SUPREME COURT OF INDIA
R.C. Tobacco Private Limited
Vs
Union of India
Transfer Case (Civil) 27 of 2004; C.A. Nos. 881-896/2004; Tc Nos.23- 26 of 2004, 28-36 of 2004; Tp No. 151 of 2004
((Mrs.) Ruma Pal and Tarun Chatterjee)
19/09/2005
MRS. RUMA PAL, J.
The dispute in these matters arises out of an exemption which had been granted
by the Central Government to new industries by Notification No. 32/99-CE dated
8th July 1999 issued under Section 5A of the Central Excise
Act, 1944 (referred to hereafter as 'the Act'). The parties in the
various proceedings which are being disposed of by this judgment, represent
industries manufacturing cigarettes on the one hand (whom we will refer to as
"the petitioners") and the Union of India and the excise authorities
on the other (who are described as "the respondents"). Almost all the
petitioners are job workers for large tobacco companies. They set up their
units under agreements with the large tobacco companies and admittedly produced
the cigarettes with the brand names of those companies. The few exceptions to
this are noted subsequently.
In December, 1997 the Government of India had announced a separate industrial
policy for the North Eastern Region of the country which proposed to stimulate
'synergetic' development of industries in the region by giving a package of
incentives which included exemption from excise duties, transport subsidies,
capital investment subsidies, interest subsidies and other benefits. Pursuant
to this policy, a number of notifications were issued by the concerned
Ministries in the Government, the relevant ones for our purpose being the
Excise Notifications Nos. 32/99 and 33/99 dated 8th July 1999 by which diverse
benefits were given. Briefly stated, under the first notification all excisable
goods were exempt from duty under the Act if the goods were produced by new
industrial units which commenced their commercial production on or after 24th
December 1997 and were located in defined areas specified in the annexure to
the notification.
The benefit was given for a period of 10 years from the date of publication of
the notification or from the date of the commencement of commercial production
whichever was later. The second notification exempted goods produced in
specified industries located in areas outside the growth centres. The procedure
envisaged for obtaining the exemption under both notifications was that the
manufacturer of goods in such industrial units would have to pay excise duty
and subsequently claim refund from the excise authorities.
A notification was issued on 31st December 1999, being Notification No. 45 of
1999 withdrawing the excise exemption to cigarettes. However, the exemption was
re-introduced on 17th January 2000 by Notification No. 1 of 2001. The petitioners
set up units in a specified growth centre and claimed the benefit of
Notification No. 32/99. This was allowed to them initially for the first few
months. However, from July to October 2000 although some of the petitioners
made payment of the excise duty, they were not refunded the amount. Being
aggrieved, the petitioners filed writ petitions before the Gauhati High Court.
An interim order was passed by the High Court on 19.1.2001 directing the
provisional refund of the excise duty by the respondents to the petitioners.
Although the exemption was finally withdrawn in respect of cigarettes by
Notification No. 1/2001 dated 22nd January 2001, the respondents' prayer for
vacating the interim order was rejected by the High Court by its order dated
8.2.2001. While extending the time for the respondents to comply with the
interim order, the High Court directed that in verifying the claims for refund,
the State Government could not interfere with the exercise of powers of the
excise authorities but made it clear that: "This is not to say that the
concerned Assistant Commissioner or the Deputy Commissioner of Central Excise
Department cannot take in to account any material furnished by the State Govt.
authorities in deciding as to whether exemption is due to a manufacturer
claiming refund under the said Notification. He may consider such material but
the judgment will be that of the Assistant Commissioner or the Deputy
Commissioner of Central Excise Department on the question as to whether the
amount claimed by the manufacturer under the said Notification is entitled to
exemption and refund under the Notification".
Relying on these observations separate orders were passed by the Assistant
Commissioner rejecting the claims for refund of the petitioners for the months
of July 2000 to January 2001 and also ordering recovery of the amounts already
refunded during April to June 2000 forthwith He found that no unit without a
Permanent Registration Certificate (PMT) issued by the Directorate of
Industries & Commerce, Government of Assam could "legally" go
into commercial production and that the earlier order of refund passed "on
the basis of such misinformation & misrepresentation of fact with regard to
the date of commercial commencement of production would also be unjust/incorrect
and devoid of 'legal sanction".
The pending writ petitions were amended to incorporate a challenge to this
order. The writ petitions were allowed by the learned Single Judge on 17th May
2002 who held that the petitioners were entitled to refund of excise duty on
the cigarettes manufactured from the date of commercial production till the
date the benefit was withdrawn by the Central Government in January 2001. The
judgment was affirmed on 4th April 2003 by the Division Bench in the writ
appeal filed by the Union of India. The Union of India has challenged the
decision before us in the above noted appeals.
