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Education Cess on DTA sale by EOU - bright future at cost of poor past

SEPTEMBER 22, 2009

By Pradeep Jain CA & Preeti Parihar CA

“ASK five economists and you'll get five different explanations? Six if one went to Harvard.” The quote given by Edgar R. Fiedler fits pin to point to the “Cenvat credit scheme of the 100% EOUs” prescribed under rule 3(7)(a) of the Cenvat Credit Rules, 2004. Since implementation stage, it has been a matter of litigation. This article presents the tale of Cenvat Credit in respect of DTA clearance by an EOU since emergence till date ...

A brief intro for EOU:

100% Export Oriented Units (EOUs) are being promoted with a view of increasing the valuable foreign exchange. Being facilitated with a number of amnesties and packages, EOUs are not considered as part of India for the purpose of levy of Central Excise Duty. In other words, sale to EOU is deemed as export and purchase from EOU is deemed as import. As the name itself indicates, its entire production is meant for export. However, it can sell a part of its production in Domestic Tariff Area (DTA), i.e. within India subject to certain conditions.

Duty payable by an EOU on DTA clearance:

As per proviso to section 3 of Central Excise Act, 1944, while affecting the DTA clearance, an EOU is required to pay excise duty equivalent to aggregate of duties of customs payable at the time of import of these goods. The duty calculation is explained as follows:-



Assessable Value (a)


Custom Duty @ 10% (b)


CVD (8% of 110/-) (c)


2% Education Cess on CVD (d) *


1% Secondary and Higher Education Cess on CVD (e) *


2% Education Cess on aggregate of Custom Duties [b+c+d+e] (f) *


1% She Cess on aggregate of Custom Duties (g) *


Total (h)


4% SAD ** [ 4% of h] (i)


Total value of goods cleared on DTA (j)


Total Excise duty as per proviso to Section 3 of the Central Excise Act, 1944 [h-a] (k)


2% Education Cess on Excise duty (l) *


1% Secondary and Higher Education Cess on Excise duty (m) *


* EC & SHEC are levied thrice in the entire calculation.

** 4% SAD is payable in lieu of VAT. In most of the cases, it is NIL as while affecting the domestic sale, VAT is payable by the EOU.

Cenvat credit on DTA clearance by an EOU:

The Cenvat scheme for 100% EOU was brought into effect vide Notification No. 06/2006-CE (NT) Dated 20/3/2006. Rule 3(7)(a) of the Cenvat Credit Rules, 2004 prescribed formula for taking the credit on invoices raised by a 100% EOU on DTA clearance. This rule [as existed just prior to latest amendment done in this rule vide Notification No.22/2009-Central Excise (N.T.) dt 7.9.2009] had coverage on the following:-

++ The rule applied on inputs or capital goods produced or manufactured, by an EOU, EHTP or STP (other than a unit which pays excise duty levied under section 3 of the Excise Act read with serial numbers 3,5, 6 and 7 of notification No. 23/2003-Central Excise, dated the 31st March, 2003) and sold in domestic tariff area;

++  The formula read as follows – Assessable value, i.e., X * [(1+BCD/200) * (CVD/100)]”. The amount so calculated comes near about equivalent to CVD;

++The formula is applicable only if the EOU pays excise duty under section 3 of the Excise Act read with serial number 2 of the notification no. 23/2003-CE dated 31.3.2003;

++ What if the duty is not paid under serial no. 2 of the notification no. 23/2003-CE dated 31.3.2003;

++ This rule does not speaks anything about the credit in respect of EC and SHEC.

Since its implementation, the formula for taking Cenvat Credit has been changed a no. of times before its elimination vide the recent notification no. 22/2009-Central Excise (N.T.) dt 7.9.2009. But no amendment therein was done regarding the credit of Education Cess and SHE Cess. Till 7.9.2009, this rule was dumb about the allowability of Cenvat credit of EC and SHEC. In law, silence speaks much. As such, there were ‘n' no. of interpretations that were taken by the various manufacturers.

Interpretations of cenvat credit on EC and SHEC – Revenue Vs Assessees :-

Since no formula was prescribed, the departmental authorities were of the opinion that credit of EC and SHEC is not allowed at all. However, this interpretation is not feasible looking to the intention of framing the Cenvat scheme by the lawmakers. Let's recall the calculation given here above of duty paid by an EOU - the EC and SHEC is paid thrice – firstly on CVD; secondly on aggregate of all custom duties (hereinafter referred as Custom EC and SHEC) and lastly both these cesses are levied on aggregate of all duties, i.e. Excise duty for an EOU (hereinafter referred as final EC and SHEC)

Since there was nothing prescribed about Cenvat Credit in respect of EC and SHEC, different assessees had different opinions – some took credit of EC and SHEC on CVD, some availed credit of final EC and SHEC and some going still further availed credit of all the three.

