2009 (9) TMI 777 - AT - Central Excise

High Court upholds demand for differential duty on EOU clearances to DTA without permission

HANIL ERA TEXTILES LTD. Versus COMMISSIONER OF CENTRAL EXCISE, RAIGAD

The High Court upheld the demand of a differential duty on a 100% Export Oriented Unit (EOU) for clearances to Domestic Tariff Area (DTA) without ... - ISSUES PRESENTED AND CONSIDERED 1. Whether pre-deposit and stay of recovery should be waived in respect of the demand of central excise duty and penalty raised on DTA clearances by a 100% EOU following cancellation of DTA-sale permission by the Development Commissioner. 2. Whether DTA clearances by a 100% EOU (permitted or unpermitted by the Development Commissioner) are assessable to excise duty under the main limb of Section 3(1) of the Central Excise Act or only under the proviso to Section 3(1). 3. The legal effect of the Development Commissioner's order cancelling prior DTA-sale permissions on the assessee's liability for duty for the disputed periods, including the significance (if any) of a writ petition filed challenging that cancellation where no interim stay was obtained. 4. Whether the demand raised by show-cause notice dated 25-7-2003 is barred by limitation, having regard to the nature of the liability, the bond (B-17) framework and the character of DTA clearances by an EOU. 5. Whether the remanded Commissioner's order complied with this Tribunal's remand directions and whether non-examination of all submissions before the Commissioner vitiates the order (i.e., whether further remand is required). 6. Whether financial hardship established by the assessee justifies reduction or waiver of pre-deposit amount and stay of recovery of penalty and the balance duty. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Waiver of Pre-deposit and Stay of Recovery Legal framework: Statutory regime permits conditional grant of stay and requires deposit under Section 35F when no prima facie case is found to restrain recovery; the Tribunal may direct pre-deposit or waive/modify it on appropriate grounds. Precedent treatment: The Court applied established principles of granting stay only where prima facie case or substantial hardship is shown, and exercised discretion in setting pre-deposit where no prima facie case favouring the appellant is found. Interpretation and reasoning: Having examined merits, precedent and limitation contentions, the Court found no prima facie case in favour of the assessee on merits and limitation, but accepted some evidentiary basis for financial hardship. Consequently, the Court exercised discretion to require a substantial but reduced pre-deposit to secure the revenue while mitigating hardship. Ratio vs. Obiter: Ratio - where no prima facie case exists on merits and limitation, Tribunal may direct pre-deposit; financial hardship may justify reduction of the deposit amount. Obiter - none beyond application to facts. Conclusion: Pre-deposit directed (fixed at a specified reduced amount) with waiver of pre-deposit/stay of recovery for penalty and balance duty upon compliance within fixed time; no full waiver of duty pre-deposit. Issue 2 - Proper Chargeability of Excise Duty: Main Limb of Section 3(1) v. Proviso Legal framework: Section 3(1) prescribes levy of excise duty; the proviso carves out specific treatment for clearances by 100% EOUs to DTA under Development Commissioner permissions and bond arrangements. Precedent treatment: A binding Larger Bench decision of the Tribunal interpreted Section 3(1) to require that DTA clearances by 100% EOUs be assessed in terms of the proviso to Section 3(1), not under the main limb, irrespective of whether Development Commissioner permission was in place at the time of clearance. Interpretation and reasoning: The Court gave primacy to the Larger Bench's statutory interpretation over Board circulars. The Court held that when existing statutory provisions are being interpreted, a binding judicial decision prevails over departmental circulars, including those purporting to clarify the chargeability. Thus, prima facie the law requires duty liability of a 100% EOU for DTA clearances to be quantified under the proviso to Section 3(1) rather than the main limb, and the demand raised was framed on that basis. Ratio vs. Obiter: Ratio - binding interpretation that clearances by 100% EOUs to DTA are to be assessed under proviso to Section 3(1) is applicable; departmental circulars cannot override such judicial interpretation. Obiter - observations on applicability of certain apex-court decisions to distinguish de-bonded warehouse contexts. Conclusion: On merits, prima facie case is against the assessee because binding Tribunal precedent requires application of proviso to Section 3(1) to 100% EOU DTA clearances; demand framed accordingly is maintainable. Issue 3 - Effect of Development Commissioner's Cancellation and Pending Writ before High Court Legal framework: Administrative cancellation of DTA-sale permission affects the regulatory authority to allow DTA clearances; challenge by writ petition is available but interim relief/stay is a separate exercise of equitable jurisdiction. Precedent treatment: The Court considered judicial guidance on the effect of an order under