Gujarat Paraffins Pvt Ltd & 1 vs Union Of India & 2

IN THE HIGH COURT OF GUJARAT AT AHMEDABAD SPECIAL CIVIL APPLICATION No. 8935 of 1998

For Approval and Signature:

HONOURABLE THE ACTING CHIEF JUSTICE MR.BHASKAR BHATTACHARYA

HONOURABLE MR.JUSTICE J.B.PARDIWALA

========================================================= 1 Whether Reporters of Local Papers may be allowed to see the judgment ?

2 To be referred to the Reporter or not ?

3 Whether their Lordships wish to see the fair copy of the judgment ?

4 Whether this case involves a substantial question of law as to the interpretation of the constitution of India, 1950 or any order made thereunder ?

5 Whether it is to be circulated to the civil judge ?

=========================================================

GUJARAT PARAFFINS PVT LTD & 1 - Petitioner(s)

Versus

UNION OF INDIA & 2 - Respondent(s)

========================================================= Appearance :

MR PARESH M DAVE for Petitioner(s) : 1 - 2.

MS SEJAL K MANDAVIA for Respondent(s) : 1 - 3.

========================================================= CORAM :

HONOURABLE THE ACTING CHIEF JUSTICE MR.BHASKAR BHATTACHARYA and HONOURABLE MR.JUSTICE J.B.PARDIWALA

Date : 30/04/2012 CAV JUDGMENT

(Per : HONOURABLE MR.JUSTICE J.B.PARDIWALA)

1. By way of present petition under Article 226 of the Constitution of India, the petitioner-Company engaged in the business of manufacturing of paraffin wax has prayed for the following reliefs :

“8(A) That Your Lordships may be pleased to issue a Writ of Mandamus or a Writ in the nature of Mandamus or any other appropriate writ, direction or order, holding and declaring that Section 87 of the Finance Act, 1997 is ultra-vires articles 14, 19(1)(g) and 265 as well as Entry 84 of the Union List to the Seventh Schedule of the Constitution of India and also ultra vires Section 11a of the Central Excise Act and be further pleased to strike down Section 87 of the Finance Act, 1997 as ultra vires and Unconstitutional;

(A-I) That this Hon'ble Court may be pleased to issue an appropriate writ, direction or order under Article 226 of the Constitution of India declaring that the Notification No.14/97 is ultra vires and unconstitutional in so far as it is sought to be applied to the 1st petitioner in respect of import of its non-APM products;

(B) That Your Lordships may be pleased to issue a Writ of Mandamus or a Writ in the nature of Mandamus or any other appropriate Writ, direction or order holding and declaring that the case of the petitioners is covered under Rule 57b of Central Excise Rules, 1944 and consequently, the provisions of Notification No.14/97-Central Excise (NT) dated 03.05.97 and Section 87 of the Finance Act, 1997 are not applicable in the petitioners case;

(C) That Your Lordships may be pleased to issue a writ of mandamus or a writ in the nature of mandamus or any other appropriate writ, direction or order setting aside the demand raised by the respondents, their servants and agents on the ground that the petitioners were entitled to take credit of duty paid on Paraffin wax only to the extent of 10% ad valorem from 23.07.96 (Annexure- F”);

(D) That Your Lordships may be pleased to issue a Writ of Mandamus or a Writ of prohibition or any other appropriate Writ, direction or order completely and permanently prohibiting the respondents, their servants and agents from taking any action against the petitioners in pursuance of Notification No.14/97-Central Excise (NT) dated 03.05.97 and Section 87 of the Finance Act, 1997;

(E) Pending hearing and final disposal of the present petition, Your Lordships may be pleased to restrain the respondents, their servants and agents from implementing the provisions of Notification No.14/97-CE (NT) dated 03.05.97 and Section 87 of the Finance Act, 1997 against the petitioners;

(F) That an ex-parte ad-interim relief in terms of paragraph 8(E) above may kindly be granted;

(G) That any other further relief that may be deemed fit in the facts and circumstances of the case may also please be granted.”

2. At the very outset, the learned counsel Mr.P.M.Dave appearing for petitioner submitted that he is giving up the challenge so far as the constitutional validity of Section 87 of the Finance Act, 1997 is concerned. He submitted that he would like to confine his challenge only to the legality and validity of the Notification bearing No.14/97-CE (N.T.) dated May 3, 1997 (hereinafter referred to as 'the impugned Notification') issued by the Central Government, insofar as it restricts the admissibility of Modvat credit for inputs imported into India.

3. The facts relevant for the purpose of deciding the present petition can be summarised as under :

3.1 The petitioner-Company is engaged in the business of manufacture of paraffin wax, which is an excisable goods under the Central Excise Act, 1944 (hereinafter referred to as 'the Act') and the petitioner is using paraffin wax classifiable under the heading No.27.12 of the Customs Tariff as one of the inputs. The challenge is to the constitutional validity of Notification bearing No.14/97-CE (N.T.) dated May 3, 1997 on the ground that it is ultra vires Articles 14, 19(1)(g) and 265 of the Constitution of India and also Rule 57(A) of the Central Excise Rules, 1944 (hereinafter referred to as 'the Rules') under which the impugned Notification has been issued as it restricts admissibility of Modvat credit for the inputs imported into India In other words, the impugned Notification insofar as it restricts admissibility of Modvat credit at the rate of 10% ad veloram in case of inputs imported into India, is unconstitutional and ultra vires.

3.2 Record reveals that the Central Government in exercise of powers conferred by Rule 57(A) of the Rules issued Notification dated March 1, 1994 bearing No.5/94-CE (N.T.) specifying various inputs and final products and thereby allowing the Modvat credit to the extent of payment of specified duty. The specified inputs and final products are described in the table attached to the notification, which includes paraffin wax covered under heading 27.12 of the Customs Tariff.

3.3 The then Finance Minister delivered a speech on July 22, 1996 proposing reduction in the customs duty of crude oil from 35% to 25% and hike in excise duty from 10% to 15% on oil petroleum products, except LPG and kerosene. Thus, in the budget for the year 1996-1997, 15% duty came to be imposed on the petroleum products.

3.4 On July 27, 1996, the Government of India issued instructions to the Public Sector Refineries that the said refineries shall pay 15% excise duty on petroleum products and they should recover only 10% from their customers. It was clarified that shortfall of 5% of duty borne by the refineries will be reimbursed from the Oil Pool Account of the refineries. On May 3, 1997, the Central Government issued the impugned Notification amending the Notification bearing No.5/94-CE (N.T.) by inserting the proviso after the portion :

“(b) are used in the manufacture of final products which are cleared from the factory on or after the 1st day of March, 1994, as under;

“Provided further that, the credit of specified duty paid in respect of inputs, namely, naptha, furnace oil, low sulphur heavy stock, light diesel oil, bitumen and paraffin wax falling under chapter 27 of the schedule to the Central Excise Tariff Act, 1985 (5 of 1986) and used in the manufacture of final products in any place in India shall be restricted;

i) In the case of inputs produced or manufactured in India, to the extent of the amount of Excise duty calculated at the rate of 10% ad valorem, and

ii) In the case of input imported into India, to the extent of the amount of additional duty calculated by assuming as if the like input produced or manufactured in India is chargeable to excise duty @ 10% adv.”

3.5 It appears that in March, 1997, the then Finance Minister while delivering speech to support proposals for the financial bill for the year 1997-1998 proposed to move official amendment in the financial bill by giving retrospective effect to the impugned Notification from July 23, 1996.

3.6 On May 14, 1997 the Finance Act, 1997 received the assent of the Hon'ble President. Section 87 of the Finance Act, 1997, gives retrospective effect to the impugned Notification with effect from July 23, 1996. Consequently, the users of specified petroleum products (Neptha, Funase Oil, Low Sulphar Heavy Stock, light diesel oil, bitumen and paraffin wax falling under Chapter 27 of Schedule to the Central Excise Tariff Act, 1985), who had taken Modvat credit at the rate of 15% instead of 10% were required to refund the excess amount of credit for the period from July 26, 1996 to May 3, 1997.

