FEBRUARY 23, 2016

By Hardik Shah, CA

EXPORTERS enjoy certain tax benefits or concession from the Government while exporting the goods from India with the objective of either incentivizing or reimbursing the taxes suffered in their supply chain. With respect to excise duty, one such benefit is the option to export the goods under Rule 18 or Rule 19 of the Central Excise Rules, 2002 i.e. under claim of rebate or by furnishing bond / undertaking without payment of duty respectively. The purpose of this mechanism is to relieve the manufacturer from the duties paid on the exported goods and to make them competitive in international market.

Section 11B(2)(a) of Central Excise Act, 1944 read with Rule 18 of Central Excise Rules, 2002 governs the grant of rebate of excise duty on excisable goods exported out of India or on excisable material used in manufacture of goods which are exported out of India (on inputs / raw material). Government has issued Notification 19/2004-CX(NT) and Notification 21/2004-CX (NT) both dated September 6, 2004 for providing rebate on finished goods and on goods used in manufacture of exported goods (on inputs / raw material) respectively.

Both these notifications effectively prescribe the nature of benefit (duties and taxes eligible for rebate) along with the conditions required to be complied. It can be observed from the comparison of both these benefits that Notification 21/2004 provides for rebate of CVD paid on goods used in manufacture of exported goods however Notification 19/2004 does not have such preposition. In Notification 21/2004, in the explanation, eligibility for rebate of additional duty was not mentioned earlier and it was added only vide Notification No. 12/2007dated March 1, 2007 so as to set right the anomaly. It is interesting to note that the benefit of CVD was disputed for rebate claims filed under Notification 21/2004 for the period prior to incorporation of benefit of CVD vide Notification 12/2007. However, similar changes have not been carried out in Notification 19/2004 till date.

The issue which merits clarity is whether CVD (duty equivalent to excise) paid on the imported goods is eligible for rebate under Rule 18 of Central Excise Rules, 2002 read with Notification 19/2004.

For better understanding of the present matter, it would be relevant for us to analyze the nitty-gritty of CVD. Section 3(1) of the Customs Tariff Act, 1975 provides for the power to levy additional duty (also known as CVD) in addition to other duties of Customs at the time of importation of goods in India. The relevant extract of the said Section is reproduced hereunder:

3. Levy of additional duty equal to excise duty

(1) Any article which is imported into India shall, in addition, be liable to a duty (hereafter in this section referred to as the additional duty) equal to the excise duty for the time being leviable on a like article if produced or manufactured in India and if such excise duty on a like article is leviable at any percentage of its value, the additional duty to which the imported article shall be so liable shall be calculated at that percentage, of the value of the imported article.

From the above extracts, it can be seen that CVD is inextricably linked to excise duty.The manner of understanding the applicability of CVD has been explained by Supreme Court in the case of Hyderabad Industries Limited Vs. Union of India, - 2002-TIOL-369-SC-CUS-CB where the Hon'ble Court had observed the following:

"As observed by this Court in Thermax Private Limited v. Collector of Customs, Bombay - 2002-TIOL-683-SC-CUS-LB at page 452-453 that Section 3(1) of the Customs Tariff Act "specifically mandates that the CVD will be equal to the excise duty for the time being leviable on a like article if produced or manufactured in India. In other words, we have to forget that the goods are imported, imagine that the Importer had manufactured the goods in India and determine the amount of excise duty that he would have been called upon to pay in that event."

To our mind the genesis of Section 3(1) of the Customs Tariff Act has been brought out in the aforesaid observations of this Court, namely, that for the purpose of saying what amount, if any, of additional duty is leviable under Section 3(1) of the Customs Tariff Act, it has to be imagined that the articles imported had been manufactured or produced in India and then to see what amount of excise duty was leviable thereon."

