DOCTRINE OF SUBSTANTIAL COMPLIANCE AND ‘INTENDED USE’

[Mr. M. GOVINDARAJAN]

                        The doctrine of substantial compliance is a judicial invention, equitable in nature, designed to avoid hardship in cases where a party does all that can reasonably expected of it, but failed or faulted in some other minor or inconsequent aspects which cannot be described as the 'essence' or the 'substance' of the requirements.    Like the concept of 'reasonableness', the acceptance or otherwise of a plea of 'substantial compliance' depends upon the facts and circumstances of each case and the purpose and object to the achieved and the context of the pre requisites which are essential to achieve the object and purpose of the rule or regulation.   Such a defence cannot be pleaded if a clear statutory pre requisite which effectuates the object and the purpose of the statute has not been met.

Substantial compliance means 'actual compliance in respect to the substance essential to every reasonable objective of the statute' and the court should determine whether the statute has been followed sufficiently so as to carry out the intent of the statute and accomplish the reasonable objectives for which it was passed.  Fiscal statute generally seeks to preserve the need to comply strictly with regulatory requirement that are important, especially when a party seeks the benefits of an exemption clause that are important.   Substantial compliance of an enactment is insisted where mandatory and directory requirements are lumped together, for in such a case, if mandatory requirements are complied with, it will be proper to say that the enactment has been substantially complied with notwithstanding the non compliance of directory requirements.   In cases where substantial compliance has been found, there has been actual compliance with the statute, albeit procedurally faulty.   The doctrine of substantial compliance seeks to preserve the need to comply strictly with the conditions or requirements that are important to invoke a tax or duty exemption and to forgive non compliance for either unimportant and tangential requirements that are so confusingly or incorrectly written that an earnest effort at compliance should be accepted. 

The test for determining the applicability of the substantial compliance doctrine has been the subject of a myriad  of cases and quite often, the critical question to be examined is whether the requirements relate to the 'substance' or 'essence' of the statute, if so, strict adherence to those requirements is a pre condition to give effect to that doctrine.   On the other hand, if the requirements are procedural or directory in that they are not of the 'essence' of the thing to be done but are given with a view to the orderly conduct of business, they may be fulfilled by substantial, if not strictly compliance.   In other words, a mere attempted compliance may not be sufficient, but actual compliance of those facts which are considered as essential.

The application of the said doctrine by the court may be well seen in the case 'Commissioner of Central Excise, New Delhi V. Hari Chand Shri Gopal' - 2010 -TMI - 78472 - (SUPREME COURT OF INDIA).   The facts of the case run as follows:

The respondents were engaged in the manufacture of excisable goods viz., preparation containing chewing tobacco falling under Chapter Heading No. 2404.40 of the Tariff Act, then chargeable to nil rate of duty which was made leviable to central excise duty with effect from 01.03.1994.   The Intelligence Wing of the Department came to know that the respondents had been manufacturing the said goods without applying/obtaining the certificate of registration as require under Rule 174 of the Excise Rules and had been removing the same clandestinely from their factories without payment of central excise duty leviable thereon and without following any of the prescribed procedures.  The factories of the respondents were inspected by the Central Excise (Preventive) Officer and took the samples of the finished products and detailed statements were also recorded from the partners of the firms.   The Central Excise Officers also visited the various factories of the respondents and it was noticed that the addictive mixture manufactured at the factories at Delhi was being clandestinely removed for the manufacturing of chewing tobacco.  

The Central Excise Officers noticed that, during the period from 18.3.1994 to 15.4.1995 M/s Gopal Zarda Udyog had manufactured and removed from their factory a total quantity of 152226.150 Kgs of preparation containing Kimam, collectively valued at Rs.15,27,90,675 and the amount of duty involved was fixed Rs.6,14,17,770.  M/s Hari Chand Shri Gopal also, during the period from 14.6.1995 5o 24.9.1996b had manufactured and removed from their factory a total quantity of 2,66,648.800   Kgs. of preparation containing Kimam collectively valued at Rs.15,86,77,319 and the amount of duty involved was fixed at Rs.7,93,38,660.