3.7 On June 23, 1997, the Deputy Commissioner (Tech.) Central Excise and Customs, Surat, issued Trade Notice No.63/97. Paragraph 2.3 of the said Trade Notice refers to Section 87 of the Finance Act, 1997 and thereby, it was informed that the buyers of those goods who took credit of the duty paid under the Modvat scheme at 15% shall pay credit taken in excess in terms within a period of 90 days though they had borne duty incidence of 10% resulting into undue enrichment within a period of 90 days, failing which the interest shall be payable at the rate of 18% per annum. Thus, by virtue of giving retrospective effect to the impugned Notification from July 23, 1996 with the aid of Section 87 of the Finance Act, 1997, the credit taken in excess of 10% ad valorem was required to be paid by the manufacturer within 90 days from the date of enactment of Finance Bill i.e. from May 14, 1997.

3.8 Record reveals that the Central Government after some point of time realised that restriction of 10% Modvat for imported inputs was not in accordance with Rule 57(A) of the Rules contained in the Modvat scheme and was also not in accordance with the fact that full duty at rate of 15% was paid on such imported inputs. Therefore, further amendment was effected in the Modvat scheme by Notification No.60/97 dated November 27, 1997 and thereby restriction of 10% Modvat credit was deleted for inputs imported directly by the manufacturer for his own use. However, this amendment was made effective only from November 27, 1997. When the Central Government realised in May, 1997 that the manufacturers producing inputs from public sector refineries were actually paying duty of 10% from their pocket, as 5% duty was paid from Oil Pool Account, the Central Government enacted Section 87 of the Finance Act, 1997 and restricted Modvat credit upto 10% retrospectively from July 23, 1996 because according to Government, it was from July 23, 1996 that the purchasers were taking higher Modvat credit for importers like the petitioner-Company also. This restriction applies retrospectively but when the Government realised by November, 1997 that the cases of direct imports of inputs in the nature of petroleum products were erroneously covered under the impugned Notification because the duty at the rate of 15% was paid on such imported inputs by the concerned importers, the Government rectified this error only prospectively i.e. from November 27, 1997.

3.9 Record reveals that as the petitioners failed to pay back the credit taken, a show cause notice bearing F.No.KLL- II/GPF/SCN-29/97-98 dated August 11, 1997 was issued to the petitioners calling upon them to show cause as to why :

(i) They should not be disallowed the wrongly availed credit of Rs.5,12,693/-.

(ii) Penalty under Rule 173-Q(1)(bb) of the Central Excise Rules, 1944 should not be imposed on them and

(iii) Interest, if any, under Section 11-AB should not be collected from them.

3.10 On November 27, 1997 the Central Government issued a Notification bearing No.60/97-CE (N.T.) amending its earlier Notification bearing No.5/94 introducing substitution for the portion beginning with the figures and words :

“(II) in the case of input imported into India” and ending with the words “Ad valorem” by the following substitution namely :-

“(ii) In the case of input imported into India (except when imported directly by a manufacturer of excisable goods for his own use and received in the factory of such manufacturer on or after 28th day of November, 1997) to the extent of the amount of additional duty calculated by assuming as it the like input produced or manufactured in India is chargeable to excise duty at the rate of 10% ad valorem.”

3.11 It appears that the show cause notice which was issued upon the petitioners was adjudicated vide order in Original No.39/D/01-02 dated August 16, 2001 confirming the demand of Rs.5,12,693/- and further imposing penalty of Rs.5 lac and ordered for payment of interest at an applicable rate.

3.12 Being aggrieved by the said order-in-original, the original petitioners approached the Commissioner (Appeals), Central Excise, Ahmedabad. The Appellate Commissioner vide Order- in-Appeal No.27/2004(27-A-III)Ce/Commnr(A) dated December 24, 2004, upheld the the demand of duty of Rs.5,12,693/- along with interest determined by the adjudicating authority in the Order-in-Original and partly allowed the appeal by setting aside the order of the adjudicating authority imposing penalty of Rs.5 lac in view of the explanation of sub-clause (2) of Section 87 of the Finance Act, 1997. It appears that the petitioners did not challenge the Order-in-Appeal before the Appellate Tribunal (CESTAT).

II. CONTENTIONS OF THE PETITIONER :

4. The learned counsel Mr.P.M.Dave appearing for the petitioners vehemently submitted that the impugned Notification insofar as it restricts admissibility of Modvat credit for the goods imported into India is concerned, deserves to be struck down as ultra vires Articles 14, 19(1) (g) and 265 of the Constitution of India and also ultra vires Rule 57(A) of the Rules itself under which the impugned Notification is issued.

4.1 Mr.Dave submitted that by the impugned Notification (i.e. Clause (ii) of the Notification), the Government has treated unequal manufacturers as equals for restricting credit to the extent of 10% for both these classes of manufacturers, and therefore, there is a violation of Article 14 of the Constitution of India inasmuch as unequals cannot be treated equally by virtue of the equality clause of Article 14 of the Constitution.

4.2 He submitted that a manufacturer purchasing inputs in the nature of petroleum products from the Public Sector Refineries actually paid excise duty at the rate of 10% from July 23, 1996 because the balance 5% excise duty for such petroleum products produced by local refineries was paid by the Government itself from the Oil Pool Account. Thus, a person/manufacturer purchasing such inputs from any refinery in India by way of local or domestic purchases actually paid only 10% excise duty from his pocket and, therefore, restricting Modvat credit to the extent of 10% for such inputs domestically produced and sold was lawful since the Gate Passes or Invoices of Public Sector refineries indicated excise duty at the rate of 15% but the manufacturer purchasing such inputs from the Public Sector refineries actually suffered incidence of excise duty only at the rate of 10%. Therefore, the action of availing Modvat credit to the full rate of 15% ad valorem by the manufacturers for such domestically procured inputs was certainly illegal and not in accordance with the Modvat scheme. A manufacturer purchasing petroleum products as inputs from the local refineries i.e. the inputs of this nature produced in India, therefore, constitute a separate class; being a class of manufacturers who purchased petroleum products from local refineries on payment of excise duty of 10% because the balance 5% was not paid or borne by such class of buyers.

4.3 He submitted that on the other hand, the persons/ manufacturers like the petitioner company have imported such petroleum products directly on their own for their own use, and such importers have paid additional customs duty equal to the excise duty at the rate of 15% ad valorem. Oil Pool Account was not operated for imports because APM regime was operative only for domestic refineries and therefore, the importers like the petitioner company have actually paid duty at the rate of 15% ad valorem from their own pockets. Such importers/manufacturers have never been given benefit of any adjustment of paying 5% of the import duties from the Oil Pool Account. Therefore, such persons who imported petroleum products directly on payment of actual duty of 15% ad valorem and used such inputs for manufacture of other goods constitute another class of buyers. This class would comprise of importers/ manufacturers who imported such inputs on their own on payment of full duty of 15% ad valorem.

4.4 Mr.Dave relying on the decision of the Supreme Court in the case of Kunnathat Thathunni Moopil Nair etc. v. State of Kerala and others, reported in AIR 1961 SC 552(1), contended that any taxing statute is not wholly immune from attack on the ground of violation of Article 14 of the Constitution of India and a power to tax does not mean that every person should be taxed equally.

4.5 Mr.Dave has also relied on the decision of the Supreme Court in the case of The Twyford Tea Co. Ltd. and another v. The State of Kerala and another, reported in AIR 1970 SC 1133 and submitted that to be able to succeed in the charge of discrimination, a person must establish conclusively that persons equally circumstanced have been treated unequally and vice versa.

