2014 (2) TMI 772 - HC - Central Excise

Court upholds validity of CENVAT Credit Rules under Central Excise Act

The court upheld the validity of Rule 13(2) of the CENVAT Credit Rules, 2002, and Rule 15(2) of the CENVAT Credit Rules, 2004, concluding that the ... Power to levy penalty for violation of CENVAT Credit Rules - Challenge to the validity of rule 13(2) of CCR 2002 and Rule 15(2) of CCR, 2004 as ultra-virus to Central Excise Act, 1994 - Delegated legislation - appellant were using non duty paid scrap for manufacturing the final product - duty paying documents obtained for availing credit without receiving Inputs - Held that:- In terms of section 37(1) and 37(4) of the Central Excise Act, 1944, the rule making authority had ample powers not only for providing for mechanism for collection of CENVAT and matters connected therewith but also to provide for penalties for breach of payment of such duty. We do not find that the rule making authority flows only from sub-section(1) of section 37 and can therefore, be stated to be general in nature without clothing the rule making authority with the power to levying penalty. As noticed section 11AC provides for penalty in case of unpaid duty by reason of fraud or collusion or any wilful mis-statement, etc., Such duty in terms of CENVAT Credit Rules, 2004, would be the central value added tax - we do not find any substance in the challenge raised by the petitioner to the rule 13(2) of the CENVAT Credit Rules, 2002 and rule 15(2) of the CENVAT Credit Rules, 2004 - Decided against Applicant. Issues Involved:1. Validity of the show cause notice dated 12.8.2008.2. Validity of Rule 13(2) of the CENVAT Credit Rules, 2002 and Rule 15(2) of the CENVAT Credit Rules, 2004.Issue-wise Analysis:1. Validity of the Show Cause Notice:The petitioners challenged the show cause notice dated 12.8.2008, which demanded recovery of Rs. 4.82 crores of allegedly wrongly availed CENVAT credit, along with interest and penalties under various provisions of the CENVAT Credit Rules, 2002, Central Excise Rules, 2002, and the Central Excise Act, 1944. The notice was based on intelligence that the petitioners used non-duty paid scrap for manufacturing and availed CENVAT credit using false documents. Despite the ongoing adjudication of the notice, the petitioners filed the writ petition challenging the notice and the validity of specific rules. The adjudication continued, and the final order was passed, which was independently challenged before the Customs, Excise & Service Tax Appellate Tribunal, resulting in remand. Consequently, the petitioners confined their challenge to the validity of the rules.2. Validity of Rule 13(2) of the CENVAT Credit Rules, 2002 and Rule 15(2) of the CENVAT Credit Rules, 2004:The petitioners argued that these rules were ultra vires the Central Excise Act, 1944, as Section 37 did not authorize the framing of rules for recovering penalties. They contended that penalty provisions are akin to compulsory tax exaction, which requires explicit legislative authority under Article 265 of the Constitution. They cited several judgments to support their claim, emphasizing that the power to impose penalties must be specific and explicit.The respondents countered that the rules were within the scope of Section 37 of the Central Excise Act, 1944, which grants the Central Government the power to make rules to carry into effect the purposes of the Act. They argued that the rules were consistent with the scheme of the Act and related provisions.Court's Analysis:The court examined the provisions of the Central Excise Act, 1944, and the relevant rules. It noted that the CENVAT regime replaced central excise duty, allowing manufacturers to take credit for CENVAT paid on inputs and input services. The rules provided mechanisms for availing, refunding, and recovering CENVAT credit. The court observed that Section 37(1) and Section 37(4) of the Central Excise Act empowered the rule-making authority to provide for penalties for breaches related to duty payment. The rules in question, specifically Rule 15(2) of the CENVAT Credit Rules, 2004, were consistent with Section 11AC of the Central Excise Act, which provides for penalties in cases of duty evasion due to fraud or collusion.The court upheld the validity of Rule 13(2) of the CENVAT Credit Rules, 2002, and Rule 15(2) of the CENVAT Credit Rules, 2004, concluding that the rule-making authority did not exceed its delegation under Section 37 of the Central Excise Act. The petition was dismissed, affirming the legality of the challenged rules.