Whether supplies made to SEZ developers prior to 31.12.2008 can be excluded from the provisions of Rule 6 by holding the amendment as retrospective?

Case:-UNION OF INDIA THROUGH COMMISSIONER OF CENTRAL EXCISE & CUSTOMS, RAIPUR Vs M/s STEEL AUTHORITY OF INDIA LTD.

Citation:- 2013-TIOL-384-HC-CHATTISGARH-CX

Brief facts:-Rule 6 of the 2004-Rules imposes different obligations on a manufacturer of exempted and dutiable goods:

• Under sub-rule 2 of rule 6 {sub-rule 6(2)} of the 2004-Rules such a manufacturer is required to maintain separate accounts for the receipt, consumption, and inventory of input and input service meant for use in manufacture of dutiable goods;

• Under sub-rule 3 of rule 6 (Sub-rule 6(3)} of the 2004-Rules, it may not do so, but in that event, the manufacturer is required to pay certain amount of total price of the exempted goods; • Sub-rule (6) of rule 6 {sub-rule 6(6)} of the 2004-Rules exempts the operation of sub-rules 6(1) to 6(4) of the 2004-Rules in certain contingencies.

Initially when the 2004-Rules were framed, sub-rule 6(6)(i) exempted the operation of sub-rules 6(1) to 6(4) to the goods cleared to the units in the Special Area Zone (SEZ) established under the Special Area Zone Act, 2005 (the SEZ-Act).

Later on, sub-rule 6(6)(i) was amended and new sub-rule 6(6)(i) was substituted by the Cenvat Credit (Third Amendment) Rules, 2008 the Amending-Rules. By the substituted sub-rule 6(6)(i) of the 2004- Rules not only clearance to a unit but clearance to a developer was also exempted from operation of sub-rules 6(1) to 6(4) of the 2004 - Rules.

The SEZs are being developed with the private enterprises at different parts of the country. One SEZ is at Kochi. M/s Mundra Port & Special Economic Zone, Mundra and M/s Bharat Petroleum Corporation Limited are its co-developers. One another SEZ is at Coimbatore Tidel Park and M/s Billimoria and Company Limited are its co developers.

The Assessee is engaged in manufacture of various Iron & Steel Products falling under Chapter 72 and 73 of the Central Excise Tariff Act, 1985 (the Excise-Tariff Act). It manufactures dutiable goods as well as exempted goods and supplied them to the co-developers of SEZs at Kochi and Coimbatore from October, 2008 to December, 2008. However, it neither maintained separate accounts as mandated under sub-rule 6(2) nor did it pay 10% of the value of the exempted goods under sub-rule 6(3)(b) of the 2004-Rules.

The Adjudicating Officer issued two show-cause notices dated 19.11.2009 and 02.12.2009 to show cause as to why 10% of the total value of the exempted goods be not recovered from them under sub-rule 6(3)(b) of the 2004-Rules along with interest and penalty on the same.

The Assessee filed its objection against the same claiming that it had supplied the goods to the developers of the SEZ at Kochi and Coimbatore and under newly substituted sub-rule 6(6)(i) of the 2004-Rules, it was exempt from the operation of sub-rules 6(1) to 6(4) of the 2004-Rules.

The, adjudicating officer by his order 07.06.2011 rejected the objection of the Assessee holding that:
·         At the relevant time, clearance of goods to the developers of SEZ was not covered by   sub-rule 6(6) (i) of the 2004-Rules;
·         The substituted sub-rule 6(6)(i) was prospective;
·         The Assessee cannot take benefit of the same.

On the aforesaid finding, the Adjudicating Officer confirmed the demand of Rs.72,28,050/- and imposed interest on the same as well as penalty of the same amount.
The Assessee filed appeal before the Tribunal. It was allowed on 06.03.2012 holding that substituted sub-rule 6(6)(i) of the 2004-Rules was retrospective. Hence, the present appeal by the Central Excise Department (the Department).