Show cause notices were issued to the respondents and their partners to show cause why the amounts of duty involved should not be demanded from them jointly and severally under Rule 9(2) of the Excise Rules read with the proviso to Sec. 11A (1) of the Tariff Act and interest thereon under Sec. 11AB of the Tariff Act, be not demanded from them.   Penalty under Rule 173Q of the Excise Rules read with Sec. 11AC of the Tariff Act and Rules 209 A of the Excise Rules was also demanded.  The respondents were also asked to show cause why the land, building, plant and machinery used in their respective factories for the manufacture of Kimam should not be confiscated under Rule 173Q(2) of the Excise Rules.

The respondents disputed the liability and claimed exemption under the Notification No.121/94-CE.   The Commissioner rejected the objections and confirmed the demand of duty and also imposed the penalty on them and order confiscation of the goods seized from the premises of the respondents with permission to redeem the confiscated goods on redemption of fines.

 Appeals were preferred before the Tribunal.   The Tribunal concurred with the findings of the Adjudicating Authority on duty liability on the goods in question and also on the issue of limitation as well as the claim for proforma credit/modvat credit, but ordered re-examination of the limited question of the applicability of Notification No. 121/94-CE, dated 11.8.94 since the respondents had raised the contention that they had substantially complied with the procedures laid down in Chapter X.

The matter was reconsidered by the Commissioner.   The respondents contended that they had dispatched the goods to their final manufacturing units through transferring challans and the receipts were recorded in Form IV Register/Stock Register and utilization of the goods was recorded in RG 12 Register.   Further it was also stated that the final products manufactured by the respondents could be ascertained from RG-1 Register maintained at the recipient end and those records would be sufficient to establish use of the goods and establish the plea of substantial compliance of the procedure set out in Chapter X for duty exemption.  The Commissioner rejected all the contentions and held that the benefit of exemption notification would be available only if the procedures laid down in Chapter X were complied with and that the records produced by the respondents would not substantiate a plea of substantial compliance of the procedure laid down in the above mentioned Chapter.  The imposition of duty liability, interest and penalty was therefore confirmed.

 The Tribunal took the view that the benefit of exemption notification should not be denied if 'intended use' of the goods was established, though there was non compliance of the procedural conditions of Chapter X.   Aggrieved by the order of the Tribunal the Department preferred the appeal.  The Department contended the following:

The benefit of Notification No.121/94-CE, dated 11.8.94 would be available to the respondents only if the procedures prescribed under Chapter X are strictly complied with;

·  The respondents at the suppliers' end contravened the provisions of Rule 9(1), 52A, 53, 54, 173B, 173F and 226 of the Excise Rules, and it is due to that reason, that show cause notices dated 25.3.1997 were served on the respondents;

·  The mere fact that the respondents had maintained some records at the recipient end would not be sufficient to satisfy the 'intended use' or the plea of 'substantial compliance' of the procedure laid down in Chapter X of the Excise Rules;

·  An exemption Notification must be strictly complied with and the assessee should bring himself within the ambit of notification.

The respondents contended that the assessee had produced documentary evidence to prove that the entire quantity of Kimam were transferred from their one unit to another and was utilized in the manufacture of branded  chewing tobacco and cleared on payment of duty.  The assessee had produced the transfer challans and made reference to Form IV Register/Stock Register regarding receipt of the Kimam and also to Form RG 12, kept for the maintenance of excisable tobacco products.  The details furnished in these records would be sufficient to establish the intended use of kimam for the manufacture of final products.