4.6 Mr.Dave further submitted that unequals are treated equally because persons like the petitioners who imported petroleum products as inputs on payment of duties at the full rate of 15% are treated at par with the persons purchasing petroleum products as inputs from the public sector refineries in India on payment of actual excise duty of only 10% by them. Clause (ii) of the impugned Notification restricts Modvat credit to 10% for imported inputs also, though imported inputs have actually suffered an additional duty equal to the excise duty at the rate of 15% ad valorem and, therefore, these inputs as well as importers importing these inputs could not have been clubbed with the persons purchasing petroleum products as inputs from the local refineries because in their case the Government itself has paid 5% towards the duty incidence from the Oil Pool Account whereas no such payment or adjustment was allowed in case of imported petroleum products. He, therefore, submitted that the action of the Government in issuing the impugned Notification thereby restricting credit to 10% for inputs produced or manufactured in India as well as inputs imported into India is in the nature of treating unequals equally by clubbing unequals together for uniform treatment of allowing only 10% uniform rate of Modvat credit irrespective of the fact that importers had actually paid higher duty on such inputs is in violation of Article 14 of the Constitution.

4.7 Mr.Dave also contended that by virtue of the impugned Notification, the APM as well as non-APM products are clubbed together, which is violative of Article 14 of the Constitution of India. He submitted that there is no dispute to the fact that the petroleum products manufactured by public sector refineries were governed by APM regime because this fact was stated even on the floor of the Parliament by the then Finance Minister while presenting the Union Budget on July 23, 1996 and, therefore, it is an admitted fact that the purchasers of such APM products from local refineries actually paid only 10% towards excise duty liability from their pockets. He submitted that there is also no dispute to the fact that imported petroleum products were in the nature of non-APM products because Oil Pool Account facility was available only for local refineries and not for the foreign refineries from whom people like the petitioner-Company purchased petroleum products directly. He further submitted that admittedly, non-APM products i.e. petroleum products imported by manufacturers directly for their own use had, therefore, suffered incidence duty at full rate of 15% and the importers had paid duty of 15% from their own pockets. Thus, according to Mr.Dave, the APM products and non-APM products constitute two separate classes of inputs and, therefore, they could not have been clubbed together by virtue of clauses (i) and (ii) of the impugned Notification for prescribing restriction of admissibility of Modvat credit of 10% for both these classes of products.

4.8 Mr.Dave further submitted that when the Government realised by November, 1997, that cases of direct imports of inputs in the nature of petroleum products were erroneously and unnecessarily covered under the impugned Notification because duty at the full rate of 15% was paid on such imported inputs by the concerned importers, the Government rectified this error only prospectively i.e. from November 27, 1997. The fact that the Modvat credit of full 15% is allowed for inputs imported directly by manufacturer for his own use from November 27, 1997 by making appropriate amendment under the main Notification No.5/94 issued under Rule 57-A shows that the Government realised its error of restricting Modvat credit to 10% ad valorem in case of imported inputs. When the amendment for restricting Modvat credit was made effective retrospectively upon realising that unscrupulous manufacturers purchasing inputs in the nature of petroleum products from local refineries were taking undue advantage of 5% excess Modvat credit, according to Mr.Dave, the Central Government was under an obligation to rectify the mistake of restricting Modvat credit in the case of imported inputs with retrospective effect in all fairness and equity. He submitted that when manufacturers like the petitioner-Company have imported petroleum products as inputs directly on their own for their own use on payment of full duty of 15%, thereby allowing Modvat credit of 15% from November 27, 1997, there is no reason as to why 15% Modvat credit should not be allowed to such importers for the past period also.

4.9 Mr.Dave lastly contended that his main plank of submission is that the action of imposing restriction with retrospective effect and withdrawing the restriction for cases like the present one only prospectively, is in violation of Articles 14 and 19(1)(g) of the Constitution of India and restriction for imported inputs is also ultra vires Rule 57-A under which the Notification was issued.

5. Mr.Dave in support of his contentions has relied upon the following decisions of the Supreme Court :

(i) Shri Ramkrishna Dalmia, reported in AIR 1958 SC 538.

(ii) D.S. Nakara, reported in (1983) 1 SCC 305.

(iii) Smt. Maneka Gandhi v. Union of India, reported AIR 1978 SC 597.

(iv) The Twyford Tea Co. Ltd. and another v. The State of Kerala and another, reported in AIR 1970 SC 1133.

(v) New Manekchawk Mills, AIR 1967 SC 1801.

(vi) The State of Kerala v. N.M. Thomas and others, reported in (1976) 2 SCC 310.

(vii) Onkar Lal Bajaj and others v. Union of India and another, reported in (2003) 2 SCC 673.

(viii) Kunnathat Thathunni Moopil Nair etc. v. State of Kerala and another, reported in AIR 1961 SC 552(1).

III. CONTENTIONS OF THE REVENUE :

6. The learned advocate Ms.Sejal Mandavia appearing for the Revenue submitted that as per the impugned Notification read with Section 87 of the Finance Act, 1997, the Department is justified in law in demanding reversal of Rs.5,12,693/- vide Order-in-Original dated August 16, 2001 and vide order dated February 24, 2004 passed by the Commissioner (Appeals). She submitted that the retrospective amendment made by the Parliament is not ultra vires or unconstitutional as the same is in the interest of the Revenue.

6.1 Ms.Mandavia contended that paraffin wax is covered under Notification No.5/94 falling under Chapter heading No.27.12 of the Central Excise Tariff Act, 1985 and paraffin wax manufactured by the petitioner's company is covered as finished products in the said Notification. She submitted that there is no merit in the contention of the petitioners that their input paraffin wax is not an 'Administered Price Mechanism' (APM) Product. She also submitted that the reference to decrease in Customs duty and in respect of petroleum products has no relevance to the issue on hand.

6.2 Relying on the decisions of the Supreme Court in the case of V.K. Industries v. Union of India, reported in 1993(65) ELT 465 (SC), she submitted that the then Finance Minister's speech is of no consequence as it is not the law. According to her, exemption cannot be claimed merely on the strength of a speech delivered by a Finance Minister at the time of laying of a budget. She submitted that Notification No.5/94 as amended by the impugned Notification clearly restricted the credits, both to the input manufactured in India as well as imported into India. There is a clear mention of paraffin wax in the restricted products. She submitted that the legislature is competent to make laws, both retrospectively and prospectively and the retrospective amendment of a statute is within the legislative competence of the legislature.

7. In support of her contentions, Ms.Mandavia, learned advocate appearing on behalf of the Revenue, has placed reliance on the following decisions :

(i) Empire Industries Ltd. v. Union of India, reported in 1985 (20) ELT 179 (SC)

(ii) B.K. Industries v. Union of India, reported in 1993(65) ELT 465 (SC)

(iii) Jaipur Hosiery Mills (P) Ltd., Jaipur v. The State of Rajasthan and others, reported in 1970(2) SCC 2.

(iv) Chhotabhai Jethabhai Patel and Co. v. Union of India, reported in 1999 (110) ELT 118 (SC)

(v) J.K. Spinning and Weaving Mills Ltd. and another v. Union of India and others, reported 1987 (32) ELT 234 (S.C.)

(vi) N. Rahmath and others v. Union of India and others, reported in 1988 (38) ELT 425 (Mad.)

8. Having heard the learned counsel appearing for the respective parties and having perused the materials on record, we are of the view that the following questions fall for our determination in this petition :

(i) Whether persons importing inputs in the nature of petroleum products on payment of full duty and persons purchasing such petroleum products on payment of such duty at a reduced rates from local refineries can be considered to be the persons belonging to the same class.

(ii) Whether restriction on quantum of admissible Modvat credit to 10% ad valorem for persons purchasing petroleum products from local refineries on actual payment of 10% excise duty could be extended and made applicable to persons importing such petroleum products as inputs on payment of additional customs duty at 15% ad valorem, or whether such importers were entitled to avail Modvat credit at the rate of 15% since they actually paid duty at that rate.

(iii) Whether such restriction for allowing Modvat credit made applicable by the Central Government to petroleum products governed by Administered Price Mechanism (APM) products, can also be made applicable to imported non-APM products.

(iv) When the Government thought fit to lift the restrictions made applicable to non-APM products on which duty at the full rate of 15% was actually paid upon realising the Modvat credit at the rate of 15% ad valorem for importing a non-APM product made by various persons directly, then in that case, whether imposing restriction on allowing Modvat credit for the intervening period can be said to be violative of Article 14 of the Constitution of India.

