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CASE NO.:

Transfer Case (civil) 27 of 2004

PETITIONER:

R.C. Tobacco Pvt. Ltd. & Anr. etc.

RESPONDENT:

Union of India & Ors.

DATE OF JUDGMENT: 19/09/2005

BENCH:

Ruma Pal & Tarun Chatterjee

JUDGMENT:

J U D G M E N T

WITH

C.A. Nos. 881-896/2004

TC ) Nos.23- 26 of 2004, 28-36 of 2004,

TP ) No. 151 of 2004

RUMA PAL, J.

The dispute in these matters arises out of an exemption

which had been granted by the Central Government to new

industries by Notification No. 32/99-CE dated 8th July 1999

issued under Section 5A of the Central Excise Act, 1944

(referred to hereafter as 'the Act'). The parties in the various

proceedings which are being disposed of by this judgment,

represent industries manufacturing cigarettes on the one hand

(whom we will refer to as "the petitioners") and the Union of

India and the excise authorities on the other (who are described

as "the respondents"). Almost all the petitioners are job

workers for large tobacco companies. They set up their units

under agreements with the large tobacco companies and

admittedly produced the cigarettes with the brand names of

those companies. The few exceptions to this are noted

subsequently.

In December, 1997 the Government of India had

announced a separate industrial policy for the North Eastern

Region of the country which proposed to stimulate 'synergetic'

development of industries in the region by giving a package of

incentives which included exemption from excise duties,

transport subsidies, capital investment subsidies, interest

subsidies and other benefits.

Pursuant to this policy, a number of notifications were

issued by the concerned Ministries in the Government, the

relevant ones for our purpose being the Excise Notifications

Nos. 32/99 and 33/99 dated 8th July 1999 by which diverse

benefits were given. Briefly stated, under the first notification all

excisable goods were exempt from duty under the Act if the

goods were produced by new industrial units which

commenced their commercial production on or after

24th December 1997 and were located in defined areas

specified in the annexure to the notification. The benefit was

given for a period of 10 years from the date of publication of the

notification or from the date of the commencement of

commercial production whichever was later. The second

notification exempted goods produced in specified industries

located in areas outside the growth centres. The procedure

envisaged for obtaining the exemption under both notifications

was that the manufacturer of goods in such industrial units

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would have to pay excise duty and subsequently claim refund

from the excise authorities.

A notification was issued on 31st December 1999, being

Notification No. 45 of 1999 withdrawing the excise exemption to

cigarettes. However, the exemption was re-introduced on

17th January 2000 by Notification No. 1 of 2001.

The petitioners set up units in a specified growth centre

and claimed the benefit of Notification No. 32/99. This was

allowed to them initially for the first few months. However, from

July to October 2000 although some of the petitioners made

payment of the excise duty, they were not refunded the amount.

Being aggrieved, the petitioners filed writ petitions before the

Gauhati High Court. An interim order was passed by the High

Court on 19.1.2001 directing the provisional refund of the

excise duty by the respondents to the petitioners. Although the

exemption was finally withdrawn in respect of cigarettes by

Notification No. 1/2001 dated 22nd January 2001, the

respondents' prayer for vacating the interim order was rejected

by the High Court by its order dated 8.2.2001. While extending

the time for the respondents to comply with the interim order,

the High Court directed that in verifying the claims for refund,

the State Government could not interfere with the exercise of

powers of the excise authorities but made it clear that:

"This is not to say that the concerned

Assistant Commissioner or the Deputy

Commissioner of Central Excise Department

cannot take in to account any material

furnished by the State Govt. authorities in

deciding as to whether exemption is due to a

manufacturer claiming refund under the said

Notification. He may consider such material

but the judgment will be that of the Assistant

Commissioner or the Deputy Commissioner of

Central Excise Department on the question as

to whether the amount claimed by the

manufacturer under the said Notification is

entitled to exemption and refund under the

Notification".

Relying on these observations separate orders were

passed by the Assistant Commissioner rejecting the claims for

refund of the petitioners for the months of July 2000 to January

2001 and also ordering recovery of the amounts already

refunded during April to June 2000 forthwith.

He found that no unit without a Permanent Registration

Certificate (PMT) issued by the Directorate of Industries &

Commerce, Government of Assam could "legally" go into

commercial production and that the earlier order of refund

passed "on the basis of such misinformation &

misrepresentation of fact with regard to the date of commercial

commencement of production would also be unjust/incorrect

and devoid of 'legal sanction".

The pending writ petitions were amended to incorporate

a challenge to this order. The writ petitions were allowed by the

learned Single Judge on 17th May 2002 who held that the

petitioners were entitled to refund of excise duty on the

cigarettes manufactured from the date of commercial

production till the date the benefit was withdrawn by the Central

Government in January 2001. The judgment was affirmed on

4th April 2003 by the Division Bench in the writ appeal filed by

the Union of India. The Union of India has challenged the

decision before us in the above noted appeals.

