JULY 31, 2015

By H S Sharma

NOTIFICATION Nos. 49 and 50/2003-CE dated 10.06.2003 grant exemption from the whole of the duty of excise and additional duty of excise in respect of the specified goods manufactured and cleared from units located in the States of Uttarakhand and Himachal Pradesh. The exemption has been granted to new industrial units which have commenced commercial production on or after 7th January, 2003 but not later than 31st March, 2010 and to the industrial units existing before 7th January, 2003 which have undertaken substantial expansion by way of increase in installed capacity by not less than 25%, on or after 7th January, 2003, but have commenced commercial production from such expanded capacity, not later than 31st March, 2010. Cut off date was extended upto 31.03.2010 vide notification no. 38/2006-CE dated 02.08.2006 the relevant portion of which reads as under:-

2. The exemption contained in this notification shall apply only to the following kinds of units, namely:-

(i) new industrial units which have commenced commercial production on or after the 7 th day of  January, 2003, but not later than the 31st day of March, 2010;

(ii) Industrial units existing before the 7th day of January, 2003, but which have undertaken substantial expansion by way of increase in installed capacity by not less than twenty-five per cent on or after the 7th day of January, 2003, but have commenced commercial production from such expanded capacity, not later than the 31st day of March, 2010.

2. Going by the phraseology of the notification, area based exemption is not available to the units which have commenced commercial production after 31.03.2010. The Notifications further provide that the exemption shall apply to the said units for a period not exceeding 10 years from the date of publication of the Notification in the Official Gazette or from the date of the commencement of the commercial production, whichever is later.

3. On query from the trade and industry as to whether the manufacturer can continue to avail exemption under these notifications where a unit manufactures a new product by installing fresh plant, machinery or capital goods after the cut-off date, the Central Board of Excise & Customs (CBEC) vide Circular No. 939/29/2010-CX dated 22.12.2010 has clarified that exemption under Notification No. 50/2003-CE will be available inter-alia, in a situation where a unit manufactures a new product by installing fresh plant, machinery or capital goods after the cut-off date. The Board has clarified that the provisions of Notification No. 49 & 50/2003-CE do not place a bar or restriction on any addition/modification in the plant or machinery or on the production of new products by an eligible unit after the cut-off date and during the exemption period of ten years although the period of exemption would remain ten years and would not get extended on account of such modifications or additions under any circumstances . This position was re-iterated by the Board vide Circular No. 960/03/2012-CX dated 17.02.2012 and further clarifying that the exemption will be available even if the unit expands by acquiring a plot of land adjacent to its existing premises and installing new plant/machinery on such land.

4. Jumping on the opportunity by this vague clarification by the CBEC, it appears that many unscrupulous manufacturers, already availing exemption under Notification No. 49 & 50/2003-CE have started misusing the benefit by installing a new independent separate unit albeit within the same premises or on adjacent piece of land to manufacture altogether different product after the cut off date. A view is being entertained by the trade and industry that the Circular allows installing a new plant & machinery to manufacture new products after the cut off date. This interpretation by the trade is totally incorrect, I feel, and at variance with the contents of these notifications as also against the settled law by the Courts. In the guise of installing a new plant, a new unit cannot be set up after the sun-set date i.e. 31.03.2010 in order to continue availing exemption under the Notification albeit for the remaining period. Any new independent production line set up after sun-set date i.e. 31.03.2010 tantamount to be a new unit that cannot enjoy exemption under the Notification.

5. It is also reliably learnt that a number of manufacturers, have taken over existing units availing area based exemption (change of ownership is not a bar to avail exemption) after sun set date of 31.03.2010 and have set up new separate production lines to manufacture altogether different products in addition to the existing production line. In some cases, they have dismantled the existing machinery thereby destroying the identity of the existing unit and have set up new machinery for the manufacture of new product altogether. It may be mentioned here that a unit is not simply a building or shed but it also involves plant and machinery capable of manufacturing a product for which it has been set up. In other words, if a unit manufacturing paper and enjoying exemption under Notification 49 & 50/2003-CE has been sold to another manufacturer as an ongoing concern and new manufacturer dismantles the paper machinery, the identity of the paper unit is lost. It cannot enjoy exemption under notification 49 & 50/2003-CE by setting up a steel plant after dismantling paper plant by taking shelter of Circular dated 22.12.2010. The misuse of area based notification is causing huge loss to the exchequer.

