2026 (3) TMI 505 - HC - Central Excise

Capacity based Excise Levy upheld as intra vires; rules permit machine based capacity determination and verification without interim relief.

Whether capacity based notifications and rules governing chewing tobacco packing machines exceed statutory power: the court applied the enabling principle ... Validity of notifications being Notification No. 04/2025-Central Excise (first notification), Notification No. 04/2025-Central Excise (N.T.) (second notification) and Notification No. 05/2025-Central Excise (N.T.) (called “Chewing Tobacco, Jarda Scented Tobacco and Gutkha Packing Machines (Capacity Determination and Collection Duty) Rules hereinafter referred to as the 2026 Rules) - ultra vires Section 3A of the Central Excise Act, 1944 and the Constitution of India - Capacity-based excise liability under Section 3A - deeming fiction - determination of annual production capacity by relevant factors - reasonableness of mechanistic capacity formulas - regulatory compliance measures including CCTV. Capacity-based excise liability under Section 3A - HELD THAT:- The Court held that Section 3A vests power in the Central Government to notify goods for capacity-based taxation and to frame rules specifying factors relevant to production and the manner of determining annual capacity. Rule 4 of the 2026 Rules, by enumerating number of packing machines and their maximum capacity, falls within the scope of Section 3A(2)(b)(i) and (ii). Rule 5, which prescribes computation based on number and speed of packing machines and retail sale price, provides the manner of determination contemplated by Section 3A(2)(b)(ii). The Court rejected the submission that these rules are prima facie beyond legislative mandate, observing that the statutory scheme permits deeming annual capacity and that the 2026 Rules are prima facie within that legislative authority (paras 25-33). [Paras 28, 30, 31, 32, 33] Notifications and the 2026 Rules are prima facie within the legislative mandate of Section 3A and not manifestly ultra vires on the ground that they determine capacity by the factors and manner prescribed. Reasonableness of mechanistic capacity formulas - HELD THAT:- The Court considered the contention that Rule 5 prescribes arbitrary maximum figures without accounting for working hours, shifts or man-days. It held that the correct test is not actual production but conformity with the legislative objective to curb tax evasion under Section 3A. The petitioners did not demonstrate that the figures were impossible; conditions appearing harsh do not render the rule irrational when justified by revenue protection. Consequently, the prima facie view was that the mechanistic formula does not invalidate the Rules (paras 31-33). [Paras 31, 32, 33] The mechanistic capacity formula in Rule 5 is not prima facie arbitrary or irrational so as to warrant interim relief. Regulatory compliance measures including CCTV - Legality of mandating CCTV installation under Rule 16 as a compliance and anti-evasion measure - HELD THAT:- The Court found no unreasonableness in mandating CCTV installation, observing that such a requirement aids enforcement and compliance in the context of Section 3A's objective to curb tax evasion. The Court treated CCTV mandate as a permissible regulatory measure within the impugned Rules (para 36). [Paras 36] Requirement of CCTV installation under the Rules is prima facie reasonable and permissible. Capacity-based duty rate specification - HELD THAT:- The Court observed that Section 3A(3) authorises levying duty at a rate on the unit of production or other specified production factor, and held that the second notification prescribing rates of duty relates to the factor relevant to production and is prima facie consistent with that provision (para 37). [Paras 37] The second notification prescribing duty rates is prima facie consistent with Section 3A(3). Interim relief and prima facie assessment - Appropriateness of granting interim relief restraining enforcement of the impugned notifications and Rules - HELD THAT: - After evaluating the statutory scheme, the Rules' alignment with Section 3A, and authorities cited, the Court concluded on a prima facie basis that the petitioners had not established that the notifications or Rules were beyond legislative power or manifestly arbitrary. The Court therefore declined to grant the interim injunction sought by the petitioners (paras 34-42). [Paras 38, 39, 40, 41, 42] No interim order granted; respondents entitled to continue implementation subject to final adjudication. Final Conclusion: On a prima facie examination the impugned notifications and the 2026 Rules fall within the legislative competence of Section 3A of the Central Excise Act, 1944 and are not manifestly arbitrary; the petition for interim relief is refused and the respondents may file affidavits in opposition as directed. Issues: Whether Notification No. 04/2025-Central Excise dated 31.12.2025, Notification No. 04/2025-Central Excise (N.T.) dated 31.12.2025 and Notification No. 05/2025-Central Excise (N.T.) dated 31.12.2025 and the Chewing Tobacco, Jarda Scented Tobacco and Gutkha Packing Machines (Capacity Determination and Collection Duty) Rules, 2026 are ultra vires Section 3A of the Central Excise Act, 1944 and the Constitution of India.Analysis: Section 3A of the Central Excise Act, 1944 empowers the Central Government to notify goods for capacity based excise duty and to frame rules specifying factors relevant to production and the manner for determination of annual production capacity. Rule 4 of the 2026 Rules identifies number of packing machines and maximum capacity of such machines as factors relevant to production and aligns with Section 3A(2)(b)(i) and (ii). Rule 5 prescribes a method based on machine number, speed and retail sale price to determine maximum capacity per machine per month; Rule 7 provides for verification including physical inspection and Rule 8 for passing determination orders. Challenges that the figures are arbitrary because they do not disclose working hours, shifts or man-days were considered against the legislative objective of curbing tax evasion under Section 3A. Precedents recognising capacity or machine-based levies and the need for standardization in similar industries were considered. The mandate for CCTV in Rule 16 was assessed in light of the objective to ensure compliance and prevent evasion.Conclusion: The impugned notifications and the 2026 Rules are prima facie within the legislative mandate of Section 3A of the Central Excise Act, 1944 and are not manifestly arbitrary; no interim relief is granted to the petitioners. The determination and verification mechanisms provided in the Rules are not shown to render the statutory scheme otiose.Ratio Decidendi: Where Section 3A of the Central Excise Act, 1944 authorises capacity based levy and empowers rule making to specify factors relevant to production and methods of capacity determination, rules that identify machine number and machine capacity as relevant factors and provide verification procedures are prima facie intra vires and not liable to interim suspension merely because prescribed figures or mechanistic formulas appear harsh absent demonstration of impossibility or manifest unreasonableness.