BANGALORE, JAN 27, 2014: THIS appeal is preferred against the order passed by the CESTAT (2007-TIOL-1827-CESTAT-BANG) holding that Sugar Cess being a duty of excise in terms of Section 3(4) of the Sugar Cess Act, CENVAT Credit Rules are also applicable to Sugar Cess and therefore CENVAT credit taken on Sugar Cess paid as countervailing duty or CVD is proper and the assessee is entitled to the said benefit of CENVAT Credit.

The assessee M/s Renuka Sugars Ltd. imported 260450 quintals of raw sugar during October 2003 to Feb 2004. They paid Rs.36,46,300/- as cess leviable under Sugar Cess Act, 1982 as part of countervailing duty. They further availed CENVAT Credit of the said amount paid as per Clause (vii) of Rule 3 sub-Rule (1) of CENVAT Credit Rules 2004. According to them the Manufacturer is allowed to take credit of additional duty leviable under Section 3 of the Customs Tariff Act, 1975, equivalent to the duty of excise specified under Clause (i), (ii), (iii), (iv), (v) and (vi) of Rule 3(1) of the said Rules.

Sugar Cess is not specified under Rule 3 of the CENVAT credit Rules, 2004 as being eligible for being taken credit of. Therefore, a show cause notice dated 05.05.2006 was issued to the assessee asking them to show cause as to why the irregularly availed and utilized CENVAT Credit should not be recovered under Rule 12 of the CENVAT Credit Rules, 2004 along with interest and why penalty should not be imposed for the said contravention.

The Additional Commissioner of Central Excise, Belgaum, vide his order in original dated 09.08.2006 observed, “there exists explicit provision under Rule 3(1)(vii) of CENVAT Credit Rules 2004 for allowing to take credit of additional duty of customs equivalent to specified duties and these specified duties are: Duty of Excise and Special Excise Duty, Additional Duty of Excise, National Calamity Contingent Duty and Education Cess specified under Central Excise Tariff Act, 1985; Section 3 of Additional Duties of Excise Act; 1979; Section 3 of the Additional Duties of Excise Act, 1957; Section 136 of the Finance Act, 2001; and Clause 81 read with Clause 83 of Finance Act, 2004 respectively. It is only those duties and additional duties which are eligible for availment of credit. The cess leviable under the provisions of the Act is not at all specified under Rule 3(1)(vii) of the said Rules as eligible for taking Cenvat Credit”. Therefore, he did not find any merit in the assessee's contention and upheld the demand raised in the show cause notice.

Aggrieved, the assessee preferred an appeal before the Commissioner (Appeals), Mangalore. The appeal came to be rejected by an order dated 03.01.2007 upholding the demand of the Additional Commissioner. Aggrieved by the said order, the assessee preferred an appeal to the CESTAT. The Tribunal held that, when the provisions of the Central Excise Act and the Rules made there under are made applicable to the Sugar Cess Act in terms of section 3(4) thereof, then it goes without saying that the provisions of CENVAT Credit Rules would also be applicable. The CENVAT Credit Rules are framed by virtue of the powers derived from the Central Excise Act. Therefore, there is nothing wrong in taking credit of the sugar cess paid as countervailing duty on imported sugar and when such credit is utilized for payment of duty when the final products are cleared from the factory. Therefore, the Tribunal set aside the order of the authorities below and upheld the action of the assessee in availing CENVAT Credit.

Aggrieved by the said order of the Tribunal, the Revenue is in appeal before the High Court.

This appeal came to be admitted on 11.03.2008 to consider the following substantial question of law:

"(1) Whether the assessee is entitled for Cenvat Credit, on the Sugar Cess (under Section 3(4) of the Sugar Cess Act, 1982) as the same is not one of the duties allowed for Cenvat Credit under Rule 3(1) of the Cenvat Credit Rules, 2004?"

Revenue Contention : the cess levied and collected under the Act does not partake the character of a duty of excise. It is in the nature of a fee, for rendering specific service as contemplated under the Sugar Development Fund Act, 1982 and therefore the assessee is not entitled to the benefit of CENVAT Credit. Secondly, to be eligible to claim CENVAT credit the cess paid under the Act should have been included in Rule 3 and a reference to the Act is conspicuously missing in Rule 3 of the CENVAT Credit Rules.

