15% ad valorem as such imports from foreign countries and foreign refineries were not governed by APM Regime, and no payment towards duty was ever made from the Oil Pool Account for such direct imports made by the citizens on their own. 13. The Union Budget for the year 1996-96 was presented in the Parliament on July 22, 1996 and it was during this Budget that the excise duty on locally produced petroleum products except LPG and kerosene was enhanced to 15% (from 10%) but by providing for adjustment of payment of 5% excise duty from Oil Pool Account by operating APM so that the ultimate burden on the local consumers may not increase by additional 5% excise duty for locally produced petroleum products. Thus, the liability of 5% was absorbed by the Union Government itself through the APM Regime. 14. It appears that, thus, the charges which were made effective from July 23, 1996 resulted in a situation whereby the people purchasing inputs in the nature of petroleum products from local refineries started taking Modvat credit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urther notification on November 27, 1997 and by this Notification No.60/97 Clause (ii) of the previous amending Notification was substituted and inputs when imported directly by manufacturer of excisable goods for his own use came to be excluded from the restriction of Modvat credit at the rate of 10% ad valorem . However, it appears that while recognising that inputs imported directly by a manufacturer for his own use should be allowed full rate of Modvat credit because such inputs had actually suffered incidence of additional duty to the tune of 15% ad valorem , the Government allowed benefit of full Modvat credit in case of such imports from the date of this second Notification i.e. only in cases where the inputs were received in the factory on or after November 27, 1997. In other words, the restriction of 10% of Modvat credit came to be lifted in case of imported petroleum products with prospective effect i.e. from November 27, 1997 and the defect was not cured by giving retrospective effect. 16. It is, thus, clear that the Government changed the scheme of Modvat credit for manufacturers like the petitioner-Company who imported petroleum products directly on payment of fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... more heavily on owners of waste lands than on owners of fertile lands. It was also contended that it is bound to happen that some owners make no income out of their lands or make a small income and they have to pay the tax out of their pocket while the owners of better classes of lands yielding larger income would be able to pay the tax out of the income from the lands. It was, therefore, submitted that the Act discriminates between several classes of owners of lands in the State and is void as infringing the equality clause in the Constitution. In this context, the Supreme Court by a majority view declared the provisions of Sections 4 and 7 of the Act unconstitutional in view of the provisions of Article 14 of the Constitution of India. While declaring so, the Supreme Court made important observations in paragraph 7, which is quoted hereinbelow, on which reliance has been placed by the learned advocate for the petitioner : 7. The most important question that arises for consideration in these cases, in view of the stand taken by the State of Kerala, is whether Art. 265 of the Constitution is a complete answer to the attack against the constitutionality of the Act. It is, theref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ferent rates of taxation, but so long as there is a rational basis for the classification, Art. 14 will not be in the way of such a classification resulting in unequal burdens on different classes of properties. But if the same class of property similarly situated is subjected to an incident of taxation, which results in inequality, the law may be struck down as creating an inequality amongst holders of the same kind of property. It must, therefore, be held that a taxing statute is not wholly immune from attack on the ground that it infringes the equality clause in Art. 14, though the Courts are not concerned with the policy underlying a taxing statute or whether a particular tax could not have been imposed in a different way or in a way that the Court might think more just and equitable. The Act has, therefore, to be examined with reference to the attack based on Art. 14 of the Constitution. 20. In Jaipur Hosiery Mills (P) Ltd. (supra ), the challenge by the appellant of that case was to the notification issued by the State of Rajasthan under Section 4(2) of the Rajasthan Sales Tax Act, 1950, exempting from tax the sale of any garments whether prepared within or imported fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O-LDO dealerships on the recommendation of the Dealer Selection Boards (DSBs) since January 1, 2000 were decided to be cancelled. The principal contention on behalf of the petitioners of that case was that en masse cancellation of allotment is equally an arbitrary exercise of executive power without any justification therefor. It was contended that the impugned order was wholly arbitrary and unconstitutional being violative of Article 14 of the Constitution of India. Allowing the appeal preferred by the petitioners and quashing