Immediately after the decision of the Division Bench of the Gauhati High Court,
Section 154 of the Finance Act, 2003 was enacted by
Parliament. The section reads as follows: "154.Amendment of notifications
issued under Section 5-A of the Central Excise Act.-(1) The notifications of
the Government of India in the Ministry of Finance (Department of
Revenue)Nos.G.S.R.508(E), dated the 8th July, 1999 and G.S.R.509(E), dated the
8th July, 1999, issued under sub-section (1) of Section 5-A of the Central
Excise Act read with sub-section (3) of Section 3 of the Additional
Duties of Excise (Goods of Special importance)Act, 1957 and sub-section
(3) of Section 3 of the Additional Duties of Excise
(Textiles and Textile Articles) Act, 1978, by the Central Government
shall stand amended and shall be deemed to have been amended in the manner as
specified against each of them in column (3) of the Ninth Schedule, on and from
the corresponding date specified in column (4) of that Schedule
retrospectively, and accordingly, notwithstanding anything contained in any
judgment, decree or order of any Court, Tribunal or other authority, any action
taken or anything done or purported to have been taken or done under the said
notifications, shall be deemed to be and always to have been, for all purposes,
as validly and effectively taken or done as if the notifications as amended by
this sub-section had been in force at all material times."
(2) For the purposes of sub-section (1), the Central Government shall have and
shall be deemed to have the power to amend the notifications referred to in the
said sub-section with retrospective effect as if the Central Government had the
power to amend the said notifications under sub-section (1) of Section 5A of
the Central Excise Act read with sub- section (3) of Section 3 of the Additional Duties of Excise (Goods of Special Importance) Act,
1957 (58 of 1957) and sub-section (3) of Section 3 of the Additional Duties of Excise (Textiles and Textile Articles) Act,
1978 (40 of 1978), retrospectively at all material times
(3) No suit or other proceedings shall be maintained or continued in any court,
tribunal or other authority for any action taken or anything done or omitted to
be done, in respect of any goods under the said notifications, and no
enforcement shall be made by any court, tribunal or other authority of any
decree or order relating to such action taken or anything done or omitted to be
done as if the amendments made by sub-section (1) had been in force at all
material times.
(4) Recovery shall be made of all amounts of duty or interest or other charges
which have not been collected or, as the case may be, which have been refunded
but which would have been collected or, as the case may be, which would have
not been refunded if the provisions of this section had been in force at all
material times, within a period of thirty days from the day on which the
Finance Bill, 2003 receives the assent of the President, and in the event of
nonpayment of duty or interest or other charges so recoverable, interest at the
rate of fifteen per cent, per annum shall be payable from the date immediately
after the expiry of the said period of thirty days till the date of payment.
Explanation. - For the removal of doubts, it is hereby declared that no act or
omission on the part of any person shall be punishable as an offence which
would not have been so punishable if the notifications referred to in sub-
section (1) had not been amended retrospectively by that sub-section.
The Ninth Schedule referred to in Section 154(1) insofar as it is relevant
seeks to amend Notification No. 32/99 dated 8th July 1999 with effect from 8th
July 1999 by excluding cigarettes falling under Chapter 24 of the First
Schedule or the Second Schedule to the Central Excise
Tariff Act, 1985. In other words, the exemptions available to the
manufacturers of cigarettes from 1999 upto 27th January, 2001 (except for a
short period between 31st December 1999 and 17th January 2000 during which it
was not available), was rescinded retrospectively. This meant that the excise
duties already refunded to the petitioners would be liable to be recovered, no
further refund would be made and that the petitioners would be liable to pay
the excise duties not paid when the exemption was in force i.e. between 8th
July 1999 and 27th January 2001.
A second batch of writ petitions were filed by the petitioners before the High
Court challenging Section 154 as being unconstitutional. They were transferred
to this Court at the instance of the Union of India and listed for hearing
along with the appeals and are also being disposed of by this judgment. If the
challenge to the retrospective operation of Section 154 is rejected by us, any
decision on the Union of India's appeals from the judgment of the High Court
would necessarily be rendered infructuous. The petitioners challenge to Section
154, therefore, is considered at the outset. Mr. Harish N. Salve appeared for
M/s R.C. Tobacco Pvt. Ltd. (referred to briefly as 'RCT') in Transfer Case No.
27 of 2004. RCT manufacturers cigarettes as a job worker under an agreement
with M/s Godfrey Philips India Ltd. Mr. Salve said that there was no dispute
that RCT was a new industrial unit within the meaning of Notification No. 32 of
1999
It was also submitted that the exemption was granted without any condition
attached except that the unit must be a new unit and must be located in one of
the growth centres etc. It is said that the High Court had correctly held that
RCT fulfilled all the pre-requisites for grant of the refund. It is said that
the inclusion of tobacco as an exempted industry was not by accident. In fact,
when the exemption was withdrawn in December 2000, it was consciously
re-introduced in January 2001. Mr. Salve conceded the legislative competence of
Parliament to enact laws that have retrospective effect. However, it is
contended the retrospectivity particularly of subordinate legislation must be
subjected to greater scrutiny. No reasons were given for retrospectively
removing a benefit consciously granted. He says that where the retrospective
legislation is unreasonable it would violate Article 14 and 19 of the
Constitution and would have to be struck down as unconstitutional. It is
submitted that a change in policy, which is sought to be given a retrospective
effect and which seeks to unsettle settled rights and to deprive people of
benefits already enjoyed and causes financial burdens would clearly be unreasonable
and arbitrary.
The unreasonableness was evident from the 'flip-flop' of the Union of India in
issuing notifications granting, then withdrawing, again granting, before
finally withdrawing the benefit in respect of cigarettes in the short space of
about a year and a half. The final withdrawal of the exemption effected by
Section 154 was also followed by the re-grant of exemptions from duties above
8% to tobacco products other than cigarettes. This erratic behaviour was,
according to Mr. Salve, the ground on which this Court in Tata Motors v.
