Whether AO was justified in demanding excise duty equivalent to customs duty on imported mushrooms in respect of DTA clearances by EOU, contrary to the order of Commissioner Appeals?

Case:- ECO VALLEY FARMS & FOODS LTD V/S THE COMMISSIONER OF CENTRAL EXCISE, PUNE-III

Citation:- 2013-TIOL-03-HC-MUM-CX

Brief Facts: - The assessee had established a 100% Export Oriented Unit (EOU) under the EOU Scheme framed by the Government, at Haveli, District Pune, inter alia for the purpose of cultivation, manufacture and export of fresh / processed mushrooms. Under the EOU Scheme framed by the Government, the assessee subject to conditions could import capital goods duty free to the extent permitted by the Development Commissioner, by availing exemption under Exemption Notification No.13/81-cus dated 9-02-1981 or 53/03-cus dated 31-03- 2003 or 53/97-cus dated 3-06-1997, as the case may be. Alternatively, the assessee could procure indigenous capital goods duty free by availing exemption notification under notification No.1/95CE dated 4-01-1995 or 22/03-CE dated 31-03-2003. Under the 100% EOU Scheme, the assessee was obliged to export the entire quantity of processed fresh mushrooms and could effect clearances of processed / fresh mushrooms in the domestic tariff area (DTA) only the extent permitted by the Development Commissioner on achieving the Net Foreign Exchange Percentage Earning ('NFEP'). Admittedly, the assessee has imported capital goods required for the unit by availing the duty exemption under the notifications prevailing at the relevant time. Admittedly, the assessee has not imported raw materials and in respect of the raw materials procured domestically for the purpose of manufacturing the processed / fresh mushrooms the assessee has not availed any exemption. The 100% EOU set up by the assessee commenced production with effect from 1st April 1997. The dispute in the present case, relates to the duty liability in respect of DTA clearances of fresh mushrooms effected by the assessee. Section 3(1) of the Central Excise Act, 1944 provides that the excise duty on excisable goods shall be levied and collected at the rates specified in the Schedule to the Central Excise Tariff Act, 1985. However, the proviso to Section 3(1) of the 1944 Act provides that in respect of DTA clearances of excisable goods processed /manufactured by a 100% EOU, the excise duty shall be levied and collected at the rate equivalent to the aggregate of the duties of customs which would be leviable under the Customs Act, 1962 or any other law for the time being in force on like articles imported in to India. The rate of customs duty on the imported articles is prescribed under the Customs Tariff Act, 1975.
During the period from April 1997 to December 1998 no excise duty was levied on the DTA clearances of fresh mushrooms effected by the assessee after obtaining permission from the Development Commissioner as it was considered that the fresh mushrooms were not excisable. However, by four show cause notices dated 4th January 1999, 11th May 1999, 31st August 1999 and 12th December 1999 issued under Section 11A of the 1944 Act, the assessee was called upon to show cause as to why excise duty equivalent to customs duty should not be levied and collected in respect of the DTA clearances of fresh mushrooms effected during the period from 1st June 1998 to 30th November 1999 on the ground that fresh mushrooms classifiable under Chapter 7 heading No.0701.00 were liable to pay Nil rate of duty under the Central Excise Tariff but as per the proviso to Section 3(1) of the 1944 Act, in respect of DTA clearances of fresh mushrooms, the assessee, a 100% EOU was liable to pay excise duty equivalent to the aggregate of the duties of customs that would be leviable on the imported fresh mushrooms. The assessee replied to the said show cause notices by contending that fresh mushrooms were not covered under heading 0701.00 and, hence, was not excisable goods under the 1985 Act and, therefore, demanding duty by invoking the proviso to Section 3(1) of the 1944 Act does not arise. Alternatively it was contended that even if it is construed that fresh mushrooms were excisable goods, since the rate of excise duty on fresh mushroom under the 1985 Act being 'nil', no excise duty equivalent to customs duty could be demanded on fresh mushrooms cleared in DTA by the assessee. The Assessing Officer (AO) accepted the contention of the assessee and by his order dated 16th November 1999 dropped the proceedings initiated against the assessee under the aforesaid four show cause notices.