Immediately after the decision of the Division Bench of

the Gauhati High Court, Section 154 of the Finance Act, 2003

was enacted by Parliament. The section reads as follows:

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"154.Amendment of notifications issued

under Section 5-A of the Central Excise

Act.-(1) The notifications of the Government

of India in the Ministry of Finance (Department

of Revenue)Nos.G.S.R.508(E), dated the

8th July, 1999 and G.S.R.509(E), dated the

8th July, 1999, issued under sub-section (1) of

Section 5-A of the Central Excise Act read

with sub-section (3) of Section 3 of the

Additional Duties of Excise (Goods of Special

importance)Act, 1957 and sub-section (3) of

Section 3 of the Additional Duties of Excise

(Textiles and Textile Articles) Act, 1978, by

the Central Government shall stand amended

and shall be deemed to have been amended

in the manner as specified against each of

them in column (3) of the Ninth Schedule, on

and from the corresponding date specified in

column (4) of that Schedule retrospectively,

and accordingly, notwithstanding anything

contained in any judgment, decree or order of

any Court, Tribunal or other authority, any

action taken or anything done or purported to

have been taken or done under the said

notifications, shall be deemed to be and

always to have been, for all purposes, as

validly and effectively taken or done as if the

notifications as amended by this sub-section

had been in force at all material times."

(2) For the purposes of sub-section (1), the

Central Government shall have and shall be

deemed to have the power to amend the

notifications referred to in the said sub-section

with retrospective effect as if the Central

Government had the power to amend the said

notifications under sub-section (1) of Section

5A of the Central Excise Act read with sub-

section (3) of Section 3 of the Additional Duties

of Excise (Goods of Special Importance) Act,

1957 (58 of 1957) and sub-section (3) of

Section 3 of the Additional Duties of Excise

(Textiles and Textile Articles) Act, 1978 (40 of

1978), retrospectively at all material times.

(3) No suit or other proceedings shall be

maintained or continued in any court, tribunal or

other authority for any action taken or anything

done or omitted to be done, in respect of any

goods under the said notifications, and no

enforcement shall be made by any court,

tribunal or other authority of any decree or

order relating to such action taken or anything

done or omitted to be done as if the

amendments made by sub-section (1) had

been in force at all material times.

(4) Recovery shall be made of all amounts of

duty or interest or other charges which have not

been collected or, as the case may be, which

have been refunded but which would have

been collected or, as the case may be, which

would have not been refunded if the provisions

of this section had been in force at all material

times, within a period of thirty days from the day

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on which the Finance Bill, 2003 receives the

assent of the President, and in the event of

nonpayment of duty or interest or other charges

so recoverable, interest at the rate of fifteen per

cent, per annum shall be payable from the date

immediately after the expiry of the said period

of thirty days till the date of payment.

Explanation. - For the removal of doubts, it is

hereby declared that no act or omission on the

part of any person shall be punishable as an

offence which would not have been so

punishable if the notifications referred to in sub-

section (1) had not been amended

retrospectively by that sub-section.

The Ninth Schedule referred to in Section 154(1) insofar

as it is relevant seeks to amend Notification No. 32/99 dated

8th July 1999 with effect from 8th July 1999 by excluding

cigarettes falling under Chapter 24 of the First Schedule or the

Second Schedule to the Central Excise Tariff Act, 1985. In

other words, the exemptions available to the manufacturers of

cigarettes from 1999 upto 27th January, 2001 (except for a short

period between 31st December 1999 and 17th January 2000

during which it was not available), was rescinded

retrospectively. This meant that the excise duties already

refunded to the petitioners would be liable to be recovered, no

further refund would be made and that the petitioners would be

liable to pay the excise duties not paid when the exemption was

in force i.e. between 8th July 1999 and 27th January 2001.

A second batch of writ petitions were filed by the

petitioners before the High Court challenging Section 154 as

being unconstitutional. They were transferred to this Court at

the instance of the Union of India and listed for hearing along

with the appeals and are also being disposed of by this

judgment.

If the challenge to the retrospective operation of Section

154 is rejected by us, any decision on the Union of India's

appeals from the judgment of the High Court would necessarily

be rendered infructuous. The petitioners challenge to Section

154, therefore, is considered at the outset.

Mr. Harish N. Salve appeared for M/s R.C. Tobacco Pvt.

Ltd. (referred to briefly as 'RCT') in Transfer Case No. 27 of

2004. RCT manufacturers cigarettes as a job worker under an

agreement with M/s Godfrey Philips India Ltd. Mr. Salve said

that there was no dispute that RCT was a new industrial unit

within the meaning of Notification No. 32 of 1999. It was also

submitted that the exemption was granted without any condition

attached except that the unit must be a new unit and must be

located in one of the growth centres etc. It is said that the High

Court had correctly held that RCT fulfilled all the pre-requisites

for grant of the refund. It is said that the inclusion of tobacco as

an exempted industry was not by accident. In fact, when the

exemption was withdrawn in December 2000, it was

consciously re-introduced in January 2001. Mr. Salve conceded

the legislative competence of Parliament to enact laws that

have retrospective effect. However, it is contended the

retrospectivity particularly of subordinate legislation must be

subjected to greater scrutiny. No reasons were given for

retrospectively removing a benefit consciously granted. He says

that where the retrospective legislation is unreasonable it would

violate Article 14 and 19 of the Constitution and would have to

be struck down as unconstitutional. It is submitted that a

change in policy, which is sought to be given a retrospective

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effect and which seeks to unsettle settled rights and to deprive

people of benefits already enjoyed and causes financial

burdens would clearly be unreasonable and arbitrary. The

unreasonableness was evident from the 'flip-flop' of the Union

of India in issuing notifications granting, then withdrawing,

again granting, before finally withdrawing the benefit in respect

of cigarettes in the short space of about a year and a half. The

final withdrawal of the exemption effected by Section 154 was

also followed by the re-grant of exemptions from duties above

8% to tobacco products other than cigarettes. This erratic

behaviour was, according to Mr. Salve, the ground on which

this Court in Tata Motors v. Maharashtra (2004) 5 SCC 783

struck down retrospective legislation as arbitrary and

unconstitutional. It was further submitted that although

promissory estoppel operates only against the executive and

not against statute, when the legislature violates promises and

representations made by the government, it is a facet of

unreasonableness that must be taken into account in evaluating

the constitutionality of the law under Articles 14 and 19. It is

argued that if the Government subsequently goes back on the

representations made in a tax exemption Notification by

causing Parliament to enact a law with retrospective effect to

reclaim the benefits so conferred, then the reasonableness of

the law must certainly be judged in the light of the

representations made by the Government.

