Supreme Court settles recovery of erroneous refunds under Central Excise Act: Commissioner of Central Excise vs. M/s Morarjee Gokuldas Spg. & Wvg. Co. Ltd. (24 March 2023)

Date of the Judgment: 24 March 2023
Citation: 2023 INSC 254
Judges: M. R. Shah, J. and Krishna Murari, J.
Can the tax authorities recover an erroneous refund of excise duty without issuing a separate notice under Section 11A of the Central Excise Act, 1944, when the refund order is reviewed under Section 35E of the same Act? The Supreme Court of India addressed this question, clarifying the relationship between these two sections. The Court held that once a refund order is set aside under Section 35E, a separate notice under Section 11A is not required for recovery of the refunded amount. This judgment settles a long-standing dispute regarding the procedure for recovering erroneously refunded excise duties. The majority opinion was authored by Justice M. R. Shah.

Case Background

The case involves M/s. Morarjee Gokuldas Spg. & Wvg. Co. Ltd., a manufacturer of cotton yarn, which used the yarn captively in its mills for weaving fabric. In 1980, the Delhi High Court ruled that the internal use of yarn within a factory did not constitute “removal” under the Central Excise Rules, 1944, thus exempting it from excise duty. Following this, the company revised its classification list, declaring no duty payable on captively consumed yarn. However, the excise department rejected this list in April 1981, directing the company to file a fresh one. The company then filed a writ petition challenging the levy of duty on captively consumed yarn. On 11 January 1983, the Delhi High Court upheld the validity of the excise rules but stated that recovery must be within the time limit prescribed under Section 11A of the Central Excise Act, 1944. The company appealed this decision to the Supreme Court.

On 15 March 1983, the Supreme Court issued an interim order requiring the company to pay 50% of the past dues within three months and provide a bank guarantee for the remaining 50%. The company complied with this order. The Supreme Court finally decided the case on 17 January 1995, directing that if a notice under Section 11A had not been served, the revenue could do so within the prescribed time limit. Subsequently, on 7 April 1995, the excise department issued a show cause notice demanding Rs. 2,96,14,265.05. The Assistant Commissioner confirmed this demand on 27 March 1996. Of the total amount, Rs. 1,48,07,132.84 was paid between 18 April 1983 and 28 December 1984, and the remaining Rs. 1,48,07,132.91 was recovered on 28 March 1996 by encashing the bank guarantees.

The company appealed the Assistant Commissioner’s decision, but the Commissioner (Appeals) dismissed the appeal on 13 June 1996. The company then appealed to the Tribunal, which set aside the Commissioner’s order on 15 May 2000, citing the lack of a demand notice under Section 11A of the Central Excise Act, 1944. The Revenue’s challenge to this order was dismissed on 17 February 2005. In the meantime, the company filed a refund claim, which was initially allowed by the Deputy Commissioner on 21 December 2000, ordering a full refund. However, the Revenue, exercising its powers under Section 35E(2) of the Central Excise Act, appealed this refund order. On 13 May 2005, the Commissioner (Appeals) allowed the Revenue’s appeal, citing unjust enrichment and the time bar under Section 11B of the Central Excise Act, 1944.

The company appealed to the Tribunal against this order. While the appeal was pending, the Revenue recovered Rs. 20,00,000 by appropriating other refunds payable to the company. The company then sought directions from the Tribunal to refund this amount. The Tribunal, on 12 October 2007, allowed the company’s appeal, setting aside the Commissioner’s order, stating that no notice under Section 11A had been issued for recovery of the refund. The High Court dismissed the Revenue’s appeal, relying on a previous decision that a notice under Section 11A is required even when a refund is reviewed under Section 35E. Aggrieved, the Revenue appealed to the Supreme Court.