Maharashtra struck down retrospective legislation as arbitrary and
unconstitutional. It was further submitted that although promissory estoppel
operates only against the executive and not against statute, when the
legislature violates promises and representations made by the government, it is
a facet of unreasonableness that must be taken into account in evaluating the
constitutionality of the law under Articles 14 and 19.
It is argued that if the Government subsequently goes back on the
representations made in a tax exemption Notification by causing Parliament to
enact a law with retrospective effect to reclaim the benefits so conferred, then
the reasonableness of the law must certainly be judged in the light of the
representations made by the Government. Mr. R. Nariman appearing on behalf of
Kreesna Industries P. Ltd in Transfer Case No. 32 of 2004 has supported Mr.
Salve and adopted his arguments. His client manufactures cigarettes under an
agreement with ITC Limited. Mr. Nariman's submission is that the fact that the
industrial units were set up by job workers under an agreement was an
irrelevant consideration as far as the industrial policy as declared by the
Central Government and the Notification No. 32 of 1999 were concerned.
This was the concurrent finding of both the courts below. It is said that the
Union of India had full knowledge of the circumstances under which his client
set up the industrial unit and gave the industry the benefit of the
notification after being satisfied that all pre-requisites under the
notification had been fulfilled. As far as the retrospective denial of the
exemption is concerned, it is said that it stands on a different footing from a
validating act. The former amounted to an imposition of tax for the first time
whereas the latter merely rectified a defect in the statute by which the
assessee was, from the outset, intended to be made liable. Reliance has been
placed on the observations of Beg, CJ in Madan Mohan Pathak v. Union of
India at 344 as well as the dissenting view of AN Sen, J in Lohia
Machines Ltd. v. Union of India . It is submitted that in the present
case the retrospectivity was harsh and excessive since there is in fact a
retrospective imposition of excise duty.
It is contended that the justification for such retrospective imposition of a
tax must be overwhelming. No such overriding consideration had been disclosed.
Furthermore, the unit would be crippled if it were asked to pay the excise duty
now. In any event, it is submitted that after the enactment of Section 154, a
demand was made for the amount refunded and for payment of excise duty for the
remaining period. According to Mr. Nariman, the demand which was raised cannot
be sustained as it was made without issuing any show cause notice and in
contravention of Section 11A of Central Excise Act, 1944. He has relied on the
decisions in East India Commercial Co. Ltd. vs. The Collector of Customs,
Calcutta as well as M/s. J.K. Cotton Spinning and Weaving Mills Ltd. vs.
Union of India para 31, National Agricultural Co-operative Marketing
Federation of India Ltd. vs. Union of India & Ors. para 29 in
support of the submission.
Mr. Dave appearing on behalf of North East Tobacco Company in Transfer Case No.
25 of 2004 has claimed not to be a job worker for any other company. He says
that unlike most other units his clients had not left the State of Assam after
the denial of exemption of excise duty. While adopting the arguments of Mr.
Salve and Mr. Nariman, it is his submission that Section 11A of the Central
Excise Act, 1985 was clearly attracted to the case and the non-compliance with
the provisions thereof rendered the demand inoperative. This argument of Mr.
Dave is sought to be sustained by the decision in M/s. J.K. Cotton Spinning and
Weaving Mills Ltd. v. Union of India & ors. . The benefit of the
exemption as opposed to other units had been passed on to his client's
customers and, it is submitted, it would be inequitable to impose excise duty
retrospectively at this stage.
Mr. Goswami appeared on behalf of M/s. Kaziranga Tobacco Products (P) Ltd. and
New Zone India (P) Ltd. in Transfer Case Nos. 23 and 24 of 2004. The two
companies are job workers for Vazir Sultan. It is claimed that the units were
set up by local persons who had made huge investments after borrowing money for
land and machinery and had been granted the relief of exemption after a full
disclosure of all the facts to the excise authorities. In fact whatever
benefits had been obtained, had been utilized by the unit to promote other
industries in the State. Mr. Goswami also submitted that the retrospective
imposition of excise duty after three years was unreasonable as has been held
in Chairman, Railway Board & Ors. v. C.R. Rangadhamaiah and Ors. 6 at 638. The policy of granting such exemption was the
outcome of experts opinion and after the exemption was reintroduced in respect
of cigarettes in January, 2000, it was extended to four other North Eastern
States namely Meghalaya, Mizoram, Nagaland and Manipur before its final
withdrawal in January 2001
Similarly, the A.S.S Cigarette Company which was a job worker under an
agreement with Godfrey Phillips India has stated in TC No. 26 of 2004 that
their Unit was set up by local industrialists and that they had deposited the
excise duty after borrowing and since the withdrawal of the exemption in 2001
they had been manufacturing non-tobacco products. New Tobacco Company in TC No.
36 of 2004 has claimed that it is not a job worker and in fact the unit still
continues to operate in Assam but has stopped the manufacture of cigarettes.
ABN Company in TP) No. 151 of 2004 has said that it has closed down the
manufacture of cigarettes after the withdrawal of the exemption. Mr. A.K.