Mr. R. Nariman appearing on behalf of Kreesna Industries

P. Ltd in Transfer Case No. 32 of 2004 has supported Mr. Salve

and adopted his arguments. His client manufactures cigarettes

under an agreement with ITC Limited. Mr. Nariman's

submission is that the fact that the industrial units were set up

by job workers under an agreement was an irrelevant

consideration as far as the industrial policy as declared by the

Central Government and the Notification No. 32 of 1999 were

concerned. This was the concurrent finding of both the courts

below. It is said that the Union of India had full knowledge of

the circumstances under which his client set up the industrial

unit and gave the industry the benefit of the notification after

being satisfied that all pre-requisites under the notification had

been fulfilled. As far as the retrospective denial of the

exemption is concerned, it is said that it stands on a different

footing from a validating act. The former amounted to an

imposition of tax for the first time whereas the latter merely

rectified a defect in the statute by which the assessee was,

from the outset, intended to be made liable. Reliance has

been placed on the observations of Beg, CJ in Madan Mohan

Pathak v. Union of India 1978 (3) SCR 334 at 344 as well as

the dissenting view of AN Sen, J in Lohia Machines Ltd. v.

Union of India (1985) 2 SCC 197. It is submitted that in the

present case the retrospectivity was harsh and excessive since

there is in fact a retrospective imposition of excise duty. It is

contended that the justification for such retrospective imposition

of a tax must be overwhelming. No such overriding

consideration had been disclosed. Furthermore, the unit would

be crippled if it were asked to pay the excise duty now. In any

event, it is submitted that after the enactment of Section 154, a

demand was made for the amount refunded and for payment of

excise duty for the remaining period. According to Mr.

Nariman, the demand which was raised cannot be sustained

as it was made without issuing any show cause notice and in

contravention of Section 11A of Central Excise Act, 1944. He

has relied on the decisions in East India Commercial Co. Ltd.

vs. The Collector of Customs, Calcutta 1963 (3) SCR 338

as well as M/s. J.K. Cotton Spinning and Weaving Mills Ltd.

vs. Union of India (1987) Supp. SCC 350 para 31, National

Agricultural Co-operative Marketing Federation of India

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Ltd. vs. Union of India & Ors. (2003) 5 SCC 23 para 29 in

support of the submission.

Mr. Dave appearing on behalf of North East Tobacco

Company in Transfer Case No. 25 of 2004 has claimed not to

be a job worker for any other company. He says that unlike

most other units his clients had not left the State of Assam after

the denial of exemption of excise duty. While adopting the

arguments of Mr. Salve and Mr. Nariman, it is his submission

that Section 11A of the Central Excise Act, 1985 was clearly

attracted to the case and the non-compliance with the

provisions thereof rendered the demand inoperative. This

argument of Mr. Dave is sought to be sustained by the decision

in M/s. J.K. Cotton Spinning and Weaving Mills Ltd. v.

Union of India & ors. 1987 (Supp) SCC 350. The benefit of

the exemption as opposed to other units had been passed on

to his client's customers and, it is submitted, it would be

inequitable to impose excise duty retrospectively at this stage.

Mr. Goswami appeared on behalf of M/s. Kaziranga

Tobacco Products (P) Ltd. and New Zone India (P) Ltd. in

Transfer Case Nos. 23 and 24 of 2004. The two companies are

job workers for Vazir Sultan. It is claimed that the units were

set up by local persons who had made huge investments after

borrowing money for land and machinery and had been granted

the relief of exemption after a full disclosure of all the facts to

the excise authorities. In fact whatever benefits had been

obtained, had been utilized by the unit to promote other

industries in the State. Mr. Goswami also submitted that the

retrospective imposition of excise duty after three years was

unreasonable as has been held in Chairman, Railway Board

& Ors. v. C.R. Rangadhamaiah and Ors. (1997) 6 SCC 623

at 638. The policy of granting such exemption was the

outcome of experts opinion and after the exemption was

reintroduced in respect of cigarettes in January, 2000, it was

extended to four other North Eastern States namely

Meghalaya, Mizoram, Nagaland and Manipur before its final

withdrawal in January 2001.

Similarly, the A.S.S Cigarette Company which was a job

worker under an agreement with Godfrey Phillips India has

stated in TC No. 26 of 2004 that their Unit was set up by local

industrialists and that they had deposited the excise duty after

borrowing and since the withdrawal of the exemption in 2001

they had been manufacturing non-tobacco products.

New Tobacco Company in TC No. 36 of 2004 has

claimed that it is not a job worker and in fact the unit still

continues to operate in Assam but has stopped the

manufacture of cigarettes .

ABN Company in TP) No. 151 of 2004 has said that it

has closed down the manufacture of cigarettes after the

withdrawal of the exemption.

