Whether the assessee is required to pay excise duty on the goods imported by them?

PJ/Case Study/2018-19/127

CASE STUDY - M/s Cairn India Limited [Order in Appeal No.88 (SJ) CE/JDR/2018]

Prepared By: Adit Gupta

Introduction: -
The compendious of the case is that, M/s Cairn India Limited(hereinafter referred to as the appellant), holder of Central Excise Registration No. AAACC3097LXM003 were engaged in manufacturing/ production of Crude oil falling under Chapter 27 of the Central Excise Tariff Act, 1985. As per the provisions of Oil Industry (Development) Act, 1974, the appellants have been paying ‘Oil Cess’ on the quantity of Crude oil received by the Refinery and also paying National Contingent Calamity Duty (NCCD) in terms of rate prescribed in the Seventh Schedule to the Finance Act,2001.
A show cause notice no. V (27) Adj. II/JPR-II/190/2013/30 dated 03.12.2014 was issued to the appellant alleging that they have cleared ‘Casting Tubes’ vide invoice dated 16.11.2009 valued at Rs. 95, 37,840/- and ‘Casting SMLS Grade L80’ vide invoice dated 07.01.2010 valued at Rs. 60,94, 301/- without payment of duty. The appellant filed reply to the show cause notice vide letter dated 31.03.2015. However, the submissions made by the appellant in their reply to the show cause notice and during the course of personal hearing were not adhered to by the learned adjudicating authority and impugned order was passed dated 11.05.2016. It held that the appellant have suppressed the facts and thus extended period was rightly invoked for demand of duty and further imposed equal penalty under section 11AC of the Central Excise Act, 1944.
Aggrieved by the impugned order in original (hereinafter referred as order) confirming payment of duty, the appellant filed the appeal before COMMISSIONER (Appeals).Thus vide order in appeal it was held that the appellant was not required to discharge duty, be duty foregone at the time of procurement or duty on scrap.

Relevant Legal Provisions:-

Provisions of Rule 4, 6 and 8 of the Central Excise Rules 2002 Related to Duty Payable on Removal, Assessment of Duty and manner of payment.
Provisions of Rule 3(5A) of Cenvat Credit Rules, 2004 related to refund of CENVAT credit to units in specified area.
Notification No. 21/2002 Customs dated 01.03.2002 Related to Exemption of the goods when imported to India.
Central Excise Duty under section 11A of the Central Excise Act, 1944.
Interest Amount under the Provision of Section 11AA of Central Excise Act 1944.
Amount of Penalty under section 11AC of the Central Excise Act, 1944 read with rule 25 of the Central Excise Rules, 2002.

Issue Involved: -
The Issue involved in this case is that whether the assessee is required to pay excise duty on the goods imported by them.

Brief Facts:-
M/s Cairn India Limited (hereinafter referred to as the appellant), holder of Central Excise Registration No. AAACC3097LXM003 were engaged in manufacturing/ production of Crude oil falling under Chapter 27 of the Central Excise Tariff Act, 1985. As per the provisions of Oil Industry (Development) Act, 1974, the appellants have been paying ‘Oil Cess’ on the quantity of Crude oil received by the Refinery and also paying National Contingent Calamity Duty (NCCD) in terms of rate prescribed in the Seventh Schedule to the Finance Act,2001. A show cause notice no. V (27)Adj.II/JPR-II/190/2013/30 dated 03.12.2014 was issued to the appellant alleging that they have cleared ‘Casting Tubes’ vide invoice dated 16.11.2009 valued at Rs. 95, 37,840/- and ‘Casting SMLS Grade L80’ vide invoice dated 07.01.2010 valued at Rs. 60,94,301/- without payment of duty. The appellant filed reply to the show cause notice vide letter dated 31.03.2015. The submissions made by the appellant in their reply to the show cause notice and during the course of personal hearing were not adhered to by the learned adjudicating authority and impugned order in original no. 11/CE/JDR/2016 dated 29.04.2016 was passed. Personal hearing for the case was convened on 11.01.2018. Aggrieved by the impugned order in original, the appellant preferred to file the appeal. Shri Pradeep Jain, CA and Shri Rajendra Sharma, Assistant Manager (finance) appeared on behalf of the appellant for personal hearing and reiterated the submissions made in their grounds of appeal.

Assessee’s Contention:

The appellant submitted that the Order-In-Original passed by the learned Assistant Commissioner is wholly and totally erroneous and is liable to be set aside.

