2023 (7) TMI 1118 - HC - Central Excise

CESTAT dismisses appeal on audit objections, stresses timely consideration of all contentions

The Principal Commissioner of CGST and Central Excise, Raigad Commissionerate Versus Reliance Industries Ltd.

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT) dismissed an appeal primarily based on audit objections raised by the Central Excise ... Refund - Refund was sanctioned by the lower authority pending the audit objection - Reversal of decision on the show cause notice till the final settlement of audit objection between the Department of Revenue and the Comptroller & Auditor General of India - refund of unutilised cenvat credit - HELD THAT:- The Tribunal ought to have considered the contentions as urged on behalf of the revenue on all the issues instead of confining the scope of the appeal merely on the ground of CERA objections, this more particularly considering the fact that the show cause notice itself was issued on 11th April 2007 which was certainly before closure of the objection, which was the first time recorded by the revenue by a communication dated 26th May 2008 addressed by the office of Commissioner, Central Excise, Raigad to the Assistant Registrar, Central Excise & Service Tax Appellate Tribunal - However, it is quite surprising that neither the appellant revenue nor the respondent had brought to the notice of the Tribunal such communication and as to what would be the effect and consequences thereof, more particularly in relation to the adjudication of the show cause notice dated 11th April 2007 and the reason for the appellant/Revenue to take recourse of the provisions of Section 11A read with Sections 11AC and 11B of the Central Excise Act, 1944. It is also clear that there could have been no warrant for issuance of the show cause notice in view of the subsequent developments which has been taken place after about 7 months of issuance of the show cause notice that is in view of the order dated 22nd November 2007 by which the revenue’s appeal against refund order itself came to be rejected. All these issues ought to have been raised and fell for consideration on rival contentions raised. Impugned order set aside - Matter restored back before the tribunal - appeal disposed off. ISSUES PRESENTED AND CONSIDERED 1. Whether the refund sanctioned under Rule 5 of the Cenvat Credit Rules, 2004 was proper and legal where accumulated Cenvat credit arose from inputs taxed at a higher duty rate than final products (and not from export-related accumulation). 2. Whether the Appellate Tribunal erred in restricting adjudication of the appeal solely to the Central Excise Revenue Audit (CERA) objection and thereby failing to decide the merits of the show cause notice and refund claim. 3. Whether the Appellate Tribunal's delay in issuing the impugned order after final hearing violated CESTAT procedure rules and circulars. 4. Whether a show cause notice issued after an audit objection (but before final settlement of the audit objection) could be validly dropped by the Commissioner without application of the provisions of Section 11A read with Sections 11AC and 11B of the Central Excise Act, 1944, and what is the effect of the revenue's subsequent conduct in proceedings (including acceptance of an Order-in-Appeal rejecting revenue's challenge to a refund). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Legality of refund under Rule 5 Cenvat Credit Rules where accumulation arose from higher input duty Legal framework: Rule 5 of the Cenvat Credit Rules, 2004 governs refund of unutilised Cenvat credit. The central question is whether accumulated credit attributable to a higher duty on inputs vis-à-vis final products qualifies for refund under the applicable rules and principles. Precedent treatment: The Court referenced relevant Supreme Court authority (not adjudicated by the Court in this judgment) concerning limits on refund and the interplay of refund claims with statutory provisions and audit objections. Interpretation and reasoning: The Court identified this as a substantive legal issue that was before the Tribunal but was not decided on merits because the Tribunal confined itself to the narrow ground of the audit objection. The Court found that the Tribunal should have considered the revenue's substantive contention on the validity of the refund sanction when the accumulation arose from rate differentials rather than export-related reasons. Ratio vs. Obiter: The need to decide legality of the refund on merits is treated as a core ratio issue for remand - the Court does not decide the substantive question itself. Conclusion: The Tribunal must examine and decide, on merits, whether the refund sanction was proper under Rule 5 in light of the factual basis for accumulated credit. This question is remitted for fresh adjudication. Issue 2 - Whether the Tribunal erred in confining adjudication to CERA objection Legal framework: Appellate jurisdiction under the Central Excise Act requires the Tribunal to decide appeals on the merits of issues properly raised before it. Internal audit procedures (CERA/CAG objections) are administrative processes whose pendency cannot automatically curtail appellate adjudication. Precedent treatment: The Court noted recent Supreme Court authority relied upon