Mr. A.K. Ganguly has appeared on behalf of Union of

India and sought to justify the validity of Section 154 by saying

that the Section merely gave effect to what was all along the

intention behind the Notification No. 32 of 1999. The object of

the industrial policy declared in 1997 was to give long lasting

benefit to the State in the form of increased investments in

industries with consequential benefits by way of increased

employment opportunities to the local population. The grant of

benefits was part of a package deal with the State getting

enduring benefits in return for a short term loss of revenue. The

operation of the notification did not attain this objective. The

manufacture of cigarettes was a controlled industry. The large

tobacco companies avoided all the controls by setting up these

industrial units and taking undue advantage of the benefits

granted by the exemption Notification. There was no delay in

Parliament stepping in since it clarified the law immediately

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after the decision of the Division Bench. The Central

Government which was exercising delegated power under

Section 5-A of the Act could not prevent Parliament from

undoing the clear error in the exercise of power by the Central

Government in granting the exemption or from correcting its

vacillating attitude. Parliament's right to legislate was

unimpeded. It was contended that the retrospective levy of

excise duty was justified in the circumstances particularly when

the liability to pay excise duty was merely suspended by the

exemption notifications. The further argument is that there was

no question of issuing a fresh show cause notice after the

enactment of Section 154, as the demand related to and arose

out of proceedings which culminated in the orders of the Asstt.

Commissioner impugned before the High Court. The orders

had not been appealed from under the Act. According to Mr.

Ganguly, the previous orders of refund were only provisional

and the subsequent orders of the Assistant Commissioner were

the final orders rejecting the claims of refund. The setting aside

of the order by the High Court was immediately followed by the

enactment of Section 154. It is said that Section 154 stands by

itself and provides for the method of recovery and that the

section could not be said to be unreasonable. It is submitted

that the fact that the section may operate harshly in individual

cases would not be sufficient reason for striking down the

Section as unreasonable. In the majority of cases the units had

not passed on the benefits granted by the exemption to their

customers and had on the other hand realized the duty from

their customers.

The competence of Parliament and State legislatures to

repeal, amend or supersede an exemption notification is

unquestionable. The power to do so retrospectively cannot be

and is also not doubted. The limitation on this power is that the

legislation must not conflict with other provisions of the

Constitution. As far as fiscal legislation is concerned, the

limitation is implicit in Article 265 of the Constitution which

provides that no tax shall be levied or collected except by

authority of law. As was held by this Court in Chhotabhai

Jethabhai Patel and Co. V. The Union of India and Anr :

"If by reason of Art. 265 every tax has to

be imposed by "law" it would appear to

follow that it could only be imposed by a

law which is valid by conformity to the

criteria laid down in the relevant Articles

of the Constitution. These are that the

law should be (1) within the legislative

competence of the legislature being

covered by the legislative entries in

Schedule VII of the Constitution; (2) the

law should not be prohibited by any

particular provision of the Constitution

such as for example Arts. 276(2), 286

etc. and (3) the law or the relevant

portion thereof should not be invalid

under Article 13 for repugnancy to those

freedoms which are guaranteed by Part

III of the Constitution which are relevant

to the subject matter of the law. (pg.30)

A law cannot be held to be unreasonable merely because

it operates retrospectively. Indeed even judicial decisions are

in a sense retrospective. When a statute is interpreted by a

court, the interpretation is, by fiction of law, deemed to be part

of the statute from the date of its enactment. The unreason

ability must lie in some other additional factors. The

retrospective operation of a fiscal statute would have to be

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found to be unduly oppressive and confiscatory before it can be

held to be so unreasonable as to violate constitutional norms.

"Where for instance it appears that the taxing statute is plainly

discriminatory or provides no procedural machinery for

assessment and levy of the tax, or that it is confiscatory, courts

would be justified in striking down the impugned statute as

unconstitutional. In such cases, the character of the material

provisions of the impugned statute is such that the court would

feel justified in taking the view that, in substance, the taxing

statute is a cloak adopted by the legislature for achieving its

confiscatory purposes". ( Rai Ramkrishna vs. State of Bihar:

AIR 1963 SC 1667) The question to be answered therefore is

whether Section 154, which is in terms retrospective, is ex facie

discriminatory, or so unreasonable or confiscatory that it

violates Articles 14 and 19 of the Constitution.

The factors which are generally considered relevant in

answering this question are (i) the context in which

retrospectivity was contemplated, (ii) the period of such

retrospectivity, and (iii) the degree of any unforeseen or

unforeseeable financial burden imposed for the past period.

The context in which legislation is enacted is to be

distinguished from the motives which impelled it to act. The

latter are irrelevant (See K.C. Gajapati Narayan Deo & Ors. v.

The State of Orissa (1954) 1 SCR 1,11; RS Joshi v. Ajit Mills

Ltd. (1977) 4 SCC 98,108). The justification put forward by the

respondent for enacting Section 154 was therefore really

unnecessary. Nevertheless, while we cannot for that reason

analyse the justification, we may at least consider the plea as

setting out the background in which the Section was passed.

The particular context of the section impugned in this

case was the industrial policy formulated by the Central and the

State Government of Assam for the development of that State.

The obvious intention behind the grant of the package of

incentives including an exemption from payment of excise

duties was to stimulate further industrial growth in the area with

enduring benefits not only to the local populace by way of

employment opportunities but also to the economic welfare of

the State. The State Government's insistence from the very

outset on the need to regulate the industries which were

claiming the benefit of the exemption was to ensure that these

objects were attained. According to the Union of India the

exemption notification, at least as interpreted by the High Court,

did not effectuate that intent. As it transpired none of the

industrial units manufacturing cigarettes were prepared to

contribute to this object and their investment in the manufacture

of cigarettes was co-extensive with the period of the exemption.

