TaxTMI 
TaxTMI 
2016 (7) TMI 1074
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.... to make rules to provide for the lapsing of credit of duty lying unutilised with the manufacturer from a specified date. 3. Section 132 (1) (a) and Section 132 (2) of the Finance Act, 1999 were enacted to validate Sub-rule (4A) of Rule 57F of the Central Excise Rules, 1944 (hereafter 'the Rules') which had been held to be beyond the rule making power of the Central Government by the Supreme Court in Eicher Motors Private Limited v. Union of India: 1999 (106) ELT 3 (SC). By virtue of the said sub-rule, MODVAT credit in respect of Excise duties paid on inputs for manufacture of goods falling under the heading no. 87.01, 87.02, and 87.04 and 87.06 of the Schedule to the Central Excise Tariff Act, 1985 lying unutilised as on 16.03.1995, was mandated to have lapsed and consequently unavailable for payment of duty on excisable finished goods. 4. The Petitioners in W.P.(C) No.4754/1995 inter alia impugn the validity of Sub-rule (4A) of Rule 57F and seek an appropriate writ declaring the said Sub-rule to be ultra vires the Constitution of India. Factual context 5. M/s SML Isuzu Limited and M/s V E Commercial Vehicles Limited (hereafter referred to as 'the Petitioners'....
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....ith retrospective effect was unreasonable and violative of the Part III of the Constitution. He submitted that it is permissible to pass retrospective legislation in certain circumstances, but it would be unreasonable to resort to such legislation in cases where the Assessees had acted in accordance with rules. He referred to the opinion of Justice Sen in Lohia Machines Limited v. Union of India (1985) 2 SCC 197, wherein it has been held that the retrospective application of Section 80J of the Income Tax Act, 1957 would be invalid. MODVAT Scheme 9. On the presentation of the Annual Budget 1986-87 in the Lok Sabha on 28.02.1986, the then Finance Minister referred to the „Modified Value Added Tax‟ MODVAT Scheme-I, which he stated was formulated to address the issues regarding the cascading effect of Excise Duty paid for the manufacturing of the products utilising excisable inputs. Conceptually, the scheme provided for a proforma credit for duties paid on inputs for discharging the excise liability on finished goods. The MODVAT Scheme initially introduced was applicable to all goods covered under 37 Chapters of the Tariff Act including motor vehicles. In ter....
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....yment of duty on the final products for the manufacture of which such inputs are intended to be utilised. There need not be any one to one co-relation between the input and the final product. It may be mentioned that there is generally no provision for refund of the Modvat credit (except in case of exports) and such credit can be utilised only for the purpose of payment of duty; (i) on the finished excisable goods in the manufacture of which such inputs are intended to be used; (ii) on the waste arising in the course of manufacture of such final products; (iii) on the inputs themselves, if such inputs are cleared as such.[Rule57F(3)]. The input duty credit available in respect of final products which are exported under bond can also be utilised similarly." 13. In terms of Rule 57G (2) of the Rules, the Petitioners are entitled to the credit of duties paid on the inputs immediately on the receipt of such inputs in the factory. It is not disputed that the excise duty structure of goods used as inputs for manufacturing the final product was always less than the excise duty payable on the final product. However, for a period of three years commencing from 1993 - that is,....
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...., 1985 (5 of 1986) shall lapse and shall not be allowed to be utilised for payment of duty on any excisable goods, whether cleared for home consumption or for export: Provided that nothing contained in this sub-rule shall apply to credit of duty, if any, in respect of inputs lying in stock or contained in finished products lying in stock on the 16th day of March, 1995." The decision of the Supreme Court in Eicher Motors Pvt. Ltd. 16. The validity of Rule 57F(4A) of the Rules was challenged before the Supreme Court, inter alia, on the following grounds:- "1. Modvat credit lying in balance with the assessee as on 163-1995 represents a vested right accrued or acquired by the assessee under the existing law and such right is sought to be taken away by impugned Rule 57F(4A) and the Central Government has no powers under Section 37 of the Central Excise Act, 1944[hereinafter referred to as 'the Act'] or any other provision thereof to frame such a rule. 2. The impugned rule is arbitrary and unreasonable as the same has been framed without due application of mind to the relevant facts and it has been exercised on the basis of nonexistent facts or which are patently erroneou....
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.... made applicable to the goods which had already come into existence in respect of which the earlier scheme was applied under which the assessees had availed of the credit facility for payment of taxes. It is on the basis of the earlier scheme necessarily the taxes have to be adjusted and payment made complete. Any manner or mode of application of the said rule would result in affecting the rights of the assessees. We may look at the matter from another angle. If on the inputs the assessee had already paid the taxes on the basis that when the goods are utilised in the manufacture of further products as inputs thereto then the tax on these goods gets adjusted which are finished subsequently. Thus a right accrued to the assessee on the date when they paid the tax on the raw materials or the inputs and that right would continue until the facility available thereto gets worked out or until those goods existed. Therefore, it becomes clear that Section 37 of the Act does not enable the authorities concerned to make a rule which is impugned herein and, therefore, we may have no hesitation to hold that the rule cannot be applied to the goods manufactured prior to 16-3-1995 on which duty h....