Ganguly has appeared on behalf of Union of India and sought to justify the
validity of Section 154 by saying that the Section merely gave effect to what
was all along the intention behind the Notification No. 32 of 1999. The object
of the industrial policy declared in 1997 was to give long lasting benefit to
the State in the form of increased investments in industries with consequential
benefits by way of increased employment opportunities to the local population.
The grant of benefits was part of a package deal with the State getting
enduring benefits in return for a short term loss of revenue. The operation of
the notification did not attain this objective. The manufacture of cigarettes
was a controlled industry. The large tobacco companies avoided all the controls
by setting up these industrial units and taking undue advantage of the benefits
granted by the exemption Notification. There was no delay in Parliament
stepping in since it clarified the law immediately after the decision of the
Division Bench. The Central Government which was exercising delegated power
under Section 5-A of the Act could not prevent Parliament from undoing the
clear error in the exercise of power by the Central Government in granting the
exemption or from correcting its vacillating attitude. Parliament's right to
legislate was unimpeded.
It was contended that the retrospective levy of excise duty was justified in
the circumstances particularly when the liability to pay excise duty was merely
suspended by the exemption notifications. The further argument is that there
was no question of issuing a fresh show cause notice after the enactment of
Section 154, as the demand related to and arose out of proceedings which
culminated in the orders of the Asstt. Commissioner impugned before the High
Court. The orders had not been appealed from under the Act. According to Mr.
Ganguly, the previous orders of refund were only provisional and the subsequent
orders of the Assistant Commissioner were the final orders rejecting the claims
of refund. The setting aside of the order by the High Court was immediately
followed by the enactment of Section 154. It is said that Section 154 stands by
itself and provides for the method of recovery and that the section could not
be said to be unreasonable.
It is submitted that the fact that the section may operate harshly in
individual cases would not be sufficient reason for striking down the Section
as unreasonable. In the majority of cases the units had not passed on the
benefits granted by the exemption to their customers and had on the other hand
realized the duty from their customers.
The competence of Parliament and State legislatures to repeal, amend or
supersede an exemption notification is unquestionable. The power to do so
retrospectively cannot be and is also not doubted. The limitation on this power
is that the legislation must not conflict with other provisions of the
Constitution. As far as fiscal legislation is concerned, the limitation is
implicit in Article 265 of the Constitution which provides that no tax shall be
levied or collected except by authority of law. # As was held by this Court
in Chhotabhai Jethabhai Patel and Co. V. The Union of India and Anr : "If
by reason of Art. 265 every tax has to be imposed by "law" it would
appear to follow that it could only be imposed by a law which is valid by
conformity to the criteria laid down in the relevant Articles of the
Constitution. These are that the law should be (1) within the legislative competence
of the legislature being covered by the legislative entries in Schedule VII of
the Constitution; (2) the law should not be prohibited by any particular
provision of the Constitution such as for example Arts. 276(2), 286 etc. and
(3) the law or the relevant portion thereof should not be invalid under Article
13 for repugnancy to those freedoms which are guaranteed by Part III of the
Constitution which are relevant to the subject matter of the law. (pg.30)
A law cannot be held to be unreasonable merely because it operates
retrospectively. Indeed even judicial decisions are in a sense retrospective.
When a statute is interpreted by a court, the interpretation is, by fiction of
law, deemed to be part of the statute from the date of its enactment. The
unreason ability must lie in some other additional factors. The retrospective
operation of a fiscal statute would have to be found to be unduly oppressive
and confiscatory before it can be held to be so unreasonable as to violate
constitutional norms. "Where for instance it appears that the taxing
statute is plainly discriminatory or provides no procedural machinery for
assessment and levy of the tax, or that it is confiscatory, courts would be
justified in striking down the impugned statute as unconstitutional. In such
cases, the character of the material provisions of the impugned statute is such
that the court would feel justified in taking the view that, in substance, the
taxing statute is a cloak adopted by the legislature for achieving its
confiscatory purposes". * ( Rai Ramkrishna vs. State of Bihar: )
The question to be answered therefore is whether Section 154, which is in terms
retrospective, is ex facie discriminatory, or so unreasonable or confiscatory
that it violates Articles 14 and 19 of the Constitution.
The factors which are generally considered relevant in answering this
question are (i) the context in which retrospectivity was contemplated, (ii)
the period of such retrospectivity, and (iii) the degree of any unforeseen or
unforeseeable financial burden imposed for the past period. The context in
which legislation is enacted is to be distinguished from the motives which
impelled it to act. The latter are irrelevant # (See K.C. Gajapati Narayan
Deo & Ors. v. The State of Orissa 11; RS Joshi v. Ajit Mills Ltd.
108). The justification put forward by the respondent for enacting
Section 154 was therefore really unnecessary. Nevertheless, while we cannot for
that reason analyse the justification, we may at least consider the plea as
setting out the background in which the Section was passed.
The particular context of the section impugned in this case was the industrial
policy formulated by the Central and the State Government of Assam for the
development of that State. The obvious intention behind the grant of the
package of incentives including an exemption from payment of excise duties was
to stimulate further industrial growth in the area with enduring benefits not
only to the local populace by way of employment opportunities but also to the
economic welfare of the State. The State Government's insistence from the very
outset on the need to regulate the industries which were claiming the benefit
of the exemption was to ensure that these objects were attained. According to
the Union of India the exemption notification, at least as interpreted by the
High Court, did not effectuate that intent. As it transpired none of the
industrial units manufacturing cigarettes were prepared to contribute to this
object and their investment in the manufacture of cigarettes was co-extensive
with the period of the exemption.