the impugned order, the Supreme Court in paragraph 27 observed as under : 27. Article 14 guarantees to everyone equality before law. Unequals cannot be clubbed. The proposition is well settled and does not require reference to any precedent though many decisions were cited. Likewise, an arbitrary exercise of executive power deserves to be quashed is a proposition which again does not require support of any precedent. It is equally well settled that an order passed without application of mind deserves to be annulled being an arbitrary exercise of power. At the same time, we have no difficulty in accepting the proposition urged on behalf of the Government ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ects so that the question of unequal treatment does not really arise between persons governed by different conditions and different sets of circumstances. The principle of equality does not mean that every law must have universal application for all persons who are not by nature, attainment or circumstances in the same position and the varying needs of different classes of persons require special treatment. The legislature understands and appreciates the need of its own people, that its laws are directed to problems made manifest by experience and that its discriminations are based upon adequate grounds, The rule of classification is not a natural and logical corollary of the rule of equality, but the rule of differentiation is inherent in the concept of equality. Equality means parity of treatment under parity of conditions. Equality does not connote absolute equality. A classification in order to be constitutional must rest upon distinctions that are substantial and not merely illusory. The test is whether it has a reasonable basis free from artificiality and arbitrariness embracing all and omitting none naturally falling into that category. 23. In Twyford Tea Co. Ltd. (sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r others, so long as they are not singled out for special treatment. Taxation law is not an exception to this doctrine: vide Purshottam Govindji Halai v. Shree B. N. Desai, 1955-2 SCR 887 = (AIR 1961 SC 552). But in the application of the principles, the courts, in view of the inherent complexity of fiscal adjustment of diverse elements, permit a larger discretion to the legislature in the matter of classification, so long it adheres to the fundamental principles underlying the said doctrine. The power of the Legislature to classify is of "wide range and flexibility" so that it can adjust its system of taxation in all proper and reasonable ways. " 24. We shall now look into the decisions which have been relied upon by the learned advocate appearing for the Revenue. 25. In B.K. Industries (supra ), the challenge before the Supreme Court was with regard to the validity of levy and collection of Cess under Section 3 of the Vegetable Oils Cess Act, 1983 for the period commencing from March 1, 1986 to March 31, 1987. It appears that the petitioners of that case were manufacturers of Vegetable Oil, which was subjected to Cess/Duty of excise under Section 3 of the Cess Act. The Union ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid to have been dispensed with by virtue of the alleged decision referred to in the Finance Minister's speech or on account of the letter dated August 11, 1986. The Finance Minister's speech is not law. The Parliament may or may not accept his proposal . Indeed, in this case, it did not accept the said proposal immediately but only a year later. It is only from the date of the repeal that the said levy becomes inoperative. 26. In Jaipur Hosiery Mills (P) Ltd. (supra ), the challenge by the appellant of that case was to the notification issued by the State of Rajasthan under Section 4(2) of the Rajasthan Sales Tax Act, 1950, exempting from tax the sale of any garments whether prepared within or imported from outside Rajasthan the value of which did not exceed Rs.4/- in single piece. The High Court of Rajasthan held that waists and underwears were covered by the notification. On March 26, 1962 the State of Rajasthan issued another notification by which the sale of garments whether prepared within or imported from outside Rajasthan the value of which did not exceed Rs.4/- in single piece was exempted from payment of sales tax, but the exemption excluded hosiery products and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arged to an excise duty of 8 annas per lb. and it also imposed new duty of excise on biris varying from 6 to 9 annas per lb. depending upon the weight of tobacco contained in the biris. In pursuance of such Section 7(2), a demand was made upon the appellants for the payment of the duty payable by them after giving credit for the refund of the duty paid on biris which had been deleted by the Act. The appellants of that case contested the legality and validity of the demand made by a petition under Article 226 of the Constitution of India before the High Court at Nagpur urging that the retrospective operation given to Section 7(1) by sub-section (2) thereof was illegal, ultra vires and unconstitutional. The High Court at Nagpur repelled all the contentions disputing the legislative competence and the constitutionality of the legislation contained in Section 7(2) of the Finance Act of 1951. In appeal before