ORDER
R. Jayaraman, Member (T)
1. The aforesaid Reference Applications have been brought by the Department seeking for a reference to the High Courts of Bombay and Gujarat on certain points of law arising out of this Bench’s common Order No. 2310-14/90-WRB, dated 24-10-1990. In the aforesaid order, this Bench dismissed the five appeals from the Department against the orders in appeal passed by the Collector of Central Excise (Appeals). In all the said appeals from the Department, the common issue was the question of applicability of period of limitation under Section 11A of the Central Excises and Salt Act, 1944 – (hereinafter referred to as the “Central Excises Act”) in respect of demands issued, for recovery of MODVAT Credits, which have been wrongly availed of, by invoking the provision of Rule 57-I of the Central Excise Rules, 1944, as it stood prior to amendment effected on 6-10-1988. The appeals from the Revenue were dismissed based on the decisions given earlier on the same issue under this Bench’s Order No. 1667 to 1670/90-WRB, dated 28-9-1990 reported in 1990 (31) ECR 680 (CEGAT-WRB). In the said order, we have rejected various contention of the Department to the effect that during the period, when Rule 57-I did not provide a specific time limit for demanding irregular MODVAT Credit taken, no time limit is applicable and demand under Rule 57-I cannot be subject to the period of limitation provided under Section 11A of the Central Excises Act. We held, in the said order, that MODVAT Credit in respect of duty paid on inputs is available for payment of duty on the final products. Hence, if there is any wrong availment of MODVAT Credit and the said credit has been utilised towards payment of duty on final product, it results in short levy of duty on the final product and hence provisions of Section 11A would come into operation. We also took note of the fact that East Regional Bench of the Tribunal had also taken the same view as ours in the TELCO case reported in 1990 (47) E.L.T. 132 and moreover that Bench dismissed a Reference Application by the Revenue against the decision holding the same view as ours. We also held that Rule 57-I is part of the Central Excise Rules and is subject to the provision of Section 11A of the Central Excise Act, when that Rule is silent about the limitation period for demand. In view of the above considerations, this Bench rejected the contention of the Revenue that MODVAT Scheme, being a special scheme, is completely independent and not complementary to Section 11A of the Central Excises Act. The present Reference Applications are from the Revenue against the aforesaid findings on point of law. The questions of law formulated are the following:
(i) Whether Rule 57-I of the Central Excise Rules, as it stood prior to amendment, should be read in conjunction with Section 11A of the Act?
(ii) Section 11A of the Act provides for recovery of duties in certain cases, while the provisions of Rule 57-I relating to recovery of wrongly availed MODVAT Credit (This being specific provision with regard to MODVAT Credit); Whether the cases covered under Rule 57-I (Prior to its amendment) for recovery of wrongly availed credit are also governed by Section 11A?
(iii) Section 11A of the Act is a general provision which covers and deals with all types of short levy, short paid, not paid duties and under assessment, whereas MODVAT Scheme and the provisions contained (under Rule 57A to 57J) therein are a special provisions. The Special Scheme regarding availing of MODVAT Credit provides its own special provision with regard to the steps to be taken in the cases of wrongful availment of credit. In the situation whether general provision of Section 11A of the Act would prevail over the provision relating to specific cases covered under Rule 57-I of the Rules?
(iv) Whether amendment vide Notification No. 28/88 (NT), dated 6-10-1988 to Rule 57-I will have retrospective effect?
2. During the arguments, Shri Mondal, the Ld. SDR fairly conceded that question No (iv) formulated above does not arise out of the order passed by the Bench, since in the aforesaid order, there is no finding on the retrospective applicability of the amendment made in Rule 57-I and hence that question cannot be said to arise out of the above order of the Bench. However, as regards the other three questions, he fairly stated that they can be combined into one question, which can be formulated thus:
“Whether, during the period prior to amendment of Rule 57-I (i.e. prior to 6-10-1988) when no specific time limit was provided for recovery of MODVAT credit taken irregularly, show cause notice is required to be issued within the period of limitation as laid down under Section 11A of the Central Excises Act?”
This is the only question to be referred and the other two questions formulated are in the form of arguments to find an answer to the main question. Thereupon, he dealt with the arguments supporting the application as follows:-
(i) MODVAT Scheme was a special scheme introduced in 1986 and the rules framed for the implementation of the scheme are totally independent of the provision of other provisions of the Act and other Rules. The Rules governing the MODVAT Scheme are dealt with in a separate Chapter (Chapter V-AA of the Central Excise Rules). From these provisions, it is clear that these rules being independent in their application, cannot be read in conjunction with Section 11A of the Central Excise Act.