The loss of revenue suffered by the Union and the State by the various
subsidies and exemptions granted was the quid in return for which the
petitioners were not prepared to suffer any quo. With the withdrawal of the
exemption, all of them without exception immediately closed down their
cigarette manufacturing units and a large majority have shifted out of the
State. Clearly if the grant of the exemption had operated as it was intended
to, it would have been unnecessary to enact Section 154. # The High Court
may have been right in construing the exemption notification as it stood. Yet
the respondent can contend that that the words should have been used in the
exemption so as to provide for sufficient safeguards to ensure that the benefit
of exemption was granted only to those industries which would in turn
permanently invest in the State. By the retrospective enactment this defective
expression of the object of the policy, was rectified.
The Exemption Notifications were issued under Section 5A of the Central Excise Act, 1944 as a delegate of Parliament. In a
Cabinet form of Government, the Executive is expected to reflect the views of
the legislature. It would be impossible for Legislatures to deal in detail and
cater to the innumerable problems which may arise in implementing a statute.
When the power of subordinate legislation is conferred by Parliament in certain
matters it can only lay down the policy and guidelines and expect that what is
done by the Executive is in keeping with such policy. It does of course retain
control over its delegate and can exercise that control by repealing the action
of the delegate . Consequently if the Executive has failed to carry out the
object of Parliament, such control may be exercised by retrospectively enacting
what the Executive ought to have achieved. #
A somewhat similar situation arose in the case of Epari Chinna Krishna Moorthy
vs. State of Orissa and Ors. . In that case the State Government had
issued an exemption notification under Section 6 of the Orissa
Sales Tax Act, 1947 for which gold ornaments were ordered to be exempted
from sales tax "when the manufacturer selling them charges separately for
the value of gold and the cost of manufacture". The Notification was
issued on 1st July, 1949. The petitioners, who were registered dealers under
the Orissa Sales Tax Act filed returns claiming exemption from sales tax. Up to
June, 1952 the claims for exemption were allowed by the Department.
Subsequently, the assessments were reopened on the ground that the exemption
had been wrongly granted. The matter ultimately came up before the High Court.
The High Court allowed the petitioners' claim for exemption under the
notification in question holding that the expression "manufacturer"
meant the first owner of the finished products for whom the ornaments were made
either by his pre-paid employee or even by independent artisans on receipt of
the raw materials and labour charges from him. On 1st August, 1961 the Orissa
Sales Tax Validation Act, 1961 was passed. It provided that notwithstanding
anything contained in any judgment, decree or order of any Court, the word
"manufacturer" meant and was always to be deemed to have meant a
person who by his own labour produces the ornaments or a person, who owns or
runs manufactories for that purpose. The petitioners did not fall within this
definition of manufacturer.
They accordingly challenged the 1961 Act on three grounds; 1) that since the
exemption had been granted by the State Government, it was not open to the
legislature to take away the exemption notification; 2) that the provisions of
1961 Act contravened Article 14; and 3) that the retrospective operation of the
impugned Section was unconstitutional because it imposed an unreasonable
restriction on the petitioners fundamental rights under Article 19(1)(g). In
negativing these arguments a Constitution Bench of this Court said:- "What
the legislature has purported to do by S. 2 of the impugned Act is to make the
intention of the notification clear. Section 2 in substance declares that the
intention of the delegate in issuing the notification granting exemption was to
confine the benefit of the said exemption only to persons who actually produce
gold ornaments or employ artisans for that purpose. We do not see how any
question of legislative incompetence can come in the present discussion. And,
if the State Government was given the power either to grant or withdraw the
exemption, that cannot possibly affect the legislature's competence to make any
provision in that behalf either prospectively or retrospectively." *
Although the length of time is not by itself decisive the effect of the
retrospectivity of the legislation in this case is less than two years. The
tussle between the excise authorities and the petitioners started almost
immediately upon the latter claiming and obtaining refunds of the excise duty
paid by them on the manufacture of cigarettes. The refusal of the excise
authorities to refund, on their interpretation of the notification, led to the
filing of the writ petitions. The writ petitions were allowed on 17th May,
2002. In the meanwhile the exemption was already withdrawn in January 2001. The
decision was then challenged in appeals by the Union of India which were finally
dismissed by the Division Bench on 4th April, 2003. Therefore between 2000 to
2003 the dispute as to the purport of the exemption notification during the
period of their operation from July 1999 to January 2001 was pending in Court.
The matters were then carried to this Court by the Union of India. While the
proceedings were pending and the issue was still at large, Section 154 was
enacted. In these circumstances, the Parliament cannot be blamed for having at
least awaited the decision of the High Court, nor can the statutory provision
be questioned as being unreasonably retrospective. # ( See in this
connection Rai Ram Krishna vs. State of Bihar , 1675 para 18).
