DECEMBER 17, 2008

By A Netizen

THE State, which is represented by the Departments, can only speak with one voice - 2005-TIOL-100-SC-CT

It is not known as to how much foreign exchange the SEZs are likely to earn for the country, but the amount of litigation they generate is sure to earn enough money to the consultants. Many instances of controversies surrounding SEZs have been covered in TIOL earlier, and the latest one is likely to put two wings of CBEC- Directorate of Revenue Intelligence (DRI) and Central Excise department- in direct conflict. Having clearly defined roles and exclusive domains of control, there should not be any conflict of interest between these two wings of CBEC. The interpretation of SEZ Act has already resulted in dispute between the trade and the department and now it seems to put two wings of CBEC against each other.

A quick flash back:

Netizens are well aware that soon after imposition of export duty on Iron and Steel products by the Central Government (effective from 10/05/2008 vide Notification No. 66/08-Cus) a doubt has arisen whether this export duty would be applicable to clearances made by DTA units (Iron & Steel Units) to SEZ Units/SEZ Developers. The issue was widely debated and there were views both for andagainst, and extensively covered in TIOL as well as in the pink media. The trade in iron & steel manufacturing industry had even taken up the matter with Ministry of Finance for clarification through Commerce Ministry. The Ministry of Commerce vide its letter dt. 30/06/2008 has finally communicated the decision of the Department of Revenue that export duty is applicable on clearances made to SEZs by DTA Iron and Steel units. As the issue was not free from doubt and also as the issue was under consideration by both ministries, the manufacturers did not discharge any export duty on clearances made to SEZ

When so much of this information (i.e non-payment of export duty by steel units) was very much available in the public domain, the DRI had to ‘gather intelligence “about non –payment of export duty by steel units and after grilling the persons in-charge of steel units in DRI style (as if they are notorious smugglers) the intelligence wing had booked cases against steel units for non-payment of export duty. As the trade is still holding the view that export duty is not liable to be paid on clearances made to SEZs, the trade, having no other option to protect against DRI onslaught, have approached various High Courts, and obtained stay against recovery of export duty and the matter is awaiting final decision by the courts. In the meanwhile the Govt. has amended Notification No. 66/2008-Cus by Notification No. 115/2008-cus dt. 31/10/2008 and export duty on Iron & Steel products has been withdrawn.

The flash point:

Even as the issue is waiting to be resolved by the courts, the other wing of the CBEC - Central Excise department - is sharpening its brains by interpreting CENVAT Credit Rules, 2004-especially the provisions relating to Rule 6 of CCR – to see if everything was right with the Iron & steel units' utilization of CENVAT Credit on the inputs used in the manufacture of iron steel products cleared to SEZ units/Developers.

For easy reference the provisions relating to Rule 6 of CCR on which Central Excise is concentrating is given below:

“6. Obligation of manufacturer of dutiable and exempted goods and provider of taxable and exempted services. - [(1) The CENVAT credit shall not be allowed on such quantity of input or input service which is used in the manufacture of 35b [exempted goods or for provision of exempted services, except in the circumstances mentioned in sub-rule (2).]

[Provided ……………………………………………….

(2) Where a manufacturer or provider of output service avails of CENVAT credit in respect of any inputs or input services, and manufactures such final products or provides such output service which are chargeable to duty or tax as well as exempted goods or services, then, the manufacturer or provider of output service shall maintain separate accounts for receipt, consumption and inventory of input and input service meant for use in the manufacture of dutiable final products or in providing output service and the quantity of input meant for use in the manufacture of exempted goods or services and take CENVAT credit only on that quantity of input or input service which is intended for use in the manufacture of dutiable goods or in providing output service on which service tax is payable.

(3) Notwithstanding anything contained in sub-rules (1) and (2), the manufacturer of goods or the provider of output service, opting not to maintain separate accounts, shall follow either of the following options, as applicable to him, namely:-

(i) the manufacturer of goods shall pay an amount equal to ten per cent , of value of the exempted goods and the provider of output service shall pay an amount equal to eight per cent. of value of the exempted services; or

(ii)……………………………………………. “

This Rule 6 of CCR at sub-rule (6) mentions that maintenance of separate accounts is not required if the exempted goods/clearance are falling under any of the following categories.

The sub rule reads as follows:

(6) The provisions of sub-rules (1), (2), (3) and (4) shall not be applicable in case the excisable goods removed without payment of duty are either-

(i) cleared to a unit in a special economic zone; or

(ii) cleared to a hundred per cent. export-oriented undertaking; or

(iii)cleared to a unit in an Electronic Hardware Technology Park or Software Technology Park; or

(iv) supplied to the United Nations or an international organization …………….

(v) cleared for export under bond in terms of the provisions of the Central Excise Rules, 2002; or

(vi) gold or silver falling within Chapter 71 of the said First Schedule,…..

