2005 (11) TMI 74 - HC - Central Excise

Court Upholds Denial of Modvat Credit on HSD Oil Retrospectively

KANORIA INDUSTRIES LTD. Versus UNION OF INDIA

KANORIA INDUSTRIES LTD. Versus UNION OF INDIA - 2005 (190) E.L.T. 295 (Kar.) Issues Involved:1. Denial of Modvat credit on high speed diesel (HSD) oil.2. Constitutional validity of Section 112 of the Finance Act, 2000.3. Alleged violation of Article 14 of the Constitution of India.4. Competence of the legislature to enact Section 112 of the Finance Act, 2000.Issue-wise Detailed Analysis:1. Denial of Modvat Credit on High Speed Diesel (HSD) Oil:The petitioners, assessees under the Central Excise Act, 1944, challenged the denial of Modvat credit on HSD oil used as an input in the production of electricity for manufacturing cement. The dispute for the first petitioner arose for the period December 1997 to March 1998, while for the second petitioner, it was from September 1997 to December 1997. The denial was based on Section 112 of the Finance Act, 2000, which invalidated the Modvat credit on HSD oil retrospectively.2. Constitutional Validity of Section 112 of the Finance Act, 2000:The petitioners contended that Section 112 of the Finance Act, 2000, which retrospectively disallowed Modvat credit on HSD oil, was unconstitutional. They argued that a validating legislation should only validate an earlier levy declared invalid by courts, by removing the defect pointed out by the court. The petitioners claimed that the Tribunal had not invalidated any law but had merely interpreted the existing notification to allow Modvat credit, hence there was no need for a validating legislation.3. Alleged Violation of Article 14 of the Constitution of India:The petitioners argued that Section 112 created an invidious classification by discriminating against manufacturers using HSD oil for electricity generation, while allowing Modvat credit for those using other inputs. They claimed this was violative of Article 14, which guarantees equality before the law.4. Competence of the Legislature to Enact Section 112 of the Finance Act, 2000:The court examined whether the legislature had the competence to enact Section 112. It was argued that the provision was within the legislative competence and aimed at retrospectively withdrawing the Modvat credit benefit, thus removing any benefit that had accrued under the earlier notifications.Judgment:Denial of Modvat Credit:The court noted that the denial of Modvat credit was based on the retrospective application of Section 112 of the Finance Act, 2000, which invalidated any Modvat credit on HSD oil from March 16, 1995, to the date the Finance Act, 2000, received presidential assent.Constitutional Validity:The court upheld the constitutional validity of Section 112, stating that the provision was a valid exercise of legislative power aimed at retrospectively withdrawing a concession. The court referenced the Supreme Court's decision in the case of Sri Prithvi Cotton Mills Ltd. v. Broach Borough Municipality, which held that a validating legislation must remove the defect pointed out by the court and make adequate provisions for valid imposition of tax.Article 14 Violation:The court rejected the argument that Section 112 violated Article 14. It held that the classification of manufacturers using HSD oil for electricity generation as a separate class was reasonable and did not constitute invidious discrimination. The denial of Modvat credit was uniformly applied to all such manufacturers, thus not violating the principle of equality.Legislative Competence:The court found that the legislature had the competence to enact Section 112 and that the provision effectively removed the benefit of Modvat credit on HSD oil retrospectively. The court emphasized that the provision was designed to override any judgments or orders that had allowed such credit, thereby achieving the purpose of a validating legislation.Conclusion:The court dismissed the writ petitions, upholding the validity of Section 112 of the Finance Act, 2000, and confirming the denial of Modvat credit on HSD oil. The rule was discharged, and the petitioners' contentions were rejected.