(ii) Even the subsequent amendment carried out to Rule 57-I providing for the period of limitation clearly indicates that the Govt. did not want to disturb the independent set up of scheme envisaged under the aforesaid Chapter. If it was otherwise, the amendment would just be in the nature of referring to the provision of Section 11A in the Rule 57-I itself.
(iii) MODVAT Credit is taken in respect of duty paid on inputs, which is permitted to be utilised for payment of duty on final products. It cannot be equated with short levy or non-levy or erroneous refund, which are to be recovered by resort to Sec. 11A of the Central Excise Act. It is a credit given in respect of duty paid on inputs under a special MODVAT scheme envisaged in the Rules and hence Section 11A cannot be inducted into that scheme.
(iv) In the initial stages of the scheme, there are bound to be some irregularities in taking credit or allowing credit. Hence till the scheme is settled down, Rule 57-I did not specifically provide for recovery of such MODVAT credit taken irregularly. Specific provision is made only effective from 6-10-1988 by amendment to Rule 57-I and even this amendment did not link up the time limit to Section 11A and even the relevant date is different – namely the date of the credit and not the date of filing RT-12 returns as laid down in Section 11A.
(v) Referring to the decision of Gujarat High Court in the case of Torrent Laboratories (P) Ltd. v. Union of India reported in 1991 (55) E.L.T. 25 (Guj.), he invited our attention to the observations of the Hon’ble High Court on the very same issue contained in paras 11, 12 and 13 of the said judgment. According to this judgment all these points raised by him have been held in favour of the Revenue and hence in the light of the judgment, there appears to be an error in appreciation of law, by this Bench, while interpreting the provision of Rule 57-I prior to its amendment by making it complementary to Section 11A of the Central Excises Act and importing the time limit prescribed in Section 11A in Rule 57-I.
(vi) In any case, when there is a High Court judgment in favour of the Revenue, on the very same issue, there is a doubt on the correctness of the interpretation of law under Rule 57-I with regard to period of limitation for demand.
On the above arguments, he pleaded that this is a fit case for reference to the respective High Courts.
3. Shri A.V. Naik, the Ld. JDR, adopted the same arguments of Shri K.M. Mondal, and urged for the reference to be made.
4. None represented the Respondents excepting in the case of M/s. Mahindra and Mahindra for whom Mrs. Dina Wadia, the Ld. Advocate appeared and pleaded as below:
(i) It is needless to emphasise that Rules are in the nature of subordinate legislation and they are always subject to the provisions of the Act enacted by the Parliament.
(ii) Hence, if there is an omission to provide for specific time limit in the Rule 57-I, it is always necessary to read the provisions of Section 11A into that rule, especially when the MODVAT Credit availed of also results in short levy of duty on the final product.
(iii) Karnataka High Court, in the case of Thungabadra Steel Products v. Union of India reported in 1991 (33) ECC 140 (Kar.) have upheld the view of the Tribunal on the very same issue.
(iv) The aforesaid decision of the Karnataka High Court takes into account the decision of the Supreme Court in J.K. Spg. & Wvg. Mills v. U.O.I. reported in 1987 (32) E.L.T. 234, wherein the Supreme Court held that notwithstanding the amendment of Rules 9 and 49 of the Central Excise Rules, which was given retrospective effect by Section 51 of the Finance Act, 1982, recoveries can be effected only subject to the provision of time limit under Section 11A of the Central Excises Act. The said decision of the Supreme Court was not considered by the Gujarat High Court in Torrent Laboratories’ case (supra). In view of the Supreme Court decision in J.K. Spg. & Wvg. Mills case (supra) on a similar issue, there is no point of law, requiring to be settled.
(v) Reliance was also placed on the decision of the Bombay High Court – 1986 (23) E.L.T. 357 – Zenith Tin Works v. Collector of Central Excise, Bombay. In the above judgment, Bombay High Court have held that during the period when Rule 56A did not provide for specific time limit, it is subject to the time limit under the erstwhile Rule 10 of the Central Excise Rules. Rule 56A is analogous to MODVAT Scheme and is also a self contained rule by itself. Even then, the Bombay High Court have taken the aforesaid view.
5. After hearing both the sides, we observe that the main thrust of the Reference Applications from the Revenue is based on the decision of the Gujarat High Court in Torrent Laboratories case 1991 (55) E.L.T. 25 (Guj.). As against this, we observe that Karnataka High Court have approved the following finding of the Tribunal (S.R.B.) on this point of law:
“When the credit has been taken wrongly or it is in excess of the eligibility, it is a case of erroneous credit, which can be recovered by a demand”. Such a demand cannot go beyond the purview of the Statutory provisions of Section 11A of the Central Excises and Salt Act, 1944. Even if Rule 57-I is sought to be invoked, it is to be read with the provisions of Section 11 A, which is the statutory provision for recovery of any duty – either short levy or non-levy or duty taken erroneously as proforma or MODVAT Credit.”