Thereafter the Revenue sought review of the aforesaid order dated 16th November 1999 and accordingly filed an appeal before the Commissioner of Central Excise (A) against the order dated 16th November 1999. By an order dated 27th May 2004 the Commissioner of Central Excise (A) dismissed the appeal filed by the Revenue by holding firstly, that the fresh mushrooms were not covered under heading 0701.00 of the Central Excise Tariff and, hence, fresh mushrooms being not excisable no duty could be demanded on clearance of the fresh mushrooms and secondly, even if it was assumed that fresh mushrooms were covered under Chapter 7 of the Central Excise Tariff, since excise duty on mushrooms covered under heading 0701.00 or under heading 0702.00 of the Central Excise Tariff being Nil, excise duty in respect of DTA clearances of fresh mushrooms effected by the assessee shall also be Nil and, therefore, the AO was not justified in demanding excise duty equivalent to the aggregate of the duties of customs leviable on fresh mushrooms imported in to India. Thus, according to the Commissioner of Central Excise (A) liability to pay excise duty equivalent to customs duty on DTA clearances of fresh mushrooms effected by the assessee, a 100% EOU would arise only if some duty was actually payable on fresh mushrooms under the Central Excise Tariff. In other words, according to the Commissioner of Central Excise (A), excise duty equivalent to customs duty under the proviso to Section 3(1) of the 1944 Act was not payable in respect of DTA clearances of excisable fresh mushrooms, if the rate of duty on fresh mushroom was Nil under the Central Excise Tariff. The said decision has been accepted by the Revenue and subsequent DTA clearances of fresh mushrooms have been allowed without demanding excise duty equivalent to customs duty payable on imported mushrooms.
By the Central Excise Tariff (Amendment) Act 2004, the six digit entries in the Schedule to the 1985 Act were rearranged into eight digit entries so as to update the entries in the Central Excise Tariff with the entries in the Schedule to the Customs Tariff Act, 1975. The said 2004 Act came into force with effect from 28th February 2005. By a notification No.1/2005-CE dated 24th February 2005 the Revenue clarified that the 2004 amendment brought out only the technical changes and not substantive changes in the Central Excise Tariff and, therefore, all the existing notifications would continue to apply even after the 2004 Act. By a circular No.808/2005 dated 25th February 2005, the Trade was further informed that the existing entries in the First and Second Schedule to the 1985 Act can be said to be reenacted by the 2004 Act. Even after this realignment of the entries in the Schedule to the 1985 Act by the 2004 Act, the Central Excise authorities continued to allow DTA clearances of fresh mushrooms without levying excise duty, because, as in the past, even after the 2004 Act, the excise duty on fresh mushrooms was 'Nil' and in terms of the order passed by the Commissioner of Central Excise (A) on 27th May 2004, if excise duty on fresh mushrooms was Nil, then, in respect of DTA clearances effected by the assessee covered under the proviso to Section 3(1) of the 1944 Act would also be Nil. However, by a show-cause notice dated 28th December 2007 issued under Section 11A of the 1944 Act, the AO sought to recover excise duty equivalent to the customs duty leviable on the imported mushrooms amounting to Rs.1,76,21,021/- in respect of DTA clearances of fresh mushrooms effected by the assessee during the period from 1st December 2006 to 30th November 2007 by invoking the proviso to Section 3(1) of the 1944 Act. According to the AO, fresh mushrooms became excisable on being specifically covered under Entry 07095100 in Chapter 7 of the 1985 Act, with effect from 28th February 2005 and though the excise duty payable under that entry was Nil, in respect of DTA clearances of fresh mushrooms, excise duty was payable at the rate equivalent to the customs duty in terms of the proviso to Section 3(1) of the 1944 Act. The assessee objected to the issuance of the show cause notice on the ground that the issue was covered by the decision of the Commissioner of Central Excise (A) dated 27th May 2004.
