2025 (10) TMI 4 - AT - Central Excise

Earth-moving equipment and excavators not 'automobiles'; Entry 100A (Third Schedule, Finance Act 2011) amendment prospective; Rule 26 penalties set aside

M/s Action Construction Equipment Ltd, Shri P.K. Bansal and Shri Vijay Agarwal Versus Commissioner of Central Excise, Goods & Service Tax, Faridabad

CESTAT held for the appellants: the Larger Bench ruled that earth-moving equipment and excavators are not 'automobiles,' so labels under Entry 100A of the ... Process amounting to manufacture - repacked spare parts - divergent view of the Tribunal and the matter was referred to the Larger Bench - word 'automobile' has not been defined in the Central Excise Act, the Central Excise Tariff Act or the Notifications issued by the Central Government - amendment made in the Third Schedule to the Central Excise Act by Finance Act, 2011 w.e.f. 29.04.2010 by adding Serial No. 100A to the Third Schedule is prospective in nature - extended period of limitation - Penalties u/r 26 of CER - HELD THAT:- It is found that since there was a divergent view of the Tribunal and the matter was referred to the Larger Bench. It is found that the rectification application filed by the department, seeking rectification in the Interim Order dated 06.06.2023, was also rejected by the Larger Bench vide order dated 08.01.2024. Further, it is found that once the Larger Bench has settled the issue in favour of the Assessees by holding that the earth-moving equipment, excavators etc cannot be called ‘automobiles’ and thus affixing the labels covered under Entry 100 of the Third Schedule to the Act is not applicable in the present case. Extended period of limitation - HELD THAT:- It is found that since there was a divergent view of the Tribunal and the matter was referred to the Larger Bench, which shows that there cannot be mala fide on the part of the Appellant who had a bona fide belief that activity of labelling on earth-moving equipment does not amount to manufacture. Therefore, this issue is also decided in favour of the Appellant. Penalties u/r 26 - HELD THAT:- It is found that the same cannot be imposed under Rule 26 as nothing has been brought on record by the department to show that the Appellants had the knowledge that excisable goods are liable to confiscation. Moreover, when the demand is set aside on merit in view of the decision of Larger Bench, therefore, penalties under Rule 26 cannot sustain. The impugned order is not sustainable in law and is set aside - appeal allowed. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether the activity of packing/repacking, labelling, affixing logo and MRP on spare parts amounts to 'manufacture' under Section 2(f)(iii) by virtue of those goods being 'parts' of 'automobiles' covered by Entry 100 of the Third Schedule. 2. How the expression 'automobile' is to be defined for the purpose of Entry 100 of the Third Schedule when not defined in Central Excise legislation or Notifications. 3. Whether the amendment inserting Serial No. 100A into the Third Schedule (Finance Act, 2011 effective 29.04.2010) operates retrospectively or prospectively. 4. Whether the extended period of limitation for demand can be invoked where the assessee acted under a bona fide belief and there existed divergent judicial views leading to a reference to a Larger Bench. 5. Whether penalties under Rule 26 of the Central Excise Rules can be imposed on officers/officials of the assessee in the absence of evidence of knowledge of liability to confiscation or mens rea, and where confiscation was not proposed. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 & 2 - Whether labelling/packaging amounts to 'manufacture' because goods are 'parts' of 'automobiles'; definition of 'automobile' Legal framework: Section 2(f)(iii) (definition of 'manufacture' to include any process amounting to manufacture) and Entry 100 of the Third Schedule (covering parts/components of automobiles) determine whether processes like packing/label affixation convert non-excisable goods into excisable manufactured goods; Central Excise / Central Excise Tariff statutes contain no definition of 'automobile'. Precedent treatment: The Tribunal had divergent views; a Larger Bench considered and answered reference questions. A Division Bench subsequently applied the Larger Bench interim ruling in similar matters. Interpretation and reasoning: The Larger Bench held it permissible to consult dictionary meanings to ascertain the ordinary meaning of 'automobile' rather than adopting definitions from other statutes (e.g., Air (Prevention and Control of Pollution) Act, Motor Vehicles Act). Applying the ordinary parlance approach, the Larger Bench concluded that earth-moving equipment and excavators do not qualify as 'automobiles' for the purpose of Entry 100. Consequently, labelling/packing of spare parts for such equipment does not render the activity a 'manufacture' under Section 2(f)(iii) by reference to Entry 100. Ratio vs. Obiter: Ratio - (a) ordinary/dictionary meaning may be used to define 'automobile' where the term is undefined in excise statutes; (b) earth-moving equipment/excavators are not 'automobiles' within Entry 100 so processes of labelling/packing of their spare parts do not amount to manufacture under Section 2(f)(iii). Obiter - comments rejecting use of other statutes' definitions for this purpose are ancillary but follow the ratio. Conclusion: