CHAPTER 10
DEMANDS DELAYED OR NOT RAISED

Short payment or non-payment of duty on any excisable goods is to be recovered by issuing a show cause notice under section 11A to be followed up with its adjudication and recovery proceedings. The period of limitation for issue of show cause notice is six months (one year from 12 May 2000) in normal cases of non-levy/short levy of duty. However in case of short levy/non-levy due to fraud, collusion etc., the limitation period stands extended to five years. Some illustrative cases of demand not raised or raised with delay or not adjudicated are given in the following paragraphs :-

10.1    Non-adjudication of demands

(i)    M/s. Indian Oil Corporation Limited, Jelpaiguri, in Bolpur Commissionerate of Central Excise, was allowed to clear petroleum products from the warehouse without payment of duty under bond through AR3A applications. Scrutiny of demand registers maintained by the department revealed that the show cause notices demanding duty on the quantity of petroleum products not re-warehoused or warehoused short were issued since 1994 but not adjudicated for a long time. It was also seen that the assessee had been receiving claims from the railways on the short quantity of petroleum products but duty was not paid on such quantities. This resulted in blockage of revenue of Rs.8.73 crore during the period from 1994-95 to 1996-97.

On being pointed out (April 2000), the department stated (April 2001) that the assessee would pay duty after settlement of the matter with their marketing companies.

The fact, remained that the department did not take any positive action even after expiry of six years to realise the Government dues. Allowing the assessee to withhold Government money because of its inability to settle the issue with their marketing companies was not justified.

The Ministry of Finance admitted the objection and stated (November 2001) that the relevant re-warehousing certificates had been obtained except in cases involving duty of Rs.71.93 lakh for which show cause notices had been issued to safeguard to Government revenue.

(ii)    A test check of Central Excise records of Bhubaneswar I Commissionerate of Central Excise, revealed that a case of suppression of production and clandestine removal of Vanaspati by M/s. IPINIT Vanaspati Limited, Cuttack, was detected on 15 September 1995. Show cause notice demanding duty of Rs.2.52 crore for the period from August 1991 to August 1995 was issued only on 27 September 1996 i.e. after 1 year. It also emerged that the assessee had stopped production and surrendered their Central Excise Registration on 1 October 1996. The first hearing in the case was scheduled as late as on 29 October 1997. Three more hearings were also held till 17 June 1998. Thereafter there was no indication of action being taken till the date of audit (November 1999).

On the unjustified and inordinate delay in the issue of show cause notice and its adjudication being pointed out (November 1999), the department adjudicated the case in December 1999 confirming demand of Rs.2.47 crore and imposing penalty of Rs.35.35 lakh.

The Ministry of Finance admitted the delay and stated (November 2001) that the case could not be adjudicated in time due to the absence of statutory time limit in the Act and large number of cases pending for adjudication.

The fact remains that lack of timely action in the case resulted in blockage of Government revenue of Rs.2.47 crore. Further, interest of Rs.3.06 crore (till June 2001) leviable under section 11AB remained unrecovered.

(iii)    M/s. Asian Paints (I) Limited, in Mumbai II Commissionerate of Central Excise, was served with a show cause cum demand notice in August 1996 for Rs.1.40 crore for reversal of Modvat credit of raw material, capital goods etc., destroyed/burnt in fire which took place on 21 February 1996. The show cause cum demand notice was not adjudicated, resulting in financial accommodation to the assessee to the extent of Rs.1.40 crore and notional loss of interest to the extent of Rs.1.35 crore.

On being pointed out (June 2001), the Ministry of Finance admitted the objection and intimated (November 2001) that the show cause notice had been adjudicated in August 2001 confirming demand for Rs.1.40 crore with penalty of Rs.0.25 crore.

10.2    Demands for duty not raised

The Supreme Court in the case of Madhumilan Syntex Private Limited and others {1988 (35) ELT 349 (SC)}, held that unless a show cause notice was issued under section 11A of the Central Excise Act, 1944, the department was not entitled to recover any dues.

(i)    M/s. Pearls Polymers Limited, Mahad, in Mumbai VII Commissionerate of Central Excise, engaged in the manufacture of plastic goods, simultaneously availed the benefit of exemption under notification dated 1 March 1997 as well as Modvat credit during the period from March 1997 to May 1998 which was not correct. The department issued show cause notice for the period July 1997 to May 1998 but no show cause notice was issued for the period from March 1997 to June 1997. This resulted in loss of revenue to the extent of Rs.3.61 crore.