To confirm the duty demand, the impugned order has alleged the contraventions of following provisions as per para 14 of impugned order in original:-
Rule 3(5A) of Cenvat Credit Rules, 2004.
Conditions of Notification no. 21/2002-Customs dated 1.3.2002.

With reference to above, the appellant has already discussed in appeal memorandum that rule 3(5A) of Cenvat Credit Rules, 2004 is not applicable in the instant case as no Cenvat Credit was availed on the subject goods. When no credit is availed on the capital goods, the same cannot be demanded back under the provisions of rule 3(5A) of the Cenvat Credit Rules, 2004. In this regard, they had also cited a number of decisions in which it was held that the duty cannot be demanded under this rule if no Cenvat credit was availed. In continuation to those decisions, the appellant added the following citation:-

SHREE BHAGESWARI PAPERS LTD. Versus COMMISSIONER OF C. EX., MEERUT-I [2016 (338) E.L.T. 132 (Tri. - All.)]

Cenvat credit - Reversal of - Sale of capital goods - Sale of boiler purchased second-hand by assessee after use of 10 years or more - Categorical assertion of assessee that no Cenvat credit was availed when second-hand boiler was purchased corroborated by memorandum of purchase - Provisions of Rule 3(5A) read with Rule 3(5) of Cenvat Credit Rules, 2004 not applicable - Rules 3(5) and 3(5A) of Cenvat Credit Rules, 2004. [para 5]
In view of above decision also, where the credit is not availed at the time of purchase of capital goods; the provisions of rule 3(5A) of Cenvat Credit Rules, 2004 are not applicable. Therefore, the impugned order in original is not legally sustainable and is liable to be quashed.

Aligning with above it is submitted that the provisions of Cenvat Credit Rules, 2004 are applicable only where the cenvat credit has been availed on inputs or capital goods. When the credit has not been availed, none of the provisions of these rules can be invoked. In the given case, the appellant had not availed the Cenvat Credit on the capital goods. Therefore, the provisions of Cenvat Credit Rules, 2004 cannot be invoked. Further, there is no other provisions under which the excise duty can be demanded from us. It is worthwhile to mention here that the excise duty is the levy on "manufacture" as laid down in the charging section 3 of the Central Excise Act, 1944. No excise duty can be levied on the goods that were not manufactured in the factory or premise of manufacturer. The impugned order has therefore made an attempt to levy the excise duty on the used capital goods which have been sold as scrap. Therefore, the impugned order has gone beyond the charging section of Central Excise Act, 1944 to levy the excise duty on these goods. Such an approach is not sustainable and impugned demand is liable to be quashed. Reliance is placed on the following decisions in this regard:-
COMMISSIONER OF CENTRAL EXCISE, JAIPUR-II Versus BIRLA CORPORATION LTD. [2005 (181) E.L.T. 263 (Tri. - Del.)]

Manufacture - Excisability - Scrap of capital goods arising during wear/tear of capital goods - It cannot be said to be manufactured and is not liable to duty - Sections 2(f) and 3 of Central Excise Act, 1944. [para 8]
Manufacture - Dismantling of capital goods - It does not amount to manufacture - Sections 2(f) and 3 of Central Excise Act, 1944. [para 8]

GRASIM INDUSTRIES LTD. Versus COMMISSIONER OF CENTRAL EXCISE, JAIPUR [2006 (203) E.L.T. 603 (Tri. - Del.)]

Waste and scrap - Dutiability - Scrap arising from repair of machinery i.e. capital goods installed in factory - Scrap dutiable under Chapter 72 of Central Excise Tariff when arising out of the manufacturing activity - Scrap from wear and tear of machine not from any manufacturing activity - No credit further availed for those machines - Demand for scrap not upheld - Section 3 of Central Excise Act, 1944. [para 2]

This decision was approved by hon'ble Supreme Court of India which is cited as GRASIM INDUSTRIES LTD. Versus UNION OF INDIA [2011 (273) E.L.T. 10 (S.C.)]. The following are the verdicts of Apex Court in this case:-
Waste & Scrap - Dutiability - Scrap or waste arising from repair and maintenance of plant & machinery (i.e. capital goods) installed in cement factory, is not dutiable as they are neither by-products of the final product nor subsidiary product - To be dutiable waste & scrap must arise regularly and continuously produced in the course of manufacturing business of the product manufactured by the assessee - Conditions contemplated under Sections 2(d) and 2(f) of Central Excise Act, 1944 has to be satisfied conjunctively in order to entertain imposition of duty under Section 3 ibid - Waste & scrap in question not classifiable under Chapter Heading 72.04 read with Note 8(a) to Section XV of Central Excise Tariff - Said Section has very limited purpose of extending coverage to the particular item to the relevant tariff entry in the schedule and cannot be construed to have any deeming effect in relation to process of manufacture as contemplated by Section 2(f) of Central Excise Act, 1944.
In view of above decisions, the impugned order is not viable in demanding the excise duty. Therefore, the impugned order is liable to be quashed.

