OCTOBER 31, 2016

By R L Kabra, I.C.W.A

IN the Central Excise Act, 1944, sub-section (1) of Section 5A gives power to Central Government to grant General Exemptions from payment of excise duty. It reads –

SECTION 5A. Power to grant exemption from duty of excise. -(1) If the Central Government is satisfied that it is necessary in the public interest so to do, it may, by notification in the Official Gazette exempt generally either absolutely or subject to such conditions (to be fulfilled before or after removal) as may be specified in the notification, excisable goods of any specified description from the whole or any part of the duty of excise leviable thereon :

Provided that, unless specifically provided in such notification, no exemption therein shall apply to excisable goods which are produced or manufactured -

(i) in a free trade zone or a special economic zone and brought to any other place in India; or

(ii) by a hundred per cent export-oriented undertaking and brought to any place in India .

[underlining supplied]

This article seeks to deal with the proviso to Section 5A(1) of the CEA, 1944, which states that unless specifically provided in the notification issued under Section 5A(1), no exemption therein shall apply to excisable goods which are produced or manufactured by an EOU and brought to any place in India (DTA).

2. Based on the aforesaid proviso, a view is being entertained that an Exemption Notification issued under Section 5A(1) [thereby providing effective rate of Central Excise duty for normal units (non EOU units)] is not applicable for goods cleared in DTA by EOU.

For example, Notification No. 2/2011-CE dated 01.03.2011, as amended, provides effective rate of 6% (instead of Tariff Rate of 12% / 12.5%) for goods mentioned therein. Similarly, Notification No. 12/2012-CE dated 17.03.2012, as amended provides effective rate of 6% to many commodities, e.g. Sugar Confectionery (excluding white chocolate and bubble gum) of Chapter Sub-heading 170490 of CETA, 1985. However, Notification Nos. 2/2011-CE dated 01.03.2011 and 12/2012-CE dated 17.03.2012 do not specifically provide that exemption therein shall apply to goods cleared in DTA by EOU. Therefore, it is viewed that in respect of clearance of such goods from EOU to DTA, while calculating duty under proviso to Section 3(1) of the CEA, 1944, especially the portion of duty equivalent to Additional Duty of Customs (CVD), the effective rate of Central Excise duty provided by such exemption Notifications should not be considered and instead Tariff Rate should be taken into consideration.

3. In the Report No. 9 of 2015 of the Comptroller and Auditor General of India on Performance of 100% Export Oriented Unit (EOU) Scheme (Union Government, Department of Revenue, Indirect Taxes – Customs), it is observed at Para 4.14:

"4.14 applicability of Central Excise exemption notifications issued under Section 5A of the Central Excise Act, 1944 to EOU

………..

……….

Thus, while DTA clearances from EOU attract duties at par with imports as per Section 3 of Central Excise Act, 1944, exemption benefits available to imports under Section 5A of the Act are not applicable to DTA clearances from EOU.

Audit observed that in eight EOUs, seven under jurisdiction of DC, Falta and one under DC, SEEPZ, Mumbai availed duty exemption benefit of Rs. 17.67 Crore under Central Excise notification issued under Section 5A of the Central Excise Act in contravention to the proviso there under as detailed below :-

(Rs. In Crore)

Central Excise Department in respect of one unit under SEEPZ SEZ issued SCN for Rs. 0.76 Lakh.

DoC in their reply (January and February 2015) stated that the cases has been forwarded to jurisdictional Central Excise Authorities to examine and submit the factual report.

Recommendation No. 6 : Department may consider suitable amendment to remove the ambiguity created due to contradictory provisions of Section 5A and Section 3 of the Central Excise Act, 1944 relating to duty leviable on domestic clearances made by EOUs."

The above views in the report of the Comptroller and Auditor General support the view that the benefit of Exemption Notification issued under Section 5A(1) of the CEA, 1944 cannot be extended for clearance of goods in DTA by EOU and show cause notices are bound to be issued to such EOUs.