(v) When the Central Government thought fit to make the restrictions applicable about the quantum of Modvat credit for non-APM products retrospectively, then whether lifting the restriction upon realising the error of restricting Modvat credit for non-APM products only prospectively can be said to be unreasonable, arbitrary and in violation of Article 14 of the Constitution of India.

IV. ANALYSIS :

9. It appears that the petitioner-Company imported a consignment of paraffin wax on payment of customs duty including additional customs duty (also known as “Counter Vailing Duty” or “CVD”), and such inputs were used in relation to manufacture of the final finished products namely Paraffin Wax. There is no dispute to the fact that CVD was actually paid by the petitioner at the rate of 15% ad valorem because Central Excise Duty leviable on such petroleum products manufactured in India was 15% ad valorem and CVD/additional customs duty is levied and collected on goods imported in India at the rate of excise duty applicable to like goods produced or manufactured in India. Thus, all the consignments of paraffin wax imported by the petitioner have actually suffered incidence of additional customs duty at the rate of 15% ad valorem.

10. Under the Central Excise Rules, 1944 (hereinafter referred to as 'the Rules') Chapter AA containing Rule 57-A onwards was enacted at the relevant time and these Rules are popularly known as the Modavt Scheme i.e. Modified Value Added Tax Scheme; and the scheme of allowing Modvat credit of various types of duty paid on inputs used in relation to manufacture of final products is contained under these Rules. Modvat credit of duty paid on the inputs was allowed as credit for paying excise duty leviable on the final products for avoiding cascading effect of duty under the Modvat credit scheme.

11. Rule 57-A(1) specifies that the Central Government was empowered to issue a notification for specifying duty for which credit was allowed and also the goods i.e. inputs and final products for which the credit scheme was applicable. Additional duty leviable under Section 3 of the Customs Tariff Act, 1975 was specified under Rule 57-A(1) for allowing its credit and the expression “paid on” occurring under Rule 57- A(1) also clarified that the amount of additional duty actually paid was allowed as Modvat credit.

12. Notification No.5/94 dated March 01, 1994 was issued under Rule 57-A; and it was specified at Clause (iii) in the first paragraph of this Notification that the additional duty under Section 3 of the Customs Tariff Act, 1975 was allowed as Modvat credit for imported inputs, and the expression “paid on inputs” occurring under this Clause (iii) emphasised that Modvat credit of the amount of additional duty actually paid on inputs was allowed. It appears that the petitioners took Modvat credit of additional customs duty actually paid by them while importing paraffin wax. The Modvat credit which was taken by the petitioner was 15% on paraffin wax imported by them. Record also reveals that various petroleum products produced in local refineries were governed and their price controlled by the Union Government under Administrative/Administered Price Regime because petroleum products produced by local refineries were APM products whose price in the domestic market was controlled and regulated by the Union Government through Oil Pool Account. On petroleum products paraffin wax produced by local refineries, excise duty at the rate of 15% ad valorem was leviable; but duty burden of 15% on locally produced petroleum products was considered to be very high. As a result of which the Union Government devised a scheme under APM Regime thereby directing the local refineries to charge excise duty at the rate of 10% only from the consumers whereas the remaining 5% duty was paid to such local refineries Oil Pool Account, thereby absorbing incidence of excise duty to the extent of 5% in the Oil Pool Account through the APM Regime Mechanism. As a result of this, though the local refineries used to show in its Gate Pass/Invoice the payment of excise duty on petroleum products at the rate of 15% ad valorem, the amount recovered from the consumer was 10% whereas the balance 5% was being adjusted under APM through Oil Pool Account. Consequently, any person purchasing inputs in the nature of petroleum products from a local refinery actually suffered incidence of excise duty at the rate of 10% only though the Gate Pass or invoice issued by the refinery would indicate total incidence of excise duty at 15% ad valorem. This system i.e. Gate Pass/Invoice showing excise duty at 15% but the person purchasing the petroleum products from a local refinery actually paying excise duty to the extent of only 10% was applicable only for purchases from the local refineries because only local refineries and their products were governed by APM Regime. For importers who directly imported the petroleum products from foreign countries, additional duty (CVD) being equal to excise duty leviable on like goods manufactured in India was levied and collected at 15% ad valorem and, therefore, the importers like the petitioner had actually paid additional duty at the rate of 15% ad valorem as such imports from foreign countries and foreign refineries were not governed by APM Regime, and no payment towards duty was ever made from the Oil Pool Account for such direct imports made by the citizens on their own.

13. The Union Budget for the year 1996-96 was presented in the Parliament on July 22, 1996 and it was during this Budget that the excise duty on locally produced petroleum products except LPG and kerosene was enhanced to 15% (from 10%) but by providing for adjustment of payment of 5% excise duty from Oil Pool Account by operating APM so that the ultimate burden on the local consumers may not increase by additional 5% excise duty for locally produced petroleum products. Thus, the liability of 5% was absorbed by the Union Government itself through the APM Regime.

14. It appears that, thus, the charges which were made effective from July 23, 1996 resulted in a situation whereby the people purchasing inputs in the nature of petroleum products from local refineries started taking Modvat credit at the rate of 15% even though they had themselves borne the duty incidence to the extent of only 10%, whereas the remaining 5% was being paid to the refineries by the Union Government itself through the Oil Pool Account. It appears that taking of Modvat credit at the rate of 15% for locally produced petroleum products continued for some time until it came to the notice of the Union Government by May, 1997. Till then the persons who purchased the petroleum products from local refineries on actual payment of excise duty by them at the rate of 10% continued taking Modvat credit at the rate of 15% on the ground of “duty paid on inputs” was 15% though they had paid only 10% whereas the balance 5% was being paid from the Oil Pool Account. This situation was not applicable in the cases like that of the petitioners where the petroleum products were imported by them directly and the imports not being controlled by APM, such importers paid additional customs duty at full rate of 15% ad valorem without taking any benefit from the Oil Pool Account.

15. The combined effect of the impugned Notification and Section 87 of the Finance Act, 1997, is that all the users of petroleum products as inputs could take Modvat credit of such petroleum products only to the extent of 10% ad valorem as such petroleum products were produced by them from local refineries, in which case the excise duty paid by them actually was only at 10% ad valorem and also in respect of imported petroleum products in which case additional customs duty was actually paid at the rate of 15% ad valorem by them. It appears that when APM and non-APM petroleum products i.e. cases of petroleum products purchased from local refineries and petroleum products imported on full payment of duty from foreign countries were, thus, unjustifiably and unreasonably clubbed together representations came to be made by those manufacturers like the petitioner-Company, who were denied Modvat credit to the extent of 5% for all the petroleum products which were imported by them directly. Upon considering such representations and realising that importers like the petitioner-Company were unnecessarily covered under the restriction of allowing the Modvat credit only to the extent of 10% because they had actually paid additional duty at the rate of 15% on petroleum products imported by them, the Central Government issued a further notification on November 27, 1997 and by this Notification No.60/97 Clause (ii) of the previous amending Notification was substituted and inputs when imported directly by manufacturer of excisable goods for his own use came to be excluded from the restriction of Modvat credit at the rate of 10% ad valorem. However, it appears that while recognising that inputs imported directly by a manufacturer for his own use should be allowed full rate of Modvat credit because such inputs had actually suffered incidence of additional duty to the tune of 15% ad valorem, the Government allowed benefit of full Modvat credit in case of such imports from the date of this second Notification i.e. only in cases where the inputs were received in the factory on or after November 27, 1997. In other words, the restriction of 10% of Modvat credit came to be lifted in case of imported petroleum products with prospective effect i.e. from November 27, 1997 and the defect was not cured by giving retrospective effect.

16. It is, thus, clear that the Government changed the scheme of Modvat credit for manufacturers like the petitioner-Company who imported petroleum products directly on payment of full rate of additional duty; but the restriction was put by Notification No.35/97 read with Section 87 of the Finance Act, 1997 with retrospective effect whereas the error of applying this restriction even for non-APM products i.e. petroleum products imported directly in India came to be rectified only with prospective effect thereby adversely affecting the manufacturers like the petitioner-Company so far as the intervening period for which the Modvat credit still remained restricted at the rate of 10% ad valorem.