Further, the impugned order has alleged the contravention of conditions of Notification no. 21/2002-Customs dated 1.3.2002. In this regard, it is submitted that the impugned order has been issued by the learned Additional Commissioner of Central Excise who has been given powers under the provisions of Central Excise Act, 1944. On the other hand, the Notification no. 21/2002-Customs have been issued under the provisions of Customs Act, 1962. The proper officer to issue the show cause notice pertaining to contraventions of provisions of Customs Act or Rules or Notifications issued under the same is the officer of Customs. An officer of Central Excise is not authorized to allege the contravention of provisions of a notification issued under Customs Act. The impugned order issued under the provisions of Central Excise Act, 1944 has thus erred in confirming the demand by alleging the contraventions of provisions of Customs Act. To support the submission, the appellant relied on the following decisions:-
RELIANCE INDUSTRIES LTD. Versus COMMISSIONER OF CENTRAL EXCISE, RAJKOT [2014 (311) E.L.T. 401 (Tri. - Ahmd.)]

Customs/Central Excise authorities - Jurisdiction of, in SEZs - The SEZ Act, 2005 and the SEZ Rules, 2006 are a self-contained piece of legislation, to be implemented exclusively by the Approval Committee and the SEZ Deve-lopment Commissioner of SEZ under the Commerce Ministry - Prior to creation of the SEZ Act, 2005, working of SEZs was regulated by provisions contained in Chapter XA of Customs Act, 1962, however, with issuance of Notification No.S.O. 320(E), dated 14-3-2006, said Chapter XA was made inapplicable to working of SEZs - Further, Section 51 of SEZ Act, 2005 conveys that in the event of any inconsistency in the provision of any other law/instrument and provisions of the SEZ Act, 2005, the provisions of the SEZ Act, 2005 will prevail - Thus, Customs/Central Excise authorities do not have jurisdiction regarding the working of SEZs- Sections 51 and 52(1) of SEZ Act, 2005. [Per : Shri H.K. Thakur, Member (T)]. [paras 88.5, 88.5.1]
Though the above decision pertain to SEZ units; however, its ratio is equally applicable in the instant case. In this case, it was held that the SEZ Act is a self-contained piece of legislation which is to be implemented by Approval Committee or development commissioner and the In the above decision, it was held that the proceedings initiated by the Customs or Central Excise Authorities are not sustainable as they are not empowered under the Provisions of SEZ Act. Likewise, in the given case, the order has been issued by the Additional Commissioner of Central Excise. Central Excise is also a self contained piece of legislation which is different than the Customs Act. Therefore, the proceedings initiated under Central Excise law cannot allege the contraventions of Customs Act (or rules or notifications issued thereunder) which is altogether different legislation. The impugned order has erred in doing so, therefore, it is liable to be quashed in view of above referred decision. The impugned order should be set aside and appeal should be allowed.

In continuation to above it is submitted that though the above stated decision has been rendered in context of SEZ Act and Customs Act; however, as per analysis done in the forgoing para, its ratio is extendable in the given case. In this regard, it is submitted that while analyzing a decision, its ratio is to be seen rather than going rigidly by the facts and circumstances. This is known as principle of ratio decided. The ratio decided is "the point in a case that determines the judgment" or "the principle that the case establishes". In other words, ratio decided is a legal rule derived from, and consistent with, those parts of legal reasoning within a judgment on which the outcome of the case depends. It has been held by the Gujarat High Court that it is the ratio decided that forms a binding precedent, not the entire facts and circumstances of the case. This decision has been given in the following case:-

DHRANGADHRA MUNICIPALITY, DHRANGADHRA AND OTHERS Versus DHRANGADHRA CHEMICAL WORKS LTD. AND OTHERS [1988 (35) E.L.T. 88 (GUJARAT)]

Precedent - Ratio decidendi constitutes a precedent and not the entire contents of a judgment.
- It is not everything said by a judge when giving judgment that constitutes a precedent. The only thing in a judge’s decision binding a party is the principle upon which the case is decided and for this reason, it is important to analyse a decision and isolate from it, the ratio decidendi. [A.I.R. 1979 S.C. 1384 cited; XXIV (1) G.L.R. 1 & A.I.R. 1987 S.C. 1073 referred]. [Para 27]
From the above decision, it is ample clear that while interpreting any decision, one would have to see the ratio laid down by the Court rather than by looking into the facts and circumstances. If the ratio decidendi is applicable, the benefit of decision is equally extendable to us and the impugned order is liable to be set aside.

