Locus standi of co-applicants before Customs, Excise & Service Tax settlement. commission

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1 Pramod Kumar Rai, Advocate Managing Partner B.Tech (IITKanpur), LLB (Gold Medal), LLM (USA) Former Joint Commissioner of Customs, Excise & Service Tax (IRS). Tel: (D)/ (O) Mob: Website: Locus standi of co-applicants before Customs, Excise & Service Tax settlement commission 1. A practice has developed whereby for settlement of a case before Custom, Excise & Service Tax Settlement commission as many applications are being filed as number of noticee in the Show Cause Notice. Under the act, the settlement application can be filed by applicant alone and there is no concept of moving application as coapplicant. However a customary practice has developed of moving application by each co-noticee from whom there is no demand of duty as co-applicant, without any kind of legal sanction. The noticee approaching the commission with admitted tax liability is being termed as main applicant and other noticees on whom penalty is proposed in SCN are being termed as Co-applicant. The co-applicants are filing applications in commission without admitting any kind of liability. The commission is accepting the application of all the applicants/co-applicants with settlement application fee of Rs The application filed by noticee with admitted tax liability is being entertained by commission, irrespective of the fact whether or not other co-noticees on whom penalty is proposed in SCN, have approached commission. In case some or all of the noticee with penal liability in SCN do not approach the commission their case is being kept out of settlement and being left open for adjudication. However the application filed by a noticee on whom penalty is proposed in SCN is not entertained

2 by commission, in case the noticee with duty liability has not approached the commission. In this way basically for a single SCN, commission is making as many cases as number of noticee. Thus noticee specific settlement is being done by commission and commission is not settling the case in totality. 3. When case of a noticee with penal liability is kept open for adjudication even after settling the case of assessee with tax liability, the case is not settled in entirety. In Commissioner v. GE Medical Systems 2012 (280) E.L.T. 33 (Kar.), high court held that imposition of penalty is directly linked and consequential to redetermination of duty and in that view, penalty cannot be decided without going into issue of duty evasion. Therefore in adjudication process for deciding the penal liability, case of duty evasion by assessee also needs to be looked into meaning there by that issue closed by commission shall be relooked by adjudicating authority without any power to do so. This article examines whether the practice adopted by settlement commission is legally correct. The meaning of case which needs to be settled 4. Settlement commission needs to settle the CASE based on application of APPLICANT. Under the law 'case' as well as 'applicant' is well defined. Section 31 of the CEA 1944 and Section 127A of Customs Act 1962 respectively defines case as under case means any proceeding under this Act or any other Act for the levy, assessment and collection of excise duty, pending before an adjudicating authority on the date on which an application under sub-section (1) of section 32E is made case means any proceeding under this Act or any other Act for the levy, assessment and collection of customs duty, pending before an adjudicating authority on the date on which an application under subsection (1) of section 127B is made :

3 5. It is to be noted that a. Definition of case is not person or noticee specific rather subject matter specific. b. Under CEA 1944, it is specifically in relation to the proceeding for the levy, assessment and collection of excise duty and not in respect of proceeding for imposition of penalty in isolation. The proceeding of penalty is incidental and included in the proceeding of levy, assessment and collection of excise duty. A proceeding of penalty has no existence in isolation to the proceeding of levy, assessment and collection of excise duty in relation to which penalty is proposed. c. Similarly under Customs Act 1962, it is specifically in relation to the proceeding for the levy, assessment and collection of duty of customs and not in respect of proceeding for imposition of penalty in isolation. The proceeding of penalty is incidental and included in the proceeding of levy, assessment and collection of customs duty. A proceeding of penalty has no existence in isolation to proceeding of levy, assessment and collection of duty in relation to which penalty is proposed. Who can be applicant before commission 6. Section 32E prescribes following qualification for the person to be applicant which shows that an assessee who is manufacturer of goods alone can be applicant and nobody else. a. The applicant must be an assessee under the Act. The Director, transporter, broker, buyer not being an assessee cannot be applicant under Section 32E of the Act. b. The applicant has to make a full and true disclosure of his duty liability which has not been disclosed before the Central Excise Officer having jurisdiction, and has to admit short levy of the duty. The person other than manufacturer cannot be applicant because he cannot disclose any duty liability on himself.

4 c. The applicant is one who has filed returns showing production, clearance and Central excise duty paid in the prescribed manner. The person other than manufacturer cannot be applicant because he has not filed any return. d. The applicant has to pay the additional amount of excise duty accepted by him along with interest due under section 11AB in advance. The person other than manufacturer cannot be applicant because he cannot pay duty in advance on his count. 7. Similarly under Section 127B prescribes qualification for the person to be applicant, which shows that a person with duty liability alone can be applicant and nobody else. o The applicant must be assessed to duty under the Act. The employees of the company or anybody else connected with the case not being an assessee cannot be applicant under Section 127B of the Act. o The applicant has to make a full and true disclosure of his duty liability which has not been disclosed before the customs Officer having jurisdiction, and has to admit short levy of the duty. The person other than importer/exporter cannot be applicant because he cannot disclose any duty liability on himself. o The applicant is one who has filed Bill of entry/shipping Bill in the prescribed manner. The person other than importer/exporter cannot be applicant because he has not filed any return. o The applicant has to pay the additional amount of duty accepted by him along with interest due in advance. The person other than importer exporter cannot be applicant because he cannot pay duty in advance on his count. 8. It is submitted that so called Co-applicants cannot be applicants either under Section 32E of CEA 1944 or under section 127B of Customs Act because