Even before adjudicating the aforesaid show cause notice dated 28th December 2007, the AO issued another show cause notice in December 2008 demanding excise duty equivalent to customs duty amounting to Rs.1,38,85,706/- in respect of DTA clearances of fresh mushrooms effected during the period from 1st December 2007 to 22nd June 2008 on the same grounds as specified in the earlier show cause notice dated 28th December 2007. The assessee once again objected to the issuance of the said show cause notice on the ground that the issue was covered against the Revenue by the decision of Commissioner of Central Excise (A) dated 27th May 2004. However, by an order-in-original dated 27th February 2009, the AO confirmed the demand of Rs.3.15 crores raised under the aforesaid two show cause notices with penalty amounting to Rs.3.11 crores. Appeal filed by the assessee against the order-in-original dated 27th February 2009 was dismissed by the CESTAT on 31st May 2011. Being aggrieved by this order of CESTAT the assessee has filed the present appeal.

Appellant’s Contention: - The appellant contended that so long as the decision of Commissioner of Central Excise (A) dated 27th May 2004 to the effect that excise duty equivalent to customs duty was not payable in respect of the DTA clearances of fresh mushrooms effected by them was holding the field, the AO in respect of subsequent DTA clearances could not have demanded excise duty equivalent to the customs duty and, therefore, the impugned duty demand confirmed with penalty is liable to be quashed and set aside. He submitted that the Commissioner of Central Excise (A) in the aforesaid order dated 27th May 2004 had specifically held that even if fresh mushrooms were covered under the 1985 Act, the excise duty on fresh mushrooms being Nil, the Revenue in respect of DTA clearances of fresh mushrooms effected by the assessee could not demand excise duty equivalent to customs duty under the proviso to Section 3(1) of the 1944 Act. He further submitted that Section 3(1) of the 1944 Act refers to levy and collection of excise duty on excisable goods and if the levy is Nil, then, there would be no collection of duty and in such a case Section 3(1) of the 1944 Act would not apply and consequently the proviso to Section 3(1) also would not apply. The assessee further submitted that the Revenue is barred from changing its stand retrospectively and, therefore, the decision of the AO could be applied prospectively and not retrospectively. Alternatively, it is submitted that since the Revenue is changing its stand retrospectively, the 100% EOU unit of them should be permitted / treated to have been relieved from the EOU Scheme with effect from 1st December 2006, so that with effect from 1st December 2006, the unit ceases to be a 100% EOU and the clearances effected from that day would be liable for Nil rate of duty under the Central Excise Tariff and consequently no demand would be enforceable against them. In support of their contentions, they relied upon on several decisions.

Respondent’s Contention: - The respondent argued that fresh mushrooms were not covered under the 1985 Act as originally enacted and it is only by the 2004 amendment to 1985 Act with effect from 28th February 2005, fresh mushrooms have been specifically included in Chapter Heading 07095100 of the 1985 Act. Therefore, the decision of Commissioner of Central Excise (A) dated 27th May 2004 rendered when the fresh mushrooms were not excisable would have no bearing after 28th February 2005 when fresh mushrooms became excisable. Accordingly, they submits that in view of the change in law, the AO was justified in demanding the excise duty equivalent to customs duty leviable on imported mushrooms, in respect of DTA clearances of fresh mushrooms effected by the assessee during the period from 1st December 2006. Further they submitted that under Section 11A of the 1944 Act the Central Excise Officer is empowered to recover duties not levied or not paid or short levied or short paid or erroneously refunded within one year from the relevant date as defined in Section 11 of the 1944 Act. In the present case, the two show cause notices in question were issued within the time limit as envisaged in Section 11A of the 1944 Act and, hence, it cannot be said that the duty is being demanded retrospectively as contended on behalf of the assessee. In support of their contentions, they relied on the decisions of the Apex Court in the case of Plasmac Machine Mfg Co Pvt Limited V/s. CCE reported in 1991 (51) E.L.T. 161 (S.C.) = (2002-TIOL-455-SC-CX), ITW Signode Ind. Limited V/s. CCE reported in 2003 (158) E.L.T. 403 (S.C.) = (2003-TIOL-38-SC-CX) and Union of India V/s. Jain Shudh Vanaspati Limited reported in 1996 (86) E.L.T. 460 (S.C.) = (2002- TIOL-585-SC-CUS).
Further it was submitted that the power to raise a demand includes the inherent power to review the past assessment and that the excise authorities are not estopped from taking a view different from the view taken in the earlier period. He further submitted that once the assessee has chosen to get out of EOU Scheme from a particular date and the same has been allowed with effect from 2nd September 2008 it is not open to the assessee thereafter to seek debonding from an anterior date with effect from 1st December 2006 on ex-post facto basis. Accordingly, it is submitted that the demand raised and confirmed by the authorities below by invoking the normal period of limitation are in accordance with law and, hence, the appeal is liable to be dismissed.

