Supreme Court clarifies the necessity of Section 11A notice for recovery of erroneous excise duty refunds when reviewed under Section 35E: Commissioner of Central Excise vs. Morarjee Gokuldas Spg. & Wvg. Co. Ltd. (24 March 2023)

Introduction

Date of the Judgment: 24 March 2023

Citation: 2023 INSC 285

Judges: M. R. Shah, J., Krishna Murari, J.

Can the tax authorities recover an erroneous refund of excise duty simply by reviewing the refund order, or is a separate notice required? The Supreme Court of India recently addressed this question, clarifying the relationship between Section 11A and Section 35E of the Central Excise Act, 1944. This case revolves around whether a separate notice under Section 11A is mandatory for recovering an erroneous refund of excise duty when the refund order is reviewed under Section 35E of the Act. The bench comprised Justices M. R. Shah and Krishna Murari, with the judgment authored by Justice M. R. Shah.

Case Background

The respondent, M/s. Morarjee Gokuldas Spg. & Wvg. Co. Ltd., manufactured cotton yarn, which they used within their own mills to produce fabric. In 1980, the Delhi High Court ruled that using yarn within the factory did not count as ‘removal’ under the Central Excise Rules, 1944, thus exempting it from duty. Following this, the company claimed no duty was payable on their captively consumed yarn. However, the excise department rejected this claim, leading the company to file a writ petition in the Delhi High Court.

In 1983, the Delhi High Court upheld the validity of the rules but stated that recovery of duty should be within the time limits of Section 11A of the Central Excise Act. The company then appealed to the Supreme Court. The Supreme Court, in an interim order dated 15.03.1983, directed the company to pay 50% of the past dues and provide a bank guarantee for the remaining 50%. The final judgment by the Supreme Court on 17.01.1995 stated that if a notice under Section 11A had not been served, the revenue could do so within the prescribed time limit.

Following the Supreme Court’s order, the Assistant Commissioner issued a show cause notice on 07.04.1995, demanding Rs. 2,96,14,265.05. The company had already paid Rs. 1,48,07,132.84 as per the interim order and the remaining amount was recovered by encashing the bank guarantee. The Commissioner (Appeals) upheld the Assistant Commissioner’s decision. However, the Tribunal set aside the Commissioner’s order, stating that no demand had been issued under Section 11A.

The company then filed a refund claim, which was initially granted by the Deputy Commissioner on 21.12.2000. The Revenue, under Section 35E of the Act, appealed this order, and the Commissioner (Appeals) set aside the refund order on 13.05.2005, citing unjust enrichment and time bar under Section 11B of the Central Excise Act. The Tribunal then allowed the company’s appeal, holding that a notice under Section 11A was necessary to recover the refund. The High Court upheld this decision, leading to the current appeal by the Revenue before the Supreme Court.

Timeline:

Course of Proceedings

The case began with the Assistant Commissioner confirming the excise duty demand against the company. The Commissioner (Appeals) upheld this decision. The Tribunal, however, set aside the Commissioner’s order, stating that no demand had been issued under Section 11A of the Central Excise Act. The Revenue challenged this order, but it was dismissed.

Subsequently, the Deputy Commissioner ordered a refund to the company. This refund order was then appealed by the Revenue under Section 35E of the Central Excise Act. The Commissioner (Appeals) overturned the refund order, citing unjust enrichment and the time bar under Section 11B of the Act.

The Tribunal, in a subsequent appeal by the company, ruled that a notice under Section 11A was necessary for the recovery of the refund. The High Court upheld the Tribunal’s decision, relying on its earlier judgment in Bajaj Auto Ltd. vs. UOI. The Revenue then appealed to the Supreme Court, arguing that the High Court had erred in not following the Supreme Court’s decision in Asian Paints (India) Ltd. vs. CCE, Bombay.