Appellant Contentions:- The counsel for the Department submits that:
• At the relevant time, sub-rule 6(6)(i) of the 2004-Rules did not include clearance to a developer in the SEZ. It was included by the Amending-Rules;

• Under sub-rule (2) of rule 1 {sub-rule1(2)} of the Amending-Rules, it came into force on the date of its publication in the official gazette;

• The Amending-Rules were published in the official gazette on 31.12.2008. They were not in force during the time when goods were cleared to the developers in SEZ;

• The Assessee is not entitled to claim benefit of the same.

Respondent Contentions:-The counsel for the assessee submits that:

• Excise duty is not levied or is remitted on the goods that are exported;

• The goods cleared to the units and developers of the SEZ are treated to be export under the law;

• The units and developers are on the same footing and are in the same class. The 2004-Rules as initially framed had not provided same treatment to them and were discriminatory as well as violative of Article 14 of the Constitution;

• The Amending-Rules have-given same treatment to the units as well as to developers and have put them in the same class. Now discrimination has been removed;

• The Amending-Rules are clarificatory and its benefit is available from the date the 2004-Rules were framed.

Reasoning of Judgment:-The essential characteristics of a tax as distinguished from other forms of imposition is that a 'tax' is a compulsory exaction of money by public authority for public purposes enforceable by law and is not for services rendered. It is without any reference to any special benefit to be conferred on the payer of the tax (see below for citations) (The Commissioner. Hindu Religious Endowments, Madras vs Sri Lakshmindra Thirtha Swamiar of Sri Shirur Mutt; AIR 1954 SC 282 : (1954) SCR 1005 Ratilal Panachand Gandhi vs State of Bombay AIR 1954 SC 388; (Pratibha Processors and others vs Union of India and others (1996) 11 SCC 101;) = (2002-TIOL-273-SC-CUS)

The concept of tax can be best illustrated with the answer of Justice Holmes to his secretary. Justice Homes was fond of upholding taxing statutes. Once his secretary asked him the reason for the same. He answered that he liked to pay his taxes because he brought his civilisation with them. Taxes help the nation to build infrastructure and are necessary.

Black's Law Dictionary explains taxes and duties as follows:

• Tax is a monetary charge imposed by the government on persons, entities, transactions, or property to yield public revenue. Most broadly, the term embraces all governmental impositions on the person, property, privileges, occupations, and enjoyment of the people, and includes duties, imposts, and excises. Although a tax is often thought of as being pecuniary in nature, it is not necessarily payable in money;

• Duty is a tax imposed on a commodity or transaction, esp. on imports. A duty in this sense is imposed on things and not persons.

Thus, tax-imposed upon commodities, goods, financial transactions in contradistinction upon the individuals – is generally referred to as 'duty'; whereas, tax is levied also on the tax payers, who could be individuals or legal entitles. Duty and tax have same connotation, same purpose, though duty is sub-specie of the tax.

Nature of Excise and Customs Duties
Different kind of duties are imposed upon goods. Traditionally, two duties were imposed: one is customs and the other is excise. Though, of late, other kinds of duties, such as Countervailing Duty (CVD), Education Cess, Anti Dumping Duty, Safeguard Duty etc are also being imposed.
The word 'Excise' is said to be ambiguous. In Atlantix Smoke Shops Ltd vs Colon & AG for Canada - 1943 AC 550, the Privy council observed, '"Excise" is a word of vague and somewhat ambiguous meaning.... The word is usually (though by no means always) employed to indicate a duty imposed on home manufactured articles in the course of manufacture before they reach the consumer. So regarded, an excise duty is plainly indirect. A further difficulty in the way of the precise application of the word is that many miscellaneous taxes, at any rate in this country, are classed as "excise" merely because they are for convenience collected through the machinery of the Board of Excise - the tax on owning a dog, for example.'

