Extended Limitation cannot Be Invoked for Audit-Based Demand: CESTAT Quashes Excise Duty Demand against Delphi Automotive [Read Order]

The Chandigarh Bench of Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that a show cause notice (SCN) issued on the basis of an audit cannot justify invocation of the extended period of limitation, setting aside the entire excise duty demand, interest and penalties confirmed through appellate orders.

The appeal was filed by Delphi Automotive Systems Pvt. Ltd., a manufacturer of catalytic converters and canisters falling under Chapter Heading 8421300 of the First Schedule to the Central Excise Tariff Act, 1985.

The dispute arose after the Department conducted an audit for the relevant period from 01.04.2001 to 31.03.2005, during which it observed that the appellant was availing a State VAT deferment scheme under Rule 69 of the Haryana Value Added Tax Rules, 2003, allowing retention of 50 percent of the sales tax collected from its customers.

According to the audit findings, the retained portion of sales tax shown in the appellant’s balance sheet under the head “capital subsidy” was alleged to form part of the assessable value under the concept of “transaction value” provided under Section 4 of the Central Excise Act, 1944. A SCN dated 31.12.2007 proposed excise duty on the retained amount along with interest under Section 11AB and penalty under Section 11AC of the Central Excise Act, 1944.

The adjudicating authority confirmed the duty but dropped the penalty, leading both sides to file appeals before the Commissioner (Appeals), who subsequently confirmed the demand, interest and penalty against the appellant.

The appellant, represented by Krati Singh, Aman Singh and Monarch Mittal, argued that the entire demand was barred by limitation because the SCN was issued more than two years after the period of dispute. They contended that there was no suppression of facts or intention to evade duty, as all transactions were recorded in statutory books and the retention of sales tax under the Haryana VAT deferment scheme was visible in the balance sheet and disclosed during audit.

They argued that demands based purely on audit findings cannot trigger the extended period under Section 11A of the Central Excise Act, 1944, and that the State’s deeming fiction under the VAT deferment scheme could not be imported into excise valuation. Further, pointed out that penalties were erroneously imposed twice through two separate appellate orders arising from the same show cause notice.

The Department, represented by Shantanu Kumar Meena, defended the demand on the ground that the retained portion of sales tax was neither paid nor payable to the State Government and therefore had to be added to the transaction value under Section 4 of the Central Excise Act, 1944. Further, argued that the appellant had failed to disclose the retention of sales tax in monthly returns and therefore suppression could be presumed, justifying the invocation of the extended limitation period.

The Bench comprising S. S. Garg, Judicial Member, and P. Anjani Kumar, Technical Member, held that although the issue on merits stood against the appellant in light of binding Supreme Court precedents, the demand could not survive as it was entirely time-barred. The Tribunal observed that the SCN was issued on 31.12. 2007 for a period ending 31.03.2005 and was founded solely on an audit.

The Tribunal held that the Department produced no evidence of suppression of facts or intent to evade duty, which is a mandatory requirement for invoking the extended period under Section 11A of the Central Excise Act, 1944. It affirmed the settled principle that extended limitation cannot be invoked for demands arising out of audit scrutiny.

Accordingly, the Tribunal set aside the entire excise duty demand along with interest and both penalties, also noting that penalty had been imposed twice for the same SCN due to the Commissioner (Appeals) adjudicating the Department’s appeal on two separate occasions.

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