17. We find considerable force in the submissions of the learned advocate for the petitioner that a manufacturer purchasing petroleum products as inputs from the local refineries i.e. the inputs of the nature produced in India and the persons/manufacturers purchasing inputs from the local refineries, therefore, constitute a separate class as such a class of manufacturers are those who produced petroleum products from local refineries on payment of excise duty of 10% because the balance 5% was not paid or borne by such class of buyers. We find substance in the contention of the learned advocate for the petitioner that by the impugned Notification No.14/97, the Government has treated unequal manufacturers as equal for restricting the credit to the extent of 10% for both these classes of manufacturers, which can be termed as violative of Article 14 of the Constitution of India inasmuch as unequals have been treated equally by virtue of the equality clause of Article 14 of the Constitution of India.

18. We shall now look into the decisions which have been relied upon by the learned advocate appearing for the petitioner.

19. In Kunnathat Thathunni Moopil Nair (supra), the Supreme Court considered the constitutional validity of the Travancore-Cochin Land Tax Act, 1955. The validity of the Act was challenged principally on the ground that it offends the provision as to the equal protection of laws contained in Article 14 of the Constitution of India. The Act was made applicable to all lands in the State and by virtue of the Act a uniform rate of tax at the rate of Rs.2/- per acre was being imposed. The contention before the Supreme Court was that all the lands in the State did not have same quality and that some of them are waste lands and other lands of varying degrees of fertility. It was contended before the Supreme Court that the tax weighs more heavily on owners of waste lands than on owners of fertile lands. It was also contended that it is bound to happen that some owners make no income out of their lands or make a small income and they have to pay the tax out of their pocket while the owners of better classes of lands yielding larger income would be able to pay the tax out of the income from the lands. It was, therefore, submitted that the Act discriminates between several classes of owners of lands in the State and is void as infringing the equality clause in the Constitution. In this context, the Supreme Court by a majority view declared the provisions of Sections 4 and 7 of the Act unconstitutional in view of the provisions of Article 14 of the Constitution of India. While declaring so, the Supreme Court made important observations in paragraph 7, which is quoted hereinbelow, on which reliance has been placed by the learned advocate for the petitioner :

“7. The most important question that arises for consideration in these cases, in view of the stand taken by the State of Kerala, is whether Art. 265 of the Constitution is a complete answer to the attack against the constitutionality of the Act. It is, therefore, necessary to consider the scope and effect of that Article. Article 265 imposes a limitation on the taxing power of the State in so far as it provides that the State shall not levy or collect a tax, except by authority of law, that is to say, a tax cannot be levied or collected by a mere executive fiat. It has to be done by authority of law, which must mean valid law. In order that the law may be valid, the tax proposed to be levied must be within the legislative competence of the Legislature imposing a tax and authorising the collection thereof and, secondly, the tax must be subject to the conditions laid down in Art. 13 of the Constitution. One of such conditions envisaged by Art. 13(2) is that the Legislature shall not make any law which takes away or abridges the equality clause in Art. 14, which enjoins the State not to deny to any person equality before the law or the equal protection of the laws of the country. It cannot be disputed that if the Act infringes the provisions of Art. 14 of the Constitution, it must be struck down as unconstitutional. For the purpose of these cases, we shall assume that the State Legislature had the necessary competence to enact the law, though the petitioners have seriously challenged such a competence. The guarantee of equal protection of the laws must extend even to taxing statutes. It has not been contended otherwise. It does not mean that every person should be taxed equally. But it does mean that if property of the same character has to be taxed, the taxation must be by the same standard, so that the burden of taxation may fall equally on all persons holding that kind and extent of property. If the taxation, generally speaking, imposes a similar burden on every one with reference to that particular kind and extent of property, on the same basis of taxation, the law shall not be open to attack on the ground of inequality, even though the result of the taxation may be that the total burden on different persons may be unequal. Hence, if the Legislature has classified persons of properties into different categories, which are subjected to different rates of taxation with reference to income or property, such a classification would not be open to the attack of inequality on the ground that the total burden resulting from such a classification is unequal. Similarly, different kinds of property may be subjected to different rates of taxation, but so long as there is a rational basis for the classification, Art. 14 will not be in the way of such a classification resulting in unequal burdens on different classes of properties. But if the same class of property similarly situated is subjected to an incident of taxation, which results in inequality, the law may be struck down as creating an inequality amongst holders of the same kind of property. It must, therefore, be held that a taxing statute is not wholly immune from attack on the ground that it infringes the equality clause in Art. 14, though the Courts are not concerned with the policy underlying a taxing statute or whether a particular tax could not have been imposed in a different way or in a way that the Court might think more just and equitable. The Act has, therefore, to be examined with reference to the attack based on Art. 14 of the Constitution.”

20. In Jaipur Hosiery Mills (P) Ltd. (supra), the challenge by the appellant of that case was to the notification issued by the State of Rajasthan under Section 4(2) of the Rajasthan Sales Tax Act, 1950, exempting from tax the sale of any garments whether prepared within or imported from outside Rajasthan the value of which did not exceed Rs.4/- in single piece. The High Court of Rajasthan held that waists and underwears were covered by the notification. On March 26, 1962 the State of Rajasthan issued another notification by which the sale of garments whether prepared within or imported from outside Rajasthan the value of which did not exceed Rs.4/- in single piece was exempted from payment of sales tax, but the exemption excluded “hosiery products and hats of all kinds”. The appellants of that case were subjected to sales tax in respect of sales of waists and underwears of knitted fabric for the assessment period April 01, 1961 to October 31, 1965. The appellants challenged the validity of the notification by way of writ petitions in the High Court under Article 226 of the Constitution of India. The High Court dismissed the petitions. On appeal, the Supreme Court observed in paragraph 3 as under :

“3. The principal attack on the impugned notification was based on Article 14 of the Constitution. It was urged before the High Court as it has been contended before us that there was no rational basis for classification between garments as such and knitted garments like Baniyans and Chaddies. In the affidavit which was filed by the State no reason was given why particular kind of garments were exempted whereas others of the same value were not given the benefit of exemption. It is well settled that although a taxing statute can be challenged on the ground to infringement of Art. 14 but in deciding whether the law challenged is discriminatory it has to be borne in mind that in matters of taxation the legislature possesses the large freedom in the matter of classification. Thus wide discretion can be exercised in selecting persons or objects which will be taxed and the statute is not open to attack on the mere ground that it taxes some persons or objects and not others. It is only when within the range of its selection the law operates unequally and cannot be justified on the basis of a valid classification that there would be a violation of Article 14.”

(Emphasis supplied)

21. In Onkar Lal Bajaj (supra), the challenge before the Supreme Court was to the validity of the order of the Government of India dated 09.08.2002, whereby all the allotment made with respect to retail outlets of petroleum products, LPG Distributorship and SKO-LDO dealerships on the recommendation of the Dealer Selection Boards (DSBs) since January 1, 2000 were decided to be cancelled. The principal contention on behalf of the petitioners of that case was that en masse cancellation of allotment is equally an arbitrary exercise of executive power without any justification therefor. It was contended that the impugned order was wholly arbitrary and unconstitutional being violative of Article 14 of the Constitution of India. Allowing the appeal preferred by the petitioners and quashing the impugned order, the Supreme Court in paragraph 27 observed as under :

“27. Article 14 guarantees to everyone equality before law. Unequals cannot be clubbed. The proposition is well settled and does not require reference to any precedent though many decisions were cited. Likewise, an arbitrary exercise of executive power deserves to be quashed is a proposition which again does not require support of any precedent. It is equally well settled that an order passed without application of mind deserves to be annulled being an arbitrary exercise of power. At the same time, we have no difficulty in accepting the proposition urged on behalf of the Government that if two views are possible and the Government takes one of it, it would not be amenable to judicial review on the ground that other view, according to the Court, is a better view.”

22. In N.M. Thomas (supra), the issue before the issue before the Supreme Court was with regard to the validity of Rule 13-AA of the Kerala State and Subordinate Services Rules, 1958, the High Court declared that Rule 13-AA is unconstitutional on the ground that the same was violative of Articles 14 and 16(4) of the Constitution of India.

