2007 (4) TMI 449 - AT - Central Excise

Tribunal allows appeal on duty payment for capital goods; rules on retrospective effect of notice

The Tribunal allowed the appeal, setting aside the Commissioner's order regarding the disposal of capital goods without duty payment. The Tribunal found ... Show cause notice - Validity of - Cenvat/Modvat - Capital goods ISSUES PRESENTED AND CONSIDERED 1. Whether a show cause notice issued under provisions of the Central Excise Rules that were not in existence on the date of issuance is legally sustainable. 2. Whether substitution of earlier Rules by the Cenvat Rules w.e.f. 31-3-2000 can be given retrospective effect so as to validate a show cause notice issued on 24-6-2002 under the earlier (substituted) provisions. 3. Whether the Supreme Court's approach in construing amendments or substitutions for exemption notifications (liberal/beneficent construction and retrospective effect) applies to replacement/substitution of procedural Rules governing issuance of show cause notices. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of show cause notice issued under non-existent Rules Legal framework: The impugned show cause notice was issued invoking Rule 57S(1)(ii) read with Rules 57Q and 51A of the Central Excise Rules, 1944; those provisions had been substituted by the Cenvat Rules effective 31-3-2000. Precedent treatment: The Tribunal's decision in Sunrise Structurals & Engineering Ltd. (and subsequent Tribunal orders cited) addressed the same contention and held that notices issued under provisions no longer in existence are not sustainable. Interpretation and reasoning: The Tribunal reasoned that a show cause notice must be founded on provisions that are in force on the date of issuance. Where the statutory or subordinate rule invoked had already been replaced, the notice purporting to be issued under the repealed provision lacks legal foundation. The present notice was issued on 24-6-2002 under the substituted (i.e., repealed) provisions; therefore those provisions could not validly support the notice. Ratio vs. Obiter: Ratio - A show cause notice issued under provisions not in existence on the date of issuance is invalid. This was treated as the decisive ground for allowing the appeal. Conclusions: The show cause notice issued under rules not in existence on the date of issuance is liable to be struck down; the Tribunal allowed the appeal on this ground without adjudicating other merits. Issue 2 - Retrospective effect of substitution by Cenvat Rules Legal framework: The Cenvat Rules substituted the earlier Modvat/related provisions with effect from 31-3-2000. The question is whether the substitution can be treated as retrospective so as to validate actions under the earlier provisions or permit notices to be framed referencing those earlier provisions after substitution. Precedent treatment: The Tribunal followed its prior decisions (Sunrise and others, and Tata Motors order) which held that substitution does not operate to rescue a notice issued under provisions that were no longer in force at the time of issuance. Interpretation and reasoning: The Tribunal observed that substitution of rules does not create a legal basis to issue a notice under a provision that no longer exists. Retrospective operation of a substituting rule would only be relevant if the new rule itself were being invoked; where the notice explicitly relies on the earlier provision which was already replaced, the substitute's retrospective effect does not validate reliance on the repealed text. In short, substitution cannot be used to retroactively reinstate a repealed provision as the source of power for a later notice. Ratio vs. Obiter: Ratio - Substitution of rules cannot be used to validate a show cause notice framed under provisions that were not in force on the date of issuance; the retrospective operation of a substituting rule, if at all relevant, does not validate notices issued under the repealed provision. Conclusions: The substituted Cenvat Rules do not operate to cure the defect in a show cause notice that invokes repealed provisions; therefore the notice was unsustainable. Issue 3 - Applicability of Supreme Court reasoning on retrospective/beneficent construction of exemption amendments Legal framework: The Supreme Court in Government of India v. Indian Tobacco Association held that amendments to exemption notifications, particularly clarificatory ones, may be given retrospective effect and that exemption provisions attract liberal/beneficent construction. Precedent treatment: The Department relied on Indian Tobacco Association to argue that the word 'substitute' and substitution by Cenvat Rules should be treated as having retrospective effect. The Tribunal distinguished that authority. Interpretation and reasoning: The Tribunal distinguished Indian Tobacco Association on the ground that that decision concerned interpretation of an exemption notification and a clarificatory amendment thereto, where liberal construction and retrospective application served the object and purport of the exemption. By contrast, the present dispute concerns procedural/substantive rules governing levy/duty notices and the issuance of show cause notices under specific rule provisions. The Tribunal held that the principles governing retrospectivity of amendment to exemption notifications are not apposite where the instrument relied upon for issuance of a notice did not exist at the relevant time. Thus the Supreme Court's approach to exemption notifications does not automatically extend to validate a notice framed under a repealed rule by reference to a substituted rule. Ratio vs. Obiter: Ratio - The Indian Tobacco Association principle is not applicable to validate a show cause notice issued under repealed rule provisions; this is a binding distinguishing ratio in the context of the present facts. Obiter - General observations about the meaning of 'substitute' in different contexts were noted but not treated as applicable. Conclusions: Reliance on the Indian Tobacco Association decision is misplaced; the distinction rests on the nature of the instrument (exemption notification vs. procedural/substantive rule governing show cause notices) and on whether the amendment/substitution is clarificatory of an existing entitlement. Cross-references and final disposition 1. The Tribunal relied on its prior decisions (Sunrise and subsequent orders including Tata Motors) to affirm that notices issued under provisions not in existence at the time of issuance are invalid; the present matter is squarely covered by those decisions (see Issue 1 and Issue 2). 2. Having found the impugned notice legally infirm on the ground that it was issued under repealed provisions, the Tribunal did not consider other substantive issues and set aside the order of the Commissioner. Final conclusion: The appeal is allowed on the ground of invalidity of the show cause notice issued under provisions not in existence on the date of issuance; the order of the Commissioner confirming duty, interest and penalty is set aside.