Nonetheless, it is explained by other Commentators and decisions as duty on manufacture of goods to be consumed within the country (bold sub-paragraphs is ours):
• Sephen in his Commentaries on the Laws of England (1928) edition, Vol IV page 420 following Blackstone, says 'Excise duties are those duties which are imposed by Parliament upon commodities produced and consumed in this country;'
• In Flint vs Stone Tracy Co 31 Sct 342, 220 US 107, Am Ann Cas 1912B, 1312, 55 Led 389 , the US Supreme court observed '"Excises" are taxes laid upon the manufacture, sale, or consumption of commodities, within the country, upon licenses to pursue occupations and upon corporate privileges;'
• Halsbury laws of England 4th edition reissue volume 12(2) paragraph 1 explains it by saying 'Historically, duties of customs, or customs duties, in the strict sense are pecuniary charges or tolls imposed by the State and payable upon goods exported from or imported into the country; and they may be contrasted with excise duties, which are payable on goods produced and consumed within the country'.
Thus, excise duty is a duty imposed on the manufacture on the goods to be used within the country. Whereas, the customs duty is duty on the goods manufactured in the other countries and brought within a country to be used or taken out of the country to be used in the other countries.
We can say that they are a kind of sister duties. The statute imposing excise and customs duty in our country namely, the Excise Act and the Customs Act, 1962 (the Customs Act) also follow the same pattern as mentioned above.

Provisions of the Excise Act and the 2002 Rules
Section 3 of the Excise Act is the charging section and is titled 'Duties specified in the Schedule to the Central Excise Tariff Act, 1985 to be levied'. It provides charging of the duty on the manufacture of the products as specified in the Central Excise Tariff Act, 1985.
The Central Excise Rules, 2002 (the 2002 Rules) provides how excise duty is to be assessed and collected:
• Rule 4 is titled 'Duty payable on removal'. It provides excise duty to be payable on removal of goods;
• Rules 6 and 7 are titled 'Assessment of duty' and 'provisional assessment'. They provide as to how the assessment of the excise duty is required to be done;
• Rule 17, 18 and 19 are titled 'Removal of goods by a hundred percent. Export-Oriented Undertaking for Domestic Tariff Area', 'Rebate of duty', and 'Export without payment of duty' respectively. These three rules together conceive an arrangement by which if the goods are to be exported, then no custom duty is charged or remitted back to them on proof of export and in case 100% export oriented undertaking removes the goods to the domestic tariff area instead of export then it is liable to pay excise duty.

Provisions of the Customs Act
Section 2 of the Customs Act is titled as 'definitions'. Sub-section (11) of section 2 {sub-section 2(11)} explains what is 'customs area'. Sub-section (18) of section 2 {sub-section 2(18)} explains what is 'export'. Subsection (23) of section 2 {sub-section 2(23)} explains what is 'import'. Sub-section (27) of section 2 {sub-section 2(27)} explains what is 'India'.
Section 12 of the Customs Act is titled 'dutiable goods' and is a charging section under the Customs Act. It provides for custom duty to be paid on the export as well as on the import of the goods as specified under the Customs Tariff Act, 1975 (the Customs-Tariff Act).
The principle envisaged in Excise Act and the 2002 Rules as well as the Customs Act is the same as traditionally how the excise and customs duties were understood. It is clear from their provisions that excise duty is payable on the manufacture of the goods but is to be paid only in respect of those goods that are to be consumed within the country, and not that are to be exported. In case, the goods are to be exported then, customs duty - if it is leviable under the Customs Act read with the Customs Tariff Act - is to be imposed.
With the aforesaid framework in the background, let us understand the purpose of the SEZ Act, clearance to units and developers in SEZ, and purpose of the newly substituted sub-rule 6(6)(i) of the 2004-Rules.

