Imposition of Education third time on DTA Clearances by EOU - Appeal dismissed on ground that appeal will lie to Apex Court

PJ/CASE STUDY/2012-13/06

12 May 2012

PJ/Case Study/2012-13/06

CASE STUDY

Prepared By:
CA Pradeep Jain
Sukhvinder Kaur LLB [FYIC]

Introduction:-

In the case under study, the issue involved is that whether on DTA clearances by EOU, third time cess is required to be paid or not.

Commissioner of Central Excise, Customs & Service Tax, Vapi v/s M/s Sarla Performance Fibres Ltd
[2012-TIOL-359-HC-AHM-CX]

Brief Facts:-

- Respondent-assessee are 100% EOU engaged in the manufacture of several kinds of yarn which fall under Chapter 54, 55 & 56 of the central Excise Tariff Act, 1985. They cleared a portion of its goods for export and a portion of goods were cleared to DTA.

- On clearance of goods to DTA unit, the EOU unit is liable to pay excise duty in terms of proviso to sub-section (1) of Section 3 of the Act. The manufacturer is required to pay excise duty at the relevant rate of the aggregate duties of the customs which would be leviable under the Customs Act, 1962 on goods of similar description, when imported into India.

- Respondent pays Education cess imposed by Sections 91 to 93 of the Finance Act, 2004 on the basic custom duty. The manufacturer also pays such education cess of additional duty of customs (CVD under Section 3 of the Customs Tariff Act).

- Department alleged that on such computation of the excise duty payable by the respondent in terms of customs duty plus Education cess and CVD plus Education cess, the respondent should further pay education cess on the entire amount so computed. The Department has taken a stand that appropriate portion of customs duty with education cess added by CVD with education cess forms the excise duty payable by the respondent while clearing its goods in DTA area, and that therefore as per the relevant provisions of the Finance Act, 2004, the respondent is liable to pay further education cess at the rate of 2% on the entire afore-said amount.

- Accordingly, show cause notice was issued to respondent demanding payment of education cess with interest third time and also proposing to impose penalties under Rule 25 of the Central Excise Rules, 2002.

- The Assistant Commissioner confirmed the demand for the period April, 2005 to December, 2005 and also imposed penalty.

- In appeal, the Commissioner (Appeals) upheld the order of the Adjudicating Authority. Hence, respondent filed appeal before the Tribunal.

- The Tribunal in its impugned order held that education cess is only a surcharge and is in the nature of enhancement of duties. Therefore, one education cess is added to the customs duties to arrive at aggregate of customs duties, the question of charging education cess again does not arise. Because once it is a enhancement, it is part of the relevant type of the duty. What is required for the purpose of proviso to section 3 of the Central Excise Act, 1944 is to arrive at aggregate of customs duties and once a view is taken that education cess is part of customs duty and is an enhancement, the question of adding it again does not arise. That education cess is not leviable under Section 93 (1) of the Finance Act, 2004 upon the 100% EOU in clearance of DTA. That Notification No. 23/03-CE dated 31.03.2003 is the subordinate piece of legislation and therefore not to be acted upon, over and above the statute. That deemed fiction has to be carried out for the legislative intent logically stretching it to the unrealistic end.

- Hence, Revenue is in appeal before the High Court.

Appellant’s Contentions:-

- On preliminary objection, the Department has submitted that issue pertains to question whether the manufacturers are required to pay education cess or not. Question does not relate to the rate of duty. Appeals are mainatianable.

- That the appeal against the decision in CCE, Mangalore v/s Mangalore Refineries & Petrochemicals Limited is pending before the Apex Court.

Respondent’s Contentions:-

- Respondent-assessee have raised preliminary objection regarding the maintainability of these appeals before the High court contending that in view of proviso to section 35G of the Central Excise Act, 1944. That issue is related to rate of duty payable by the manufacturers and therefore, appeal will lie to the Apex Court.