by the respondent but expressly declined to rule on that authority, leaving its consideration to the Tribunal on remand. Interpretation and reasoning: The Tribunal dismissed the appeal solely on the basis that the matter related to an audit objection and internal procedures between the Department of Revenue and the Comptroller & Auditor General, and it considered such procedures as not appropriate for appellate intervention. The Court found this approach incorrect because (a) the show cause notice predated final settlement of the audit objection, (b) subsequent events (including an Order-in-Appeal rejecting revenue's challenge to the refund) and communications (including a departmental communication dated 26 May 2008) bearing on the propriety of pursuing the show cause were not placed before the Tribunal, and (c) the Tribunal thereby failed to exercise its appellate function to decide contested legal questions on their merits. Ratio vs. Obiter: The conclusion that the Tribunal erred in limiting adjudication to the audit objection and must decide all rival contentions on merits is a ratio of the Court's decision to remit the matter. Conclusion: The impugned order is set aside and the appeal is restored for full adjudication on the merits by the Tribunal; the Tribunal must consider all issues raised by the parties and not treat the audit objection as automatically dispositive. Issue 3 - Delay by the Tribunal in issuing the impugned order Legal framework: CESTAT (Procedure) Rules and relevant circulars impose expectations for timely disposal of appeals and issuance of orders after hearing. Precedent treatment: The Court noted the issue was framed for consideration but did not engage in an extended analysis or record a finding of substantive prejudice from any delay. Interpretation and reasoning: Although delay in issuance of orders was raised as an issue, the Court's principal concern was the inadequacy of adjudication rather than chronology. The Court did not find it necessary to quash the impugned order on grounds of delay alone and refrained from making a detailed ruling on procedural violation; instead it directed expedited reconsideration within a specified timeframe. Ratio vs. Obiter: Observations regarding delay are largely obiter in the sense that they did not form the primary basis for allowing the appeal; the operative direction was remand for reconsideration within four months. Conclusion: No separate order was made on delay as a standalone ground; the Tribunal was directed to dispose of the restored appeal expeditiously within four months. Issue 4 - Validity of dropping a show cause notice in presence of audit objection and application of Sections 11A, 11AC, 11B Legal framework: Sections 11A, 11AC and 11B of the Central Excise Act provide statutory safeguards and procedures for recovery/waiver in cases of demand where audit objections or other departmental processes are involved; the Commissioner's power to drop proceedings is subject to these statutory constraints and to proper exercise of jurisdiction. Precedent treatment: The Court recorded that parties relied upon Supreme Court decisions addressing interrelation of audit objections, departmental settlement, and the requisite application of Sections 11A/11AC/11B. The Court declined to decide on those precedents in the present judgment and left their consideration to the Tribunal. Interpretation and reasoning: The Court found factual and procedural complexities: the show cause notice was issued on 11 April 2007 (prior to CERA closure), CERA issued an HM report on 20 February 2007, the Commissioner filed an appeal against the refund order, and subsequently an Order-in-Appeal (22 November 2007) rejected the revenue's appeal. The Commissioner later dropped the show cause notice by order dated 31 January 2008; that order was reviewed by a Committee of Chief Commissioners and the revenue sought appellate recourse. Given these events, the Court held that whether the Commissioner properly dropped the show cause notice without following Sections 11A/11AC/11B and what effect the revenue's conduct had on the adjudication are questions requiring full examination by the Tribunal. The Court criticized the Tribunal for treating audit settlement as an internal matter that barred appellate adjudication. Ratio vs. Obiter: The determination that these statutory issues must be examined afresh by the Tribunal is part of the operative ratio remanding the matter; the Court did not decide the legal effect of Sections 11A/11AC/11B on the facts. Conclusion: Questions concerning the validity of dropping the show cause notice, applicability of Sections 11A/11AC/11B, and the effect of subsequent departmental communications and decisions were left open for the Tribunal to decide on remand. Disposition and Directions The impugned appellate order is set aside, the appeal before the Appellate Tribunal is restored, and all issues - including the legality of the refund sanction, the propriety of the show cause notice, the application of Sections 11A/11AC/11B, and related factual and legal contentions - are to be decided afresh by the Tribunal on merits. The Tribunal is directed to decide the appeal expeditiously and within four months; all contentions of the parties remain expressly open. No costs were ordered.