The facts in brief were that the respondents before the Supreme Court were working as Lower Division Clerks (LDC) in the Registration Department of the State Government. For promotion to Upper Division Clerk (UDC) in that department on the basis of seniority, the Lower Division Clerks had to pass (1) Account Test (Lower), (2) Kerala Registration Test and (3) Test in the manual of office procedure. The respondent’s grievance was that in view of certain concessions given to members of Scheduled Castes and Scheduled Tribes, they were able to obtain promotions earlier than the respondent, though the members of the Scheduled Castes and Scheduled Tribes who were promoted had not passed the tests. In this context, the Supreme Court by a majority view made some important observations with regard to discrimination and Article 14 of the Constitution of India in paragraphs 24 and 31, which are quoted as under :

“24. Discrimination is the essence of classification. Equality is violated if it rests on unreasonable basis. The concept of equality has an inherent limitation arising from the very nature of the constitutional guarantee. Those who are similarly circumstanced are entitled to an equal treatment. Equality is amongst equals. Classification is, therefore, to be founded on substantial differences which distinguish persons grouped together from those left out of the groups and such differential attributes must bear a just and rational relation to the object sought to be achieved.

xxx xxx xxx 31. The rule of parity is the equal treatment of equals in equal circumstances. The rule of differentiation is enacting laws differentiating between different persons or things in different circumstances. The circumstances which govern one set of persons or objects may not necessarily be the same as those governing another set of persons or objects so that the question of unequal treatment does not really arise between persons governed by different conditions and different sets of circumstances. The principle of equality does not mean that every law must have universal application for all persons who are not by nature, attainment or circumstances in the same position and the varying needs of different classes of persons require special treatment. The legislature understands and appreciates the need of its own people, that its laws are directed to problems made manifest by experience and that its discriminations are based upon adequate grounds, The rule of classification is not a natural and logical corollary of the rule of equality, but the rule of differentiation is inherent in the concept of equality. Equality means parity of treatment under parity of conditions. Equality does not connote absolute equality. A classification in order to be constitutional must rest upon distinctions that are substantial and not merely illusory. The test is whether it has a reasonable basis free from artificiality and arbitrariness embracing all and omitting none naturally falling into that category.”

23. In Twyford Tea Co. Ltd. (supra), the petitioners of that case prayed for appropriate writ, order or direction to declare the Kerala Plantation (Additional Tax) Act, 1960 and the Kerala Plantation (Additional Tax) Act, 1967, as unconstitutional and void. The two statutes which were impugned before the Supreme Court imposed tax on plantations. The contention of the petitioners before the Supreme Court was that there is no rational classification of plantations; that unequals have been treated as equals and that a flat rate imposed upon all the plantations irrespective of their yield is arbitrary. According to the petitioners of that case, some of the plantations may not make enough profit to be able to pay tax and in their case the tax became confiscatory. They also complained of discrimination and questioned the legislative competency of the Kerala Legislature to impose tax. Upholding the contentions of the petitioners as regards treating the persons equally circumstanced unequally, the Supreme Court held in paragraph 18 as under :

“18. What is meant by the power to classify without unreasonably discriminating between persons similarly situated, has been stated in several other cases of this Court. The same applies when the legislature reasonably applies a uniform rate after equalising matters between diversely situated persons. Simply stated the law is this: Differences in treatment must be capable of being reasonably explained in the light of the object for which the particular legislation is undertaken. This must be based on some reasonable distinction between the cases differentially treated. When differential treatment is not reasonably explained and justified the treatment is discriminatory. If different subjects are equally treated there must be some basis on which the differences have been equalised otherwise discrimination will be found. To be able to succeed in the charge of discrimination, a person must establish conclusively that persons equally circumstanced have been treated unequally and vice versa. However, in Khandige Sham Bhat v. Agricultural Income-tax Officer, (1963) 3 SCR 809 at p. 817 = (AIR 1963 SC 591 at p. 594) it was observed:

"If there is equality and uniformity within each group, the law will not be condemned as discriminative, though due to some fortuitous circumstance arising out of a peculiar situation some included in a class get an advantage over others, so long as they are not singled out for special treatment. Taxation law is not an exception to this doctrine: vide Purshottam Govindji Halai v. Shree B. N. Desai, 1955-2 SCR 887 = (AIR 1961 SC 552). But in the application of the principles, the courts, in view of the inherent complexity of fiscal adjustment of diverse elements, permit a larger discretion to the legislature in the matter of classification, so long it adheres to the fundamental principles underlying the said doctrine. The power of the Legislature to classify is of "wide range and flexibility" so that it can adjust its system of taxation in all proper and reasonable ways."

24. We shall now look into the decisions which have been relied upon by the learned advocate appearing for the Revenue.

25. In B.K. Industries (supra), the challenge before the Supreme Court was with regard to the validity of levy and collection of Cess under Section 3 of the Vegetable Oils Cess Act, 1983 for the period commencing from March 1, 1986 to March 31, 1987. It appears that the petitioners of that case were manufacturers of Vegetable Oil, which was subjected to Cess/Duty of excise under Section 3 of the Cess Act. The Union Minister of Finance in his Budget Speech delivered on February 28, 1986, while presenting the Budget for the years 1986-1987 made a statement, “the long term Fiscal Policy recognizes that cesses levied as excise duties contribute to the multiplicity of taxes. As an endeavour to reduce the number of these cesses, it has been decided to dispense with the cess on cotton, copra and vegetable oils. The Ministry of Agriculture will take appropriate action in the matter. The loss to the exchequer on this account will be Rs.5.90 crores.” The contention before the Supreme Court on behalf of the petitioners was that the Budget Speech of the Finance Minister delivered on the floor of the Lok Sabha constitutes an enforceable and effective decision upon which the petitioners were entitled to act. It is also submitted that the said decision was exemplified and implemented by way of a communication from the Directorate of Vanaspati, Vegetable Oils and Fats referred to above. In view of such communication, the petitioners of that case did not pass on the burden of the said cess to their purchasers on and from March 1, 1986. It was contended before the Supreme Court that it was not open to the Government to go back upon the said decision and demand cess for the period subsequent to March 1, 1986. The Supreme Court while dismissing the writ petitions took the view that the Finance Minister’s Speech is not the law and that the Parliament may or may not accept his proposal. The Supreme Court in paragraph 9 held as under :

“9. We find it difficult to agree. It is not brought to our notice that the budget proposals contained in the Finance Minister’s speech were accepted by the Parliament. The cess having been imposed by a Parliamentary enactment could be rendered inoperative only by a Parliamentary enactment. Such repealing enactment came only in the year 1987 with effect from April 1, 1987. Not only that. The repealing Act expressly provided in section 13 that the cess due before the date of said repeal. but not collected, shall be collected according to law as if the Cess Act is not repealed. This provision amounts to a positive affirmation of the intention of the Parliament to keep the said imposition alive and effective till the date of the repeal of the Cess Act. In the face of the said statutory provisions, no rights can be founded-nor can the levy of the cess be said to have been dispensed with by virtue of the alleged decision referred to in the Finance Minister’s speech or on account of the letter dated August 11, 1986. The Finance Minister’s speech is not law. The Parliament may or may not accept his proposal. Indeed, in this case, it did not accept the said proposal immediately but only a year later. It is only from the date of the repeal that the said levy becomes inoperative.”