6. This Bench had taken a somewhat similar view as that of Sough Regional Bench confirmed by the Karnataka High Court. However, now we find another judgment of the Gujarat High Court on this issue, which has given rise for the Reference Applications. We, therefore, propose to analyse this judgment of the Gujarat High Court for the limited purpose of the present Reference Applications. It is observed that in Torrent Laboratories case decided by the Gujarat High Court, it dealt with the Special Civil Application filed by the assessees contending that Rule 57-I was ultra vires, since it did not provide for issue of a show cause notice and no period of limitation was prescribed for demanding credit and whatever action taken under Rule 57-I prior to amendment was void and consequent on the amendment, no action can lie against the assessees under the Rule 57-1 in respect of the period prior to its amendment. However, while dealing with the Sp.C.A. in Paras 11, 12, 12A and 13 also the Hon. High Court specifically went into the question as to whether Rule 57-I prior to amendment had to be read in conjunction with Section 11A of the CESA and rejected the contention of the Petitioners urging that Rule 57-I prior to amendment had to be subject to the provisions of Section 11A of the CESA. Instead of reproducing the entire aforesaid paras, referred to above, we would deem it sufficient to reproduce some excepts from the aforesaid paragraphs:-
Quote
“… It is over-simplification to say that Rule 57-I as it stood prior to amendment is nothing but provision with regard to recovery of duty as it is in the case of short payment of duty, short levy or under assessment. Section 11A of the Act is a general provision which covers and deals with all types of short levy, short payment and under assessment. On the other hand, the provisions with regard to the Modvat Scheme (Rule 57A to 57P) have been introduced in the statute book by notification dated March 1, 1986. Provisions with regard to Modvat may be analogous to the provisions of set off contained in Rule 56A, but it is not set off by way of proforma credit. There is distinction between the two. The very fact that despite the provisions of Section 11A of the Act and Rule 56A being on the statute book, the legislature thought it fit and proper to make special provisions with regard to the cases of wrongful availment of credit by enacting Rule 57-I shows that the legislature did not intend to apply the general provisions contained in Section 11A of the Act to the cases of wrongful availment of credit which is specifically provided for in Rule 57-I… . The type of cases covered by Modvat are required to be specifically they are not to be dealt with as per the provisions of Section 11A of the Act and Rule 56A of the Rules… .
Thus in view of the first principles as regards the interpretation of statutes and in view of the aforesaid two decisions of the Supreme Court, the contention that the provision of Section 11A of the Act as regards the period of limitation should be read into Rule 57-I as it stood prior to the amendment cannot be accepted.” Unquote
7. However, we observe that the principles laid down under Section 11A have been found acceptances by the Hon’ble High Court in the same judgment and these have been read into Rule 57-I prior to its amendment. To counter the argument that Rule 57I did not provide for time limit and hence it is ultra vires, the Hon’ble High Court of Gujarat held that:-
“In the absence of any provision with regard to the specific period of limitation, reasonable period of limitation has got to be read into it. This is how the Supreme Court has upheld the provisions of Rule 12 of the Medicinal and Toilet Preparation (Excise Duties) Rules, 1956. The same principle would be applicable to the provisions of Rule 57-I of the Rules as it stood prior to the amendment. Hence there is no substance in this connection and the same has got to be rejected.”
To counter the argument that Rule 57-I did not provide for issue of show cause notice and hence is not violative of the principle of natural justice, the Hon’ble High Court of Gujarat held that:
“In the absence of specific provision containing principles of natural justice in the rule does not mean that the provisions of the rule excludes the observance of principles of natural justice. The principles of natural justice is nothing but fair play in action… . There is nothing in the provision of Rule 57-I as it stood then, in any of the provisions of the Rules to indicate that the observance of principles of natural justice have been excluded and the authority invoking the provisions of Rule 57-I can ignore the principles of natural justice.”