4. It is pertinent to note that the EOUs clear the goods in DTA on payment of duty in accordance with the proviso to Section 3(1) of the CEA, 1944 and Notification No. 23/2003-CE dated 31.03.2003, as amended, issued under Section 5A(1) of the CEA, 1944. The opening para of the said Notification No. 23/2003-CE dated 31.03.2003 reads –

"In exercise of the powers conferred by sub-section (1) of section 5A of the Central Excise Act, 1944 (1 of 1944) (hereinafter referred to as the Central Excise Act), the Central Government, being satisfied that it is necessary in the public interest so to do, hereby exempts excisable goods of the description specified in column (3) of the Table below, and falling within the Chapter, heading No. or sub-heading No. of the First Schedule to the Central Excise Tariff Act, 1985 (5 of 1986) (hereinafter referred to as the Central Excise Tariff Act), specified in the corresponding entry in column (2) of the said Table, produced or manufactured in an export oriented undertaking or an Electronic Hardware Technology Park (EHTP) Unit or a Software Technology Park (STP) Unit and brought to any other place in India in accordance with the provisions of Export and Import Policy and subject to the relevant conditions specified in the Annexure to this notification, and referred to in the corresponding entry in column (5) of the said Table, from so much of the duty of excise leviable thereon under section 3 of the Central Excise Act as specified in the corresponding entry in column (4) of the said Table."

[underlining supplied]

The plain reading of the aforesaid Notification makes it clear that the said Notification is applicable, inter-alia , to goods produced or manufactured in an export oriented undertaking and cleared to DTA (brought to any other place in India).

Therefore, while calculating duty payable by EOU for clearance in DTA in accordance with the proviso to Section 3(1) of the CEA, 1944 and Notification No. 23/2003-CE dated 31.03.2003 (say, for example as per Sr. 2 of the Table to said Notification), if the duty equivalent to CVD portion of Customs duty is calculated by taking into consideration the effective rate provided by any other exemption notification, the duty paid by the EOU must be considered to be paid under Section 3(1) of the CEA, 1944 and Notification No. 23/2003-CE dated 31.03.2003 only . In such case, reference to such other Exemption Notification is only incidental and the duty is, in fact, paid by EOU as provided by Notification No. 23/2003-CE dated 31.03.2003, therefore, EOUs cannot be termed to have availed benefit of exemption provided by such other Exemption Notification and thereby hit by proviso to Section 5A(1) of the CEA, 1944.Therefore, the duty paid by the EOU for clearance in DTA in accordance with Notification No. 23/2003-CE dated 31.03.2003 cannot be termed as short payment of duty.

5. The issue of admissibility of benefit of exemption Notification issued under Section 5A of the Central Excise Act, 1944 while calculating additional duty (CVD) portion in aggregate duties of Customs on the goods cleared in DTA by EOUs has been clarified long back in the letter F.No. DGEP/EOU/03/2007/879 dated 02.04.2008 of the Directorate General of Export Promotion, CBEC, as follows :-

"2. The issue has been examined. EOUs are required to pay duties on their clearance to DTA equating such clearance at par with imports in terms of proviso to Section 3 of the Central Excise Act, 1944. For the purpose of calculating additional duty (CVD) on imported goods under Section 3 of the Custom Tariff Act, 1975, any general excise exemption as well as conditional excise exemption, if conditions are satisfied, would be applicable for determining the CVD liability. Thus, there is no bar in applying an exemption notification issued under section 5A of the Central Excise Act for the purpose of computation of CVD to be paid by EOUs on the goods cleared into DTA. The restriction on EOUs for applying exemptions issued under section 5A of the Central Excise Act is for the purpose that EOUs should not pay excise duty only as in the case of clearances from DTA units, unless so intended. This would render section 3 of the Central Excise Act redundant which require EOUs to pay central excise duty equivalent to the aggregate of customs duties. However, as in the case of import, wherein CVD is paid equal to excise duty as applicable, exemptions of central excise duty shall also be applicable to EOUs for computation of duty on DTA clearances.

It is, thus, viewed that there is no bar under the proviso to Section 5A ibid for considering excise exemption while calculating the additional customs duty component payable by an EOU on DTA clearances. Hence, the unit would be liable to pay duties based on applicable basic custom duty and applicable additional customs (CVD) in terms of the exemption vide Sl. No. 32 of notification No. 4/2006-CE dated 01.03.2006 on Sulphuric Acid subject to the condition 2 of the Annexure to this notification."

[underlining supplied]

The aforesaid clarification issued by the Central Board of Excise & Customs leaves no room for any doubt on the applicability of other Exemption Notifications issued under Section 5A(1) of the CEA, 1944 for the purpose of calculating applicable Additional Customs Duty (CVD).

6. The issue has also been decided by Hon'ble CESTAT in the case of Commissioner of Central Excise, Hyderabad-IV Vs. ShantaBiotechnics Ltd. [2010-TIOL-1494-CESTAT-BANG] in favour of the EOU.

Considering the above legal position, it would be in the fitness of things that SCNs issued to the EOUs on this issue be decided accordingly. Board may like to clarify the legal position so that pending matters be disposed of well before we embark on to the GST bandwagon.

(The author is a Superintendent of Central Excise & the views expressed are strictly personal.)