The conflict in the interpretations taken by the Revenue and the assessees brought the matter before the appellate authorities.

Judicial Rulings:

++ Hyundai Motor India Ltd. vs Commissioner of C.Ex., Chennai [2007-TIOL-1528-CESTAT-MAD]:-

This decision is completely in favour of assessees. It says a completely different thing – since the duty paid by a 100% EOU is simply a duty of Excise under Section 3 of Central Excise Act, 1944. Only quantum of duty is prescribed as aggregate of duties of customs. Going by this analogy, hon'ble Chennai Tribunal has allowed the credit of entire duty paid by EOU. Similar views have been taken in the following cases:-

++ India Japan Lighting Ltd. vs CCE, Chennai [2004 (064) RLT 0166 (CESTAT-Che.)]

If we consider these decisions honestly, it is ample clear that if total duty paid by EOU is allowed as credit to the purchaser, there was no need of prescribing a different system for calculation of duty for duty paid on DTA clearance. In such cases, the goods from EOU will always be cheaper and would grab the market of the indigenous manufacturers who manufacture goods by using heavy duty paid inputs while the inputs used by the EOU are duty free. This is not logical also and of course, not the intention of the law makers.

Anyhow, these decisions are generally allowing the Cenvat Credit as a whole but not talks specifically about the Cenvat credit in respect of EC and SHEC.

++ M/s Emcure Pharmaceuticals Ltd. vs. Commissioner of Central Excise, Pune-I [2008-TIOL-625-CESTAT-MUM]:-

Firstly, the silence of law was broken by Mumbai Tribunal. In this case, it was held that the amount calculated as per formula prescribed will be credit of Excise duty. And credit of EC and SHEC will be allowed in addition to this amount. This decision cleared only one ambiguity that the credit of EC and SHEC will be allowed but which EC and SHEC was not answered by the hon'ble Tribunal.

++ Sarla Performance Fibers Ltd. vs The Commissioner of Central Excise and Customs [2008-TIOL-516-HC-Mum-CX]:-

This decision does not say anything about the Cenvat Credit in respect of EC and SHEC paid by an EOU, yet played an important role in this matter. In this decision, Mumbai High Court has held that an EOU is not required to pay the final EC and SHEC, i.e. those levied third time on the excise duty. It was somewhat in favour of Revenue as it denied the credit of the final EC and SHEC by saying that since the hon'ble High Court has held that it is not required to pay EC and SHEC third time, the question of allowing Cenvat Credit of the same does not arise at all.

As such, there are divergent decisions of taking the Cenvat Credit on the invoices raised by the EOU on DTA clearance. But all these disputes have been brought to an end by amendment in rule 3(7)(a) of the Cenvat Credit Rules, 2004 vide notification no. 22/2009-Central Excise (N.T.) dt 7.9.2009.

Notification no. 22/2009-Central Excise (N.T.) dt 7.9.2009 :-

This is the latest amendment in the rule 3(7)(a) of the Cenvat Credit Rules, 2004. This notification adds proviso to this rule which prescribes a clear and unambiguous language which says that:-

++ The amendment is meant for the EOUs/EHTP/STP units paying excise duty leviable under section 3 of the Excise Act read with serial number 2 of the notification no. 23/2003-Central Excise, dated 31st March, 2003;

++ The amendment seeks to provide credit of CVD, SAD and final EC and SHEC;

But is this amendment going to settle all the issues that were matter of litigation prior to this amendment?

Implications of Amendment:

++ This amendment has specifically prescribed that out of all the duties paid by the EOU, the credit of CVD, SAD and final EC and SHEC will be allowed. One good thing that it would not create ambiguity in future as the language is clear and unambiguous. One bad thing that this amendment would mean that prior to this, credit of EC and SHEC was not allowed. This is a ball in the hands of Revenue and as such there are chances of deciding the pending matters against the assessees on the grounds that this amendment is applicable w.e.f. 7.9.2009, prior to which date, there was no clause of allowing Cenvat Credit on the Education Cess and Secondary and Higher Education Cess.

