By TIOL News Service

AHMEDABAD, DEC 15, 2014: THE following entry in Notification 14/2002-CE, the Explanation II and the Condition no. 3 (as extracted below) are responsible for the matter being referred to the Larger Bench of the CESTAT.

Table

Explanation II.- For the purposes of the conditions specified below, textile yarns or fabrics shall be deemed to have been duty paid even without production of documents evidencing payment of duty thereon.

The issue referred to the Larger Bench is whether the benefit of Sr. No. 12 of Table annexed to Notification No. 14/2002-CE dated 01.03.2002 will be admissible to the processed knitted and crocheted cotton fabrics, when read with Condition 3 and Explanation-II to the said notification, if actual duty payment nature of the base fabrics is not established.

In the case of CCE Ludhiana vs. Prem Industries - 2009-TIOL-1311-CESTAT-DEL, the Bench held that by virtue of Explanation-II of exemption Notification No. 14/2002-CE the grey fabrics purchased from the market should be deemed to be duty paid &the manufactured goods (sl. 16) were held eligible for exemption. This decision was followed by the Mumbai bench in MorarjeeGokuldasSpg. &Wvg. Company Limited & other cases.

However, in the case of Auro Textiles, M.M. Dyeing & Finishing Mills (P) Limited - 2010-TIOL-1240-CESTAT-DEL , Vohra Dyeing - 2010-TIOL-1886-CESTAT-DEL it was held by CESTAT Delhi that the words 'on which duty has been paid' mentioned in the condition in the Exemption Notification No. 14/2002-CE dated 01.3.2002, should mean actual payment of duty.

After considering the elaborate submissions made by both sides and the interveners, the Bench observed thus –

A simple and plain reading of the exemption Notification No. 14/2002-CE is NOT available

++ We are of the considered view that natural expressions used in a statute should be understood in a simple and plain meaning of the expressions as commonly understood. However, a harmonious construction of a statue or provisions of an exemption notification has to be made when the expressions used does not convey a clear and unambiguous interpretation.

++ In the present notification, Sr. No. 10 of table annexed to Notification No. 14/2002-CE exempts all goods knitted or crocheted fabrics of cotton subject to the condition that such fabrics is made out of yarn on which appropriate duty is paid and no credit is taken on inputs and capital goods. Similar condition exists in Sr. No. 12 of the same notification. The words like appropriate duty of excise leviable, 'read with any notification for the time being in force' 'duty has been paid' and 'no credit of duty paid on inputs or capital goods has been taken' have been used in condition-3 pertaining to Sr. No. 12 of Notification No. 14/2002-CE. All these expressions have been interpreted by various orders of CESTAT and Courts, including the Apex Court.

++ On top of all this Explanation-II of Notification No.14/2002-CE creates a fiction that for the purpose of condition of this notification taxable yarn or fabrics shall be deemed to be duty paid even without production of documents evidencing payment of duty.

++ In view of the above, it cannot be said as held inter-alia by CESTAT in the case of Auro Textiles (supra) that a simple and plain reading of the exemption Notification No. 14/2002-CE is available.

++ In the existing set of facts and circumstances a harmonious construction/ interpretation is required to be made to understand the intention of the framers of Notification No. 14/2002-CE. If a view is taken that all the goods lying in the market are non-duty paid by virtue of Sr. No. 10 of Notification No. 14/2002-CE then Explanation-II to this notification becomes redundant. Secondly, by presuming that all categories of grey fabrics supplied to the appellants have not discharged any duty that interpretation will be like creating another fiction that all grey fabrics lying in the market are 'deemed not duty paid', unless established by an assessee availing exemption under Notification No. 14/2002-CE.

++ For a claim under Sr. No. 12 of Notification No.14/2002-CE by an assessee, it cannot be presumed that all grey cotton fabrics received by a textile processor is not duty paid because Sr. No. 10 of the same notification exists. It is also relevant to note that exemption under Sr. No. 10 of this exemption notification is not unconditional but is subject to certain conditions. Thus, the grey fabrics available in the market may not be 100% grey fabrics on which no duty has been paid. That is why a fiction is created under Explanation-II that for the purpose of condition of this notification textile yarn or fabrics shall be deemed to have duty paid even without production of duty paying documents. There is no expression like, "except goods which are clearly recognizable as non-duty paid" in Explanation-II of Notification No. 14/2002-CF, to have any doubt.

++ There is apparent conflict between Condition-3 and Explanation-II of the Notification No.14/2002-CE and has to be given a harmonious construction.