On being pointed out (November 1999), the Ministry of Finance contended (September 2001) that the show cause notice was not issued as the recovery of duty had become time barred by December 1997 when the Board issued a clarification in this regard.

The reply of the Ministry is not tenable as irregularity could have been detected by the department at the time of scrutiny of the classification, declaration and RT 12 return. The notification dated 1 March 1997 clearly restricts simultaneous availment of both the benefits.

(ii)    Prices of the various petroleum products were revised from 3 July 1996 and the rates of Central Excise duty were increased from 10 to 20 per cent ad valorem with effect from 23 July 1996.

Test check of records of the distribution outlets of the Indian Oil Corporation situated in Uttar Pradesh revealed that petroleum products like high speed diesel, motor spirit, aviation turbine fuel, liquified petroleum gas, furnace oil were sold at the enhanced price and duty was also recovered at the enhanced rates from the customers. However, differential duty of Rs.3.58 crore recovered as a result of increase in price and duty rates which was payable on 1 August 1996 was not paid to the Government. Department also did not take any action for recovery of differential duty and also for recovery of interest on delayed payment. The amount of duty was, however, paid by the assessee with a delay of more than four years between August 2000 and June 2001. This resulted in blockage of Government revenue of Rs.3.58 crore for more than four years entailing notional loss of interest of Rs.3.47 crore.

This was pointed out in July 2001; reply of the department/Ministry of Finance had not been received (January 2002).

(iii)    M/s. Hitkari Fibres Limited, Mahad, in Mumbai VII Commissionerate of Central Excise, manufactured jute backed sheet and used it without payment of duty, in the manufacture of jute backed carpet which had leviable to nil rate of duty. As the final product was cleared without payment of duty, duty was payable on jute backed sheet. Though the show cause cum demand notices were issued for the period from July 1998 to March 1999, no show cause notice was issued for the period from March 1997 to June 1998 involving duty of Rs.28.38 lakh.

On being pointed out (November 1999), the Ministry of Finance admitted the objection and stated (November 2001) that the show cause notice was under preparation.

10.3    Delay in raising demand

The Central Board of Excise and Customs, through its letter dated 18 August 1988, issued instructions directing field officers to take recourse to section 11A only and issue legal notices wherever required in order that the department did not suffer due to show cause notice becoming time barred or on account of faulty show cause notice.

M/s. Indian Oil Corporation Limited, Bangalore, in Bangalore I Commissionerate of Central Excise, engaged in marketing of petroleum products collected notional railway freight charges on sales invoices but such charges were not included in the assessable value. Thus, there was short payment of duty of Rs.1.54 crore from September 1994 to September 1996. No demand was raised by the department even though there was a decision of the Supreme Court of October 1983 (Bombay Tyre International) to this effect. Board’s clarification of 21 June 1996 also stipulates inclusion of such charges in the assessable value. Demand raised by the department on 30 November 1999 was dropped by Commissioner of Central Excise (Appeals), Chennai on 31 March 2000 on the grounds that the demands were time barred. It was seen that the reason for the short levy was well known to the department all the while through mandatory returns and invoices. The demand could therefore have been issued within time and revenue loss of Rs.1.54 crore could have been avoided.

On being pointed out (May 2000), the Ministry of Finance contended (August 2001) that the department was not at fault for not issuing demand within six months as freight was not includible in the assessable value prior to the amendment made in section 4 of the Act on 28 September 1996.

Reply of the Ministry is not tenable as the expenses incurred by the assessee on railway freight to bring the goods from refineries were inward expenses which were includible in the assessable value in terms of Supreme Court rulings in the case of Bombay Tyre International Limited {1983 (14) ELT 1896} and Madras Rubber Factory {1995 (77) ELT 433} upholding that all costs incurred to make the goods complete and marketable is to be included in the assessable value. Further, the amendment of 28 September 1996 was clarificatory in nature as it elaborated the definition of ‘place of removal’ under section 4 so as to include therein ‘a depot, premises of a consignment agent or any other place or premises from where the excisable goods are to be sold after their clearances from the factory’. Inward expenses were to be included in the assessable value in terms of aforesaid rulings of the Supreme Court even prior to the amendment ibid.

10.4    Other cases

In 4 other cases of delay in raising demands, the Ministry of Finance/department had accepted the objection involving duty of Rs.0.93 crore till January 2002.