The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Kolkata Bench has held that mere delayed payment of duty does not automatically attract the enhanced-duty mechanism under the Seventh Proviso to Rule 9 of the Pan Masala Packing Machines (Capacity Determination and Collection of Duty) Rules, 2008.

The bench of  R. Muralidhar (Judicial Member) and K. Anpazhakan (Technical Member) has observed that the Second and Seventh Provisos to Rule 9 operate in distinct fields. While the Second Proviso deals with delayed payment of the duty already determined and requires payment of interest, the Seventh Proviso applies where the manufacturer, despite non-payment by the due date, continues to operate packing machines, thereby attracting the prescribed higher-duty mechanism.

Buy Now: 100+ Judgements On Customs Classification

The dispute arose from proceedings concerning the manufacture of notified goods under the compounded levy scheme governed by the Pan Masala Packing Machines Rules, 2008.

Under Rule 9, the monthly duty payable on notified goods was required to be discharged by the 5th day of the same month, while the manufacturer was also required to furnish the prescribed Form-II intimation before the jurisdictional Central Excise Superintendent by the 10th day of that month.

The Department alleged that the assessee had failed to discharge the monthly duty liability within the prescribed time from February 2010 onwards, while continuing manufacturing operations. According to the Revenue, this attracted the Seventh Proviso to Rule 9.

The Department further relied upon declarations showing that 22 single-track packing machines were available in the factory premises. It proceeded on the basis that the entire 22 machines had to be considered for calculating the assessee’s monthly duty liability under the Seventh Proviso.

At the applicable rate of ₹12.50 lakh per packing machine, the Department calculated monthly duty on 22 machines at ₹2.75 crore. After the duty rate was enhanced to ₹19 lakh per machine from 17 March 2012, the Department recalculated the overall liability.

For the period from February 2010 to January 2013, the total duty liability was worked out at ₹113.99 crore. Since the assessee had already discharged ₹16.78 crore, calculated on the basis of the machines actually in operation, the Department alleged short-payment of ₹97,20,38,438.

A central issue before the Tribunal was whether all 22 machines physically present in the factory could be treated as machines “available” for production for the purpose of the Seventh Proviso.

The assessee maintained that although 22 machines were physically present, only four machines were operationalduring the relevant period. The remaining 18 machines were sealed/uninstalled and were not available for production.

According to the assessee, it had made the relevant declarations to the jurisdictional authorities, and the competent officer had determined the monthly duty liability on the basis of the four operating machines. The assessee subsequently paid the duty, albeit belatedly, along with applicable interest under the Second Proviso to Rule 9.

The department however, argued that the assessee had itself declared the availability of 22 machines in Form-I and that the Seventh Proviso required the duty to be calculated with reference to the total number of machines found available in the factory.

The department contended that the statutory requirement was clear: monthly duty had to be paid by the 5th of the month, and failure to do so, coupled with continued operation of packing machines, attracted the Seventh Proviso.

The Revenue argued that the Rules did not distinguish between “belated payment” and “default payment” for purposes of the Seventh Proviso. According to the Department, once duty was not paid by the prescribed due date and the manufacturer continued to operate packing machines, duty was required to be calculated on the basis of the machines available in the factory.

The Department also relied upon Supreme Court decisions including Bansal Wire Industries Ltd. v. State of U.P. and State of Rajasthan v. Basant Agrotech (India) Ltd., arguing that fiscal statutes must be interpreted strictly and that tax liability cannot be determined merely on assumptions concerning legislative intent.

The department further challenged reliance on the Tribunal’s decision in Goyal Tobacco Co. Pvt. Ltd., contending that the matter involved a different statutory regime and that the Department had pursued further litigation against the decision.

The assessee, on the other hand, argued that the Second and Seventh Provisos addressed two materially different situations.

According to the assessee, the Second Proviso specifically deals with failure to pay the determined duty by the prescribed date and provides the consequence of payment of the outstanding duty along with interest.

The Seventh Proviso, in contrast, contains an additional condition — the manufacturer must continue to operate packing machines during the period of non-payment. Therefore, the assessee argued that delayed payment alone could not trigger the enhanced-duty mechanism.

The assessee also emphasized that there was no allegation that it had misdeclared the number of packing machines actually installed or operated. It had consistently discharged duty on the basis of machines actually in operation and had subsequently paid the duty together with applicable interest.

Reliance was also placed on Sanket Food Products (P) Ltd. v. CCE, Aurangabad, where the Tribunal had examined the scope of the Seventh Proviso and held, in the circumstances of that case, that a manufacturer who had properly declared the number of machines intended to be used could not be equated with a manufacturer who had misdeclared the number of machines.

The CESTAT identified the central question as whether the assessee’s Central Excise duty liability was required to be determined under the Seventh Proviso to Rule 9, as contended by the Revenue, or whether the delayed payment was governed by the Second Proviso, as contended by the assessee and accepted by the adjudicating authority.