6. As an illustration, a paper unit cannot set up a steel plant in the same premises in as much as steel plant by no stretch of imagination can be treated as a part of existing paper unit by applying the clarification dated 22.12.2010. Even in the case of Additional CIT vs. Hutti Gold Mines - (1981) 128 ITR 476 (Kar), the High Court of Karnataka has held that even if the same product is being manufactured in both the units, benefit available under section 80J of the Income Tax Act cannot be denied. Thus the High Court considered both the units as separate units even if the same product was being manufactured. The crux of the matter is that where there are two separate production lines even for the same product but both are independent of each other, that it is to say, where one production line is switched off, the other can independently work or vice versa, both would be treated as separate, independent units. Therefore, if a new separate independent production line is added after the cut off date i.e. 31.03.2010, the goods manufactured from that new line, cannot enjoy exemption under the Notification.

7. It is well settled that the term 'factory' and 'unit' have different connotations. There can be more than one unit in a factory. Although the exemption has been granted to an 'industrial unit' but the term 'industrial unit' has not been defined in the notifications. So taking recourse to definition of an industrial unit as interpreted by the courts, it is observed that in the case of Commissioner of Central Excise vs. Reckitt Colman of India Ltd., 1997 (92) ELT 457 (SC), while construing Notification No. 89/79-CE, it was held by the Supreme Court that each section or part of the factory manufacturing different goods has to be considered as separate industrial unit. The test for determining whether a unit is to be considered as a new industrial unit or part of the existing unit has been laid down by the Supreme Court in the case of Textile Machinery Corporation Ltd. vs. CIT - 2002-TIOL-973-SC-IT-LB. In this case, while interpreting the provisions of Section 15C of Indian Income Tax Act, 1922 (pari-materia to the excise exemption), the Supreme Court laid down the test to determine whether a unit is a new industrial unit or an expansion of already existing unit. The Apex Court held that for considering an undertaking to be a new one, a physically separate & viable unit must come in existence and such unit must be able to exist on its own as a viable unit irrespective of the existing unit. It was also held that for considering a unit as a new unit, new Plant & Machinery must be erected for bringing in the existence of a new unit. A similar view was also taken by the Madras High Court in the case of Rajeswari Mills Ltd. vs. CIT, 1963 (50) ITR 29 (Mad). In this case, the issue was regarding exemption to spinning unit and the weaving unit under Section 15C of Indian Income Tax Act, 1922. In this case, the assessee had a weaving mill for weaving silk fabrics. Thereafter, additional investment in Plant & Machinery etc. was made for setting up of a spinning mill within the same factory premises. The assessee claimed exemption for the spinning mill. Income Tax department contended that since weaving mill and spinning mill is part of the same branch of trade or manufacture and is one business, exemption will not be available separately for each of the two divisions for a period of five years. This contention of the department was rejected by the High Court. The High Court held that spinning mill installed by using separate Plant & Machinery in separate Building constitutes a distinct unit. Reliance is also placed on the judgment of the Bombay High Court in the case of Devidayal Electronics & Wires Ltd. vs. UOI, 1984 (16) ELT 30 (Bom). In this case, the High Court was interpreting the proviso to Notification No. 74/78-CE dated 1.3.1978. The question before the Court was whether separate building within the factory wherein varnishes were manufactured can be considered as an industrial unit. High Court held that industrial unit means a separate or isolable part concerned with the industrial activity and thus varnish unit was considered as separate unit than unit manufacturing wires.

8. Now whether a new independent, industrial unit set up after the cut off date by an existing unit/factory availing area based exemption, can also avail area based exemption for the new unit commencing commercial production after the cut off date, has been decided in a catena of judgements. In the case of Saurashtra Ferrous Pvt. Ltd. v/s UOI 2014 (309) ELT 0049 (Guj.), the High Court observed that so far as the claim of the petitioner with respect to the Pig Iron is concerned, as industrial Unit was not commissioned and the plant and machineries were not installed (fully) prior to 31-12-2005, exemption is not available.