challenge before higher courts, noting that mere filing of a writ petition does not render the administrative order non-final unless interim relief or stay is granted by the High Court or appellate forum. Interpretation and reasoning: The Court examined the Development Commissioner's order and found that cancellation operated for specified periods; where the assessee challenged that order before the High Court but failed to secure interim relief/stay, the cancellation attained operative effect for the purpose of departmental proceedings. The Court rejected the contention that pendency of writ alone deprived the cancellation of finality for administrative assessment purposes. Ratio vs. Obiter: Ratio - absence of an interim stay of the cancelling order means the cancellation remains operative for purposes of departmental demand; pendency of a writ petition without stay does not vitiate the administrative action's effect. Obiter - comparison with appellate stay jurisprudence in different factual contexts was distinguished. Conclusion: Development Commissioner's cancellation had operative effect; failure to obtain interim relief in High Court means the assessee cannot treat the cancellation as non-final for resisting departmental demand. Issue 4 - Limitation: Whether the Demand Is Time-Barred Legal framework: Limitation provisions under Section 28 of the Customs Act and Section 11A of the Central Excise Act govern period for raising demands; extended/continuing liability principles apply where duty liability is continuous in nature and where bond obligations exist. Precedent treatment: Conflicting decisions exist; some Tribunal decisions hold extended/continuous liability prevents limitation defense where duty is continuous or where departmental knowledge exists; other decisions have denied extended limitation when no mala fides or when clearances were done under invoices and not clandestinely. Interpretation and reasoning: The Court analyzed facts: DTA clearances were effected under permissions periodically granted and recorded; B-17 bond and notifications were referred to in the show-cause; Development Commissioner had permitted DTA sales at times and later cancelled; assessee failed to produce the B-17 bond copy at hearing. Given the bond framework and the continuous nature of the EOU's liability to account for DTA clearances in terms of the proviso, the Court took a prima facie view that the demand under Section 11A read with the bond was not barred by limitation. Ratio vs. Obiter: Ratio - where duty liability is continuous and grounded in bond/notification obligations, plea of limitation may not be available; absence of documentary proof by assessee (e.g., bond) supports prima facie view against limitation defence. Obiter - references to divergent authority distinguishing cases where extended limitation was disallowed due to lack of mala fides. Conclusion: Prima facie the demand is not time-barred; the limitation plea fails on the material before the Court. Issue 5 - Compliance with Tribunal's Remand Directions Legal framework: On remand, the adjudicating authority must consider and decide issues in accordance with the remand scope; failure to comply may warrant further remand or other remedial directions. Precedent treatment: The Court acknowledged that parties may contend non-compliance and that the Tribunal will examine such factual/legal compliance at appeal stage. Interpretation and reasoning: The assessee broadly alleged non-examination of all submissions and non-compliance with remand. The Court reserved consideration of this contention to the appeal hearing on merits, indicating that the point requires fuller scrutiny of remand scope and the Commissioner's order. Ratio vs. Obiter: Obiter - that the Tribunal will consider remand-compliance issues at the appropriate appellate stage; no definitive ruling made on compliance. Conclusion: Point left to be examined at the appeal stage; no immediate remand ordered on the limited record. Issue 6 - Financial Hardship and Quantum of Pre-deposit Legal framework: Tribunal may reduce pre-deposit on demonstration of financial hardship, balancing revenue protection and bona fide inability to pay. Precedent treatment: The Court assessed documentary material (annual report, audited financials) and the timing of documents to determine credibility of hardship plea. Interpretation and reasoning: The Court found some credible evidence of significant losses in successive years but noted lack of up-to-date financial particulars. Weighing the absence of a prima facie case in favour of the assessee on merits/limitation against the showing of hardship, the Court exercised discretion to fix a substantial reduced pre-deposit (specific amount) to be paid within a set period, and to grant waiver/stay for penalty and remaining duty subject to compliance. Ratio vs. Obiter: Ratio - financial hardship may justify reduction (not elimination) of pre-deposit; quantification is discretionary and fact-specific. Obiter - observations on insufficiency of documentary currency and causation of losses. Conclusion: Pre-deposit reduced to a specified substantial amount to be deposited within prescribed time; upon compliance, penalty and balance duty recovery stayed.