Validity of compounded levy rules upheld as a legal issue in appeal, defeating duty demand based on ultra vires provisions.

A challenge to duty demand and penalty under the compounded levy scheme was entertained in appeal because the validity of the rules governing annual capacity determination under Section 3A of the Central Excise Act, 1944 raised a question of law. The appellate objection that the point had not been taken before the lower authorities was rejected. Applying binding precedent, the rules in force before Notification No. 42/98 were treated as ultra vires the enabling provision, so the duty demand founded on those rules could not be sustained. The impugned order was set aside and consequential relief followed.

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Issues: Whether the duty demand and penalty raised under the compounded levy scheme, based on the Hot Air Stenter Independent Processors Annual Capacity Determination Rules, 1998, could be sustained in view of the challenge to the validity of the rules framed under Section 3A of the Central Excise Act, 1944.

Analysis: The demand was founded on annual capacity determination under the 1998 Rules issued under Section 3A of the Central Excise Act, 1944. The binding precedent relied upon held that the rules, prior to Notification No. 42/98, were ultra vires the enabling provision. The objection that the point had not been taken before the lower authorities was rejected because the issue involved a question of law that could be raised at the appellate stage.

Conclusion: The impugned order was set aside and the appeal was allowed, with consequential relief.

Ratio Decidendi: A legal challenge to the validity of the rules governing duty liability under the compounded levy scheme can be entertained in appeal, and where the governing rules are held ultra vires the enabling provision, the duty demand based on those rules cannot stand.

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