The pendency of the proceedings before the Courts meant that there was a
possibility of an outcome adverse to the petitioners however strong the
petitioners may have considered their case to be. If this Court had reversed
the view of the High Court, the petitioners would have had to bear the burden
of the excise duty for the period they had manufactured the cigarettes. It
could not have been predicted with any certainty that the appeals of the Union
of India would fail. By enacting Section 154, Parliament has forestalled a
decision by this Court and in effect taken away the basis for the decisions of
the High Court. In the circumstances, it could not be said that the financial
burden was unforeseen or unforeseeable.
In Chairman Railway Board vs. C.R. Rangadhamaiah (supra) the impugned
notifications had sought to curtail pensionary rights with retrospective
effect. The notifications were held to be unconstitutional on the grounds that
when the pension had been granted to the employees, Articles 31(1) and 19(1)(f)
were available, both of which were violated by such retrospective operation. It
was also held that it was violative of Articles 14 and 16 of the Constitution
because it had the effect of reducing the amount of pension that had become
payable to employees who had already retired from service on the date of
issuance of the impugned notifications according to the rules in force at the
time of their retirement. However the right of the petitioners to the exemption
in the present case can at best be described as a precarious one. It is
established law that benefits granted by exemptions may be modified or
withdrawn. By the notification the accrued liability to pay excise duty is
merely suspended. Such an exemption by its very nature is susceptible to being
revoked or modified or subjected to other conditions. The Government and a
fortiori the Parliament is free to determine the priorities in the matter of
utilization of finances and the courts cannot place an embargo on the
Government or on the plenary power of Parliament to withdraw the benefit on the
basis of any principle of promissory estoppel. It has been said: "It is
necessary that the Legislature should be able to cure inadvertent defects in
statutes or their administration by making what has been aptly called 'small
repairs'. Moreover, the individual who claims that a vested right has arisen
from the defect is seeking a windfall since had the legislature's or
administrator's action had the effect it was intended to and could have had, no
such right would have arisen.
Thus, the interest in the retroactive curing of such a defect in the administration
of government outweighs the individual's interest in benefiting from the defect
The Court has been extremely reluctant to override the legislative judgment as
to the necessity for retrospective taxation, not only because of the paramount
governmental interest in obtaining adequate revenues, but also because taxes
are not in the nature of a penalty or a contractual obligation but rather a
means of apportioning the costs of government among those who benefit from it
." *
As we have said, Mr. Salve relied on Tata Motors Ltd. vs. State of Maharashtra
& Ors., to contend that despite the enormous powers of Parliament to
legislate prospectively or retrospectively, unless the material is disclosed
why there was an 'on again and off again' exemption, Section 154 must be held
to be arbitrary and therefore unconstitutional. In that case Rule 41E of the
Bombay Sales Tax Rules 1959 allowed benefit of set-off in respect of all waste
goods or scrap goods or bye- products. This benefit was sought to be taken away
by Section 26 of the Maharashtra Tax Laws (Levy Amendment and Repeal) Act, 1989
which amended Rule 41E. The validity of such retrospective amendment to Rule
41E was challenged. It was contended that as a result of the amendment the
assessee was deprived of the benefit for a period 8 years after which the
benefit was reintroduced by another amendment of Rule 41E in 1992. This Court
held that in absence of any material as to why the benefit under Rule 41E had
been denied for a particular period, Section 26 of the 1989 Amendment Act
deserved to be quashed.
The Court found in favour of the assessee because there was no reason
whatsoever forthcoming for the withdrawal of the benefit retrospectively for a
limited period. The decision is distinguishable. In this case, the reasons for
the retrospective enactment of Section 154 have been given and as we have also
said, those reasons are at least factually plausible. The next challenge of the
petitioners is based on Section 11A of the Act, the relevant extracts of which
reads: "11-A RECOVERY OF DUTIES NOT LEVIED OR NOT PAID OR SHORT LEVIED OR
SHORT-PAID OR ERRONEOUSLY REFUNDED- (1) When any duty of excise has not been
levied or paid or has been short levied or short paid or erroneously refunded,
a Central Excise Officer may, within six months from the relevant date, serve
notice on the person chargeable with the duty which has not been levied or paid
or which has been short levied or short-paid or to whom the refund has
erroneously been made, requiring him to show cause why he should not pay the
amount specified in the notice:
Provided that where any duty of excise has not been levied or paid or has been
short- levied or short-paid or erroneously refunded by reason of fraud,
collusion or any willful mis- statement or suppression of facts, or
contravention of any of the provisions of this Act or of the rules made
thereunder with intent to evade payment of duty, by such person or his agent,
the provisions of this sub-section shall have effect, for the words "six
months", the words "five years" were substituted.
(a) in the case of excisable goods on which duty of excise has not been
levied or paid or has been short-levied or short-paid-
(A) where under the rules made under this Act a periodical return, showing particulars
of the duty paid on the excisable goods removed during the period to which the
said return relates, is to be filed by a manufacturer or a producer or a
licensee of a warehouse, as the case may be, the date on which such return is
so filed;
(B) where no periodical return as aforesaid is filed, the last date on which
such return is to be filed under the said rules;
(C) in any other case, the date on which the duty is to be paid under this Act
or the rules made thereunder.
(b) in a case where duty or excise is provisionally assessed under this Act or
the rules made thereunder, the date of adjustment of duty after the final
assessment thereof;
(c) in the case of excisable goods on which duty of excise has been erroneously
refunded, the date of such refund. The contention is that Section 154 violates
Section 11A in that it does not envisage the service of any notice and it seeks
to allow recoveries to be made after the periods of limitation provided.