The loss of revenue suffered by the Union and the State by the

various subsidies and exemptions granted was the quid in

return for which the petitioners were not prepared to suffer any

quo. With the withdrawal of the exemption, all of them without

exception immediately closed down their cigarette

manufacturing units and a large majority have shifted out of the

State. Clearly if the grant of the exemption had operated as it

was intended to, it would have been unnecessary to enact

Section 154.

The High Court may have been right in construing the

exemption notification as it stood. Yet the respondent can

contend that that the words should have been used in the

exemption so as to provide for sufficient safeguards to ensure

that the benefit of exemption was granted only to those

industries which would in turn permanently invest in the State.

By the retrospective enactment this defective expression of the

object of the policy, was rectified.

The Exemption Notifications were issued under Section

5A of the Central Excise Act, 1944 as a delegate of Parliament.

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In a Cabinet form of Government, the Executive is expected to

reflect the views of the legislature. It would be impossible for

Legislatures to deal in detail and cater to the innumerable

problems which may arise in implementing a statute. When the

power of subordinate legislation is conferred by Parliament in

certain matters it can only lay down the policy and guidelines

and expect that what is done by the Executive is in keeping

with such policy. It does of course retain control over its

delegate and can exercise that control by repealing the action

of the delegate . Consequently if the Executive has failed to

carry out the object of Parliament, such control may be

exercised by retrospectively enacting what the Executive ought

to have achieved.

A somewhat similar situation arose in the case of Epari

Chinna Krishna Moorthy vs. State of Orissa and Ors. AIR

1964 SC 1581. In that case the State Government had issued

an exemption notification under Section 6 of the Orissa Sales

Tax Act, 1947 for which gold ornaments were ordered to be

exempted from sales tax "when the manufacturer selling them

charges separately for the value of gold and the cost of

manufacture". The Notification was issued on 1st July, 1949.

The petitioners, who were registered dealers under the Orissa

Sales Tax Act filed returns claiming exemption from sales tax.

Up to June, 1952 the claims for exemption were allowed by the

Department. Subsequently, the assessments were reopened on

the ground that the exemption had been wrongly granted. The

matter ultimately came up before the High Court. The High

Court allowed the petitioners' claim for exemption under the

notification in question holding that the expression

"manufacturer" meant the first owner of the finished products for

whom the ornaments were made either by his pre-paid

employee or even by independent artisans on receipt of the

raw materials and labour charges from him. On 1st August,

1961 the Orissa Sales Tax Validation Act, 1961 was passed. It

provided that notwithstanding anything contained in any

judgment, decree or order of any Court, the word

"manufacturer" meant and was always to be deemed to have

meant a person who by his own labour produces the ornaments

or a person, who owns or runs manufactories for that purpose.

The petitioners did not fall within this definition of manufacturer.

They accordingly challenged the 1961 Act on three grounds; 1)

that since the exemption had been granted by the State

Government, it was not open to the legislature to take away the

exemption notification; 2) that the provisions of 1961 Act

contravened Article 14; and 3) that the retrospective operation

of the impugned Section was unconstitutional because it

imposed an unreasonable restriction on the petitioners

fundamental rights under Article 19(1)(g). In negativing these

arguments a Constitution Bench of this Court said:-

"What the legislature has purported to

do by S. 2 of the impugned Act is to

make the intention of the notification

clear. Section 2 in substance declares

that the intention of the delegate in

issuing the notification granting

exemption was to confine the benefit of

the said exemption only to persons who

actually produce gold ornaments or

employ artisans for that purpose. We

do not see how any question of

legislative incompetence can come in

the present discussion. And, if the State

Government was given the power either

to grant or withdraw the exemption, that

cannot possibly affect the legislature's

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competence to make any provision in

that behalf either prospectively or

retrospectively."

Although the length of time is not by itself

decisive the effect of the retrospectivity of the

legislation in this case is less than two years. The tussle

between the excise authorities and the petitioners started

almost immediately upon the latter claiming and obtaining

refunds of the excise duty paid by them on the manufacture of

cigarettes. The refusal of the excise authorities to refund, on

their interpretation of the notification, led to the filing of the writ

petitions. The writ petitions were allowed on 17th May, 2002. In

the meanwhile the exemption was already withdrawn in

January 2001. The decision was then challenged in appeals by

the Union of India which were finally dismissed by the Division

Bench on 4th April, 2003. Therefore between 2000 to 2003 the

dispute as to the purport of the exemption notification during the

period of their operation from July 1999 to January 2001 was

pending in Court. The matters were then carried to this Court by

the Union of India. While the proceedings were pending and the

issue was still at large, Section 154 was enacted. In these

circumstances, the Parliament cannot be blamed for having at

least awaited the decision of the High Court, nor can the

statutory provision be questioned as being unreasonably

retrospective.( See in this connection Rai Ram Krishna vs.

State of Bihar AIR 1963 SC 1667, 1675 para 18).

The pendency of the proceedings before the Courts

meant that there was a possibility of an outcome adverse to the

petitioners however strong the petitioners may have considered

their case to be. If this Court had reversed the view of the High

Court, the petitioners would have had to bear the burden of the

excise duty for the period they had manufactured the cigarettes.