Legislative intention

++ For understanding the intention of the legislature behind this exemption one has to go to the Explanatory Notes and the speeches of the Finance Minister, if any, given at the time when exemption under Notification No. 14/2002 was issued. It is observed from the case records that Explanatory Notes of Budget Bulletin 2002 with respect to Notification No.14/2002-CE dated 01.3.2002, under the heading "II TEXTILE FABRIC" clarified as follows:-

"II. TEXTILE FABRIC

"Notification No.14/2002-CE and 15/2002-CE, both dated 01.03.2002 prescribes effective rates of duty of 'nil' of 12% adv. in the case of textile fabrics subject to the condition that the goods should have been made from textile yarns of fabrics on which the appropriate excise duty or CVD has been paid. It may, however, be noted that Explanation II to the notification makes it abundantly clear that all fibres and yarns are deemed to have been duly paid even without production of documents evidencing payment of duty. Therefore, the manufacturer is eligible for the rates prescribed in the notification. The only condition that has to be satisfied is with regard to availment or non-availment of CENVAT credit, as the case may be.

It is thus made clear that the benefit of the rate of duty should be allowed without insisting upon any documentary proof for payment of duty. However, if the manufacturer wants to avail CENVAT credit of duty paid on inputs or capital goods on actual basis, he will be required to produce duty paying documents as prescribed under the CENVAT Credit Rules."

++ It is evident from the above Explanatory Notes that framers of Notification No.14/2002-CE wanted to extend the benefit of this exemption to the manufacturers subject to the only condition that no CENVAT credit is taken/ not taking of such CENVAT credit was not only restricted to inputs but was also to capital goods . It is further clarified that benefit of rate of duty should be allowed without insisting upon any documentary proof of payment of duty.

++ In view of the above legislative intent, we do not agree with the views expressed by CESTAT two Member judgment in the case Auro Textiles vs. CCE .

Chaos & absurdity to be avoided

++ It has been rightly argued that if the views of the Revenue are accepted then it will lead to chaos and absurdity because making a manufacturer to pay duty again after breaking CENVAT chain by not taking credit, will burden small processing manufacturers to pay duty again on the processed fabrics when no credit on inputs is taken. Indirectly all the textile processors will be forced to adopt CENVAT credit route only to avoid cascading effect of taxation. It will not be in the interest of Small operators to follow only the CENVAT credit mode.

++ In UOI vs. State of Tripura [AIR 2012 Supreme Court 3240],GOI vs. Indian Tobacco Association - 2005-TIOL-109-SC-CUS it is held that an exemption notification must be construed with regard to the object and purport it seeks to achieve. It was also laid in these judgments that an expression used in a statute should be given its ordinary meaning unless that meaning leads to anomalous or absurd situation.

++ If the interpretation meant by the Revenue is accepted then every alternate stage of processing will be required to be taxed by virtue of Section 2(f)(ii) of the Central Excise Act, 1944 read with Chapter note-4 of Chapter 52 or Chapter 54 or Chapter 55 of the Central Excise Tariff Act, 1985. This will be an anomalous or absurd situation or else textile processors will be forced to avail CENVAT credit route alone to avoid cascading effect of taxation.

Conclusion

++ Decisions taken in the case of CCE Ludhiana vs. Prem Industries , Simplex Mills Co. Limited vs. CCE and MorarjeeGokuldasSpg. &Wvg. Co. Limited vs. CCE were correct interpretation of exemption Notification No.14/2002-CE dated 01.03.2002.

++ Accordingly, benefit of Sr. No. 12 of Notification No. 14/2002-CE will be admissible to the appellants by considering the fabric received for processing as 'deemed duty paid' as per Explanation -II of Notification No. 14/2002-CE.

Apart from holding as above, another issue came to the fore and which was - Whether amendment to notfn. 14/2002-CE by notfn. 3/2003-CE substituting condition no.3 to read – “ If no credit of the duty paid on inputs or capital goods has been taken under rule 3 or rule 11 of the CENVAT Credit Rules, 2002 ” is retrospective ?

The Larger Bench observed -

+ Notification No. 14/2002-CE dated 01.3.2002 was also amended by Notification No. 37/2002-CE dated 03.07.2002 when Explanation-VII was added to Notification No. 14/2002-CE and which reads –

“(1) x x x:

(2) xxx;

(3) this Explanation shall have effect as if it had always been the part of this notification."

+ From Explanation-VII (3), it has been made clear that this explanation will have effect as it was always existing as a part of Notification No. 14/2002-CE.

+ Therefore, legislature has the expertise and language to convey where an amendment will be corrective and retrospective. As no such Clause (like the one above) exists in Notification No. 03/2003-CE dated 06.1.2003 while amending Condition-3 of Notification No. 14/2002-CE, therefore, the same cannot be considered curative and retrospective in operation.

Conclusion: Reference regarding admissibility of exemption under Sr. No. 12 of Notification No. 14/2002-CE dated 01.03.2002 is answered in favour of the appellants and against the Revenue.

(See 2014-TIOL-2524-CESTAT-AHM-LB)