Reasoning of Judgment: - The Hon’ble High Court held that in view of chapter note 1 to Chapter 7 of the 1985 Act, it is crystal clear that edible mushrooms, whether dried or fresh, were covered under Chapter 7 of the 1985 Act. Dried mushrooms were covered under Chapter Heading 07.01 and fresh mushrooms were covered under heading 07.02 of the Central Excise Tariff. The expression 'other edible vegetables' in Chapter Heading 07.02 read with chapter note 1 in Chapter 7 would make it clear that mushrooms other than dried mushrooms viz. fresh mushrooms were covered under Chapter Heading 07.02 of the Central Excise Tariff. The rate of excise duty payable on dried mushrooms under Chapter Heading 07.01 as well as the rate of excise duty on fresh mushrooms under Chapter Heading 07.02 was Nil. In the proceedings initiated in the year 1999, the specific case of the Revenue was that the fresh mushrooms were excisable under Chapter 7 of the 1985 Act. Whether fresh mushrooms were covered under heading 07.01 or 07.02 has no relevance, because in either case the rate of duty was Nil, but according to the Revenue, once the fresh mushrooms were found to be excisable, then, under the proviso to Section 3(1) of the 1944 Act, the assessee was liable to pay excise duty equivalent to customs duty payable on imported fresh mushrooms. That argument of the Revenue was rejected by the Commissioner of Central Excise (A) by holding that even if fresh mushrooms were excisable and covered under Chapter 7 of the Central Excise Tariff, in view of the Nil rate of duty, the Revenue was not justified in demanding excise duty equivalent to customs duty in respect of DTA clearances of fresh mushrooms effected by the assessee. Thus, the Commissioner of Central Excise (A) while accepting the contention of the Revenue held that fresh mushrooms were excisable, held that in view of the Nil rate of duty, the Revenue was not justified in demanding duty equivalent to customs duty in respect of DTA clearances of fresh mushrooms effected by the assessee, a 100% EOU. Therefore, the argument of the Revenue that the fresh mushrooms were not excisable prior to the 2004 amendment to the 1985 Act is unsustainable. Moreover, the argument of the Revenue that by the 2004 amendment to the 1985 Act, fresh mushrooms were made excisable for the first time with effect from 28th February 2005 is also unsustainable, because, the said amendment was brought about with a view to convert the existing six digit entries in the schedule to the 1985 Act to eight digit entries on par with the entries in the schedule to the Customs Tariff Act and not with a view to bring in new goods within the purview of excise. This was further clarified by issuing notification No.1 of 2005-CE dated 24th February 2005 and Trade Circular No.808/2005 dated 25th February 2005, wherein it is stated that by the 2004 amendment merely a technical change of transition from six digit to eight digit classification is brought about and no substantive change is brought about. The fact that fresh mushrooms classified in the general category under heading 07.02 of the Central Excise Tariff prior to the 2004 amendment have been classified specifically under entry 07095100 in Chapter 7 of the Central Excise Tariff after the 2004 amendment, it cannot be inferred that fresh mushrooms became excisable for the first time after the 2004 amendment to the 1985 Act. In any event, prior to the 2004 amendment, the Revenue had initiated proceedings to demand duty on the footing that fresh mushrooms were excisable and the Commissioner of Central Excise (A) had held that even though the fresh mushrooms were excisable, in view of the Nil rate of duty on fresh mushrooms, the Revenue was not justified in demanding excise duty equivalent to customs duty under the proviso to Section 3(1) of the 1944 Act. Therefore, the argument of the Revenue that the fresh mushrooms became excisable only after the 2004 amendment to the 1985 Act with effect from 28th February 2005 cannot be accepted.

