The Hindu Business Line : Three draconian notifications

The new provisions are obviously intended to circumvent the usual method of issuing a show-cause notice with all the documents in support of the allegations…

Arvind P. Datar

On December 30, 2006, three draconian notifications were issued making far-reaching changes to the Central Excise law. The first notification inserted Rule 12CC in the Central Excise Rules, 2002, enabling the Government to impose drastic restrictions on a manufacturer, dealer or exporter.

The second inserted Rule 12 AA in the Cenvat Credit Rules, 2004 permitting similar restrictions on the utilisation of Cenvat Credit. And the third, common to both, enabled drastic action to be taken against the manufacturer, dealer or exporter merely on prima facie belief of the Commissioner of Central Excise.

The procedure prescribed is truly incredible and it is astonishing that such rules have been inserted without amending the parent Act. It is almost certain that no Member of Parliament is even aware of the far-reaching effect that these notifications can have. Similar provisions do not exist in other taxing statutes.

How the notifications work

The notifications operate thus: If the Commissioner of Central Excise is satisfied that a person has knowingly violated certain provisions of the Act or Rules, he can forward a proposal to the Chief Commissioner specifying the facilities to be withdrawn and restrictions to be imposed on the assessee concerned.

The Chief Commissioner has to examine this proposal and after satisfying himself that the evidence in the proposal is sufficient to form a reasonable belief that the person has knowingly committed the offence, he can forward his proposal with his recommendation to the Central Board of Excise and Customs (CBEC). At this stage, there is a provision for hearing the assessee but, shockingly, there is no provision for disclosing the documents on the basis of which the Commissioner proposes to take action.

The provisions for hearing have perhaps been included only as a token compliance of the principles of natural justice. A Member of the CBEC is expected to examine the recommendation and pass an order specifying the facilities to be withdrawn or restrictions to be imposed. Recently, a spate of such cases were initiated. In all the cases, the Member had withdrawn the provision for monthly payment of duty and required the assessee to pay duty at the time of each clearance.

The assessees have also been restrained from enjoying Cenvat Credit for a period of six months. Thus, on the basis of a mere prima facie belief, draconian steps can be taken against an assessee.

It is perhaps expected that a subsequent show-cause notice will be issued setting out the allegations in detail. One must be incredibly naive to expect that any justice will be done to an assessee once a Member of the CBEC (the highest authority in the Department) has confirmed that there is a prima facie case against the assessee.

The new provisions are obviously intended to circumvent the usual method of issuing a show-cause notice with all the documents in support of the allegations, granting an opportunity to the assessee, giving a right to cross-examination and then passing an order. These procedures need not be resorted to any more.

An order barring Cenvat credit for six months can inflict serious damage to an assessee’s business. Most goods are subject to 16 per cent duty and if the assessee is prevented from taking Cenvat credit, it could result in substantial increase in his cost of production.

Postponing the credit beyond six months may also be disastrous because an assessee would keep on buying new raw materials and may not be able to set off the accumulated credit that has piled up over six months.

Contrary to SC rulings

The validity of these provisions is also contrary to a series of judgments of the Supreme Court from 1952. In the historic State of West Bengal vs Anwar Ali Sarkar (AIR 1952 SC 75) case, the West Bengal Special Court Ordinance prov ided for speedier trials of serious offences.

By a majority of 4:1, the Supreme Court struck down the ordinance on the ground that there was no classification of cases that were to be tried by the special courts under a fast track procedure and those which would be tried by the ordinary criminal courts. Therefore, despite the desirable social objective of bringing dreaded criminals to book, the Supreme Court held it to be unconstitutional.

Subsequently, in a number of cases, the courts have struck down the provisions which do not contain any guideline or yardstick to determine which case would be subject to a more harsh procedure.

Despite these settled principles of law, the Central Government has issued three notifications which are capable of being misused. When there are so many Commissioners in the country with relatively little work, there is no reason why an assessee should be deprived of the normal procedure for deciding cases of tax evasion.

(The author is a senior advocate of the Madras High Court.)