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....sident (hereinafter referred to as the said period) under the Central Excise Act or any rules made thereunder in relation to the lapsing of credit of duty lying unutilised with the manufacturer of specified excisable goods and also for not allowing such credit to be utilised for payment of any kind of duty on any excisable goods shall be deemed to be, and to always have been, for all purposes, as validly and effectively taken or done as if the amendments made by sub-section (1) had been in force at all material times and, accordingly, notwithstanding anything contained in any judgment, decree or order of any court, tribunal or other authority, - (a) the lapsing of credit of duty lying unutilised with the manufacturer of specified excisable goods and also for not allowing such credit to be utilised for payment of any kind of duty on any excisable goods, during the said period shall be deemed to always have been, as validly lapsed, as if the amendments made by sub-section (1) had been in force at all material times; (b) no suit or other proceedings shall be maintained or continued in any court for allowing the credit of, and no enforcement shall be made by any court of any decree....
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....r Motors (supra). The second aspect relates to the challenge to the validity of the substantive import of the Rule 57F(4A) of the Rules as offending the rights guaranteed under Part III of the Constitution of India. 24. As indicated above, the only ground on which the Supreme Court held that Rule 57F(4A) could not be applied to MODVAT credit already accumulated with the manufacturers was that the same would affect the rights of parties which had crystallised and the Central Government was not empowered to frame any subordinate legislation for taking away the said accrued rights. Indisputably, the said defect has been cured inasmuch as the Parliament has by Section 131 of the Finance Act, 1999 specifically empowered the Central Government to frame Rules for lapsing of accumulated credit on a specified date. Thus, if we assume - for the purposes of considering the challenge to the retrospective affirmation of Rule 57F(4A) of the Rules - that there was no defect in Rule 57F(4A) at the time when it was initially made except that the Central Government lacked the power to do so, it is at once clear that the challenge to Section 132(2) of the Act is without merit. This is so, because it....
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....s firmly established since the decision of the Federal Court in the case of The United Provinces v. Mst. Atiqa Begum : (1940) F.C.R. 110." 26. In Virender Singh Hooda v. State of Haryana: (2004) 12 SCC 588, the Supreme Court observed: "It is well settled that if the legislature has the power over the subject-matter and competence to make a valid law, it can at any time make such a valid law and make it retrospectively so as to bind even past transactions. The validity of a validating law, therefore, depends upon whether the legislature possesses the competence which it claims over the subject-matter and whether in making the validation it removes the defect which the courts had found in the existing law." 27. There are numerous decisions of the Supreme Court and High Courts where the Courts have rejected the challenge to validating acts which retrospectively validate a levy that has been struck down by the Courts. It is now well established that the legislature can frame laws retrospectively within the field of their legislative competence. It is also well established that validating acts which cure the defect that invalidated an earlier legislation cannot be impugned as being....
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....mes relevant to enquire as to how the retrospective effect of the amendment operates." The Gujarat High Court in Niko Resources Limited v. Union of India: (2015) 374 ITR 369 (Guj) reiterated the above view. 30. In Shri Prithvi Cotton Mills Ltd. v. Broach Borough Municipality: (1969) 2 SCC 283, the Supreme Court considered the challenge to the validity of the Gujarat Imposition of Taxes by Municipalities (Validation) Act, 1963. The said enactment was impugned as being ultra vires Article 19(1)(f), 19(1)(g) and 265 of the Constitution of India. The said challenge arose in the context of rates imposed by Broach Borough Municipality (hereafter 'BBM') constituted under Section 8 of the Bombay Municipal Boroughs Act, 1925. BBM purporting to Act under Section 73 of the Bombay Municipal Boroughs Act, 1925 and the Rules made thereunder imposed rates on lands and buildings on the basis of percentage on the capital value of lands and buildings within the municipality. The levy of rates was challenged by way of writ petitions. While the petitions were so pending, the Gujarat Legislature enacted Gujarat Imposition of Taxes by Municipalities (Validation) Act, 1963 to validate the impo....
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....d interpretation of the law under which the tax was collected and by legislative fiat makes the new meaning binding upon courts. The legislature may follow any one method or all of them and while it does so it may neutralise the effect at the earlier decision of the court which becomes ineffective after the change of the law. Whichever method is adopted it must be within the competence of the legislature and legal and adequate to attain the object of validation. If the legislature has the power over the subject-matter and competence to make a valid law, it can at any time make such a valid law and make it retrospectively so as to bind even past transactions. The validity of a Validating law, therefore, depends upon whether the legislature possesses the competence which it claims over the subject-matter and whether in making the validation it removes the defect which the courts had found in the existing law and makes adequate provisions in the Validating law for a valid imposition of the tax." After observing as above, the Supreme Court rejected the challenge to the validity of Bombay Municipal Boroughs Act, 1925 in the following manner:- "The legislature in Section 73 had ....