 The Supreme Court observed that the Notification No.121/94-CE, dated 11.8.1994 exempts certain specified intermediate goods if those goods were captively consumed in the manufacture of specified final products.  The compliance of the provisions of Chapter X is a pre condition for claiming exemption from payment of excise duty on goods, which otherwise attracted duty.   Even assuming that the respondents were eligible for exemption from duty, the respondents could not be absolved from the legal obligation to comply with the statutory requirements for the manufacture of excisable goods at the supplier end.

The Supreme Court further held that the purpose and object of the notification was to exempt those specified intermediate goods, which were otherwise excisable to duty, and not to exempt or absolve the respondents from following the statutory requirements for the manufacture of intermediate excisable goods.  The notification under Chapter X was designed in such a manner to ensure an inseparable link between the supplier and the recipient of excisable goods for the manufacture of specified final products.  Rule 192 of Chapter X states that a manufacture intending to receive duty free goods under remission is required to make an application in Form R-1 for obtaining excisable goods to be used for special industrial purpose giving details of the estimated quantity of each class or variety of goods and the value of such goods likely to be used during the year, commodities to be manufactured and estimated output and clearance of each commodity during the year, manner of manufacture, purpose for which manufactured product is supplied and the source from which excisable goods will be obtained.  Based on the details furnished in the Form R-1, the Registering Authority has to consider granting permission from remission of duty.   For the said purpose, R2 certificate is required to be issued specifying that the registration certificate is meant for obtaining the excisable goods under Rule 192.  On the basis of R2 Certificate, the manufacturer become eligible for getting the excisable goods for which the remission of duty has been sought.   Further the applicant is also required to execute a bond with security in Form B-8, as required under Rule 192 and the Collector can put further conditions for filing the B-16 Bond or B-17 Bond during the permission granted for remission of duty.  On such request and after complying with all the statutory formalities, the jurisdictional Officer is required to issue C2 certificate and on the strength, the applicant can obtain duty free goods.  The jurisdictional officer has also to certify that the said manufacturer ir registered in their Range under Rule 192 and is authorized for obtaining excisable goods at NIL/concessional rate of duty for use in special industrial purpose for the manufacture of specified excisable goods at their factory.  Further on the strength of C2 certificate, the excisable goods can be removed from the factory of source manufacturer without payment of duty or concessional rate of duty, as the case may be.  Further as per Sub Rule (1) of Rule 194, the applicant is required to maintain proper records of such goods indicating the applicant is required to maintain proper records of such goods indicating quantity, value, rate and amount of duty, marks and number/wastage etc., in Form RG 16 register.  Further the applicant  is also required to file quarterly in the form RT 11 and in that return, the registered person had to make entries regarding details of receipt of goods, quantities issued for manufacturing wastage or other losses, description of process in which excisable goods to be used etc.,  The supplier of goods is required to be registered with Central Excise  under Rule 174 and is also required to mention in Column 10(i) or 10(ii) of RT 12 returns with the details of goods dispatched to the assessee availing facility under Chapter X.   The supplier of goods can remove the goods only under proper gate pass GP-1 and is required to mention the details of CT-2 on the gate pass.

                        The respondents have laid great emphasis on maintenance of some statutory registers and filing of periodical returns at the recipient unit, so as take the shelter under the doctrine of substantial compliance for remission of duty.   Respondents pointed out that they had identical columns in the registers kept at the recipient end, hence, the requirement of maintaining separate registers at the supplier end the requirements of Chapter X was substantially complied with.  At the supplier end, no registration under Rule 174 was obtained and no records were kept.   The applicants, at the recipient end, were also legally obliged to give various declarations in the statutory forms so as to claim exemption and such declarations admittedly were not made.   Non compliance of those conditions enumerated under various rules in Chapter X of the Excise Rules and non furnishing of various statutory forms prescribed under Chapter X, in the view of the court, are fatal to a plea of substantial compliance and intended use.   The respondents, therefore, on the facts of this case, have not succeeded in establishing the plea of 'intended use' or 'the substantial  compliance' of the procedure set out in Chapter X so as to claim the benefit of the exemption notification dated 11.8.1994.