Legal Framework

The case primarily revolves around the interpretation of three sections of the Central Excise Act, 1944:

• Section 11A: This section deals with the recovery of excise duty that has not been levied or has been short-levied or erroneously refunded. It prescribes a time limit for issuing a notice to recover such duty. It states:
  
  “11A. 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, for any reason, other than the reason of fraud, collusion or any wilful mis-statement or suppression of facts, the proper officer may, within one year 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.”
• Section 11B: This section deals with claims for refunds of excise duty. It specifies the conditions under which refunds can be claimed and the time limits for such claims. It also includes provisions related to unjust enrichment.
• Section 35E: This section empowers the authorities to review orders passed by subordinate officers. It allows the authorities to initiate an appeal against the order sanctioning the refund if it is deemed erroneous. It states:
  
  “35E. Powers of Board or Commissioner of Central Excise to pass certain orders.—(1) The Board may, of its own motion, or on the application of any aggrieved person, call for and examine the record of any proceeding in which a Commissioner of Central Excise as an adjudicating authority has passed any decision or order under this Act for the purpose of satisfying itself as to the legality or propriety of such decision or order and may pass such order thereon as it thinks fit. (2) The Commissioner of Central Excise may, of his own motion, call for and examine the record of any proceeding in which an adjudicating authority subordinate to him has passed any decision or order under this Act for the purpose of satisfying himself as to the legality or propriety of such decision or order and may pass such order thereon as he thinks fit.”

The interplay between these sections is crucial in this case. The main point of contention is whether a notice under Section 11A is required when an erroneous refund is sought to be recovered through the review mechanism under Section 35E.

Arguments

Arguments by the Revenue:

• The Revenue argued that the High Court erred in relying on the Bajaj Auto Ltd. judgment, which was delivered before the Supreme Court’s decision in Asian Paints (India) Ltd.
• The Revenue emphasized that the Supreme Court in Asian Paints (India) Ltd. had clearly stated that Sections 35E and 11A operate in different fields and serve different purposes, with distinct time limits.
• It was submitted that Section 35E would be rendered ineffective if a separate notice under Section 11A was required for recovery of erroneously refunded duty.
• The Revenue contended that once proceedings under Section 35E are initiated and the refund order is set aside, the necessary consequences should follow without a separate notice under Section 11A.
• The Revenue also argued that the Tribunal had not considered the merits of the case, particularly the issue of unjust enrichment under Section 11B.
• The Revenue pointed out the assessee’s contradictory stance of claiming the initial payment was under protest for refund purposes, while arguing that the assessment was final and no notice under Section 11A was required.

Arguments by the Assessee:

• The assessee relied on the Tribunal’s decision in Re-Rolling Mills, which held that the time limit under Section 11A governs the issuance of demand notices.
• The assessee argued that the Bombay High Court in Bajaj Auto Ltd. had correctly held that erroneous refunds cannot be recovered without a notice under Section 11A within the stipulated time.
• It was submitted that since the time limit for filing an appeal under Section 35E(2) is longer than the time limit prescribed under Section 11A, a show cause notice under Section 11A should precede the proceedings under Section 35E(2).
• The assessee contended that a notice under Section 11A is a condition precedent for the recovery of an erroneous refund within the normal period of limitation under Section 11A.

Submissions of Parties

Issues Framed by the Supreme Court

The Supreme Court framed the following key issues for consideration:

1. Whether a notice under Section 11A of the Central Excise Act is necessary for the recovery of the amount when the refund granted is reviewed under Section 35E of the Act.
2. Whether a separate notice under Section 11A of the Act is to be issued within the time limit prescribed under Section 11A and before the proceedings under Section 35E of the Act are initiated.
3. Whether the notice under Section 11A of the Act shall precede the proceedings under Section 35E of the Act?