It could not have been predicted with any certainty that the

appeals of the Union of India would fail. By enacting Section

154, Parliament has forestalled a decision by this Court and in

effect taken away the basis for the decisions of the High Court.

In the circumstances, it could not be said that the financial

burden was unforeseen or unforeseeable.

In Chairman Railway Board vs. C.R.

Rangadhamaiah (supra) the impugned notifications had

sought to curtail pensionary rights with retrospective effect.

The notifications were held to be unconstitutional on the

grounds that when the pension had been granted to the

employees, Articles 31(1) and 19(1)(f) were available, both of

which were violated by such retrospective operation. It was

also held that it was violative of Articles 14 and 16 of the

Constitution because it had the effect of reducing the amount of

pension that had become payable to employees who had

already retired from service on the date of issuance of the

impugned notifications according to the rules in force at the

time of their retirement. However the right of the petitioners to

the exemption in the present case can at best be described as

a precarious one. It is established law that benefits granted by

exemptions may be modified or withdrawn. By the notification

the accrued liability to pay excise duty is merely suspended.

Such an exemption by its very nature is susceptible to being

revoked or modified or subjected to other conditions. The

Government and a fortiori the Parliament is free to determine

the priorities in the matter of utilization of finances and the

courts cannot place an embargo on the Government or on the

plenary power of Parliament to withdraw the benefit on the

basis of any principle of promissory estoppel. It has been said:

"It is necessary that the Legislature

should be able to cure inadvertent

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defects in statutes or their administration

by making what has been aptly called

'small repairs'. Moreover, the individual

who claims that a vested right has

arisen from the defect is seeking a

windfall since had the legislature's or

administrator's action had the effect it

was intended to and could have had, no

such right would have arisen. Thus, the

interest in the retroactive curing of such

a defect in the administration of

government outweighs the individual's

interest in benefiting from the defect\005.

The Court has been extremely reluctant

to override the legislative judgment as to

the necessity for retrospective taxation,

not only because of the paramount

governmental interest in obtaining

adequate revenues, but also because

taxes are not in the nature of a penalty

or a contractual obligation but rather a

means of apportioning the costs of

government among those who benefit

from it ."

As we have said, Mr. Salve relied on Tata Motors Ltd.

vs. State of Maharashtra & Ors., (2004) 5 SCC 783 to

contend that despite the enormous powers of Parliament to

legislate prospectively or retrospectively, unless the material is

disclosed why there was an 'on again and off again' exemption,

Section 154 must be held to be arbitrary and therefore

unconstitutional. In that case Rule 41E of the Bombay Sales

Tax Rules 1959 allowed benefit of set-off in respect of all waste

goods or scrap goods or bye- products. This benefit was

sought to be taken away by Section 26 of the Maharashtra Tax

Laws (Levy Amendment and Repeal) Act, 1989 which amended

Rule 41E. The validity of such retrospective amendment to

Rule 41E was challenged. It was contended that as a result of

the amendment the assessee was deprived of the benefit for a

period 8 years after which the benefit was reintroduced by

another amendment of Rule 41E in 1992. This Court held that

in absence of any material as to why the benefit under Rule

41E had been denied for a particular period, Section 26 of the

1989 Amendment Act deserved to be quashed. The Court

found in favour of the assessee because there was no reason

whatsoever forthcoming for the withdrawal of the benefit

retrospectively for a limited period.

The decision is distinguishable. In this case, the reasons

for the retrospective enactment of Section 154 have been given

and as we have also said, those reasons are at least factually

plausible.

The next challenge of the petitioners is based on Section

11A of the Act, the relevant extracts of which reads:

"11-A RECOVERY OF DUTIES NOT

LEVIED OR NOT PAID OR SHORT \026 LEVIED

OR SHORT-PAID OR ERRONEOUSLY

REFUNDED- (1) When any duty of excise has

not been levied or paid or has been short

levied or short paid or erroneously refunded, a

Central Excise Officer may, within six months

from the relevant date, serve notice on the

person chargeable with the duty which has not

been levied or paid or which has been short

levied or short-paid or to whom the refund has

erroneously been made, requiring him to show

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cause why he should not pay the amount

specified in the notice:

Provided that where any duty of excise

has not been levied or paid or has been short-

levied or short-paid or erroneously refunded

by reason of fraud, collusion or any willful mis-

statement or suppression of facts, or

contravention of any of the provisions of this

Act or of the rules made thereunder with intent

to evade payment of duty, by such person or

his agent, the provisions of this sub-section

shall have effect, for the words "six months",

the words "five years" were substituted.

2) xxx xxx xxx xxxx

3) For the purposes of this section,

i) xxx xxx xxx xxx

ii) "relevant date" means:

(a) in the case of excisable goods

on which duty of excise has not been

levied or paid or has been short-levied

or short-paid-

(A) where under the rules made

under this Act a periodical return,

showing particulars of the duty paid on

the excisable goods removed during the

period to which the said return relates, is

to be filed by a manufacturer or a

producer or a licensee of a warehouse,

as the case may be, the date on which

such return is so filed;

(B) where no periodical return as

aforesaid is filed, the last date on which

such return is to be filed under the said

rules;

(C) in any other case, the date on

which the duty is to be paid under this Act

or the rules made thereunder.

(b) in a case where duty or excise is

provisionally assessed under this Act or

the rules made thereunder, the date of

adjustment of duty after the final

assessment thereof;

(c) in the case of excisable goods on

which duty of excise has been

erroneously refunded, the date of such

refund.