Assessee's Contention : the cess levied and collected under the Act is nothing but a duty of excise on the sugar produced by the assessee; the levy of such cess is an addition to the duty of excise leviable on sugar under the Central Excise Act, 1944 or any other law for the time being in force. Sub Section (4) of Section 3 of the Act incorporates the provisions of the Central Excise Act and the Rules made thereunder in relation to the levy and collection of duty of excise on sugar in the Act. Therefore, by virtue of Section 2A of the Central Excise Act, 1944 the cess paid under the Act which is in the nature of a duty of excise shall be construed to include Central Value Added Tax, i.e., CENVAT. Therefore, the assessee is entitled to the benefit of CENVAT Credit as held by the Tribunal.

High Court Findings :

Fee or Tax : In order to answer the substantial question of law, first it is necessary to find out whether the cess paid under the Act is a fee or a tax. The Act was enacted to provide for imposition of cess on sugar for the development of sugar industry and for matters connected therewith.

The High Court observed,"The wordings used in Section 3 of the Act makes it clear that, although a cess is levied and collected for the purpose of the Sugar Development Fund Act, 1982, it is in the nature of a duty of excise on all sugar produced by any sugar factory in India. The duty of excise levied under sub-Section [1] shall be in addition to the duty of excise leviable on sugar under the Central Excise Act or any other law for the time being in force as is clear from sub-Section (2). The way sub-Section (2) is worded makes it clear that what is levied and collected as a cess under sub-Section (1) of Section 3 is characterized as a "duty of excise" levied under "the Central Excise Act". Further, sub-Section (4) makes it clear that the provisions of the Central Excise Act and the Rules made thereunder including those relating to refunds and exemptions from duty shall, so far as may be, apply in relation to the levy and collection of the said duty of excise as they apply in relation to the levy and collection of the duty of excise on sugar under that Act. In other words, the provisions of the Central Excise Act and the Rules made there under are read into the Act. Levy and collection of cess under the Act is treated as levy and collection of a duty of excise on sugar under the Central Excise Act. "

The High Court referred to several judgements of the Supreme Court to arrive at the above conclusion. The High Court further observed, "it is clear that the traditional view that there must be actual quid pro quo for a fee has undergone a sea change in the recent years. The tax recovered by a public authority invariably goes into the Consolidated Fund, which ultimately is utilized for all public purposes. Whereas, a cess levied by way of fee is not intended to be, and does not become, a part of the Consolidated Fund. It is earmarked and set apart for the purpose of services for which it is levied ."

The High Court noted that the cess collected under the Act invariably goes to the Consolidated Fund, which ultimately is utilized for all public purposes. Therefore, there is no quid pro quo between the cess levied and collected and the services rendered for such payment. On the contrary, the proceeds are credited to the Consolidated Fund of India which is meant to be utilized for all public purposes, may be including the purpose contemplated under the Sugar Development Fund Act, 1982 . And emphatically held,"the cess imposed under the Act is a duty of excise or a tax. The contention that it is a fee and the assessee is not entitled to CENVAT credit has no substance. Therefore, the sugar cess paid under the Act is tax, and to be precise it is DUTY OF EXCISE and not FEE ."

CENVAT Credit of Cess : It was fairly submitted by the counsel for the Revenue that if the cess paid under the Act is held to be a duty of excise or a tax, then the assessee is entitled to the credit of such duty/tax paid. The High Court observed,"The Excise Duty on sugar is payable under two enactments, i.e., [1] Section 3 of Central Excise Act of 1944, at the rate prescribed in the Central Tariff Act, 1985. In addition, the assessee is also liable to pay cess as a duty of excise under the Sugar Cess Act of 1982. On such additional duty or CVD paid at the time of import by the assessee, apart from the Basic Customs Duty, he is entitled to the CENVAT Credit in terms of clause (vii) of Rule 3 of CENVAT Credit Rules, 2004 ."

Held : the assessee was entitled to claim CENVAT credit in respect of the cess paid as additional duty (CVD) on raw sugar imported under the Sugar Cess Act of 1982 read with Section 3 of the Customs Tariff Act, 1975. Therefore, the substantial question of law is answered in favour of the assessee and against the Revenue.

(See 2014-TIOL-98-HC-KAR-CX)