2016 (6) TMI 311 - HC - Central Excise

High Court Decision: MODVAT Credit Demand Valid, Section 112 Constitutional

M/s Ester Industries Ltd. Versus Union of India And Ors.

The High Court upheld the validity of the letter demanding repayment of MODVAT credit and the constitutionality of Section 112 of the Finance Act, 2000. ... Admissibility of MODVAT credit - Excise duty paid on High Speed Diesel Oil (hereafter 'HSD') which was consumed by the Petitioner for generation of electricity used for the manufacture of excisable goods in its factory - The disputes in the present case essentially concern the MODVAT credit which was claimed and allowed to the Assessee for the period 16th March, 1995 till 1st March, 1998. - Period before the retrospective amendment vide Section 112 of the Finance Act, 2000 Held that:- the Supreme Court noticed the Notification No. 5/94-C.E. (N.T.) dated 1st March, 1994 and Notification No.8/95-C.E. (N.T.) dated 16th March, 1995 issued under Rule 57A of the Rules and held that the appellants were not entitled to credit for the duty paid on HSD. The Supreme Court further noticed that although the appellants were not entitled to claim MODVAT credit on the duties paid on HSD, the Tribunals had held otherwise and 'therefore, there was a necessity for the Finance Act to be brought in whereby a clarificatory explanation to the legal position was laid down'. The Supreme Court also rejected the contention of the appellants therein that Section 112 of the Act had the effect of taking away vested rights. Appellant is correct when he contends that the constitutional validity of Section 112 of the Act was not challenged in Sangam Spinners Limited. However, as noted above, the contention whether any vested right was created in favour of the appellants was considered by the Supreme Court and the same was expressly rejected. The Supreme Court had further held that Section 112 of the Act was clarificatory and the appellants were not entitled to credit for duties paid on HSD by virtue of the express exclusion in notifications dated 1st March, 1994 and 16th March, 1995. Thus, the very basis on which the Petitioner advanced its contentions stands eroded. Therefore, the contention that the provisions of Section 112 of the Act are expropriatory must be rejected, as squarely covered by the decision of the Supreme Court in Sangam Spinners Limited v. Union of India and Ors. [2011 (3) TMI 4 - Supreme Court]. The Petitioner’s contention that a separate adjudication was required for raising a demand for recovery of MODVAT credit availed on HSD also cannot be accepted as the said issue was considered by the Supreme Court in Ors. v. Maharaja Shree Umaid Mills [2013 (12) TMI 878 - SUPREME COURT]. Therefore, it is clear that Section 112 of the Finance Act 2000 has been held to be clarificatory and it has been conclusively held that MODVAT credit on duties paid on HSD used as an input was not available. Consequently, assessees who had claimed the same were liable to refund the credit wrongly taken. - Decided against the petitioner Issues Involved:1. Validity of the letter demanding repayment of MODVAT credit.2. Constitutionality of Section 112 of the Finance Act, 2000.3. Entitlement to MODVAT credit on High Speed Diesel Oil (HSD) used for electricity generation.4. Retrospective effect of Section 112 and its impact on vested rights.5. Requirement of adjudication for recovery of MODVAT credit.Detailed Analysis:1. Validity of the Letter Demanding Repayment of MODVAT Credit:The Petitioner filed a petition under Articles 226 and 227 of the Constitution of India, challenging a letter dated 13th July 2000, issued by the Superintendent of Central Excise, demanding repayment of Rs. 1,69,91,809 claimed as MODVAT credit under Rule 57A of the Central Excise Rules, 1944. The Petitioner argued that the demand was invalid as it was based on a mere letter without a valid order passed after issuing a show cause notice and providing a reasonable opportunity to be heard.2. Constitutionality of Section 112 of the Finance Act, 2000:The Petitioner challenged Section 112 of the Finance Act, 2000, arguing that it was ultra vires the Constitution as it sought to retrospectively take away a vested right to MODVAT credit. The Petitioner contended that unutilized MODVAT credit is a substantive right that cannot be retrospectively nullified by the government.3. Entitlement to MODVAT Credit on High Speed Diesel Oil (HSD) Used for Electricity Generation:The Petitioner, a manufacturer of excisable goods, claimed MODVAT credit on excise duty paid on HSD used for generating electricity in its factory. The Petitioner argued that MODVAT credit was available under Rule 57A of the Central Excise Rules, 1944, and subsequent notifications, despite HSD being specifically excluded by Notification No. 5/98-C.E.(N.T.) dated 2nd March 1998.4. Retrospective Effect of Section 112 and Its Impact on Vested Rights:The Supreme Court in Sangam Spinners Limited v. Union of India and Ors. (2011) and Union of India and Ors. v. Maharaja Shree Umaid Mills (2014) held that Section 112 of the Finance Act, 2000, was clarificatory and did not take away any vested rights. The Court observed that HSD was specifically excluded from eligible inputs by notifications dated 1st March 1994 and 16th March 1995, and thus, no vested right to MODVAT credit on HSD existed. Consequently, Section 112 did not retrospectively withdraw any rights but clarified the existing legal position.5. Requirement of Adjudication for Recovery of MODVAT Credit:The Supreme Court in Maharaja Shree Umaid Mills held that no separate adjudication was required for recovering MODVAT credit wrongly availed on HSD. The Court stated that once it was certain that MODVAT credit had been wrongly availed, the Revenue was justified in recovering the amount with interest, provided a 30-day period was given for voluntary repayment before imposing interest.Conclusion:The High Court dismissed the petition, upholding the validity of the letter demanding repayment of MODVAT credit and the constitutionality of Section 112 of the Finance Act, 2000. The Court found that the Petitioner was not entitled to MODVAT credit on HSD used for generating electricity, as HSD was specifically excluded from eligible inputs by relevant notifications. The Court also held that Section 112 was clarificatory and did not retrospectively take away any vested rights. Finally, the Court ruled that no separate adjudication was required for recovering wrongly availed MODVAT credit, provided the assessees were given a 30-day period to repay voluntarily.