Reference can also be drawn to CBEC Circular No. 83/2000-Cus dated October 16, 2000 wherein the Board has clarified that wherever the word 'duty' appears in erstwhile MODVAT Rules, it shall be construed to having reference to Central Excise or the additional duty under Section 3 of the Customs Tariff Act, 1975. The relevant extract is reproduced hereunder:

"4. A combined and harmonious reading of these provisions reveals that the word 'duty' appearing anywhere in the Modvat Rules, unless otherwise qualified, should always be construed as having reference to duty of Central Excise or the additional duty under Section 3 of the Customs Tariff Act, 1975. Since Rule 57F(13) mentions the wording "Credit of specified duty in respect of Inputs so used……. "and Rule 57F(14) states that no credit in sub-rule (13) shall be allowed if the exporters avail of drawback……….in respect of such duty, it is amply clear that the prohibition of Rule 57F(14) for grant of refund is only in respect of availment of drawback as regards the Central Excise duty or countervailing duty. There is no double benefit available to the manufacturer where only Customs portion of All Industry Rate of Drawback is claimed, if refund of unutilised credit is given, as no Modvat (now Cenvat) credit facility is permissible for customs duties suffered on imported inputs. Denial of refund of Modvat credit of Excise/Countervailing duty paid on inputs relating to export products, if this cannot be used otherwise, will this not only act harshly on the exporters, it will not be in accordance with the provisions of the modvat rules.

5. It is, therefore, clarified that where only customs portion of duties is claimed as per the all industry rate of drawback, Rule 57F(14), does not come in the way of admitting refund of unutilised credit of Central Excise/Countervailing duty paid on inputs used in products exported."

Considering the above rationale, inter alia, Department of Revenue - Revisionary Authority in respect of revision application/s filed by Om Sons Cookware Pvt. Ltd. 2011 (268) ELT 111 (GOI) claiming the rebate of CVD filed under Notification 21/2004 for the period prior to amendment by Notification 12/2007 has concluded that rebate of CVD paid on inputs / raw materials used in the manufacture of exported goods is admissible since CVD is levied in lieu of excise duty.This view was also upheld by Delhi High Court in CCE, Delhi-I Vs. Joint Secretary (Revision Authority) 2013 (287) ELT 177 (Del.).

We must also refer to the similar situation which was created at the time of levy of Education Cess effective July 9, 2004vide Finance Act, 2004. However, the Education Cess was included in explanation to the Notification No. 19/2004 and 21/2004 vide Notifications 28/2004 and 30/2004 both dated October 21, 2004 respectively. Various assesses have claimed the rebate including Education Cess during this interim period stating that they are eligible for the benefit from the date of levy since the subsequent notification is clarificatory in nature and should be read retrospectively. Rajasthan High Court in the case of Banswara Syntex Ltd. Vs. Union of India - 2007-TIOL-553-HC-RAJ-CX has upheld the above view.

Recently, Gujarat High Court while dealing with the claim of rebate of CVD,by SEZ unit on its procurement, filed under Notification 19/2004 in the case of Intas Pharma Ltd. Vs. Union of India - 2015-TIOL-2880-HC-AHM-CUS has held that rebate of CVD will not be admissible since CVD is not excise duty. The Court has observed that CVD paid at the time of import of goods is a duty equal to excise duty leviable on such goods if manufactured in India. Such duty is levied to offset the disadvantage to like Indian goods due to high excise duty on their inputs and to provide a level playing field to indigenous goods which have to bear various internal taxes. However, it can be observed that the above referred decision/s and/or circulars where not brought to the notice of the Court as the wording of Notification 19/2004 and 21/2004 are similar in respect of duties ought to be eligible for claim of rebate.

It would be important to understand that rebate/drawback etc. are export-oriented schemes and undue restriction and technical interpretation should be avoided. Otherwise, it will defeat the very purpose of such schemes which serve as export incentive. If the fact of export having been made is not in doubt then I believe that a liberal interpretation should be given for technical breaches. Any interpretation unduly restricting the scope of beneficial provision should be avoided so that it may not take away with one hand what the policy intends to give with the other.

I am aware about the principle which specifies that exemption notification should be strictly and literally construed and also, that the notification should be interpreted in the light of the words employed and there is no room for intendment. However, in my opinion,strict interpretation should be given while dealing with the matter relating to eligibility of the benefit. Once the assessee satisfies the eligibility criteria, exemption should ideally be construed liberally if the contextual construction does not deserve the strict meaning. The purpose should not be defeated so as to deny and deprive what is clearly flowing from it. Meaning of the exemption notification has to be gathered from the language employed without ignoring the reason and cause why the Government has issued the said notification and purpose behind the said notification.

Considering the above, I would request CBEC to kindly remove the anomaly in Notification 19/2004 by incorporating the clause of CVD within the definition of 'duty' eligible for rebate since the trade and industry has to entail unnecessary litigation.

(The views expressed are strictly personal.)