Further they held that it is well established principle of judicial discipline that the orders passed by the higher appellate authorities must be followed unreservedly by the subordinate authorities. Once the decision given by the higher appellate authority is accepted by the Revenue, then, it is not open to the AO to doubt the correctness of the order passed by the appellate authority and must follow the appellate order. This view is based on the decision of the Apex Court in the case of Jindal Dye Intermediate Limited V/s. Collector of Customs reported in 2006 (197) E.L.T. 471 (S.C.) =(2006-TIOL-58-SC-CUS) and similarly the Apex Court decision in the case of Union of India V/s. Kamlakshi Finance Corporation Limited reported in 1991 (55) E.L.T. 433 (S.C.) = (2002-TIOL-484-SC-CX-LB) and also on the decision in the case of Commissioner of Central Excise, Mumbai V/s. Bigen Industries Limited reported in 2006 (197) E.L.T. 305 (S.C.) = (2006-TIOL-49-SC-CX).
It was held that in the present case, the specific case of the Revenue prior to the 2004 amendment to the 1985 Act was that fresh mushrooms were excisable under Chapter 7 of the 1985 Act and even though the rate of excise duty on fresh mushrooms was Nil, as per the proviso to Section 3(1) of the 1944 Act in respect of DTA clearances of fresh mushrooms effected by the assessee, a 100% EOU, the excise duty was payable equivalent to the customs duty payable on imported fresh mushrooms. The Commissioner of Central Excise (A) held that the fact that fresh mushrooms were excisable would not entitle the Revenue to recover duty, because, so long as the duty on fresh mushrooms under the Central Excise Tariff was Nil, in respect of DTA clearances of fresh mushrooms by a 100% EOU covered under the proviso to Section 3(1) of the 1944 Act would also be Nil. That decision of the Commissioner of Central Excise (A) dated 27th May 2004 was admittedly accepted by the Revenue. Therefore, so long as the decision of the Commissioner of Central Excise (A) dated 27th May 2004 was holding the field, all the adjudicating authorities including the Commissioner of Central Excise were bound by the said decision passed by the Commissioner of Central Excise (A) dated 27th May 2004. This view is supported by the decision of this Court in the case of Prakash Construction & Engineering Company V/s. Union of India reported in 1991 (56) E.L.T. 58 (Bom.).The argument of the Revenue that the decision of the Commissioner of Central Excise (A) dated 27th May 2004 rendered prior to the 2004 amendment to the 1985 Act would not be applicable after the 2004 amendment to the 1985 Act is without any merit, because, as noted earlier, fresh mushrooms were excisable prior to the 2004 amendment and continue to be excisable even after the 2004 amendment. Similarly, excise duty on fresh mushrooms prior to the 2004 amendment was Nil and even after the 2004 amendment continues to be Nil. Therefore, the 2004 amendment to the 1985 Act which brought out transition from six digit to eight digit classification did not bring about any change in law regarding the excisability on fresh mushrooms or dutiability on fresh mushrooms. In other words, the fresh mushrooms were excisable prior to the 2004 amendment and continue to be excisable subsequent to the 2004 amendment and, therefore, the decision rendered by the Commissioner of Central Excise (A) on 27th May 2004 prior to the 2004 amendment was binding on the adjudicating authorities including the Commissioner of Central Excise even after the 2004 amendment to the 1985 Act. Assuming that the adjudicating authority considered that the decision of the Commissioner of Central Excise (A) which was accepted by the Revenue required to be reconsidered, then, the proper course for the adjudicating authority while passing the assessment in respect of the subsequent clearances was to record his views on the decision of the Commissioner of Central Excise (A) but pass an order in consonance with the decision of Commissioner of Central Excise (A) so that the higher authorities could take a relook at the decision of Commissioner of Central Excise (A) dated 27th May 2004. In other words, until the decision of Commissioner of Central Excise (A) dated 27th May 2004 was reversed by a competent higher authority, the AO was bound by the said decision and could not have taken a view contrary to the view taken by the Commissioner of Central Excise (A). The fact that Section 11A of the 1944 Act as amended by the Finance Act 2000 empowers the Central Excise Officer to demand excise duty for a period of one year prior to the issuance of show-cause notice even if duty was not paid on account of approved classification list / price list / assessment order, it does not mean that the AO can disregard the orders passed by the higher authorities. By amending Section 11A, the legislature has empowered the AO to demand duty not paid on account of erroneous approval of classification list / price list / assessment order and the legislature has not empowered