Non speaking order is not sustainable:-

In the memorandum of appeal, the appellant have categorically submitted that when an order is passed, all the submissions given by the assessee should be discussed and distinguished. If the assessee had cited some case laws, the same should be discussed and distinguished. An order passed without stating as to why these decisions are not applicable in their case is not viable. In this regard, it is submitted that in the reply to show cause notice,they had cited a number of Supreme Court and High Court decisions which have not been discussed and distinguished while passing the order. Thus, the order has proved to be non speaking and non reasoned order as it has been passed by ignoring the decisions of Supreme Court. Such an order is not viable in view of following decisions:-
COMMISSIONER OF CENTRAL EXCISE, BANGALORE VERSUS SRIKUMAR AGENCIES [2008 (232) E.L.T. 577 (S.C.)]:-

“Appellate Tribunal’s order - Non-speaking order - Facts not analysed in detail in impugned order by Tribunal - Disposal of appeals by mere reference to decisions not proper way to deal with appeals - Applicability of decision cited by Revenue not considered - Appeals involving different goods - CESTAT ought to have examined cases individually and articles involved - Manner of disposal not proper - Impugned order set aside - Question referred to Larger Bench of Supreme Court not answered as matter remitted to CESTAT for fresh decision by appropriate Bench - Section 35C of Central Excise Act, 1944. - By clubbing all the cases together and without analyzing the special features of each case disposing of the appeals in the manner done was not proper. [para 6]”

STATE OF HIMACHAL PRADESH VS SARDARA SINGH [2008-TIOL-160-SC-NDPS]:-

Even High Courts are required to pass speaking reasoned orders - The "inscrutable face of a sphinx" is ordinarily incongruous with a judicial or quasi-judicial performance. The manner in which appeal against acquittal has been dealt with by the High Court leaves much to be desired. Reasons introduce clarity in an order. On plainest consideration of justice, the High Court ought to have set forth its reasons, howsoever brief, in its order indicative of an application of its mind, all the more when its order is amenable to further avenue of challenge. The absence of reasons has rendered the High Court order not sustainable. The requirement of indicating reasons in such cases has been judicially recognized as imperative. Judicial discipline to abide by declaration of law by this Court, cannot be forsaken, under any pretext by any authority or Court, be it even the Highest Court in a State, oblivious to Article 141 of the Constitution of India. Reasons are live links between the mind of the decision taker to the controversy in question and the decision or conclusion arrived at. Reasons substitute subjectivity by objectivity. The emphasis on recording reasons is that if the decision reveals the "inscrutable face of the sphinx", it can, by its silence, render it virtually impossible for the Courts to perform their appellate function or exercise the power of judicial review in adjudging the validity of the decision. Right to reason is an indispensable part of a sound judicial system, reasons at least sufficient to indicate an application of mind to the matter before Court. Another rationale is that the affected party can know why the decision has gone against him. One of the salutary requirements of natural justice is spelling out reasons for the order made, in other words, a speakingout. The "inscrutable face of a sphinx" is ordinarily incongruous with a judicial or quasi-judicial performance: SUPREME COURT;

Thus, the hon’ble Supreme Court has held that before confirming the demand, the adjudicating authority is supposed to analyze each and every decision cited by the assessee. An order passed casually without discussing the decisions is not proper manner of disposing the case. In the instant case, the adjudicating authority has not discussed and distinguished the decisions cited by us, therefore, the impugned order being a non-speaking order is not tenable and is liable to be quashed.

Extended period of limitation not invokable:-

The impugned order has invoked the extended period of limitation by raising following allegation at para 16:-

"………………… Thus, the assessee has wilfully and deliberately suppressed the material facts and neither shown the clearance of the said goods in their ER-1 return of the respective months nor intimated to department about the clearance of the said goods with intent to evade payment of Central Excise Duty/ Amount…."