According to the respondents the refunds granted under the notifications dated
8th July, 1999 were not the "normal" refunds made under the Act but
were of a special kind for which the complete machinery was provided under the
Notifications. The submission is that since the exemption notifications
themselves had been withdrawn by Section 154, the amounts refunded thereunder
were recoverable independently of Section 11A under Section 154(4).
There are two aspects to this dispute. The first is the question of
limitation and the second the question of notice. As far as the first aspect is
concerned refund of duty under the Act has been provided for by Section 11B.
The Section specifies the manner and circumstances under which refunds of duty
may be made. It is neither of the parties' case that the refund made to the
petitioners of the excise duty paid by them was under this Section. # In
the present case Paragraph 2 of the Notification 32/99 prescribed for the
method for giving effect to the exemption. It provided:
(a) The manufacturer shall submit a statement of the duty paid from the said
account current to the Assistant Commissioner of Central Excise or Deputy
Commissioner of Central Excise, as the case may be, by the 7th of the next
month in which the duty has been paid from the account current.
(b) The Assistant Commissioner or Deputy Commissioner of Central Excise, as the
case may be, after such verification, as may be deemed necessary, shall refund
the amount of duty paid from the account current during the month under
consideration to the manufacturer by the 15th of the next month.
(c) If there is likely to be any delay in the verification, the Assistant
Commissioner or Deputy Commissioner of Central Excise, as the case may be,
shall refund the amount on provisional basis by the 15th of the next month to
the month under consideration, and thereafter may adjust the amount of refund
by such amount as may be necessary in the subsequent refunds admissible to the
manufacturer.
The claim for refund is subject to verification but the refund must be
granted even before such verification on a provisional basis. It was for that
reason that the learned single Judge had directed the refund by an interim
order but allowed the Assistant Commissioner to independently verify the
claims. Although Section 11A does not refer to Section 11B, it speaks of duties
"erroneously refunded". It cannot therefore refer to the refunds made
to the petitioners under the notifications as there was no error in the
provisional refunds made under the notifications to the appellants. What was
sought to be recovered under Section 154 was not an erroneous refund but a
benefit provisionally granted. #
In J.K. Cotton Spinning & Weaving Mills Ltd. vs. Union of India
relied upon by the petitioners, by virtue of the retrospective amendment of
Rules 9 and 49 of the Central Excise Rules in 1982, commodities obtained at an
intermediate stage of manufacture in a continuous process were deemed to have
been 'removed' within the meaning of Rule 9(1) thereby making such intermediate
products dutiable under the Act with effect from the commencement of the Act
i.e. 1944. In this context the Court held that the amended Rules 9 and 49 would
take effect subject to Section 11A. The decision is distinguishable.
The circumstances in which the Court held that the demands for duty could
only be limited to six months prior to the amendment was unquestionably
different from those present in the case before us. What we have to consider
here is whether the benefit granted in 1999 could be withdrawn in 2003. Besides
the Court in J.K. Cotton Spinning & Weaving Mills Ltd's case rejected the
contention of the Union of India that Section 51 of 1982 Finance Act by which
the amendments were made to Rules 9 and 49 overrode the provisions of Section
11A saying 'if the intention of the legislature was to nullify the effect of
Section 11A, the legislature would have specifically provided for the same'.
Similarly our decision in National Agricultural Cooperative Marketing
Federation of India Ltd. vs. Union of India which dealt with an amendment to
Section 80P(2)(a)(iii) of the Income Tax Act, 1961 noted that 'the amendment
does not seek to touch on the periods of limitation provided in the Act, and in
the absence of such express provision or clear implication, the legislature
clearly could not be taken to intend that the amending provisions authorizes
the Income Tax Officer to commence proceedings which before the new Act came
into force, had, by the expiry of the period provided become barred".
In the present case Section 154(4) specifically and expressly allows amounts to
be recovered within a period of thirty days from the day the Finance Bill, 2003
received the assent of the President. It cannot but be held therefore that the
period of six months provided under Section 11A would not apply. On the
question of notice prior to the recovery irrespective of Section 11A, it is
contended by the petitioners relying on the decision of this Court in East
India Commercial Co. Ltd. vs. The Collector of Customs , 361 that whether
a statute provides for notice or not, it was incumbent upon the respondents to
issue notice to the petitioners disclosing the circumstance under which
proceedings are sought to be initiated against them and that any proceedings
taken without such notice would be against the principles of natural justice.
Assuming that the principle were applicable to the case before us, in fact
notices of personal hearing were served on the petitioners by the Assistant
Collector for a personal hearing before the Assistant Collector passed the
orders by which the petitioners were held liable to repay the refunds made and
to pay the excise on the goods cleared for the subsequent periods.
The High Court's decision setting aside the orders as being contrary to the Exemption
Notification was sought to be overcome by Section 154(1). In other words, by
virtue of Section 154(1), notwithstanding the decision of the High Court, the
orders of the Assistant Collector, which were purported to have been taken
under the notifications, were validated as if the notifications as amended had
been in force when the orders were passed.
