By TIOL news service

CHENNAI, MAY 08, 2016: THE Issue is whether the moment the goods went out of the protective cover given by SEZ, the duty automatically got attached to the goods and hence, the inclusion of the same in the sale price for the purpose of levy of value added tax is valid. Yes is the answer.

Facts of the case

The assessee company is authorised to carry on certain operations in their unit located within the SEZ. In the course of the authorised operations, assessee manufactured and sold Optix OSN Series Intelligent Optical Transmission Platforms, referred to as "Optical Cabinets", to a company by name Huawei Telecommunications (India) Limited, during the period from April 2010 to March 2011. For the purpose of manufacturing the aforesaid Optical Cabinets, assessee imported various components from a company by name Huawei Tehnologies Co. Ltd., China. Since these imports were made by a company located in SEZ, no Duty of Importation was levied upon the assessee, in view of the exemption contained in Sections 7 and 26 of the SEZ Act, 2005. After importing the components without payment of basic Customs Duty and CVD, assessee manufactured Optical Components and sold them to Huawei India. The sale was subject to payment of appropriate VAT under the TNVAT Act, 2006 and Central Sales Tax Act under the CST Act, 1956.

The sale and supply of goods between the assessee and Huawei India were on an "ex-works basis" in terms of a Supply Agreement. As per the Supply Agreement, the assessee was obliged to sell and deliver the goods at the SEZ facility gate in Chennai. Thereafter, it was the obligation of the purchaser to clear the goods from the SEZ, upon payment of all applicable Duties and Taxes. As a matter of fact, the purchaser, Huawei India, filed Bills of Entry for Home Consumption and cleared the goods from the SEZ, by paying applicable Customs Duty, in their capacity as importer-buyer.

Later on, a notification No.125/2010-Customs, was issued imposing Anti-Dumping Duty at the rate of 266% on the import of certain transmission equipments and sub-assemblies and components, when imported from China. The said notification was given retrospective effect from 8.12.2009, on account of the fact that a provisional levy had already been made earlier. As the unit of assessee was located in SEZ, the imported goods were not subjected to Anti-Dumping Duty in his hands. However, when assessee sold the goods manufactured in SEZ, to Huawei India, a doubt arose as to whether the component of Anti-Dumping Duty should be included for the purpose of computing the liability of tax under TN VAT Act,2006 and CST Act.

Therefore, assessee sought a clarification from the department. Pending receipt of the clarification, the purchaser namely Huawei India made payment of Anti-Dumping Duty on the value of imported components. According to the petitioner, this payment was made by assessee, without any notice or intimation to assessee.

Subsequently, the Assistant Commissioner (Commercial Taxes) informed assessee that the value of Anti-Dumping Duty was to be included in the sale price, for the purpose of levy of CST under the CST Act, 1956. By another letter, the Assistant Commissioner (Commercial Tax) also issued a show cause notice proposing to compute the tax liability and also to impose penalty. AO passed an order finalising the assessment for the year 2010-11. By the next notice, the very same officer sent a proposal to revise the assessment by including the value of Anti-Dumping Duty paid by the purchaser, for the purpose of revising the tax liability. Though the assessee submitted a letter of objection, and also participated in the personal hearing granted on 19.9.2011, the Assessing Officer passed a revised order dated 21.10.2011 demanding tax on a price that included Anti-Dumping Duty. A penalty at 150% was also imposed under the revised order. On appeal, the FAA dismissed the appeal filed by assessee. Further appeal with the Tamil Nadu Sales Tax Appellate Tribunal also met the same fate.

Therefore, the assessee is before the High Court.