The impugned demand based on characterization of the goods as parts of 'automobiles' fails; the activity of labelling/packing spare parts for earth-moving equipment does not amount to manufacture under Section 2(f)(iii) as Entry 100 is inapplicable. Issue 3 - Prospective vs. retrospective operation of amendment inserting Serial No. 100A into Third Schedule Legal framework: Finance Act amendment inserting Serial No. 100A effective 29.04.2010 and corresponding notifications; role of Circulars clarifying temporal operation of Schedule amendments. Precedent treatment: The Larger Bench expressly addressed the temporal operation of the Finance Act amendment, and the Tribunal has applied that answer in subsequent matters. Interpretation and reasoning: The Larger Bench concluded that the amendment adding Serial No. 100A is prospective in nature. The Ministry's Circular noting that notifications accord effect on specified dates and that inclusion in the Third Schedule would follow enactment supports the prospective view; the Tribunal treated post-enactment inclusion as not retroactive beyond the legislative effective date principle. Ratio vs. Obiter: Ratio - the insertion of Serial No. 100A by the Finance Act operates prospectively (i.e., not to create retrospective liability prior to the effective legislative date specified by the Finance Act/Notification). Obiter - factual remarks about interim Circulars' interplay are illustrative and not foundational to the principle. Conclusion: The amendment is prospective; retrospective application to create liability for earlier periods is not warranted by the amendment itself. Issue 4 - Extended period of limitation where there was divergent judicial view and reference to Larger Bench Legal framework: Limitation provisions for demanding duty (extended period) require circumstances like suppression or misstatement or fraud; bona fide belief and disclosure in returns are relevant to limit invocation of extended period. Precedent treatment: The Tribunal referred to prior decisions where divergent judicial views and bona fide beliefs precluded finding mala fide necessary to sustain extended-period demands. Interpretation and reasoning: The Tribunal found that the existence of divergent views within the Tribunal, the fact that the matter was referred to the Larger Bench, and that the assessee regularly filed returns and acted under a bona fide legal position rebut the inference of mala fide or deliberate evasion required to invoke the extended period. A reasonable reliance on unsettled law and ongoing judicial process prevents treating the assessee's conduct as suppression. Ratio vs. Obiter: Ratio - where legal position is genuinely debatable and referred to a Larger Bench, extended period cannot be invoked absent evidence of suppression, fraud or mala fide; Bereft of such evidence, the normal limitation applies. Obiter - references to specific prior case facts are illustrative. Conclusion: Extended period of limitation is not invokable against the assessee on these facts; demand beyond normal period cannot stand. Issue 5 - Validity of penalties under Rule 26 in absence of mens rea/confiscation proposal Legal framework: Rule 26 penalties are predicated on knowledge that goods dealt with are liable to confiscation; mens rea (knowledge/intent) is an essential ingredient for imposition; confiscation proposal in show-cause is relevant to sustain Rule 26 penalties. Precedent treatment: Tribunal and High Courts have held that mens rea and evidence of knowledge are necessary preconditions; penalties set aside where department fails to demonstrate knowledge or confiscation proposal. Interpretation and reasoning: The Tribunal noted absence of evidence showing that the penalised officers had knowledge that the goods were excisable/liable to confiscation and observed that no confiscation was proposed in the show-cause instrument. Given that the substantive demand itself was set aside on merits (following Larger Bench), imposition of Rule 26 penalties cannot be sustained. The Tribunal applied authoritative principles that penalties cannot be levied as automatic corollaries when foundational liability is unsustainable and where mens rea is not established. Ratio vs. Obiter: Ratio - Rule 26 penalties require proof of knowledge of liability to confiscation (mens rea); absence of such proof and absence of a confiscation proposal render penalties unsustainable, particularly where substantive demand fails. Obiter - reliance on particular authorities is supportive but not essential to the core principle. Conclusion: Penalties under Rule 26 imposed on officers are unsustainable for lack of evidence of knowledge/intent and because the underlying duty demand was set aside; penalties are therefore liable to be quashed. Overall Disposition Applied to the Present Appeals Applying the Larger Bench's determinations and subsequent Division Bench decisions, the Tribunal set aside the impugned demand, disallowed invocation of the extended period, and quashed penalties under Rule 26; credited prior deposit for the period concerned and accorded consequential relief as per law. These conclusions rest on the ratio that the goods in question are not 'parts' of 'automobiles' within Entry 100, the amendment was prospective, bona fide belief plus divergent judicial views negate extended-period invocation, and mens rea is essential for Rule 26 penalties.