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....ssary to invoke the 14th Clause of Section 73 which contains a residuary power to impose any other tax not expressly mentioned." The facts in the above case are in one sense materially similar to the facts in the present case as in the present case also, the Supreme Court had earlier held Rule 57F(4A) to be beyond the rule making power of the Central Government as conferred under Section 37 of the Act. 31. As pointed out earlier, by virtue of Section 131(b) of the Finance Act, 1999, the Parliament had cured the defect on account of which Rule 57F(4A) had been read down. There is no dispute as to the legislative competence of the Parliament to enact such law. The provisions of Section 132(1) (a) and Section 132(2) of the Finance Act, 1999 are only directed to sustain Rule 57F(4A) as originally enacted. Thus, in our view, the challenge laid by the Petitioners insofar as the aspect of the retrospective operation of the impugned provisions to the extent that Rule 57F(4A) is validated, cannot be sustained. 32. This brings us to the second aspect of the challenge laid by the Petitioners, that is, whether Rule 57F(4A) is invalid as being violative of Article 14, 19(1)(f) and 19(1)(g),....
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....y..... " 34. Thus, while it is recognised that the powers of the State to levy tax and enact fiscal laws are wide, the laws framed cannot be so irrational as to fall foul of Article 14 or 19(1)(g) of the Constitution. Particularly, in cases such as the present one, where the benefit of the scheme on the basis of which the Petitioners had already acted is sought to be withdrawn, the enactment has to be justified on some rational basis. 35. The learned counsel for the Petitioners strongly relied on dissenting opinion of Justice Sen, in Lohia Machines (supra). In that case, the Supreme Court considered the challenge to a legislative amendment to Section 80J of the Income Tax Act, 1961. The majority opinion was that the amendment was only clarificatory and, therefore, was held to be valid. However, Justice Sen was of the view that the amendment was not clarificatory and the introduction of Sub section (1A) in Section 80J had the effect of retrospectively withdrawing the benefit granted under Section 80J in certain cases. As rightly pointed out by the learned counsel for the Petitioners, the observations made by Justice Sen in respect of retrospective amendment - although forming a p....
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....by the Calcutta High Court in Shew Bhagwan Goenka v. Commercial Tax Officer.: (1973) 32 STC 368 (Cal) wherein the Court after referring to the various decisions of the Supreme Court including Rai Ramkrishna (supra) observed as under:- "Different considerations may arise where by an amendment with retrospective operation a fresh tax is sought to be levied....... It is necessary, therefore, to enquire as to the circumstances under which the amendment in question was introduced." 37. To summarise, the legal position as now well established is that a legislature has the power to enact laws both prospectively as well as retrospectively. In the case where the legislature enacts laws for curing defects to validate an earlier enacted invalid law, or to clarify an earlier legislation, the same would not be unconstitutional solely for the reason that the said laws have been enacted with retrospective effect. However, in cases where a law is enacted to impose a fresh levy with retrospective effect or to take away a benefit granted under an earlier law, the same is required to be justified on rational reasons. 38. The question whether an enactment is reasonable has to be considered in the ....
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.... utilised was interpreted in a manner as not to require the same duty paid raw material to be used in the manufacture of final finished product in respect of which credit for the duty paid input was claimed. In that view, the MODVAT scheme as introduced worked on the principle that the duty paid inputs had a co-relation with the finished products even though such co-relation was not of a kind that required the very same input to be used in the final product. It was clarified by the department in that sense that there was no one to one co-relation between duty paid on the inputs and the output. However, it was also clear that the duty paid on inputs was not available as a credit in respect of duties on any other excisable finished product. If this restriction was continued and the duty structure was not rationalised for higher duties (in absolute terms) then the duties paid on the inputs that resulted in the accumulated credit available with the Petitioners would remain as such and would be of no benefit to them (unless they changed their business model). Thus, although, the Petitioners had an accrued right in respect of duty paid by them, such right was limited and the Petitioners ....
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....ute Mills Co. Ltd. v. The State of Uttar Pradesh: AIR 1961 SC 1534, the Supreme Court had unequivocally held as under : "And then it is argued that a sales tax being an indirect tax, the seller who pays that tax has the right to pass it on to the consumer, that a law which imposes a sales tax long after the sales had taken place deprives him of that right, that retrospective operation is, inconsequence, an incident inconsistent with the true character of a sales tax law, and that the Validation Act is therefore not a law in respect of tax on the sale of goods, as recognised, and it is ultra vires entry 54. We see no force in this contention. It is no doubt true that a sales tax is, according to accepted notions, intended to be passed on to the buyer, and provisions authorising and regulating the collection of sales tax by the seller from the purchaser are a usual feature of sales tax legislation. But it is not an essential characteristics of a sales tax that the seller must have the right to pass it on to the consumer, nor is the power of the legislature to impose a tax on sales conditional on its making a provision for sellers to collect the tax from the purchasers. Whether a law....