FEBRUARY 05, 2016

By Manish Jain

FOREIGN Trade Policy (FTP 2009-14) provided for various export promotion measures including various export promotions schemes such as advance authorization schemes, DFIA, EPCG and other incentive duty credit scrips issued under chapter 3 of the FTP. It provides for various duty credit scrips being freely transferable or with limited transferability such as SFIS, FPS, FMS, SHIS, DEPB etc. Said scrips were issued as percentage of the FOB value of export made by the assesse during particular year.

The said scrips are allowed to be utilized for payment of duties i.e customs, excise and service tax. The payment of duty is made by way of debit in the scrip, instead of cash payment.

For governing the mechanisms of such payment of duty by way of debit in the scrip, various notifications are issued under Customs Act, 1962, Central Excise Act, 1944 and Finance Act, 1994. The said notifications are issued as exemption notifications, though the payment of duty is made by way of debit in the scrip.

Various litigations involving utilization of scrips

Different scrips have peculiar conditions governing utilization of the said scrip. Various conditions of the said scrips/ notifications have become subject of different interpretations. A large number of varied schemes have also created confusion in the minds of assessee and department.

All the said factors have led to widespread litigation and demands have been raised for short levy or non-levy of duty.

Whether debit of duty in said scrip is payment of duty or exemption

The vital issue that arises in such litigations is whether the duty amount debited through duty credit scrips can be regarded as payment of duty or such goods would qualify as "exempted goods".

This point is vital, because once it is settled that debit of duty in the scrip is considered as duty payment, then there is no question of short payment of duty or non-payment of duty triggering the issuance of show cause notice.

Contrary view of two high courts on the issue

Hon'ble Madras High court held that debit in the scrip is mode of payment of duty

Hon'ble Madras High Court in the case of Tanfac Industries Limited Vs. CCE - 2009-TIOL-291-HC-MAD-CUS has held that debit of any amount under DEPB scheme is a mode of payment of duty on the imported goods and it cannot be said that the goods were exempt from duty. The High Court held as under:

"Therefore, the goods cleared under DEPB Scheme cannot be treated an exempted goods, but they can only be treated to be duty-paid goods and therefore, the interest is payable as per Section 61(2) of the Act. The debit of any amount under the DEPB Scheme is a mode of duty on the imported goods and cannot be treated as exempted goods,"

The above decision of the Madras High Court was appealed by way of Special Leave Petition to the Supreme Court. However, the Supreme Court did not grant leave to the appellant and dismissed the appeal in limine.

The aforesaid decision was followed by the Single Member of CESTAT in the case of Universal Power Transformers Private Ltd. v CCE, Bangalore - 2010-TIOL-985-CESTAT-BANG where it was held that debits made in SFIS would not amount to availment of exemption from payment of duty. In this case the issue before the Tribunal was that, whether the clearance of goods under SFIS in terms of Notification No. 34/2006-CE dated 14.6.2006, would amount to clearance of exempted goods for the purpose of Rule 6 of the Cenvat Credit Rules, 2004. The tribunal held that the duty liability debited in SFIS Scrip would amount to discharge of tax liability and does not amount to availment of exemption. Hence, the Tribunal held that Rule 6(3)(b) of the Cenvat Credit Rules, 2004 would not be applicable. The Tribunal in this regard relied on the decision of the Madras HC in the case of Tanfac (supra), the relevant portion of the decision is reproduced as under:

8.1 It can be seen from the above reproduced clarification that the CBEC specifically mentioned the conditions that has to be performed by the jurisdictional Central Excise Officer of the assessees from where goods are cleared under SFIS. The CBEC circular also very specifically clarifies that the original certificate has to be produced before the jurisdictional Central Excise Officer for "debiting the duties of excise leviable on the goods". The wordings of notification and subsequent CBEC Circular, would make it clear that the duty liability which has been debited in the SFIS scrip, would amount to discharge of duty liability and not amounting to exemption, as was proposed by Revenue.