26. In Jaipur Hosiery Mills (P) Ltd. (supra), the challenge by the appellant of that case was to the notification issued by the State of Rajasthan under Section 4(2) of the Rajasthan Sales Tax Act, 1950, exempting from tax the sale of any garments whether prepared within or imported from outside Rajasthan the value of which did not exceed Rs.4/- in single piece. The High Court of Rajasthan held that waists and underwears were covered by the notification. On March 26, 1962 the State of Rajasthan issued another notification by which the sale of garments whether prepared within or imported from outside Rajasthan the value of which did not exceed Rs.4/- in single piece was exempted from payment of sales tax, but the exemption excluded “hosiery products and hats of all kinds”. The appellants of that case were subjected to sales tax in respect of sales of waists and underwears of knitted fabric for the assessment period April 1, 1961 to October 31, 1965. The appellants challenged the validity of the notification by way of writ petitions in the High Court under Article 226 of the Constitution of India. The High Court dismissed the petitions. On appeal, the Supreme Court observed in paragraph 3 as under :

“3. The principal attack on the impugned notification was based on Article 14 of the Constitution. It was urged before the High Court as it has been contended before us that there was no rational basis for classification between garments as such and knitted garments like Baniyans and Chaddies. In the affidavit which was filed by the State no reason was given why particular kind of garments were exempted whereas others of the same value were not given the benefit of exemption. It is well settled that although a taxing statute can be challenged on the ground to infringement of Art. 14 but in deciding whether the law challenged is discriminatory it has to be borne in mind that in matters of taxation the legislature possesses the large freedom in the matter of classification. Thus wide discretion can be exercised in selecting persons or objects which will be taxed and the statute is not open to attack on the mere ground that it taxes some persons or objects and not others. It is only when within the range of its selection the law operates unequally and cannot be justified on the basis of a valid classification that there would be a violation of Article 14.”

(Emphasis supplied)

27. In Chhotabhai Jethabhai Patel (supra), the appellants before the Supreme Court were tobacco merchants and manufacturers of biris. On February 28, 1951 a Bill was introduced in the House of People, being Bill 13 of 1951, containing the financial proposals of the Government of India for the fiscal year beginning April 1, 1951. By way of Clause 7 of the Bill made provision for the amendment of the Central Excise Act (Act 1 of 1944) by way of alteration of duties on “tobacco manufactured and unmanufactured” was introduced. It provided that “unmanufactured tobacco other than flue-cured and ordinarily used otherwise than for the manufacture of cigarettes” (which included tobacco intended for manufacture into biris) should be charged to an excise duty of 8 annas per lb. and it also imposed new duty of excise on biris varying from 6 to 9 annas per lb. depending upon the weight of tobacco contained in the biris. In pursuance of such Section 7(2), a demand was made upon the appellants for the payment of the duty payable by them after giving credit for the refund of the duty paid on biris which had been deleted by the Act. The appellants of that case contested the legality and validity of the demand made by a petition under Article 226 of the Constitution of India before the High Court at Nagpur urging that the retrospective operation given to Section 7(1) by sub-section (2) thereof was illegal, ultra vires and unconstitutional. The High Court at Nagpur repelled all the contentions disputing the legislative competence and the constitutionality of the legislation contained in Section 7(2) of the Finance Act of 1951. In appeal before the Supreme Court, it was contended that Section 7(2) of the Act was unconstitutional as it contravenes the fundamental rights guaranteed under Articles 19(1)(f) and 31(1)(2) of the Constitution of India. It was mainly contended that the retrospective levy of excise duty violated the freedom guaranteed by Article 19(1)(f) of the Constitution. Dismissing the appeals, the Supreme Court held and observed in paragraph 41 as under :

“41. It would thus be seen that even under the constitution of the United States of America the unconstitutionality of a retrospective tax is rested on what has been termed "the vague contours of the 5th Amendment." Whereas under the Indian Constitution the pounds on which infraction of the rights to property is to be tested not by the flexible rule of "due process" but on the more precise criteria set out in Art. 19(5) mere retrospectivity in the imposition of the tax cannot per se render the Law unconstitutional on the ground of its infringing the right to hold property under Art. 19(1) (f) or depriving the person of property under Art. 31(1). If on the one hand, the tax enactment in question were beyond the legislative competence of the Union or a State necessarily different considerations arise. Such unauthorised imposition would undoubtedly not be a reasonable restriction on the right to hold property besides being an unreasonable restraint on the carrying on of business, if the tax in question is one which is laid on a person in respect of his business activity.”

28. In J.K. Spinning and Weaving Mills Ltd. (supra), the issue before the Supreme Court was with regard to the constitutional validity of amendment in Rules 9 and 49 of the Central Excise Rules, 1944 with retrospective effect by virtue of Section 51 of the Finance Act, 1982. In this context, more particularly, the hardship which would be caused to the appellants due to length of the retrospective operation of the amendments, the Supreme Court held in paragraph 29 as under :

“29. It is not disputed that the Legislature is competent to make laws both prospectively and retrospectively. But, as pointed out by this Court in Jawaharmal v. State of Rajasthan and Others, (1966) 1 S.C.R. 890, the cases may conceivably occur where the court may have to consider the question as to whether excessive retrospective operation prescribed by a taxing statute amounts to the contravention of the citizens' fundamental rights; and in dealing with such a question the court may have to take into account all the relevant and surrounding facts and circumstances in relation to the taxation. Again in Rai Ramkrishna and Others v. State of Bihar, (1964) 1 S.C.R. 897 this Court has pointed out that if the retrospective feature of a law is arbitrary and burdensome, the statute will not be sustained and the reasonableness of each retrospective statute will depend on the circumstances of each case; and the test of the length of time covered by the retrospective operation cannot, by itself, necessarily be a decisive test.”

29. In N. Rahmath (supra), the petitioners of that case challenged the constitutional validity of Section 52 of the Finance Act, 1982 and the conditions imposed in Notification dated February 23, 1982 on the ground of violation of the petitioners’ fundamental rights under Articles 14 and 19(1) (g) of the Constitution of India. While upholding the validity of the notification which was brought in by the legislature that the retrospective effect by Section 52 of the Finance Act, 1982, the Supreme Court held in paragraph 7 as under :

“7. It is by now well-established that Parliament has got the power to make a law on a topic in respect of which it is competent to enact a law both prospectively and retrospectively, and such a power to make a law retrospectively more freely exercised by the legislature in the field of taxation. Since the object of validating Acts is to enable the legislature to carry into effect that which it had designed and attempted, but which has failed of its expected legal consequences only by reason of some statutory disability or irregularity in their action, the general rule that a statute should not be construed to operate retroactively, unless the legislative intent is clear that it should so operate, has no application to such validating Acts. Such Acts which by their very nature intended to operate on past transactions are, therefore, necessarily retrospective.”

30. In Empire Industries Ltd. (supra), the same principle has been reiterated so far as retrospective operation of imposition of tax is concerned. The Supreme Court in paragraph 45 observed as under :

“45. The question whether the impugned Act is covered by entry 84 can be looked at from another point of view namely the actual contents of entry 84. In the case of Aluminium Corporation of India Ltd. v. Coal Board, AIR 1959 Cal 222, a Division Bench of Calcutta High Court had to consider this question in the context of Coal Mines (Conservation and. Safety) Act, 1952. The objection of the petitioner in that case was that although coal might be a material or a commodity, it was not something which was produced and therefore the entry which applied to the goods produced in India could not apply to coal. No question of manufacture obviously arose. It was submitted that the coal produced itself. This was rejected. The word 'produced' appearing in Entry No. 84 of List I of the Seventh Schedule is used in juxtaposition with the word 'manufactured' according to the Division Bench and used in connection with duty of excise and consequently it would appear to contemplate some expenditure of human skill and labour in bringing the goods, concerned into the condition which would attract the duty. It was not required that the goods would be manufactured in the sense that raw material should be used to turn out something altogether different. It would still require that these should be produced in the sense that some human activity and energy should be spent on them and these should be subjected to some processes in order that these might be brought to the state in which they might become fit for consumption. To speak of coal, the Division Bench was of the opinion. as produced in the sense to its being made a material of consumption by human skill and labour was entirely correct and had sanction of approved usage. Reference was made to the observations of The King v. Caledonian Collieries, Limited; 1928 AC 358, where the Judicial Committee held that the respondents before them were 'producers of coal'. If that aspect of the matter is kept in mind then expenditure of human skill and material have been used in the processing and it may not be that the raw material was first transformed but over the transformed material, further transformation was done by the human labour and skill making this fit for human consumption.”

31. The principle of law explained in the decisions which have been relied upon by the learned advocate for the petitioner is that the same Rules of law should be applicable to all the persons within the Indian territory or that the same remedies should be made available to them, irrespective of difference of circumstances. In all the judgments, one principle is very loud and clear and that is that all the persons similarly circumstanced shall be treated alike, both in privileges conferred and liabilities imposed.

