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TMI Blog2015 (9) TMI 151X X X X Extracts X X X X X X X X Extracts X X X X ..... egal, ultra vires and unenforceable. The appellants, in the writ petition, also prayed for a direction to the respondents not to give effect to Rule 5 of the Rules and to determine the annual production capacity of the appellants-Company under the provisions of the Rule 3(3) without reference to Rule 5 of the Rules and collect excise duty based on such determination for the period between 1.9.1997 and 31.3.2000. They also sought direction to the respondents to refund with interest the excess amount of excise duty paid by them. 4. The question that falls for our consideration in these appeals is "Whether Rule 5 of the Rules is liable to be declared unconstitutional, violative of Article 14 and/or ultra vires Section 3A of the Central Excise Act, 1944 (for short the "Act"). 5. It would be necessary to state the facts to the extent that are necessary to address the question raised in the appeals. The first appellant, hereinafter called as company, is a Company incorporated under the provisions of Companies Act, 1956. The second appellant, at the relevant time, was Chairman and Managing Director of the company. The relevant assessment years for our purpose are 1996-97 to 1999-2000. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in section 3, where the Central Government, having regard to the nature of the process of manufacture or production of excisable goods of any specified description, the extent of evasion of duty in regard to such goods or such other factors as may be relevant, is of the opinion that it is necessary to safeguard the interest of revenue, specify, by notification in the Official Gazette, such goods as notified goods and there shall be levied and collected duty of excise on such goods in accordance with the provisions of this section. (2) Where a notification is issued under sub-section(1), the Central Government may, by rules, provide for determination of the annual capacity of production, or such factor or factors relevant to the annual capacity of production of the factory in which such goods are produced, by the Commissioner of Central Excise and such annual capacity of production shall be deemed to be the annual production of such goods by such factory: Provided that where a factory producing notified goods is in operation only during a part of the year, the production thereof shall be calculated on proportionate basis of the annual capacity of production. (3) The duty of exci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... basis of capacity of production in respect of notified goods. This Section was introduced/inserted in the Act by Section 81 of the Finance Act, 1997 (Act 26 of 1997) with effect from 14-5-1997 and was deleted in the Act by Section 121 of the Finance Act, 2001 (Act 14 of 2001) with effect from 11-5-2001. The intention to introduce this provision is clear from the language of the said provision. In certain sectors like induction furnaces, steel re-rolling mills, etc., evasion of excise duty in regard to such goods was rampant, and therefore, to safeguard the interests of revenue it was decided to levy and collect duty of excise on notified goods on the basis of annual capacity of production. Under the scheme evolved in this provision, the annual capacity of production of mills and their furnaces was to be determined by the Commissioner of Central Excise in terms of the Rules. Thereafter, the assessee was liable to pay duty based on such determination. The Commissioner was obliged to redetermine the annual capacity, in the event the assessee for any reason claimed lower production than the production determined as per the provisions contained in this Section read with the Rules. 10. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es that where a notification is issued under Sub-section (1), the Central Government may, by Rules, provide for determination of the annual capacity of production, or such factor or factors relevant to the annual capacity of production of the factory in which such goods are produced, by the Commissioner of Central Excise and such annual capacity of production shall be deemed to be annual production of such goods by such factory, provided that where a factory producing notified goods is in operation only during a part of the year, the production thereof, shall be calculated on proportionate basis of the annual capacity of production. 13.2. The Central Government in exercise of the powers conferred by sub-section (2) of Section 3A of the Act made the Rules, called, "Hot Re-rolling Mills Annual Capacity Determination Rules, 1997" and brought into force on 1st August 1997. The Rules applied to non-alloy steel hot re-rolled products falling under sub-heading nos. 7211.11, 7211.19, 7211.30, 7211.52, 7211.59, 7211.60, 7211.92, 7211.99, 7213.90, 7214.90, 7215.90, 7216.10 and 7216.90 of the Schedule to the Central Excise Tariff Act, 1985 for determining the annual capacity of production of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sub-section (5) states, where the Commissioner of Central Excise determines the actual production as in sub-section (4), the amount of duty already paid, if any, shall be adjusted against the duty so determined and if the duty already paid falls short of, or is in excess, the duty so determined, the assessee shall pay the differential or is entitled to refund as the case may be. 14. Thus the scheme contained in Section 3A is clear which takes care of all situations as reflected in the proviso to Sub-section (2) and (3) and so also in sub-section (4) of Section 3A of the Act. 15. That takes us to look into the provisions contained in Rule-5 of the Rules which is under attack in these appeals. Rule-5 of the Rules reads thus: "5. In case, the annual capacity determined by the formula in sub-rule (3) of rule 3 in respect of a mill is less than the actual production of the mill during the financial year 1996-97, then the annual capacity so determined shall be deemed to be equal to the actual production of the mill during the financial year 1996-97." 