A grievance has been raised by the petitioners that cigarette manufacturers
have been unfairly discriminated against. We are unable to accept the submission
for several reasons. First, there is a presumption in favour of
constitutionality of a statute, a presumption which only the clearest and
weightiest evidence can displace. Second, we can take judicial notice of the
fact that cigarettes have been treated as a class apart for the purposes of
levy of excise duty with the manufacture of cigarettes probably yielding the
highest revenue to the exchequer. As was said in R.K. Garg vs. Union of India
by the following words: "The presumption of constitutionality is
indeed so strong that in order to sustain it, the Court may take into
consideration matters of common knowledge, matters of common report, the
history of the times and may assume every state of facts which can be conceived
existing at the time of legislation."
Third "another rule of equal importance is that laws relating to economic
activities should be viewed with greater latitude than laws touching civil
rights such as freedom of speech, religion etc." (ibid).
The final question is that of the relief to be granted. The petitioners can be
broadly classified into three groups:
A. Job workers for large cigarette companies which have closed down the units
with the withdrawal of the exemption and left the State of Assam.
B. Job workers for large cigarette companies which have closed down their
cigarette manufacturing units but started new business in other products.
C. Industrial units which have set up their own units and have reinvested their
earnings in their businesses in the State after closing down the manufacture of
cigarettes. Some units have admittedly not passed on the excise duty benefits
to their customers. On the other hand the large cigarette companies have
recovered the excise duty from the customers. Other units claim to have passed on
the benefit of the entire exemption to their customers.
All the petitioners however claim that they would be financially crippled if
they were called upon to repay the refund of the excise duties or pay the
excise duty on the cigarettes manufactured by them. According to them the
quantum of excise duties would far exceed their profits from the manufacture of
cigarettes.
The respondents on the other hand have urged that the petitioners were merely
fronts for the large cigarette companies which had misused the notification to
avoid the excise duty otherwise payable by them. This was clear from the
agreements entered into between them and the various industrial units through
which they claimed the benefits. The agreements showed inter alia that the
entire set up was financed by the large companies. The arrangement was back to
back so that with the withdrawal of the exemption, the units would be closed
down. The promptness with which a unit went into commercial production after it
was set up in a few days showed that there was no real investment by the
petitioners.
Many of the units had not even got permanent registration before they went into
production and claimed refund of large amounts of excise duty. Admittedly the
large cigarette companies had not only not passed on the benefit of exemption
but had levied and retained the excise duty on the cigarettes manufactured by
the petitioners for the customers of the large companies. The petitioners who
were admittedly in group A have refuted this and contend that their
relationship with the large cigarette companies was on a principal to principal
basis and that under their agreements they alone would be liable to pay the
excise duty now demanded by the respondents under Section 154.
We are not in a position to determine the disputes raised. However we cannot
lose sight of the fact that although excise duty like other indirect taxes may
be passed on to the customer of the goods under the law as it now stands, it is
the manufacturer of the excisable goods to whom the excise authorities will
look for payment. How the manufacturer will adjust its liability with its
customers does not concern the respondents nor can they be asked to recover
their dues from persons who may have ultimately taken on the responsibility to
pay the excise duty as a result of an agreement with the manufacturer. (See in
this connection State of Rajasthan vs. J.K. Udaipur Udyog Ltd. 0, 692). Furthermore having upheld the constitutional
validity of Section 154 it would be a pyrrhic victory for the Union of India if
they could not in fact recover the tax. It is not a case where the legislation
has merely withdrawn the exemptions.
The consequences of the withdrawal have been statutorily provided for including
the recovery of the excise duties refunded or not paid. The effective period of
such imposition is about eight months. The State has been deprived of revenue
without any corresponding benefit. It may be that the retrospective operation
may operate harshly in some cases, but that would not by itself invalidate the
demand. [See: Epari Chinna Krishna Moorthy vs. State of Orissa (supra)] It
needs to be emphasized that in effect the retrospective operation extended over
a very short period and principles of equity must give way to express statutory
provision. As was said in Story on Equity (3rd Eng.Ed.1920)p.34:-" Where a
rule, either of the common or the statute law, is direct, and governs the case
with all its circumstances, or the particular point, a court of equity is as
much bound by it as a court of law, and can as little justify a departure from
it" .
No doubt in British Physical Lab India Ltd vs. State of Karnataka & Ors.
8 relied upon by the petitioners the Sales
Tax Authorities proposed to recover the difference in duty from manufacturers
within the State having regard to the fact that the notifications giving them
the benefit of a lower rate of tax had been struck down. This court held that
they should not do so. The rationale behind the decision has been explicitly
stated in Texmaco Ltd vs. State of Andhra Pradesh 7.
In directing that the State shall not collect the amount of sales tax that had
become payable by reason of the quashing of the notifications, this Court noted
that the notifications had been intended to protect the local cement
industries. The quashing of the notifications should have the effect of putting
the local cement industry and the same industry outside the State on par. It
could not place the former in a disadvantageous position qua the later. Apart
from this, the respondent-State had also not contested the factual position.
The circumstances in which this Court directed the State not to collect amount
of sales tax which had become payable only by reason of the Order quashing the
notifications issued under the State Sales Tax Act do not exist here. What we
are considering in this case is a positive statutory mandate directing the
consequences of the withdrawal of the exemption notifications. For the
reasons stated we dismiss the transferred writ petitions without any order as
to costs. #