The contention is that Section 154 violates Section 11A in

that it does not envisage the service of any notice and it seeks

to allow recoveries to be made after the periods of limitation

provided.

According to the respondents the refunds granted under

the notifications dated 8th July, 1999 were not the "normal"

refunds made under the Act but were of a special kind for which

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the complete machinery was provided under the Notifications.

The submission is that since the exemption notifications

themselves had been withdrawn by Section 154, the amounts

refunded thereunder were recoverable independently of Section

11A under Section 154(4).

There are two aspects to this dispute. The first is the

question of limitation and the second the question of notice. As

far as the first aspect is concerned refund of duty under the Act

has been provided for by Section 11B. The Section specifies

the manner and circumstances under which refunds of duty

may be made. It is neither of the parties' case that the refund

made to the petitioners of the excise duty paid by them was

under this Section.

In the present case Paragraph 2 of the Notification 32/99

prescribed for the method for giving effect to the exemption. It

provided:

(a) The manufacturer shall submit a

statement of the duty paid from the

said account current to the Assistant

Commissioner of Central Excise or

Deputy Commissioner of Central

Excise, as the case may be, by the

7th of the next month in which the

duty has been paid from the account

current.

(b) The Assistant Commissioner or

Deputy Commissioner of Central

Excise, as the case may be, after

such verification, as may be deemed

necessary, shall refund the amount

of duty paid from the account current

during the month under

consideration to the manufacturer by

the 15th of the next month.

(c) If there is likely to be any delay in

the verification, the Assistant

Commissioner or Deputy

Commissioner of Central Excise, as

the case may be, shall refund the

amount on provisional basis by the

15th of the next month to the month

under consideration, and thereafter

may adjust the amount of refund by

such amount as may be necessary

in the subsequent refunds

admissible to the manufacturer.

The claim for refund is subject to verification but the

refund must be granted even before such verification on a

provisional basis. It was for that reason that the learned single

Judge had directed the refund by an interim order but allowed

the Assistant Commissioner to independently verify the claims.

Although Section 11A does not refer to Section 11B, it

speaks of duties "erroneously refunded". It cannot therefore

refer to the refunds made to the petitioners under the

notifications as there was no error in the provisional refunds

made under the notifications to the appellants. What was

sought to be recovered under Section 154 was not an

erroneous refund but a benefit provisionally granted.

In J.K. Cotton Spinning & Weaving Mills Ltd. vs.

Union of India (1987) Supp. SCC 350 relied upon by the

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petitioners, by virtue of the retrospective amendment of Rules 9

and 49 of the Central Excise Rules in 1982, commodities

obtained at an intermediate stage of manufacture in a

continuous process were deemed to have been 'removed'

within the meaning of Rule 9(1) thereby making such

intermediate products dutiable under the Act with effect from

the commencement of the Act i.e. 1944. In this context the

Court held that the amended Rules 9 and 49 would take effect

subject to Section 11A. The decision is distinguishable. The

circumstances in which the Court held that the demands for

duty could only be limited to six months prior to the amendment

was unquestionably different from those present in the case

before us. What we have to consider here is whether the

benefit granted in 1999 could be withdrawn in 2003. Besides

the Court in J.K. Cotton Spinning & Weaving Mills Ltd's case

rejected the contention of the Union of India that Section 51 of

1982 Finance Act by which the amendments were made to

Rules 9 and 49 overrode the provisions of Section 11A saying

'if the intention of the legislature was to nullify the effect of

Section 11A,\005.., the legislature would have specifically

provided for the same'. Similarly our decision in National

Agricultural Cooperative Marketing Federation of India Ltd.

vs. Union of India (2003) 5 SCC 23 which dealt with an

amendment to Section 80P(2)(a)(iii) of the Income Tax Act,

1961 noted that 'the amendment does not seek to touch on the

periods of limitation provided in the Act, and in the absence of

such express provision or clear implication, the legislature

clearly could not be taken to intend that the amending

provisions authorizes the Income Tax Officer to commence

proceedings which before the new Act came into force, had, by

the expiry of the period provided become barred". In the

present case Section 154(4) specifically and expressly allows

amounts to be recovered within a period of thirty days from the

day the Finance Bill, 2003 received the assent of the President.

It cannot but be held therefore that the period of six months

provided under Section 11A would not apply.

On the question of notice prior to the recovery irrespective

of Section 11A, it is contended by the petitioners relying on the

decision of this Court in East India Commercial Co. Ltd. vs.

The Collector of Customs (1963) 3 SCR 338, 361 that

whether a statute provides for notice or not, it was incumbent

upon the respondents to issue notice to the petitioners

disclosing the circumstance under which proceedings are

sought to be initiated against them and that any proceedings

taken without such notice would be against the principles of

natural justice. Assuming that the principle were applicable to

the case before us, in fact notices of personal hearing were

served on the petitioners by the Assistant Collector for a

personal hearing before the Assistant Collector passed the

orders by which the petitioners were held liable to repay the

refunds made and to pay the excise on the goods cleared for

the subsequent periods. The High Court's decision setting

aside the orders as being contrary to the Exemption Notification

was sought to be overcome by Section 154(1). In other words,

by virtue of Section 154(1), notwithstanding the decision of the

High Court, the orders of the Assistant Collector, which were

purported to have been taken under the notifications, were

validated as if the notifications as amended had been in force

when the orders were passed.

A grievance has been raised by the petitioners that

cigarette manufacturers have been unfairly discriminated

against. We are unable to accept the submission for several

reasons.