the AO to demand duty if he considers that the duty was not paid or payable on account of the erroneous order passed by the Appellate Authority or the competent Court. Therefore, the AO was not justified in demanding duty on DTA clearances of fresh mushrooms contrary to the decision of the Commissioner of Central Excise (A) dated 27th May 2004, especially when the Revenue has accepted the said decision of Commissioner of Central Excise (A). It is only on 31st May 2011 when the CESTAT held that even if the rate of excise duty under the Central Excise Tariff on excisable goods is Nil, under the proviso to Section 3(1) of the 1944 Act, excise duty equivalent to customs duty would be payable on DTA clearances of such excisable goods by a 100% EOU, the decision of the Commissioner of Central Excise (A) dated 27th May 2004 ceased to have binding effect. In other words, till 31st May 2011, the decision of the Commissioner of Central Excise (A) dated 27th May 2004 which was accepted by the Revenue wad binding on all the adjudicating authorities including the Commissioner of Central Excise. Therefore, in the facts of the present case, the demand confirmed by Order in original dated 27th February 2009 being contrary to the decision of the Commissioner of Central Excise (A) dated 27th May 2004, which was holding the field and accepted by the Revenue, cannot be sustained. The CESTAT on 31st May 2011 while correctly interpreting the proviso to Section 3(1) of the 1944 Act, ought to have held that so long as the decision of the Commissioner of Central Excise (A) dated 27th May 2004 was holding the field, the adjudicating authorities were bound by the said decision. In other words, the CESTAT ought to have held that the interpretation of the proviso to Section 3(1) of the 1944 Act given by the Commissioner of Central Excise (A) on 27th May 2004 which was accepted by the Revenue ought to have been followed by the AO while passing the order in original dated 27th February 2009 and the fact that the CESTAT on 31st May 2011 has disagreed with the decision of the Commissioner of Central Excise (A) would not validate the order in original passed on 27th February 2009. To put it simply, the CESTAT ought to have held that the decision of the Commissioner of Central Excise (A) dated 27th May 2004, which was accepted by the Revenue was binding on the AO and therefore the order in original passed by the AO on 27th February 2009 contrary to the decision of the Commissioner of Central Excise (A) dated 27th May 2004 was bad in law. It is relevant to note that the dispute before the CESTAT was not arising out of the order of the Commissioner of Central Excise (A) dated 27th May 2004 and in fact that decision was accepted by the Revenue. The dispute before the CESTAT related to the assessment order passed on 27th February 2009 in respect of the DTA clearances effected after the decision of the Commissioner of Central Excise (A) dated 27th May 2004. Therefore, while it was open to the CESTAT to disagree with the decision of the Commissioner of Central Excise (A) dated 27^th May 2004, the CESTAT ought to have held that the adjudicating authority was bound by the decision of the Commissioner of Central Excise (A) till it was set aside on 31st May 2011 and accordingly the CESTAT ought to have set aside the demands confirmed by the AO on 27^th February 2009. Reliance placed by the Revenue on the decision of the Apex Court in the case of Plasmac Machine Manufacturing Company Private Limited (supra) is totally misplaced. In that case, injection moulding machines manufactured by the assessee which were in the past classified under Tariff Item No.68 were sought to be classified in the year 1981-82 under Tariff Item 52 of the Central Excise Tariff. In that context, it was held that there is no estoppel against the statute and it is open to the excise officer to revise the classification from one tariff heading in to another. It is relevant to note that in that case the AO sought to take a view contrary to his own view in the past, where as, in the present case, the AO is seeking to take a view contrary to the view taken by the Commissioner of Central Excise (A) on 27th May 2004 which is not permissible in law. Therefore, the above decision has no applicable to the facts of the present case. Similarly, the other decisions relied upon by the counsel for the Revenue is also distinguishable on facts.

Decision: - The appeal was allowed.

Comment:-The analogy drawn from this case is that when duty for mushrooms is specified as NIL under the Central Excise Tariff Act, 1985 then equivalent customs duty as per proviso to section 3(1) for the DTA clearances made by 100% EOU cannot be demanded as when excise duty itself is NIL under section 3, then duty under proviso will also have to be construed as NIL. Moreover, the issue was already settled by the order of Commissioner Appeals and so the Assessing Officer ought to have followed the same while passing the order.

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