The Tribunal noted that the assessee had declared that only four machines were operational and that the competent authority had acted upon that declaration while determining the corresponding monthly duty liability.

The assessee subsequently discharged the duty, although belatedly, together with applicable interest.

The dispute therefore essentially concerned the remaining 18 machines which, according to the assessee, were sealed or uninstalled and unavailable for production.

The Tribunal examined the language of both provisions.

The Second Proviso provides that where the manufacturer fails to pay duty by the due date, the outstanding amount is payable along with interest for the period beginning from the day after the due date until actual payment.

The Seventh Proviso, on the other hand, applies where the manufacturer does not pay duty by the due date and continues to operate any packing machine. In such a situation, the monthly duty is calculated on the basis of the relevant higher number of packing machines specified in the provision.

The CESTAT held that the two provisions must be given meaningful and separate fields of operation.

It observed that the Second Proviso expressly contemplates the consequence of delayed payment, whereas the Seventh Proviso addresses a materially different situation involving continued operation of packing machines during the period of non-payment.

In a significant observation, the Tribunal held that mere failure to discharge the determined duty liability within the prescribed time cannot, by itself, automatically trigger the Seventh Proviso.

The Tribunal reasoned that such an interpretation would substantially render the Second Proviso redundant because every case of delayed payment would then necessarily result in computation of duty under the Seventh Proviso.

According to the Bench, the statutory scheme must instead be interpreted so that both provisions retain meaningful operation: the Second Proviso addresses the consequence of payment default, whereas the Seventh Proviso applies where such default is accompanied by continued operation of packing machines in the circumstances contemplated by the provision.

The Tribunal particularly emphasized the words “continues to operate”, holding that they constitute a substantive condition governing the operation of the Seventh Proviso and cannot simply be disregarded.

The CESTAT also rejected the proposition that a machine should automatically be considered “available” merely because it remained physically present within the factory premises.

The Tribunal observed that a packing machine could remain physically present while being sealed, removed from installation or otherwise rendered incapable of operation.

Therefore, physical presence alone could not establish that the machine was available for production for purposes of the higher-duty mechanism under the Seventh Proviso.

The Revenue, according to the Tribunal, had not produced independent and reliable evidence demonstrating that the 18 additional machines were actually operated for manufacturing the notified goods during the relevant period.

The Tribunal also took note of a CBEC clarification dated 20 April 2010, issued in relation to the manner of payment of duty under the Pan Masala Packing Machine Rules.

The clarification specifically stated that the expression “total number of Packing Machines found available” was to be understood as machines found available for production. It further clarified that machines sealed by the Department would not be considered as machines available in the factory for the purpose of payment of duty.

The Tribunal found this clarification relevant to the controversy concerning the 18 sealed machines.

The Bench also considered the earlier Tribunal decision in Sanket Food Products (P) Ltd. v. Commissioner of Central Excise & Customs, Aurangabad, which had dealt with the scope of the Seventh Proviso.

The Tribunal noted that the earlier decision distinguished between a manufacturer who had declared the number of machines intended to be used and a manufacturer who had misdeclared the number of machines.

In that case, the Tribunal had held that, in the absence of evidence of misdeclaration or manufacture using a higher number of machines than declared, the demand under the Seventh Proviso was not sustainable and the liability for delayed payment was governed by the Second Proviso.

The Kolkata Bench found that the reasoning was consistent with the statutory scheme applicable in the present case.

The CESTAT ultimately found that the assessee had disclosed the number of machines it intended to operate and that the competent authority had proceeded on the basis of that declaration while determining the duty liability.

The Tribunal observed that there was no material showing that the assessee had represented that all 22 machines were operational and subsequently suppressed their actual operation.

More importantly, the Revenue had not produced cogent material establishing that the assessee had actually operated the additional 18 machines despite its declarations.

Consequently, the foundational requirement for invoking the Seventh Proviso was not established.

The Tribunal concluded that the assessee’s liability for delayed payment was appropriately governed by the Second Proviso to Rule 9.

Since the assessee had declared the number of machines intended to be operated, the competent authority had determined the corresponding duty, and the assessee had subsequently discharged that liability along with applicable interest, the delayed payment by itself could not justify invoking the Seventh Proviso.

The Tribunal accordingly held that there was no justification for recomputing the duty liability by taking into account the additional 18 machines which had not been established to be in operation.

The CESTAT ultimately held that the adjudicating authority was justified in dropping the demand proposed under the Seventh Proviso.

The Tribunal found that the original adjudicating authority had correctly appreciated the distinction between the consequences under the Second and Seventh Provisos and had correctly concluded that the assessee’s liability was governed by the Second Proviso.

Membership Required to Access Case Details & Order Copy

To view the complete Case Details and Download Order Copy, you must have an active membership. Please subscribe to continue.

Read More: One-to-One Input-Export Correlation Not Required: CESTAT Quashes Recovery of Cenvat Refund