32. No action should treat unequals as equals as that would definitely be violative of Article 14 of the Constitution of India. In Special Courts Bill, 1978 :

“20.8 In Special Courts Bill, 1978, In re, (1979) 1 SCC 380, the Supreme Court stated various propositions which emerge from its judgments in relation to cases arising under Article 14 of the Constitution. The relevant propositions may be referred to:

“(4) The principle underlying the guarantee of Article 14 is not that the same rules of law should be applicable to all persons within the Indian territory or that the same remedies should be made available to them irrespective of differences of circumstances. It only means that all persons similarly circumstanced shall be treated alike both in privileges conferred and liabilities imposed. Equal laws would have to be applied to all in the same situation, and there should be no discrimination between one person and another if as regards the subject-matter of the legislation their position is substantially the same.

(7) The classification must not be arbitrary and must be rational, that is to say, it must not only be based on some qualities or characteristics which are found to be in all the persons grouped together and not in others who are left out but those qualities or characteristics must have a reasonable relation to the object of the legislation. In order to pass the test, two conditions must be fulfilled, namely, (1) that the classification must be founded on an intelligible differentiation which distinguishes those that are grouped together from others and (2) that the differentia must have a rational relation to the object sought to be achieved by the Act.

(8) The differentia which is the basis of the classification and the object of the Act are different things and what is necessary is that there must be a nexus between them. In short, while Article 14 forbids class discrimination by conferring penalties or imposing liabilities upon persons arbitrarily selected out of a large number of other persons similarly situated in relation to the penalties sought to be conferred or the liabilities proposed to be imposed, it does not forbid classification for the purpose of legislation provided such classification is not arbitrary in the sense above mentioned.”

33. On the other hand, the decisions which have been relied upon by the learned counsel appearing for the Revenue are also on a very settled position of law i.e. with regard to retrospective effect and retrospective imposition of a duty. In the present case, the controversy is not much on the issue as to whether there could be retrospective imposition of tax or duty. The controversy in the present case is that if the Government thought fit to issue notification No.60/97 dated November 27, 1997 to the effect that paraffin wax directly imported by manufacturers on or after 1997 was excluded from applicability of Notification No.5/1994 dated March 1, 1994, more particularly, to rectify the unscrupulous practice apparently adopted by certain entities paying only 10% excise duty to refineries in respect of APM products and obtaining 15% Modvat credits, then whether the applicability of Notification dated November 27, 1997 with prospective effect would be violative of Article 14 of the Constitution of India.

34. In the present case, we have no hesitation in holding that unequals are treated equally because persons like the petitioners who imported petroleum products as inputs on payment of duty at the full rate of 15% are treated at par with the persons purchasing the petroleum products as inputs from the public sector refineries in India on payment of actual excise duty of only 10%.

35. We have noticed from the affidavit-in-reply filed by the Revenue, more particularly, from paragraph 2.2 that Oil Pool Account was created for discharging the Government obligations to compensate oil companies for difference between their revenue from domestic sales and the cost of procuring oil from international market and it is also clear from paragraph 3 of the reply that APM (i.e. Administered Price Mechanism) was made applicable only to public sector refineries importing crude oil for manufacturing petroleum products, and the private importers like the petitioners were not covered within APM. It is also clear from paragraph 5 of the reply that the object of creating APM was to compensate the oil companies for difference between their revenue from domestic sales and cost of procuring crude oil from international market. From the averments in the reply, it is abundantly clear that the respondents have accepted that the petitioner being a private importer was not covered under APM regime and that the petitioner belong to a different class of the importer than the public sector refineries covered under APM. For this reason, we do not find any merit in the contention of Ms.Mandavia that there is nothing like APM products and non-APM products.

36. We are of the view that the fact that Modvat credit of full 15% is allowed for inputs imported directly by manufacturer for his own use from November 27, 1997 by making appropriate amendment under the main Notification No.5/1994 issued under Rule 57A is suggestive of the fact that the Government took cognizance of the error of restricting Modvat credit to 10% ad valorem in cases of imported inputs. When the amendment for restricting Modvat credit was made effective retrospectively upon realizing that few manufacturers purchasing inputs in the nature of petroleum products from local refineries were taking undue advantage of 5% excess Modvat credit, then in that case, the Central Government ought to have rectified the error of restricting Modvat credit in case of imported inputs with retrospective effect. We are not at all enamoured by the submission of Ms.Mandavia that the validity of the impugned restriction unreasonably and arbitrarily imposed for imported inputs be upheld on the ground that the Government has taken corrective measures at the earliest and that the restriction would operate only for a limited period of about 16 months i.e. from July 3, 1996 to November 27, 1997.

37. It is a settled legal proposition that if initial action is not in consonance with law, subsequent proceedings would not sanctify the same. In such a fact situation, the legal maxim sublato fundamento cadit opus is applicable, meaning thereby, in case of foundation is removed, the superstructure falls. Similar principle of law, in our opinion, can be extended in the present case too. Though the restriction operated for about 16 months, the action of not allowing the Modvat credit of the actual amount paid as additional duty to the petitioner-Company is in violation of Article 14 of the Constitution of India because such a restriction was unreasonable and arbitrary even during the intervening period i.e. during the period of operation.

38. To pass the test of permissible classification, two conditions must be fulfilled, namely, (i) that the classification must be founded on an intelligible differentia which distinguishes persons or things that are grouped together from those that are left out of the group, and (ii) that the differentia must have a rationale relation to the objects sought to be achieved by the statute in question. The fundamental principle flowing from the judgments relied upon by the petitioner is that Article 14 forbids class legislation but permits reasonable classification for the purpose of legislation which classification must satisfy the above twin tests. The Government would have to affirmatively satisfy the Court that the twin tests had been satisfied, and for that the Government must establish not only a rationale principle on which classification was founded but the Government must also co-relate it to the objects sought to be achieved. If this cannot be shown by the Government, then the departure was arbitrary, irrational, unreasonable and discriminatory. The only objective sought to be achieved by restricting Modvat credit to the extent of 10% for inputs in the nature of petroleum products was to allow manufacturers purchasing such petroleum products from public sector refineries the credit of that amount which was actually paid by them as excise duty. Since duty only to the extent of 10% was recovered from such manufacturers by refineries whereas 5% was paid to the refineries from Oil Pool Account fright from July 23, 1996, the restriction under the Notification No.14/1997 was made for allowing Modvat credit to the extent of only 10% and this Notification issued on May 3, 1997 was given retrospective effect from July 23, 1996 onwards. By virtue of the clarifications made vide various Trade Notices, the objective of restricting Modvat credit to only 10% right from July 23, 1996 in case of APM products i.e. petroleum products purchased from public sector refineries was clarified by the Government itself. The objective of the amendments so made vide Notification No.14/1997 and Section 87 of the Finance Act, 1997 was to restrict Modvat credit to 10% for inputs produced and manufactured in India is thus an undisputable position. By clubbing non-APM products, i.e. inputs imported on payment of full duty at the rate of 15%, the objective was not achieved and the amendments had no rationale relation with imports of petroleum products at full rate of duty.

39. In the aforesaid premises of the matter, we hold that the Notification No.14/1997 dated May 3, 1997 is ultra vires Articles 14 and 19(1)(g) of the Constitution of India in so far as it is sought to be applied to the petitioner in respect of import of its non-APM products.

40. The petition is accordingly allowed. It is hereby declared that the Notification No.14/1997 dated May 3, 1997 restricting admissibility of Modvat credit for all the petroleum products to the extent of 10% irrespective of the fact that whether the inputs were manufactured in India or the inputs were imported into India, being violative of Article 14 of the Constitution of India, is hereby quashed and set-aside.

41. As we have quashed the Notification No.14/1997 dated May 3, 1997, the demand raised by the respondents and the consequential order of penalty is also hereby quashed and set-aside.

(Bhaskar Bhattacharya, Acting C.J.)

(J.B.Pardiwala, J.)

Akar/moin