Timeline:

Course of Proceedings

The initial dispute arose when the respondent company was asked to pay excise duty on the yarn it used internally. The Delhi High Court initially ruled in favor of the department, but the Supreme Court intervened, leading to a complex series of events. The matter went through various levels of adjudication, from the Assistant Commissioner to the Tribunal, and then to the High Court. The Tribunal initially sided with the company, stating that the refund was valid, and the High Court upheld the Tribunal’s decision. However, the Revenue appealed to the Supreme Court, which ultimately overturned the High Court’s judgment. The core issue was whether a separate notice under Section 11A of the Central Excise Act, 1944, was required for recovery of the refunded amount when the refund was reviewed under Section 35E of the same Act.

Legal Framework

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

• Section 11A: This section deals with the recovery of excise duty not levied or short-levied or erroneously refunded. It prescribes a time limit for issuing a notice for such recovery.
• Section 35E: This section provides the power to the authorities to review an order passed by a subordinate authority if it is prejudicial to the interests of revenue.

The interplay between these two sections is crucial. Section 11A provides a mechanism for recovering duties that were not correctly levied or were erroneously refunded, while Section 35E allows for a review of decisions that may be detrimental to revenue. The central question was whether a notice under Section 11A is a prerequisite for recovering amounts when an erroneous refund is reviewed and set aside under Section 35E. The Supreme Court clarified that these two sections operate in different fields and for different purposes. The court stated that the time limits prescribed under these sections are different and that Section 35E would be rendered ineffective if a notice under Section 11A was mandatory for recovery of amounts under Section 35E.

Arguments

The arguments presented by both sides focused on the interpretation of Sections 11A and 35E of the Central Excise Act, 1944.

Revenue’s Arguments:

• The Revenue argued that the High Court erred in relying on the judgment of the Bombay High Court in the case of Bajaj Auto Ltd. vs. UOI, 2003 (151) ELT-23 (Bom), as it was delivered before the Supreme Court’s decision in Asian Paints (India) Ltd. vs. CCE, Bombay 2002 (142) ELT-522 (SC).
• The Revenue emphasized that the Supreme Court in Asian Paints (India) Ltd. had held that Sections 35E and 11A operate in different fields and are invoked for different purposes, with different time limits.
• It was argued that requiring a separate notice under Section 11A after initiating proceedings under Section 35E would render Section 35E ineffective.
• The Revenue contended that when proceedings under Section 35E are initiated and an appeal is filed against a refund order, there is no need to issue a notice under Section 11A.
• The Revenue also pointed out that the Tribunal had not considered the merits of the case, particularly the issue of unjust enrichment under Section 11B of the Central Excise Act, 1944.
• The Revenue highlighted that the assessee had taken contradictory stands, claiming the initial payment was under protest for refund purposes but arguing that the assessment was final for recovery purposes.

Assessee’s Arguments:

• The assessee argued that the Tribunal had correctly relied on the decision in Collector of Central Excise, Bhubaneshwar vs. Re-Rolling Mills, 1997 (94) ELT 8, which held that the time limit under Section 11A governs the issue of demand.
• The assessee contended that the Bombay High Court’s decision in Bajaj Auto Ltd. supported their position that an erroneous refund cannot be recovered without a notice under Section 11A.
• It was argued that a notice under Section 11A is a condition precedent for recovery of an erroneous refund within the prescribed time limit, even when proceedings under Section 35E are initiated.
• The assessee submitted that since the time limit for filing an appeal under Section 35E(2) is longer than the time limit under Section 11A, a show cause notice should precede the proceedings under Section 35E(2).

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, 1944, is necessary for the recovery of an amount when a refund granted is reviewed under Section 35E of the Act.
2. Whether a separate notice under Section 11A of the Act is required 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

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered the following authorities:

Judgment

The Supreme Court allowed the appeal of the Revenue, setting aside the High Court and Tribunal’s orders. The Court held that once an order sanctioning a refund is set aside under Section 35E of the Central Excise Act, 1944, no separate notice under Section 11A is required for the recovery of the erroneously refunded amount.