First, there is a presumption in favour of constitutionality

of a statute, a presumption which only the clearest and

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weightiest evidence can displace.

Second, we can take judicial notice of the fact that

cigarettes have been treated as a class apart for the purposes

of levy of excise duty with the manufacture of cigarettes

probably yielding the highest revenue to the exchequer.

As was said in R.K. Garg vs. Union of India (1981) 4

SCC 675 by the following words:

"The presumption of constitutionality is

indeed so strong that in order to sustain

it, the Court may take into consideration

matters of common knowledge, matters

of common report, the history of the

times and may assume every state of

facts which can be conceived existing at

the time of legislation."

Third "another rule of equal importance is that laws

relating to economic activities should be viewed with greater

latitude than laws touching civil rights such as freedom of

speech, religion etc." (ibid).

The final question is that of the relief to be granted.

The petitioners can be broadly classified into three

groups:

A. Job workers for large cigarette

companies which have closed down

the units with the withdrawal of the

exemption and left the State of

Assam.

B. Job workers for large cigarette

companies which have closed down

their cigarette manufacturing units

but started new business in other

products.

C. Industrial units which have set up

their own units and have reinvested

their earnings in their businesses in

the State after closing down the

manufacture of cigarettes.

Some units have admittedly not passed on the excise

duty benefits to their customers. On the other hand the large

cigarette companies have recovered the excise duty from the

customers. Other units claim to have passed on the benefit of

the entire exemption to their customers.

All the petitioners however claim that they would be

financially crippled if they were called upon to repay the refund

of the excise duties or pay the excise duty on the cigarettes

manufactured by them. According to them the quantum of

excise duties would far exceed their profits from the

manufacture of cigarettes.

The respondents on the other hand have urged that the

petitioners were merely fronts for the large cigarette companies

which had misused the notification to avoid the excise duty

otherwise payable by them. This was clear from the

agreements entered into between them and the various

industrial units through which they claimed the benefits. The

agreements showed inter alia that the entire set up was

financed by the large companies. The arrangement was back to

back so that with the withdrawal of the exemption, the units

would be closed down. The promptness with which a unit went

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into commercial production after it was set up in a few days

showed that there was no real investment by the petitioners.

Many of the units had not even got permanent registration

before they went into production and claimed refund of large

amounts of excise duty. Admittedly the large cigarette

companies had not only not passed on the benefit of exemption

but had levied and retained the excise duty on the cigarettes

manufactured by the petitioners for the customers of the large

companies.

The petitioners who were admittedly in group A have

refuted this and contend that their relationship with the large

cigarette companies was on a principal to principal basis and

that under their agreements they alone would be liable to pay

the excise duty now demanded by the respondents under

Section 154.

We are not in a position to determine the disputes raised.

However we cannot lose sight of the fact that although excise

duty like other indirect taxes may be passed on to the customer

of the goods under the law as it now stands, it is the

manufacturer of the excisable goods to whom the excise

authorities will look for payment. How the manufacturer will

adjust its liability with its customers does not concern the

respondents nor can they be asked to recover their dues from

persons who may have ultimately taken on the responsibility to

pay the excise duty as a result of an agreement with the

manufacturer. (See in this connection State of Rajasthan vs.

J.K. Udaipur Udyog Ltd. (2004) 7 SCC 673, 692).

Furthermore having upheld the constitutional validity of

Section 154 it would be a pyrrhic victory for the Union of India if

they could not in fact recover the tax. It is not a case where the

legislation has merely withdrawn the exemptions. The

consequences of the withdrawal have been statutorily provided

for including the recovery of the excise duties refunded or not

paid. The effective period of such imposition is about eight

months. The State has been deprived of revenue without any

corresponding benefit. It may be that the retrospective

operation may operate harshly in some cases, but that would

not by itself invalidate the demand. [See: Epari Chinna

Krishna Moorthy vs. State of Orissa (supra)] It needs to be

emphasized that in effect the retrospective operation extended

over a very short period and principles of equity must give way

to express statutory provision. As was said in Story on Equity

(3rd Eng.Ed.1920)p.34:-

" Where a rule, either of the common or

the statute law, is direct, and governs

the case with all its circumstances, or

the particular point, a court of equity is

as much bound by it as a court of law,

and can as little justify a departure from

it" .

No doubt in British Physical Lab India Ltd vs. State of

Karnataka & Ors. (1999) 1 SCC 170 relied upon by the

petitioners the Sales Tax Authorities proposed to recover the

difference in duty from manufacturers within the State having

regard to the fact that the notifications giving them the benefit of

a lower rate of tax had been struck down. This court held that

they should not do so. The rationale behind the decision has

been explicitly stated in Texmaco Ltd vs. State of Andhra

Pradesh (2000) 1 SCC 763. In directing that the State shall not

collect the amount of sales tax that had become payable by

reason of the quashing of the notifications, this Court noted

that the notifications had been intended to protect the local

cement industries. The quashing of the notifications should

have the effect of putting the local cement industry and the

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same industry outside the State on par. It could not place the

former in a disadvantageous position qua the later. Apart from

this, the respondent-State had also not contested the factual

position. The circumstances in which this Court directed the

State not to collect amount of sales tax which had become

payable only by reason of the Order quashing the notifications

issued under the State Sales Tax Act do not exist here. What

we are considering in this case is a positive statutory mandate

directing the consequences of the withdrawal of the exemption

notifications.

For the reasons stated we dismiss the transferred writ

petitions without any order as to costs.