the Supreme Court, it was contended that Section 7(2) of the Act was unconstitutional as it contravenes the fundamental rights guaranteed under Articles 19(1)(f) and 31(1)(2) of the Constitution of India. It was mainly contended that the retrospective levy of excise duty violated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 897 this Court has pointed out that if the retrospective feature of a law is arbitrary and burdensome, the statute will not be sustained and the reasonableness of each retrospective statute will depend on the circumstances of each case; and the test of the length of time covered by the retrospective operation cannot, by itself, necessarily be a decisive test. 29. In N. Rahmath (supra ), the petitioners of that case challenged the constitutional validity of Section 52 of the Finance Act, 1982 and the conditions imposed in Notification dated February 23, 1982 on the ground of violation of the petitioners' fundamental rights under Articles 14 and 19(1)(g) of the Constitution of India. While upholding the validity of the notification which was brought in by the legislature that the retrospective effect by Section 52 of the Finance Act, 1982, the Supreme Court held in paragraph 7 as under : 7. .. .. It is by now well-established that Parliament has got the power to make a law on a topic in respect of which it is competent to enact a law both prospectively and retrospectively, and such a power to make a law retrospectively more freely exercised by the legislature in the fie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nse to its being made a material of consumption by human skill and labour was entirely correct and had sanction of approved usage. Reference was made to the observations of The King v. Caledonian Collieries, Limited; 1928 AC 358, where the Judicial Committee held that the respondents before them were 'producers of coal'. If that aspect of the matter is kept in mind then expenditure of human skill and material have been used in the processing and it may not be that the raw material was first transformed but over the transformed material, further transformation was done by the human labour and skill making this fit for human consumption. 31. The principle of law explained in the decisions which have been relied upon by the learned advocate for the petitioner is that the same Rules of law should be applicable to all the persons within the Indian territory or that the same remedies should be made available to them, irrespective of difference of circumstances. In all the judgments, one principle is very loud and clear and that is that all the persons similarly circumstanced shall be treated alike, both in privileges conferred and liabilities imposed. 32. No action should treat un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Revenue are also on a very settled position of law i.e. with regard to retrospective effect and retrospective imposition of a duty. In the present case, the controversy is not much on the issue as to whether there could be retrospective imposition of tax or duty. The controversy in the present case is that if the Government thought fit to issue notification No.60/97 dated November 27, 1997 to the effect that paraffin wax directly imported by manufacturers on or after 1997 was excluded from applicability of Notification No.5/1994 dated March 1, 1994, more particularly, to rectify the unscrupulous practice apparently adopted by certain entities paying only 10% excise duty to refineries in respect of APM products and obtaining 15% Modvat credits, then whether the applicability of Notification dated November 27, 1997 with prospective effect would be violative of Article 14 of the Constitution of India. 34. In the present case, we have no hesitation in holding that unequals are treated equally because persons like the petitioners who imported petroleum products as inputs on payment of duty at the full rate of 15% are treated at par with the persons purchasing the petroleum products ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as taken corrective measures at the earliest and that the restriction would operate only for a limited period of about 16 months i.e. from July 3, 1996 to November 27, 1997. 37. It is a settled legal proposition that if initial action is not in consonance with law, subsequent proceedings would not sanctify the same. In such a fact situation, the legal maxim sublato fundamento cadit opus is applicable, meaning thereby, in case of foundation is removed, the superstructure falls. Similar principle of law, in our opinion, can be extended in the present case too. Though the restriction operated for about 16 months, the action of not allowing the Modvat credit of the actual amount paid as additional duty to the petitioner-Company is in violation of Article 14 of the Constitution of India because such a restriction was unreasonable and arbitrary even during the intervening period i.e. during the period of operation. 38. To pass the test of permissible classification, two conditions must be fulfilled, namely, (i) that the classification must be founded on an intelligible differentia which distinguishes persons or things that are grouped together from those that are left out of the gr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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