After considering the submissions, the High Court held as below -

++ if the date of removal is not ascertainable, the focus is shifted to the date of payment of duty or tax. Therefore, it is clear that the chargeability to duty of customs, including anti dumping, countervailing and safeguard duties, arises upon removal from the Special Economic Zone to the Domestic Tariff Area and hence, the reasoning given by the Supreme Court in Madras Rubber Factory that the liability to pay cess got attached to the rubber, would apply equally to the case on hand. As a matter of fact, the liability to pay anti dumping duty arises due to the import. The revision petitioner herein is exempt from payment of the same, solely on account of the fact that they are located in a Special Economic Zone and that therefore, they are protected by Section 26(1) of the Central enactment and Section 12(1) of the State enactment. It is the appellant who enjoys the exemption by virtue of the statutory scheme and it is the very same appellant who suffers the automatic withdrawal of exemption, the moment the goods are removed from the Special Economic Zone to the Domestic Tariff Area. Therefore, the primary liability for payment of anti dumping duty actually falls upon the appellant, the moment the goods are removed from the Special Economic Zone to the Domestic Tariff Area. The Supply Agreement that the appellant had with their purchaser, in whatever clever manner they are worded, merely shifted the burden of payment of anti dumping duty to the buyer. To put it differently, the statutory liability for payment of anti dumping duty fell upon the petitioner by virtue of the statutory scheme of the Special Economic Zones Act. The contractual liability perhaps fell upon the purchaser. The contract between the petitioner and their purchaser cannot alter the incidence of duty. Therefore, the distinction sought to be made by senior counsel for the petitioner about the three decisions of the Supreme Court (McDowell, Mohan Breweries and Madras Rubber Factory) cannot be accepted. In the State of Rajasthan v. Rajasthan Chemists Association 2006-TIOL-80-SC-CT , SC was concerned with the validity of Section 4-A of the Rajasthan Sales Tax Act, 1994, by which sales tax was leviable not on the actual price, but on the MRP of the goods declared on the package. While upholding the judgment of the Rajasthan HC declaring Section 4-A to be unconstitutional, the Supreme Court held that a tax cannot be levied on a person unconnected with the event nor the measure or value to which rate of tax can be applied, can be altogether unconnected with the subject of tax. This decision is relied upon by the learned senior counsel to drive home the point that when the anti dumping duty is paid after the point of sale, by the buyer, the same cannot be included in the turnover of the revision petitioner who is unconnected with the import;

On the issue whether anti dumping duty would form part of the sale price

++ it should be pointed out that anti dumping duty is levied under a notification issued by the Central Government in exercise of the power conferred by Section 9-A of the Customs Tariff Act, 1975, whenever any article is exported from any country or territory to India at less than its normal value. As held by the Allahabad HC in India Exports v. State of U.P. [(2012) 21 Taxmann.Com 595 (All.)], the legal fiction created under the Special Economic Zones Act, 2005 as though a Special Economic Zone is a territory outside the territory of India, cannot be extended beyond its purpose. The phrase used in Section 9-A of the Customs Tariff Act is "where any article is exported .... to India". Therefore, the fact remains that the petitioner, though located in a Special Economic Zone, is nevertheless in India, to whom a company from China has exported goods. But, the petitioner enjoyed exemption from payment of anti dumping duty only because of being located in a SEZ. This exemption was available just like a shelter so long as the goods were in the Special Economic Zone. The moment the goods got removed from out of the shelter into a Domestic Tariff Area, Section 15 of the Tamil Nadu Special Economic Zones Act and Section 30 of the Central enactment came into play. As a consequence, the anti dumping duty became payable. The fact that the purchaser paid the same or the fact that the sale had taken place prior to the clearance of the goods, is of no consequence, since the point of first import was when the goods came to India from China. Assuming that the clearance of goods by the buyer of the petitioner, which happened at the gate of the Special Economic Zone is also equivalent to an import, it could be taken only to be a second incidence of import. Anti dumping duty was leviable on the first incidence of import. This is why the expression "leviable" appearing in Section 15 of the State enactment and Section 30 of the Central Special Economic Zones Act is of significance. Hence, we are of the considered view that the anti dumping duty actually became leviable from the time of export from China into India, but was not actually collected due to the protective cover given by the Special Economic Zones Act. The moment the goods went out of this protective cover, the duty automatically got attached to the goods and hence, the inclusion of the same in the sale price for the purpose of levy of value added tax is in order;