- Reliance is placed on following judgments: -

1. CCE, Mangalore v/s Mangalore Refineries & Petrochemicals Limited [2011-TIOL-366-HC-KAR]

2. Central Excise, Customs & Service tax, Daman v/s Gandhi Fibers [2011 (268) ELT 354 (Guj)]

3. Central Excise & Customs v/s Swiss Glass Coat Equipments Limited [2011 (273) ELT 364 (Guj)]

- On merits, it is submitted that respondent have already suffered education cess on the BCD and also on CVD payable, there is thereafter no additional liability to pay education cess.

Reasoning of the High Court:-

- The High Court has observed that looking to the nature of controversy the same is not maintainable and have listened to the arguments only restricted to preliminary question of maintainability of these appeals.

- The High Court perused the provision of Section 35G (1) of the Act which provides for appeal to the High Court and held that from the said provision, it can be seen that an appeal against the decision of the Appellate Tribunal would lie before the High Court unless it is an order relating among other thing to the determination of any question having a relation to the rate of duty of excise or to the value of goods for the purpose of assessment. Since admittedly the High Court were not concerned with the value of goods for the purpose of assessment, the question is – is the order of the Tribunal one which relates to the determination of any question having relation to the rate of duty of excise. Answer to this question would decide whether the present appeals are maintainable before this Court or not.

- The High Court noticed that exclusion clause in sub-section (1) of Section 35G is worded in an expansive manner and excludes all appeals arising out of orders of the Tribunal relating among other thing to the determination of any question having a relation to the rate of duty of excise. In other words, what is excluded from the purview of the High Court's jurisdiction is not merely an order of Tribunal which decides the rate of duty of excise but any order which concerns determination of any question which has relation to such rate of duty of excise. Expression “any question having a relation to the rate of duty” is a wide one.

- With above discussion, it was held that if the Court revert back to the facts of the case, as already noted, the dispute between the parties and which came to be settled by the Tribunal by the impugned order is with respect to the question whether the manufacturers are required to pay education cess on the computation of the customs duty and the CVD on which, once they have already paid such education cess. The Tribunal ruled in favour of the manufacturers and rejected the Revenue's case that such education cess was required to be paid once again. To our mind, such decision of the Tribunal would certainly be covered under the expression "the order determining a question having relation to the rate of duty of excise". If the Department is correct in its stand, the manufacturers would have to pay excise duty at a rate higher than what they have been paying. In other words, computation of excise duty would have to include component of education cess. On the other hand, if the manufacturers are correct in their stand, such education cess would be excluded. In any case, it would have a direct bearing on the rate at which manufacturers should pay the excise duty on their clearances in the DTA from EOU Units. In that view of the matter, we are of the opinion that the respondents' preliminary objection is required to be upheld.

Decision of the High Court:-

Appeals dismissed.

Conclusion:-

The High Court has dismissed the appeal on the preliminary issue that the matter is related to rate of duty and therefore, appeal will lie to the Supreme Court. However, the issue of levy of third time education cess of DTA clearances by EOU is still left open.

This issue has been issue of controversy between department and the assessee. The tribunal has decided twice in favour of assessee but the department is taking the same to High Court. Still the issue has not been resolved. It has not been decided on merit but on the technical ground that the appeal lies with Highest Court of India. It will be decided by Apex Court only.

But the controversy prevails with buyer also. They have to see whether they can take the credit on the same or not. The issue is highly debatable. The department says the credit of cess paid on CVD is allowed. But the assessee says that the department contention at the time of charging is that the cess is payable as the excise duty is paid by EOU. If this contention hold good then the credit of cess paid on excise duty is available as credit. But the department maintained that the credit is available under Rule 3(7)(a) of Cenvat credit Rules only. Erstwhile Rule does not talk about cess.

Now there is another twist in the story. Now the education cess and SHE cess is not charged on CVD at the time of import from this budget. But whether the same will apply for EOU? If yes, then the EOU will pay cess two times as per department but only once as per assessee. Now, the credit of final cess will be available or not? The litigation will go on. But now the question will change. Whether the EOU has to pay cess twice (not three times as said earlier) or only one time. Even the result of earlier dispute has not come and new amendment has come. Even the earlier issue is decided in favour of manufacturer but the department will contend that new provision has come.

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PJ/CASE STUDY/2012-13/06
12 May 2012

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