Sukumar Mukhopadhyay: Smoke signals from an ordinance

The retrospective amendment of central excise law by an ordinance is neither legally cogent nor perceivably sound.

As expected, the Central Excise Laws (Amendment and Validation) Ordinance, 2005 has made news due its nullifying effect on the Supreme Court order of September 2004, which gave ITC the right to get Rs 830 crore back from the government.

This defying act in passing an ordinance is widely perceived in public as arbitrary, vindictive and negative. It sends negative signals to entrepreneurs and has undermined the due process of law. A review petition in this case had already been filed by the government and it is pending before a larger bench of the Supreme Court.

It was in order to request the court to expedite the decision. Now, having changed the notification midway, the review petition has been rendered infructous by the same government that has filed it. It cannot brook the delay, so it has broken the due process of law.

Consider, first, the pure legality of it. Judging from the number of Supreme Court judgements on it, it is not a unanimous situation. The government has the legislative competence to amend law retrospectively.

But this is only the first principle. In some cases, the Supreme Court has also set aside such ordinances calling them illegal such as in D Cawasji vs State of Mysore [1985 (19) ELT 3 (SC)].

And in each judgement in which this has been upheld, the court has done so by giving good reasons for doing so and laying down some conditions.

In the landmark judgements of J&K Spinning & Weaving mills vs UOI [1987 (32) ELT (234) SC] and Mafatlal Industries Ltd vs UOI [1997 (89) ELT 247 SC] under the Central Excise Act, the Supreme Court upheld the retrospective amendment but subject to the issue of demand within the available time limit of six months under Sections 11A and 11B of the Act.

The court laid down the general principle that the amendment cannot be unreasonable or arbitrary. It has to be on "proper and cogent grounds", the hardship factor has also to be taken into account and has to be in the public interest.

Moreover, the amendment must first rectify the defect that had invalidated the collection. This is what it laid down in the Cawasji case.

In this case, under the Mysore Sales Amendment Act 1969, the Mysore High Court issued a writ directing the state government to forbear from collecting any amount as sales tax treating excise, health cess and education cess as part of the value of the goods and also to refund the amount collected.

The state government reacted by not correcting the defect but retrospectively validating and increasing the levy.

The Supreme Court held that "Validation of a tax so declared illegal may be done only if the grounds of illegality or invalidity are removed and are capable of being removed and the tax thus made legal."

It added that it may or may not have been competent for the state legislature to validly remove the lacunae and remedy the defect in the levy but if it can do so, then the retrospective levy can be validated.

So we have to see now if the Ordinance 2005 has been able to rectify the defect in the levy pointed out by the Supreme Court judgement of 2004.

This is the crux of the issue. The ordinance has amended Section 37 of the Excise Act and Rule 8(1) retrospectively to amend the relevant notification no. 36 of 1983 and others.

In the definition of sale price the expression, "may be sold in accordance with the declaration made on such package " has been replaced by "may be sold in retail".

The idea is to remove the reference to the concept of declaration made on the package. For it is the declaration on the package that brought the Standard Weights and Measures (SWM) Act into reckoning.

But the fact is that in the first part of the definition of the sale price, the reference to the declaration on a package remains. So the reference to the SWM Act may still be brought in by the Supreme Court if it hears the matter again.

If ITC still takes the matter to the Supreme Court, how far the court will be convinced that the reference to the declaration on package will not bring the SWM Act into the reckoning, is difficult to say. It remains an arguable case. If the court is not convinced that the defect has not been rectified, then the retrospective amendment instantly becomes invalid.

Moreover, if ITC argues, as it surely will, that it has still complied with the amended notification, the Supreme Court may find it difficult to go into all the details of the case and have compelling reasons to remand the case to an adjudication authority.

In that case, the whole process of adjudication, appeal to a tribunal and to the Supreme Court will start all over again. And it will go on for another 17 years.

There is one question the government will find hard to convince the Supreme Court if it hears the case again, and that is, public interest. It is not an ongoing issue such as the processing of cotton fabrics as it was in the Empire Industries case. It is a closed issue and relates to only one manufacturer.

There are no group of people involved. It is a question of evasion alleged against one party and it is all based on facts. It is difficult to argue that it is in the interest of the public. Just because a huge amount of revenue is involved, it cannot be said that it is a case of public interest.

It is true that the government believes that ITC has made undue benefit by manipulating the retail price. But the case has to be fought in the Supreme Court. If the government loses there, an ordinance after 17 years of litigation is not the correct path.

The conclusion is that any obsession with the power to retrospectively amend an act will prolong litigation, which is bound to happen now.

It speaks ill of a tax system that lacks certainty which is one of the canons of taxation laid down by Adam Smith more than a century ago. This uncertainty will undermine investor confidence.

(The writer is former member, Central Board of Excise and Customs)