The Court specifically relied on its earlier decision in Asian Paints (India) Ltd. vs. CCE, Bombay 2002 (142) ELT-522 (SC), stating that:

“The two sections operate in different fields and are invoked for different purposes. Different time-limits are, therefore, set out therein. 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 emphasized that the High Court had erred in relying on the decision in Bajaj Auto Ltd., which was delivered before the Supreme Court’s judgment in Asian Paints (India) Ltd.. The Supreme Court held that the decision in Asian Paints (India) Ltd. was binding on the High Court.

The Court further stated that once the order sanctioning the refund is set aside under Section 35E, the necessary consequences follow, and there is no further question of any refund pursuant to the original order.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily driven by the need to uphold the integrity and effectiveness of Section 35E of the Central Excise Act, 1944. The Court emphasized that Sections 11A and 35E serve distinct purposes, and requiring a notice under Section 11A after a review under Section 35E would render the latter ineffective. The Court’s reasoning was influenced by the following factors:

• Statutory Interpretation: The Court interpreted Sections 11A and 35E to operate in different fields, each with its own purpose and time limits.
• Precedent: The Court relied heavily on its previous decision in Asian Paints (India) Ltd., which clarified the relationship between these two sections.
• Practicality: The Court noted that requiring a separate notice under Section 11A after a review under Section 35E would be impractical and would undermine the effectiveness of Section 35E.
• Consistency: The Court aimed to ensure consistency in the application of the law, emphasizing that the High Court should have followed the binding precedent set by the Supreme Court in Asian Paints (India) Ltd..

The Court’s decision reflects a clear intent to prevent any interpretation of the law that would render any provision ineffective or redundant.

Logical Reasoning

Key Takeaways

• A separate notice under Section 11A of the Central Excise Act, 1944, is not required for the recovery of an erroneously refunded amount when the refund is reviewed and set aside under Section 35E of the same Act.
• Sections 11A and 35E operate in different fields and have different purposes and time limits.
• The decision in Asian Paints (India) Ltd. is a binding precedent on this issue.
• The time limit under Section 11A does not apply to recovery proceedings initiated under Section 35E.
• This judgment clarifies the procedure for recovering erroneous refunds, ensuring that the revenue’s power to review decisions under Section 35E is not undermined.

Directions

The Supreme Court did not issue any specific directions, other than setting aside the orders of the High Court and the Tribunal and restoring the order of the Commissioner (Appeals).

Development of Law

The ratio decidendi of this case is that once an order sanctioning a refund is set aside under Section 35E of the Central Excise Act, 1944, no separate notice under Section 11A is required for the recovery of the erroneously refunded amount. This judgment reinforces the interpretation of Sections 11A and 35E as distinct provisions with separate purposes and time limits, as established in Asian Paints (India) Ltd.. This decision clarifies that Section 35E is not subservient to Section 11A, and the time limits prescribed under Section 11A do not apply to proceedings under Section 35E. This judgment solidifies the legal position and prevents any interpretation that would render Section 35E ineffective.

Conclusion

The Supreme Court’s judgment in Commissioner of Central Excise vs. M/s Morarjee Gokuldas Spg. & Wvg. Co. Ltd. clarifies the interplay between Sections 11A and 35E of the Central Excise Act, 1944. The Court held that a separate notice under Section 11A is not required for the recovery of an erroneously refunded amount when the refund is set aside under Section 35E. This decision settles a long-standing legal dispute, ensuring that the revenue’s power to review decisions is not undermined by procedural requirements. The judgment reinforces the distinct nature of Sections 11A and 35E and their respective roles in the recovery of excise duties.

LEGAL ISSUE: Recovery of erroneously refunded excise duty
CASE TYPE: Central Excise Law
Case Name: Commissioner of Central Excise, Mumbai – 1 vs. M/s. Morarjee Gokuldas Spg. & Wvg. Co. Ltd.
[Judgment Date]: 24 March 2023