2009 (11) TMI 771 - AT - Central Excise

Tribunal restores interest demand in revenue appeal, penalty deemed unjustified.

COMMR. OF C. EX., VISAKHAPATNAM Versus ACD COMMUNICATIONS PVT. LTD.

The Tribunal partially allowed the appeal filed by Revenue, restoring the original authority's order on the demand for interest on the differential duty ... - ISSUES PRESENTED AND CONSIDERED 1. Whether amounts realized pursuant to supplementary invoices reflecting price escalation under a contractual price-adjustment clause (i.e., sales effected on a provisional basis at the time of clearance) constitute differential consideration on which interest is payable from the date of clearance until payment of differential duty. 2. Whether statutory provisions governing interest on non-levy/short-levy (including Section 11A/11AB context and finalization of provisional assessment under Rule 7(3) of the Central Excise Rules) preclude recovery of interest on differential amounts realized prior to formal finalization of assessment. 3. Whether penalty under Rule 25(1)(a) of the Central Excise Rules is justified where differential duty is paid upon realization of the supplementary consideration and there is no deliberate or mala fide breach of law. ISSUE-WISE DETAILED ANALYSIS Issue 1: Interest on differential amounts realized pursuant to supplementary invoices issued after clearance under a price-escalation/provisional pricing contract Legal framework: Where goods are cleared under contract terms permitting post-clearance price adjustment, the initial clearance operates on a provisional basis; the definitive valuation/duty liability may be ascertained later. Statutory provisions and rules concerning interest on non-levy/short-levy and the finalization of provisional assessments (including Rule 7(3) CER and statutory interest provisions) govern imposition of interest on any differential duty determined subsequently. Precedent treatment: Earlier tribunal authority had held that such sales akin to provisional assessment do not attract interest on differential amounts realized (i.e., interest not payable because payment represents finalization rather than short-levy). A subsequent Larger Bench of the Tribunal, however, treated finalization of provisional assessment as attracting interest on differential duty even if paid before formal order under Rule 7(3) is issued. The matter was thereafter authoritatively considered by the Apex Court, which resolved the dispute in favour of recovery of interest on differential amounts arising from finalization of provisional assessment. Interpretation and reasoning: The Court accepts that where clearance is effected on a provisional pricing basis and later the price is finalized resulting in additional consideration, the additional duty assessed on that differential amount represents a differential liability arising from delayed payment. Interest is therefore properly chargeable for the period of delay - from the date of clearance of the goods until the date of payment of the differential duty - consistent with the statutory scheme addressing interest on underpaid duties once the liability is ascertained. The Court finds the original authority's demand of interest for the intervening period to be in accordance with law as clarified by the Larger Bench and subsequently settled by the Apex Court. Ratio vs. Obiter: The holding that interest is payable on differential amounts realized under supplementary invoices issued post-clearance (in contracts with price escalation) is ratio decidendi for the appeals concerning interest. It follows the settled higher authority ruling and is applied as the governing legal principle. Conclusion: Interest on the differential duty realized by issuance of supplementary invoices after provisional clearance is lawfully recoverable for the period from date of clearance until payment of differential duty; the demand for interest in the facts under consideration is upheld and restored. Issue 2: Applicability of Section 11A/11AB and timing under Rule 7(3) CER to preclude interest where differential payment occurs before formal finalization Legal framework: Provisions addressing non-levy/short-levy (and related interest provisions) and the mechanics of provisional assessment finalization under Rule 7(3) CER determine when interest becomes exigible and whether payment prior to formal finalization affects interest liability. Precedent treatment: A tribunal view denying interest on differential amounts on the basis that Section 11A/11AB or the concept of provisional assessment excludes such recovery was considered; this view was later negatived by a Larger Bench of the Tribunal and ultimately settled by the Apex Court in favour of interest recovery notwithstanding payment prior to issuance of the formal finalization order under Rule 7(3). Interpretation and reasoning: The Court reasons that the statutory provisions on interest and the scheme for provisional assessment do not immunize differential amounts realized after clearance from interest simply because the formal Rule 7(3) order has not yet been issued; once the differential duty is ascertained, the statutory entitlement to interest arises for the intervening period. The Court relies on the authoritative clarification of the Larger Bench and the Apex Court to resolve any conflict with earlier contrary tribunal treatment. Ratio vs. Obiter: The determination that Section 11A/11AB or Rule 7(3) timing does not bar recovery of interest on differential amounts paid before formal finalization is treated as ratio and applied to reverse the impugned vacation of demand for interest. Conclusion: The statutory scheme permits recovery of interest on differential duty determined on finalization of provisional assessment, even if the differential amount is paid before issuance of the Rule 7(3) finalization order; therefore Section 11A/11AB or timing under Rule 7(3) does not preclude interest in such circumstances. Issue 3: Validity of penalty under Rule 25(1)(a) where differential duty was paid upon realization and no deliberate default is shown Legal framework: Rule 25(1)(a) permits imposition of penalty for contraventions; normally penalty requires some element of culpability or deliberate defiance of statutory obligations to be justifiably imposed, particularly where the assessee discharges duty obligations upon realization of consideration. Precedent treatment: The Court notes that penalty cannot be sustained absent a finding of deliberate or mala fide conduct; statutory provision permitting penalty does not override the requirement of culpability for imposition where facts show timely payment upon realization and no contested ground demonstrating willful breach. Interpretation and reasoning: The Court finds that the assessee paid the differential duty as soon as the supplementary consideration was realized and there is no material to suggest deliberate or intentional evasion. The appeal did not raise grounds justifying penalty, and imposition of penalty in absence of deliberate defiance is not warranted even where statute provides for penalty. Consequently the original imposition of penalty is set aside. Ratio vs. Obiter: The conclusion that penalty under Rule 25(1)(a) is not sustainable in the absence of deliberate breach or defiance constitutes the operative ratio regarding penalty in this matter. Conclusion: Penalty imposed under Rule 25(1)(a) is not justified on the facts; penalty is revoked while the demand for interest is restored in accordance with the applicable legal position. Disposition applied by the Court The appeal is partially allowed: the order of the original authority is restored to the extent it confirmed demand of interest; the penalty imposed under Rule 25(1)(a) is vacated for lack of deliberate breach. Cross-references: Issue 1 and Issue 2 are interlinked - resolution of interest liability rests on the treatment of provisional assessment finalization (Issue 2) which governs the conclusion on recoverability of interest (Issue 1).