In view of above concluding para from impugned order in original, it is clear that the extended period of limitation has been invoked on the grounds that the appellant had:-

neither shown the clearance of the said goods in their ER-1 return of the respective months;
nor intimated to department about the clearance of the said goods with intent to evade payment of Central Excise Duty.

With reference to above allegations it is reiterated that there is only one column in the ER-1 return in which clearance of goods OTHER THAN THOSE MANUFACTURED IN THE FACTORY can be shown. It is the column no. 5 of the ER-1 wherein the details of cenvat credit availed and reverse are to be shown. The column no. 5 is not applicable as the credit was not availed on the subject goods. No other column in the ER-1 or any other return prescribed in the Central excise law asks for the mention of subject goods. Therefore, legally, there is no provision in the Central Excise Law which requires us to give details of the subject goods. Further, there was no such demand from the Central Excise department asking for furnishing of this information. There is no provision in the Central Excise Act or rule framed thereunder which asks for submission of this information suo motu to the department. Therefore, there is no liability to furnish such information and so it cannot be said that there was any suppression of facts so as to invoke extended period of limitation. This has been held by hon’ble Gujarat High Court in the case of APEX ELECTRICALS PVT. LTD. VERSUS UNION OF INDIA [1992 (61) E.L.T. 413 (Guj.)] that non-furnishing of the information not required under law does not amount to suppression. The verdicts of hon’ble High Court are given as follows:-
“Demand - Limitation - Suppression - Information not required to be supplied under law if not supplied does not amount to suppression - Proviso to Section 11A(1) of Central Excises and Salt Act, 1944.”
Similar decision was given in the following cases:-

GUFIC PHARMA VS. CCE - 1996 (85) ELT 67 (T) [AFFIRMED BY SUPREME COURT AT 1997 (93) ELT A186]
PROLITE ENGINEERING CO. VS UNION OF INDIA [1995 (75) ELT 257 (GUJ.)]
UNIQUE RESIN INDUSTRIES VS. CCE - 1995 (75) ELT 861 (T)

In all the above cases, it was held that the information not required to be submitted under law, if not submitted, will not amount to suppression of facts. Thus the impugned order invoking the extended period of limitation on the grounds of non-furnishing of information (that was not required to be submitted under law), is bad in law and is liable to be set aside.

Reasoning adopted by the adjudicating authority: -
It was held that the demand has been raised on the ground that the goods namely ‘Casting Tubes’ and ‘Casting SMLS Grade L80’ which were procured duty free under exemption Notification No. 21/2002-Customs dt 01.03.2012,when cleared as scrap, were liable to duty foregone at the time of procurement. The authority accepted the contention by the Appellant that the said goods were not the imported ones but procured duty free under Notification No. 6/2002 C.E. However so far the question arose was whether crude oil manufactured by the appellant is an exempted goods and whether oil cess is a duty of excise. In this case the appellants are engaged in Manufacture of Crude oil which is excisable and falling under Chapter Sub Heading 2709000 of Schedule to CETA. Under the said tariff entry, the Crude oil attracts Nil rate of duty. Thus it can be concluded that the crude oil manufactured by the appellant fall under the purview of exempted goods in terms of Explanation appended to the Notification No. 89/99-CE. To decide whether Oil Cess is a duty of excise, Section 2A and Section 3 are duly considered. After considering the Provisions of the stated sections, it is clear that a duty of excise is leviable on all excisable goods produced or manufactured in India at the rate specified in the First Schedule to the Central Excise Tariff Act, 1985. Thus the duty which is levied in accordance with the First Schedule to CETA only qualifies as duty of excise. In the present case the Oil Cess is levied under Oil Industry (Development) Act,1974 and not levied under the CETA 1985., thus on this account the oil cess is not a duty of excise. Merely its collection by the Central Excise authorities and borrowing of provisions of Ventral Excise Act 1944 by the said OID Act would not make cess a duty of excise.

Conclusion:- On the basis of above pretentions it can be concluded that, the appellant were not liable to pay duty on Clearance of said ‘Casing tubes’ and ‘Casting SMLS Grade L 80’ vide invoice dated 16.11.2009 and dated 07.01.2010 respectively. When there was no duty liability, question of interest or imposition of Penalty does not arise. The impugned order dt 11.05.2016 passed by the adjudicating authority is set aside.

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25 August 2018

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PJ/Casestudy/2018-19/127
25 August 2018