9. In the case of Plastene India Ltd. v/s UOI & Others, the Gujarat High Court observed that so far as the reliance placed upon the Circular No. 110/21/2006-CX.3, dated 10-7-2008 by the petitioners is concerned, it is absolutely misplaced. Under the aforesaid clarificatory circular, it is mentioned that in case a unit introduces the new product manufactured from raw material by installing fresh plant and machinery after the cut-off date i.e. 31-12-2005, in such a situation, exemption would not be available to the said new product and the said new product would be cleared on payment of duty as applicable and separate records will be required to be maintained to distinguish production of these products from the products which are eligible for exemption. It also further clarifies that where a unit starts producing some products (after the cut-off date) using the plant and machinery installed up to cut-off date and without any addition to the plant and machinery, in that case, the unit would be eligible for the benefit of exemption notification because the plant and machinery used for manufacturing has remained the same. In the present case, admittedly, there is no new product by installing fresh plant, machinery or capital goods after the cut-off date i.e. 31-12-2005. The same product is manufactured/continued to be manufactured however, some additional machineries have been installed. ..."

10. Moreover, in a recent unreported case in Appeal case no. E/1425, 1451, 1533/2010 dated 02.03.2015 in the case of CCE Rajkot v/s Varsana Ispat Ltd ., CESTAT (Ahmedabad) relying on the above judgements of the High Court has held that area based exemption under Notification 39/2001-CE dated 31.07.2001 is available to those new industrial units which have been set up not later than 31.12.2005; that ingots and billets are two different commercial commodities. While ingot unit was set up before the cut-off date i.e. 31.12.2005, they have installed concast machinery for the manufacture of billets after the cut off date of 31.12.2005 and, therefore, exemption to billet unit is not available.

11. The above tests laid down by the Supreme Court and the High Courts have been consistently followed to determine whether a unit is a new industrial unit or part of the existing unit or whether an existing unit availing area based exemption can also avail exemption for a new unit set up after the cut off date.

12. CBEC in its Letter No. Dy. No. R-106/DS(CX.1)/06 dated 21.03.2006 has clarified that in a case where a manufacturer increases the production of its final products by setting up a new production line after the cut off date, the benefit of Notification No.50/2003-CE will not be available. In Letter F. No. 110/13/2006 CX-3 dated 10.07.2008, the Board has clarified a similar issue in respect of Notification No. 39/2001-CE dated 31.7.2001 (area based exemption notification for the Kutch region). In this letter, it was clarified that where a unit introduces a new product by installing fresh plant and machinery after the cut-off date, the exemption would not be available to this new product. However by inserting vague wording in its circular dated 22.12.2010 (issued from the same Section of the CBEC), the Board needs to clarify whether the clarification given there-under is in line with the interpretation as made out and understood by the trade and industry and even the Department that existing unit availing exemption under Notification no. 49 & 50/2003-CE can also also avail the exemption for an independent, industrial unit which has been installed and commenced commercial production after the cut off date i.e. 31.03.2010. If so, whether the judgements/orders passed by the High Courts/CESTAT cited above, have been contested or are going to be contested. If the Department still holds the view that Circulars dated 22.12.2010 and 17.02.2012 are correct and have been issued on a settled legal position (though it is not), then the Department should challenge and file appeals against judgments of the Gujarat High Court and Tribunal Ahmedabad irrespective of the fact that these are in favour of the Department. Therefore, while keeping the Circulars dated 22.12.2010 and 17.02.2012 alive as also not challenging the judgments/ decision, Department cannot have contradictory stand i.e. having the cake and eating it too. However, it also needs to be kept in mind that it is a settled law that a circular contrary to the statutory provisions has no existence in law as held by the Supreme Court in the case of CCE Bolpur v/s Ratan Melting & Wire Industries - 2008-TIOL-194-SC-CX-CB.

13. Whether the Department issues a clarificatory Circular to the effect that in guise of installing a new plant to manufacture a new product after the cut-off date i.e. 31.03.2010, a new independent unit is not contemplated by such clarification, or the Department appeals against the judgment/ decision irrespective of the fact that these are in favour of the Department, would be interesting to watch.