15.1. The Rules contain hardly five rules. Rule-5, as a matter of fact, was inserted by M.F.(DR) Notification No.45/97-C.E.(NT), dated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re making such change. Thereafter, the Commissioner shall determine duty from the date from which the change in the installed capacity shall be deemed to be effective. Thus Sub-rule (2) of Rule 4 also takes care of the situation where there shall be change in the machinery having its effect on the production, empowering the Commissioner to determine the date from which date the change in the installed capacity shall be deemed to be effective. 16. The combined reading of Section 3A and the Rules would show that the legislature while drafting Section 3A and the Rules was conscious of all odd situations so as to avoid any injustice being done to the manufacturers. 17. At this stage, we would like to consider the example discussed in the Court, in the course of arguments, by the learned counsel for the appellants in support of his contention that Rule 5 is violative of Article 14 of the Constitution. 17.1. A and B are two classes of manufacturers of bars/rods. The quantum of production of bars/rolls by class "A' manufacture for the year 1996-97 was 150, for the year 1997-98 the annual production determined as contemplated by the Rules was 120 and if the actual production in 1997 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der this Section, the Central Government can charge excise duty on the basis of annual capacity of production in respect of the notified goods. This provision changed the method of levy from the quantity of goods actually manufactured to a method based on the annual capacity of production of a factory determined by the Commissioner of Excise in the manner prescribed by the Rules. The classification for the purpose of Section 3A was that all manufacturers of notified goods such as steel re-rollers, would pay duty based on annual capacity of production. For determination of annual production, the Central Government provided a formula, by the Rules, for its determination and the factors relevant to the annual capacity of production of the factory in which such goods are produced. Once the annual capacity of production is determined on the basis of the statutory formula, the manufacturer is required to pay duty on the quantity as determined. It is in this backdrop, it was vehemently contended, Rule 5 is an exception to the general scheme of Section 3A. This Rule treat the equals as unequal. In other words, it was contended that Rule 5 is not only violative of Article 14 of the Constitu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the purpose of attaining specific ends. What is necessary in order to pass the test of permissible classification under Article 14 is that the classification must not be "arbitrary, artificial or evasive" but must be based on some "real and substantial distinction" sought to be achieved by the legislature. (See R.K.Garg and others vs. Union of India and others, AIR 1991 SC 2138). 24. The question that falls for our consideration in the present case is whether the classification made by the Rule in the present case satisfy the aforesaid tests and that it is violative of equal protection clause in Article 14. In this connection the following observations made by the Supreme Court in R.K.Garg (supra) are relevant : "10. Another rule of equal importance is that laws relating to economic activities should be viewed with greater latitude than laws touching civil rights such as freedom of speech, religion etc. It has been said by no less a person that Holmes, J. that the legislature should be allowed some play in the joints, because it has to deal with complex problems which do not admit of solution through any doctrine or straight jacket formula and this is particularly true in case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce. 21. Classifications based on differences in the value of articles or the economic superiority of the persons of incidence are well recognized. A reasonable classification is on which includes all who are similarly situated and none who are not. In order to ascertain whether persons are similarly placed, one must look beyond the classification and to the purposes of the law." (emphasis supplied) 25. In view of the law laid down by the Supreme Court and having regard to the object of Section 3A, we are of the opinion, that Rule 5 cannot be stated to be violative of Article 14 or ultra vires Section 3A. In other words, the differentia or classification, as alleged, have a rational nexus with the object to be achieved by the law. To test this view, we would like to once again refer to the example given by the learned senior counsel for the appellants to emphasis that Rule 5 is discriminatory. Class A manufacturer to whom, according to the appellants, a gross injustice is likely to be done, in our opinion, is also without any substance. Even if it is assumed that provisions contained in Rule 5 make distinction between Class A manufacturer and Class B manufacturer, such distincti ..... X X X X Extracts X X X X X X X X Extracts X X X X
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