(vii) all goods which are exempt from the duties of customs leviable under the First Schedule to the Customs Tariff Act, 1975 (51 of 1975)……………..”

It is the very interpretation of this particular sub-rule which is going to be a bone of contention between DRI and Central Excise in the days to come. According to DRI, all clearances to SEZ including those made to ‘SEZ Developers' will constitute ‘exports' and hence liable for payment of export duty. Whereas the Central Excise department is holding a different view in respect of clearances made to ‘SEZ developers' according to which such clearances do not constitute ‘export' and therefore not covered under any of the exclusion categories mentioned under Rule 6(6) of CENVAT Credit Rules (Please refer above). The big bosses of the department are of view that iron & steel units have to maintain separate accounts as mandated under Rule 6 or they have to pay 10% or reverse proportionate CENVAT credit as per the formula given under the rule in respect of clearances made to ‘SEZ developers' [This view is appears to have been taken basing on the Addl. Director General (EP) letter F.No.DGEP/SEZ/473/2006 dt. 3/04/2006]. Instructions were already issued to the field formations to verify this aspect and to take necessary action.

What is ‘export' for DRI is not ‘export' for Central Excise

As per the DRI interpretation of the SEZ Act, all clearances including those made to ‘SEZ Developers' would constitute export. As an extension of this interpretation the clearances made to ‘SEZ developers' would automatically be covered under clause ((v) of Rule (6)(6) of CCR -cleared for export under bond in terms of the provisions of the Central Excise Rules, 2002- and there should not be any issue on this count. However, the Central Excise department appears to be not in agreement with DRI view on clearances made to SEZ developers (or the department is not serious about the case booked by DRI). According to the Central Excise Department, such clearances are out of the ambit of Rule 6 (6) (v) - to put it in simple terms the clearances to ‘SEZ developers' are not to be treated as exports. Thus what constitute ‘export” for DRI under SEZ Act is not ‘export' for the Central Excise under Rule 6 of CCR, strange as it may sound , but the steel units are in for another round of trouble, this time from Central Excise wing cornering them for not following tenants of Rule (6) of CCR.

Job of the consultants now made easy

While on one hand the CBEC is defending cases (booked by DRI) before the courts by taking a stand that all clearances to SEZs (both to the Units and developers) as constituting exports, on the other hand a wing within its fold (department of central excise) wants the units to maintain separate accounts for the clearances made to SEZ developers as per the requirement of Rule 6 of CCR or to pay 10% amount. If the Central Excise wing also starts issuing notices (or even a letter) to steel units demanding 10% ‘amount' under Rule (6) of CCR on the clearances made to “SEZ developers”, it will certainly make the job of consultants, already defending against the cases of DRI, easy. The consultant can give reply to the SCN issued by DRI by sending a copy of SCN issued by Central Excise (holding a view that clearances to SEZ developers as not constituting export) demanding ‘amount' under Rule 6 of CCR. The consultants can easily convince the courts that DRI interpretation of the SEZ Act as not correct by simply bringing to the knowledge of the court the divergent stand taken by the central excise department on similar issue. If this happens the fate of the DRI case, having booked after collecting so much of intelligence, is anybody's guess. It is a clear case of confusion prevailing with in the mind of departmental officers, who are expected to clear the doubts of the trade.

If the DRI is wishing to protect its case, the immediate job it has to do is to take up the issue with their own brethren in Central Excise department pleading with them not to initiate any action under Rule (6) of CCR till the courts decide the matter pending before them – i.e whether clearances to SEZ constitute “export” as contended by DRI.

Trade to welcome notice under Rule 6 from Central Excise:

The trade will be a happy lot in case the central excise department proceeds to issue notice (or even letters) demanding them to pay amount under Rule 6 of CCR on the clearances made to ‘SEZ developers' as this will only strengthen the view of the trade -that clearances to SEZ as not constituting ‘export' . The Courts will definitely take note of the two different stands taken by the department on the same issue and the cases pending before the courts are likely to go in favour the trade. If the trade wins the case against the levy of export duty on SEZ clearances, they will be happy to discharge ‘amount ‘ under Rule 6 of CCR as demanded by central excise since duty burden under Rule 6 of CCR will be much less compared to export duty demanded (by the DRI). This is because the clearances to ‘SEZ units' is any way covered under the exclusion category under Rule 6(6(1) of CCR and the only liability under rule 6 will be against the clearances made to ‘SEZ developers' which may not be substantial (if the formula given in the rule 6 of CCR is followed).

Even though the government has withdrawn export duty on steel products by Notification No.115/2008-cus dt. 31/10/2008., the controversy it generated is here to stay for days to come. It is very interesting to wait and watch as to how the situation will unfold before the courts take up the issue for final hearing. Till such time the controversy will only bring more revenue to the consultants.