++ Going further, this amendment says that credit of SAD will also be allowed. But during import SAD is payable in lieu of VAT. Since the EOUs clearing goods in Domestic Tariff Area pays VAT, there is no question of allowing credit of the same. However, this amendment is done perhaps to affirm the decision of hon'ble Delhi Tribunal in the case of M/s Moser Baer India Ltd Vs CCE, Noida [2009-TIOL-1058-CESTAT-DEL-LB] wherein it was held that EOUs are liable to pay SAD for DTA clearance if its sale is exempt from Sales Tax/VAT. So, in order to avoid any further litigation in this regard, this amendment is a preventive one. In other words, this amendment has a limited scope. Anyhow if SAD is paid by the EOU on DTA clearance, the buyer will be able to take the credit of the same.

++ Clause ‘e' to para 6.8 of the Foreign Trade Policy prescribes that the sales beyond DTA sale entitlement will be effected on payment of full duties. This amendment is silent about the credit to be taken in such cases. Will the credit of CVD, EC and SHEC and SAD will be allowed or will it continue the litigation that “entire amount of duty paid is Cenvatable”. Perhaps ‘yes'; because there is no specific provision to deal with such cases. Reiterating once more, this is not the intention of the law makers and still an amendment is required to prescribe the Cenvat scheme in such cases where EOU affects DTA clearance on payment of full duties. This is also required in case the duty is not paid under serial no. 2 of the notification no. 23/2003-CE dated 31.3.2003 because the rule 3(7)(a) of the Cenvat Credit Rules, 2004 does not prescribe anything about it.

++ Still more, is this amendment in contradiction to decision of hon'ble Mumbai High Court in case of Sarla Performance Fibers Ltd. vs The Commissioner of Central Excise and Customs as discussed hereabove which says that EC and SHEC is not payable the third time. Will this amendment take away the effect of cases already decided on line of this decision or will it still generate new modes of litigation.


The amendment had to be retrospective in nature, rather it is prospective. The main implication of deciding the pending cases against the genuine assessees will be the worst one. Once again, the innocent assessees would suffer because of incomplete framing. An amendment settles old issues but gives rise to new litigations. This is what a law is all about ...

Sub: Misconception of payment of Cesses

There is a misconception that ECess and SHE Cess is payable a second time (the component of Rs. 0.393 and Rs. 0.197 as per the table shown in the article)in the trade and it appears that the trade has reconciled to this fact because of consistent approach of the departmental officers in the field insisting on such payment.

But a close look at the proviso to Section 3(1) of the Central Excise Act, 1944 reveals otherwise. An extract of the relevant provision is reproduced below:

"Provided that the duties of excise which shall be levied and collected on any excisable goods which are produced or manufactured,—

[(i) * * * *]
(ii) by a hundred per cent export-oriented undertaking and brought to any other place in India,

shall be an amount equal to the aggregate of the duties of customs which would be leviable under the Customs Act, 1962 (52 of 1962), or any other law for the time being in force, on like goods produced or manufactured outside India if imported into India"

So what is proposed to be levied on 100% EOUs is 'duties of excise' which shall be an amount equal to the aggregate of the 'duties of customs'. At this juncture the relevant question to be examined is what constitutes 'duties of excise' and 'duties of 'customs' and whether 'ECess' and 'SHE Cess' could be regarded as 'duties of excise' as well as 'duties of customs'.

As per Sections 93 & 94 of Finance Act, 2004, ECess and SHE Cess is regarded as 'duty of excise' and 'duty of customs' respectively. Similarly, Sections 138 and 139 of Finance Act, 2007, ECess and SHE Cess is regarded as 'duty of excise' and 'duty of customs' respectively. This apart, all duties levied in terms of CEA, 1994, ADE (TTA) Act, 1978, ADE (GSI) Act, 1957 etc are also 'duties of excise'. Similarly duties levied in terms of Section 12 of Customs Act, 1962 and duties levied in terms of Section 3 of Customs Tariff Act, 1975 are also regarded as 'duties of customs'.

So, when we examine all these provisions harmoniously, what comes out is that the phrase 'duties of excise' and 'duties of customs' referred to in proviso to Section 3(1) of CEA, 1994 also includes ECess and SHE Cess respectively. So if the 'aggregate duties of customs' is calculated in terms of that provision and which obviously includes Cesses as well, the amount that is arrived at shall be regarded as 'duties of excise' that would be leviable on clearances of EOU into DTA. There is a clear misconception in the trade and departmental circles that 'the aggregate duties of customs' computed under proviso to Section 3(1) is 'excise duty'. But this is wrong if we read the provisions correctly. In the proviso what is mentioned is 'duties of excise' and not 'excise duty.

The provisions when read harmoniously does not warrant computation of ECess and SHE Cess separately which is a common mistake done by all and sundry (includes the authors of this article).

I request the fraternity of Advocates, Chartered Accountants, Consultants etc should not jump onto the bandwagon and propagate something illegal without doing a proper homework.

Posted by santosh hatwar