8. Dismissing the argument that the proceedings under Rule 57-I prior to its amendment are not valid and only after the amendment, proceedings can be initiated for recovery of Modvat Credit, the Gujarat High Court observed:
“Rule 57-I of the Rules provided for taking measures in case of wrongful availment of credit. Clause (1) of the Rule has been substituted by adding fresh clause (1). By introducing this amendment, what did the legislature do? The legislature simply made detailed and precise provision with regard to period of limitation and the show cause notice to be issued and for affording an opportunity of being heard to the assessee in certain cases. As indicated hereinabove, the provisions with regard to the limitation and the provisions with regard to affording an opportunity of being heard were required to be read into the Rules. Thus, that which was implicit in the rule has been made explicit with little more precision, by introducing the amendment. By introduction of the amendment in the rule, by no stretch of reasoning it can be said that the legislature wanted to give amnesty to persons who are alleged to have availed of Modvat credit wrongfully. There is no indication whatsoever either in the history of the particular provisions of the Rules or in the subsequent steps taken by the legislature or in the context of the rules to indicate that the legislature desired to give pardon to the assessees who were alleged to have taken Modvat credit wrongfully.”
9. From the aforesaid narrations read by us in the Gujarat High Court judgment in the Torrent Laboratories case, the following picture emerges:
(i) That High Court considered mainly the Writ Petitions challenging the vires of Rule 57-I prior to amendment; All the same one of points raised and considered related to the present issue covered by the Reference Application before us.
(ii) Though that Court held that Rule 57-I cannot be read in conjunction with Section 11A, it accepts the need for issue of a Show Cause Notice for recovery of Modvat credit and also accepts that such a notice shall be issued within a reasonable period.
(iii) That decision also holds that the amendment to Rule 57-I only makes explicit what was implicit before amendment.
10. Viewing the picture as thus emerging, we find that in a substantial way, the Gujarat High Court have confirmed the requirement of issue of a Show Cause Notice within a period of six months in normal case or 5 years in the case of fraud etc., by stating that the amendment to Rule 57-I makes it explicit, what was implicit earlier. Apart from that if we go by the observations of that High Court to the effect that a notice is to be issued within a reasonable period, the question will arise as to what could be the reasonable period – can it be the period provided under the law of limitation? or can it be any period to be decided on discretion depending on the merits of the case, which may vary from case to case? or can it be only six months in the normal course and 5 years in the case of fraud etc. as provided for in the amendment, which has made the earlier position explicit?
11. We are of the view that Gujarat High Court could not have conceived of a reasonable period with our precision, leaving it to the discretion of the officers for deciding it on the basis of facts and circumstances of each case. The question may also arise as to when a specific time limit is prescribed in the particular statute itself under Section 11A, can recourse be made to the period prescribed in the general law of limitation, especially when the Gujarat High Court itself have held that amendment to Rule 57-I makes it explicit, what was implicit earlier. If we read the amendment to Rule 57-I, it runs more or less on similar lines as that laid down under Section 11A, excepting that the relevant date for recovery of Modvat credit is specified as the date of credit. Even Section 11A prescribes different relevant dates for different contingencies but the period of six months or 5 years is a common factor in all such contingencies. Hence, with due respect to the Gujarat High Court, it appears to us that despite the finding to the effect that the provisions under Section 11A cannot be imported into Rule 57-I prior to amendment, it recognises the need for bringing into these principles into Rule 57-I, because of their observations elsewhere in the judgment (vide paras 7, 8 and 18-A of the judgment). In other words, the principles underlying Section 11A which were thrown out of door by that Court find a way through the windows in the aforesaid paras of the judgment.
12. Be that as it may, when there are now conflicting views of two different High Courts on the same question, namely whether Rule 57-I prior to amendment is subject to the provision of Section 11A of the Act, we agree that there is an area of doubt to be resolved. For this purpose, we would deem it proper to place the proposal before the President of the Tribunal for making a reference direct to the Supreme Court. We feel that the course envisaged under Section 35H of the Central Excises & Salt Act, 1944 be adopted in this case, because already we find there are two conflicting views from two different High Courts – one from Karnataka High Court and another from the Gujarat High Court. Even the present applications are required to be referred to two different High Courts one to Bombay High Court and another to Gujarat High Court and the possibility of getting two divergent decisions cannot be ruled out, which would cause more complications in making out final disposal of the appeals covered by a common order based on the decisions on References made to two different High Courts.
13. Having regard to all these factors, we propose to the President in terms of Section 35H of the Central Excises and Salt Act, 1944, the following question of law, for submission to the Hon’ble Supreme Court of India for consideration:-
“Whether Rule 57-I of the Central Excise Rules, as it stood prior to amendment effected on 6-10-1988, is subject to the provisions of limitation prescribed under Section 11A of the Central Excises and Salt Act, 1944
or
Whether it is independent of Section 11A aforesaid and can be invoked for recovery of Modvat credits even covering the period beyond six months from the date of credit?”
14. Files containing (i) the orders of the Bench – Order No. 2310 to 14/90-WRB, dated 24-10-1990 as also the earlier detailed order reported in 1990 (31) ECR 680, (ii) copy of the Reference Applications made are also submitted herewith.