++ the issue can be looked at from another angle also. The actual purpose of levy of anti dumping duty, as pointed out by SC in Reliance Industries Ltd. v. Designated Authority 2006-TIOL-120-SC-AD, is to maintain a level playing field for the domestic market, with the products that are exported into India. Once it is established that there is (i) dumping, (ii) injury, and (iii) causal link between dumping and injury, anti dumping duty is levied. The margin of dumping is the difference between the normal value, namely the price in the domestic market of the foreign exporter and the export price at which the goods are exported to India. Therefore, once anti dumping duty is levied, the same becomes part of the sale price, as otherwise the sale price of the product imported into India will be different from the sale price of the product domestically manufactured. Hence, the first question of law is answered against the petitioner/assessee and in favour of the revenue;

++ a look at the orders of assessment would show that to begin with, there was a doubt as to whether anti dumping duty itself was payable or not. Even before this doubt could be cleared, the petitioner themselves sought a clarification from AO vide letter dated 06.9.2010. Much before this clarification was issued, the company which purchased the finished product from the revision petitioner paid the anti dumping duty. Thereafter, AO issued a clarification dated 29.4.2011 to the effect that anti dumping duty is to be included in the sale price. Simultaneously, a show cause notice was issued on the same date, namely 29.4.2011 and an order of assessment was passed on 27.6.2011, without imposing any penalty. However, a show cause notice was issued on 30.6.2011 for revising the assessment and this resulted in a best of judgment assessment dated 21.10.2011. In this order, AO imposed a penalty at 150% u/s 27(3)(c). No finding of fact was recorded by AO (i) as to how he was satisfied, and (ii) as to whether there was wilful non disclosure of assessable turnover. In fact, no finding to this effect could have been recorded by the AO in view of the fact that the whole thing was brought to the notice of the AO by the petitioner themselves by their letter dated 06.9.2010 seeking a clarification. Before the Appellate Deputy Commissioner, the assessee raised an objection with regard to penalty. In one paragraph, the Appellate Authority held that there was a wilful intention on the part of the assessee to evade the taxes by adopting a device and by filing incorrect and incomplete returns. In other words, the Appellate Authority did not also address himself to the question as to whether there was wilful non disclosure or not. Tribunal also misdirected itself on this issue. Therefore, we are of the considered view that the second question of law has to be answered in favour of the revision petitioner. Accordingly, it is answered and the imposition of penalty at the rate of 150% u/s 27(3)(c) of the TNVAT Act, 2006 is set aside.

++ the petitioner was the actual importer of the original components. But, since the petitioner was located in a Special Economic Zone, they enjoyed the protective cover provided the statutory scheme of the Special Economic Zones Act, 2005. The moment the petitioner removed the goods from the Special Economic Zone to the Domestic Tariff Area, the protective cover was withdrawn. What was cleared by the ultimate purchaser, namely Huawei India from the unit of the petitioner in the Special Economic Zone was the finished product manufactured by the petitioner. In chronology, this was the second clearance, assuming that it is a clearance. There was actually a first clearance of the imported goods. This first clearance was made by the petitioner, when they imported the components from Huawei Technologies Co. Ltd., China. This clearance was allowed to be made without payment of duty because of the location of the petitioner in a Special Economic Zone. The third question of law is raised by the petitioner, by forgetting for a moment that there were actually two clearances in this case. Hence, the third question of law has also to be answered against the petitioner. In the result, the questions of law (i) and (iii) are answered against the petitioner/assessee. The second question of law alone is answered in favour of the petitioner and that too, in respect of penalty alone. Therefore , the appeal is allowed in part, setting aside only the element of penalty . In all other aspects, the orders of the subordinate authorities are upheld.

(See 2016-TIOL-893-HC-MAD-VAT)