Purpose of SEZ and Clearance of Goods to SEZ is Export
The Government of India introduced a policy on 01.04.2000 for setting up of the Special Economic Zones (SEZ), with a view to provide an internationally competitive and hassle free environment for exports. The units could be set up in the SEZ for manufacture of goods and rendering services. They were to be net foreign exchange earner and were not to be subjected to any pre-determined value addition or minimum export performance requirements.
Initially, in order to implement the aforesaid policy, the Customs Act was amended and Chapter XA with Sections 76A to 76H was inserted. Subsequently, the SEZ-Act was enacted and Chapter XA of the Customs Act was deleted.

Section 2 of the SEZ Act is titled 'definitions'. It provides as follows:
• Sub-section (g) of section 2 {sub-section 2(g)} of the SEZ-Act defines 'developer'. It means a person or a State, which is granted a letter of approval under sub-section(10) of section 3 {section 3(10)} of the SEZ Act by the Central Government and includes an authority and a co-developer;
• Sub-section (m) of section 2 {sub-section 2(m)} defines the word 'export'. It means supplying goods, or providing services, from the domestic tariff area to a unit or developer.
• Sub-section (zc) of section 2 {sub-section 2(zc)} defines the words 'existing unit' and 'unit', it means, a unit which has been set up by an entrepreneur in a SEZ and includes an existing unit.

Section 51 of the SEZ-Act is titled 'Act to have overriding effect'. It provides that the SEZ-Act will have effect notwithstanding anything contained in any other law for the time being in force or in any other instrument. It has notwithstanding anything contained in any other law for the time being in force or in any other instrument. It has overriding effects over any other law and in case of conflict, the SEZ Act is to prevail.

The SEZ-Act is within the territorial limits of the country; the goods supplied to the unit or to the developer in SEZ do not go outside the country, yet, in view of the definition in section 2 (m) of the SEZ Act, they are to be treated as export.

In the present case, the Assessee had supplied goods from the domestic tariff area to a developer and it is to be treated as an export in view of sub-section 2(m) of the SEZ Act. In case it is treated to be export then all benefits as given to export under any other law should be given.

In case, the general principle as well as the framework of the Customs Act or Excise Act is to be understood, in that event, there should not be any excise duty on anything which is supplied to a unit or developer. The principle that is applicable to the unit in the SEZ should also apply to a developer as well.

The SEZ Act treats the unit as well as the developer on the same footing. The obligations arising under the Excise-Act or the 2002-Rules or the 2004-Rules for a unit in SEZ should be same for a developer of SEZ; they should have same liabilities, same benefits. However, this was not so: there was some distinction in the 2004- Rules as they were initially framed.

The Assessee is a manufacturer of the goods that are taxable under the Excise-Tariff Act. Rule 6 of the 2004- Rules is titled 'obligation of a manufacturer of dutiable and exempted goods and provider of taxable and exempted services'. It provides certain obligation on the manufacturer of such goods. The assessee is one such manufacturer. It not only manufactures dutiable goods but exempted goods as well.

Rule 6(2) read with rule 6(3) of the 2004-Rules provide that separate accounts for dutiable goods be maintained or in the alternative 10% {this is the percentage under sub-rule 6(3)(b) of the 2004 Rules for the nature of goods manufactured by the Assessee} of the price of exempted goods be deposited. Admittedly, the Assessee has neither kept separate accounts for the dutiable goods as mandated under sub-rule 6(2) of the 2004 Rules nor it has deposited 10% as mentioned in sub-rule 6(3) of the 2004 - Rules.

Initially, sub-rule 6(6)(i) of the 2004-Rules was as follows:

Rule 6. Obligation of manufacturer of dutiable and exempted goods and provider of taxable and
exempted services:-
...
(6) The provisions of sub-rules (1), (2), (3) and (4) shall not be applicable in case the excisable goods removed without payment of duty are either-
(i) cleared to a unit in a special economic zone;
...