5 a. They do not approach commission by admitting duty liability. For every applicant under the law it is mandatory to admit a minimum of three lakhs of tax liability. The co-applicants who are neither manufacturers nor importer/exporter cannot admit any tax liability also. b. The applicant must be an assessee under the Act assessed to duty liability. The Director, employee, transporter, broker, buyer, CHA etc not being an assessee cannot be applicant under Section 32E/127B of the Act. c. The applicant has to make a full and true disclosure of his duty liability which has not been disclosed before the Officer having jurisdiction, and has to admit short levy of the duty. The person other than assessee cannot be applicant because he cannot disclose any duty liability on himself. d. The applicant is one who has filed returns showing production, clearance and Central excise duty paid under central Excise law or who has filed B/E or S/B under Customs Law. The person other than manufacturer/importer/exporter cannot be applicant because he has not filed any return/bill of entry/shipping bill. 9. It is submitted that so called Co-applicants are not applicants either under Section 32E of CEA 1944 or under section 127B of Customs Act rather they are just proforma interested parties having interest in the settlement of case and definitely they will be saddled with liability in case, the case is not settled. However if the case is settled, it needs to be settled in its entirety in respect of all persons who are associated with a case and not in respect of specific persons and once the case is settled no penalty can be imposed on any person in respect of that case because definition of case is not person specific. 10. The commission has to settle the case in its entirety and it cannot be vivisected at all between various parties and one case cannot be vivisected to make as many cases as number of noticee. This view has been consistently taken by tribunal. In S.K. Colombowala V/S Commissioner Of Customs (Import), Mumbai 2007 (220)

6 E.L.T. 492 (Tri.-Mumbai) it was held that since once the case is settled by the Settlement Commission, it is settled in its entirety and such a case then cannot be adjudicated quo other co-noticees. Relevant Para of the Judgment is reproduced below: 26 (b) The question as to who played the main role is irrelevant for the reason that once the case is settled by the Settlement Commission, it is settled in its entirety and such a case then cannot be adjudicated qua other co-noticees. 26(c) The case against all co-noticees comes to an end once the order of settlement is passed in respect of the person entitled to file an application before the Settlement Commission and therefore, penalty imposed upon the appellants cannot be sustained and is set aside 11. Relying upon above decision, again in Vijay R. Bohra V/S Commissioner C. Ex., Daman 2010(260) E.L.T. 290 (Tri.-Ahmd.) it was held that on settlement of dispute of main noticee by Settlement Commission, even when penalty was imposed on main applicant and even when there was a specific remark by the commission that case of main applicant alone is settled and case of other noticee is not settled, cases against all Co-Noticees regarding penalty would come to an end. It was held that no distinction could be drawn between those case where some penalty has been imposed on main noticee and case where Settlement Commission fully waived penalty on main noticee. It was held that in all cases, the case of co noticee will come to an end with settlement of case of main noticee. 12. Similarly in Windoors (India) V/S Commissioner Of Central Excise, Mumbai-Ii 2009 (246) E.L.T. 345 (Tri. - Mumbai) it was decided that order of settlement when passed in respect of main noticee, case against all co-noticees come to an end and immunity when granted to main noticee from fine, penalty and prosecution, imposition of penalty on other co-noticee is not sustainable. Similarly in PEARL POLYMERS LTD. V/S COMMR. OF C. EX., RAIGAD 2008 (226) E.L.T. 566 (Tri. - Mumbai) it was decided that the case is settled by Settlement Commission in its entirety and case against co-noticee also comes to an end.

7 13. However the commission continue to vivisect the SCN into as many cases as number of noticee and whenever the tribunal decisions were placed before commission, commission refuse to take those decisions on record. Commission has not given any elaborate reasoning so far as to why it does not agree with tribunal decisions and as to how and why it treats co-noticee without duty liability as applicant when under the law they cannot be applicant. 14. The co-noticees without any duty liability and being termed as co-applicant by the commission are not applicants in true sense. The case needs to be settled just based on application of main applicant who is the only applicant in the eyes of law. It is submitted that so called Co-applicants are not applicants under Section 32E/127B of the act rather they are just pro-forma parties having interest in the settlement of case and they may be saddled with liability in case, the case is not settled. However if the case is settled, it is settled in its entirety in respect of all persons who are associated with a case and not in respect of specific persons and once the case is settled no penalty can be imposed on any person in respect of that case because definition of case is not person specific. 15. It is a wrong practice on the part of commission to take application fee from proforma parties and to treat them as applicant when under the law they do not qualify as applicant. It is also wrong on the part of commission to settle the case specific to noticee and not in its entirety. It is against the basic objective of settlement to keep part of the case open for adjudication. The case of duty evasion by a single party under a single SCN, cannot be vivisected into as many cases as number of noticee. The practice of noticee specific settlement by commission needs to be changed towards settlement of the case in totality. Pramod Kumar Rai, Advocate