9. I find that Hon'ble High Court of Judicature at Madras in the case of Tanfac Industries Ltd. v. CCE (supra) had considered an issue which was identical. In the said case their lordships were considering whether the debits made under DEPB script is equivalent to payment of duty in cash…"

The Single Member decision in the aforesaid case was subsequently followed by Division Bench of the Tribunal in the following cases:

Contrary view of Hon'ble Gujarat High court holding that debit in the scrip is exemption and not duty payment

Hon'ble Gujarat High Court in the case of Gujarat Ambuja Exports Ltd. v. Government of India, - 2012-TIOL-546-HC-AHM-CUS specifically dissented with the judgment of the Madras High Court in Tanfac. The relevant portion of the judgment of the Gujarat High Court is reproduced as under:

20. We may also recall that the Larger Bench of the Tribunal in the case of Essar Steel Ltd. (supra) held that mere entry in the DEPB book is not sufficient for eligibility of Modvat credit availed on the strength of Bill of Entry where the importer had availed of benefit of the exemption from payment of customs duty. This would further go to show that while no customs duty is paid, there would be no question of availing Modvat credit on such duty.

21. We may notice that vide circular dated 8-7-2004, the Ministry of Finance, in a question whether goods that are fully exempt from excise/customs duty or are cleared without payment of such duty would be subject to education cess, clarified that the education cess is leviable at the rate of 2% of the aggregate of the duties of excise/customs levied and collected. If goods are fully exempted from excise duty or customs duty or are chargeable to nil rate of duty or are cleared without payment of duty under specified procedure such as clearance bond, there is no collection of duty and, therefore, no education cess would be leviable on such clearances.

22. In view of such clarification by the Government and in view of our conclusions hereinabove that against an import made under the DEPB scheme, of the goods which are fully exempt from payment of customs duty and therefore no customs duty is levied and collected, the education cess at the prescribed rate also cannot be levied.

23. We are not unmindful of the decision of Madras High Court in the case of Tanfac Industries Ltd. v. Asstt. Commr. of Cus., Cuddalore reported in 2009 (240)ELT 341. In the said case, in the background of interest on warehoused goods where such demand of interest on goods cleared beyond 90 days arose, the Division Bench of the High Court came to the conclusion that on the imports under DEPB scheme, the importers pay duty not by cash but by way of credit and, therefore, the goods cleared under DEPB scheme cannot be treated as exempted goods. It can only be treated as duty-paid goods.

24. With respect, we are unable to concur with such a view. Firstly, in the said decision, the question of levy of education cess was not involved. More particularly in our view, the exemption Notification No. 45/2002 is issued under the exercise of powers under Section 25 of the Customs Act, 1962. Such notification grants total exemption from payment of customs duty and additional duty on all goods other than edible oils which are imported under DEPB scheme. It is, of course, subject to conditions specified in the notification itself. Such conditions require adjustment of the credit in the DEPB scrip against the customs duty liability. However, such adjustment is only procedural in nature. As noted earlier, para 7.14 of the Export Import Policy clearly provided that the exporter who does not desire to go through the licensing route would have an optional facility of being governed under the DEPB scheme.

Thus, the Gujarat High Court specifically dissented from the Madras High Court and held that availment of the benefit of such notifications will amount to availment of "exemption".

However, the Gujarat High Court may be distinguished on the ground that it dealt with the DEPB Scheme / Notification as it stood prior to September 2004, when it did not provide for availment of Cenvat credit.

For the purpose of CCR, CBEC has treated debit in scrip is duty payment and not exemption

The Central Board of Excise and Customs, vide Circular No. 973/07/2013-CX dated 4.09.2013 has clarified that debit of duty in these scrips shall be treated as payment of duty for the purpose of determining the applicability of Rule 6 of the Cenvat Credit Rules, 2004.  Therefore in respect of goods cleared availing the benefit of any of Notifications No. 29/2012-CE, 30/2012-CE, 31/2012-CE, 32/2012-CE and 33/2012-CE all dated 9th July, 2012, payment of amount under Rule 6(3) of the Cenvat Credit Rules, 2004 is not applicable. Therefore, the manufacturer of capital goods need not reverse credit in terms of Rule 6, treating such clearances against SHIS scrip, as exempted goods.

Conclusion

It has to be understood that the mechanism of issuing scrip is created only as an alternative method of cash incentive. The intention of the scheme is to promote export by issuing said credit scrips and permitting the utilization of said scrips against the duty payment.

Thus debit in the scrips, therefore, ought to be treated as duty payment uniformly.

It may also be noted that whole exercise of questioning the debit in the scrip is futile exercise and without any revenue implication to the government, because ultimately the said scrip has to be re-credited and the assesse would be utilizing the said re-credited scrip for payment of duty.

(The author is Principal Associate,  Lakshmikumaran & Sridharan, Ahmedabad and the views expressed are strictly personal.)