Initially, sub-rule 6(6)(i) provided that the provisions of sub-rules 6(1) to 6(4) of the 2004-Rules will not be applicable in case the excisable products are removed without payment of duty and cleared to a unit in a SEZ. The relevant point to note is that the 2004-Rules as initially envisaged provided benefit to the goods cleared to a unit in SEZ only and not to the developer though under the SEZ Act the position of the developer as well as the unit was one and the same; they were in the same class, entitled to the same treatment. This appears to be an inadvertent omission.

It appears that the aforesaid mistake was realised by the Government and rule 6(6)(i) of the 2004-Rules was substituted by the following new sub-rule:

"(i)cleared to a unit in a special economic zone or to a developer of a special economic zone for their authorised operations".

After substitution of rule 6(6)(i) by the Amended Rules, the discrimination between the developer and a unit in SEZ has been obliterated. Both stand in the same footing. It is now in consonance with the Article 14 of the Constitution of India. Nevertheless, in case the submission of the Department-that the amended substituted sub-rule came into force from the date of its publication in the official gazette i.e on 31.12.2008-is accepted, then the discrimination would be there prior to 31.12.2008 though after this date it would not be there.

The Central government is a state within the meaning of Article 12 of the Constitution. It is prohibited to discriminate under Article 14 of the Constitution. In case the submission of the Department is accepted, it would leave the Central government to the charge of discrimination. Could this be the intention; can this be presumed; should this be the result? In our opinion the emphatic answer to the aforesaid question is - NO.

It is clear from the nature of the excise duty as it has been traditionally understood to be duty only on the manufacture of those goods that are to be consumed within the country and not on the goods to be exported. This is also framework of the Excise Act. As the supply of the goods to a developer of SEZ is treated to be export, there appears to be no reason why this benefit was not there, except that it was due to a mistake or inadvertence that the word developer was not initially included in the sub-rule 6(6)(i) of the 2004-Rules and the developers and units were not given same treatment.

It is settled rule of interpretation that rule or notification takes effect from the date it is issued and not from any prior date. However, Justice GP Singh in his book 'Principles of Statutory Interpretation' 12th Edition, 2010 at page 1021 observes,

'A rule, which is not in terms retrospective, may have retrospective operation because of the retrospective operation of the enactment in respect of which it is made.'

So is the case here. The substituted sub-rule 6(6)(i) of the 2004-Rules should have retrospectivity in order not to discriminate and to be in consonance with the nature of excise duty. In our opinion, the rule is clarificatory, corrects an obvious mistake, removes discrimination, and provides correct legal principle. Its prospective enforcement would leave it to be suspect at the touchstone of Article 14 of the Constitution. Considering this aspect it is proper to hold that the substituted sub-rule 6(6)(i) is came into force from the date the 2004-Rules were enforced.

CONCLUSIONS of the Tribunal are as follows:

(a) The Excise Duty is imposed on the manufacture of the product that is to be consumed in the country; whereas a customs duty is imposed on the product that is manufactured within the country but is to be used outside the country i.e. exported as well as manufactured outside the country and brought into the country for use i.e. imported;
(b)The amended rule is merely clarificatory, corrects an obvious mistakes, removes discrimination
between developers and units in special area zones. It merely clarifies or explains the existing law of providing non-imposition of excise duty on goods that are held to be export under the Special Area Zone Act;
(c) The substituted sub-rule 6(6)(i) is enforced from the date the 2004-Rules came into force.

In view of above, both the substantial questions of law are decided against the department. The appeal has no merits. It is dismissed.

Decision:- Revenue appeal dismissed.

Comment:-The analogy drawn from this case is that when any amendment appears to correct the omission or mistake, it is said to have retrospective application even if the amendment notification provides the date of publication in the official gazette as the implementation date. In the instant case also, as SEZ unit and the developer are on the same footing, providing benefit to one and not to other cannot be the intention of the legislature and accordingly it was concluded that the amendment had retrospective application.

Comments

PJ/Case Law/2013-14/1614

Post a Comment

Query