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• M/s. J.K. Cotton Spinning & Weaving Mills Company Ltd. vs. Union of India [1981 (8) ELT 887]: This case was referred to for the initial ruling that captively consumed yarn was not subject to excise duty.
• Collector of Central Excise, Bhubaneshwar vs. Re-Rolling Mills [1997 (94) ELT 8]: This case was cited by the assessee, but the Court did not agree with its view that the time limit of Section 11A governs the issue of demand under Section 35E.
• Bajaj Auto Ltd. vs. UOI [2003 (151) ELT-23 (Bom)]: The Court held that the High Court erred in relying on this case, as it was decided before the Supreme Court’s judgment in Asian Paints (India) Ltd.
• Asian Paints (India) Ltd. vs. CCE, Bombay [2002 (142) ELT-522 (SC)]: The Court relied heavily on this judgment, stating that it was binding on the High Court. The Court reiterated that Sections 35E and 11A operate independently.
• CCE, Chennai vs. Sha Harakchand Samanthmal [2004 (177) ELT 990 (T)]: This case was cited as an example where the Tribunal had followed the decision in Asian Paints (India) Ltd.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the need to maintain the effectiveness of Section 35E of the Central Excise Act, 1944. The Court emphasized that Sections 35E and 11A operate in different fields and for different purposes. The Court was also influenced by the fact that the assessee was trying to approbate and reprobate by claiming that the initial payment was under protest for the purpose of refund and at the same time also claiming that the assessment was final. The Court’s reasoning was also based on the fact that the order-in-original sanctioning the refund was set aside in the proceedings under Section 35E of the Act.

Fact:Law Ratio

Logical Reasoning:

The Court rejected the argument that a notice under Section 11A is required before proceedings under Section 35E, emphasizing that these sections serve different purposes and have different timelines. The Court also noted that the High Court had erred in relying on a previous judgment that was inconsistent with the Supreme Court’s ruling in Asian Paints (India) Ltd. The court’s reasoning was based on the principle that the law should be interpreted in a way that does not render any provision ineffective or redundant.

The Court stated: “The two sections operate in different fields and are invoked for different purposes. Different time-limits are, therefore, set out therein.”

The Court further stated: “We do not accept the contention that recovery of excise duty cannot be made pursuant to an appeal filed after invoking the provisions of Section 35-E, if the time limit provided in Section 11-A has expired. To so read the provisions, would be to render Section 35-E virtually ineffective, which would be impermissible.”

The Court also observed: “As observed hereinabove, once the order in original sanctioning the refund came to be set aside in a proceeding under Section 35E of the Act and the proceedings under Section 35E was initiated within the time prescribed under Section 35E of the Act, thereafter there is no question of any further notice under Section 11A of the Central Excise Act.”

Key Takeaways

• A separate notice under Section 11A of the Central Excise Act, 1944 is not required for the recovery of an erroneously refunded excise duty when the refund order is reviewed under Section 35E of the same Act.
• Section 35E and Section 11A operate in different fields and serve different purposes.
• The time limits prescribed under Section 11A do not apply to recovery proceedings initiated under Section 35E.
• The Supreme Court’s judgment in Asian Paints (India) Ltd. is binding on all High Courts and Tribunals.
• Tax authorities can recover erroneous refunds by reviewing the original order under Section 35E without issuing a separate notice under Section 11A.
• This judgment clarifies that Section 35E would be rendered ineffective if a separate notice under Section 11A was required for recovery of erroneously refunded duty.
• The Court emphasized that the law should be interpreted in a way that does not render any provision ineffective or redundant.

Final Decision

The Supreme Court allowed the appeal filed by the Revenue. The Court set aside the impugned judgment of the High Court and restored the order passed by the Commissioner (Appeals), which had set aside the refund order. The Court clarified that once the refund order is set aside under Section 35E, no separate notice under Section 11A is required for recovery of the erroneously refunded amount. The Court held that the High Court had erred in not following the Supreme Court’s decision in Asian Paints (India) Ltd. vs. CCE, Bombay.

The Supreme Court’s decision provides clarity on the interplay between Section 11A and Section 35E of the Central Excise Act, 1944. It establishes that the review mechanism under Section 35E is sufficient for recovering erroneous refunds, without the need for a separate notice under Section 11A. This ruling ensures that the tax authorities can effectively recover erroneous refunds, and it also reinforces the principle that different provisions of the law should be interpreted in a way that does not render any provision ineffective or redundant.