By TIOL News Service

NEW DELHI, FEB 19, 2018: THE petitioners filed a writ petition for quashing of Notification No. 22/2015-CE(NT) dated 29th October, 2015 as violating Articles 14, 19(1)(g), 265 and 300A of the Constitution of India, and for direction that the credit accumulated on account of Education Cess (EC, for short) and Secondary and Higher Education Cess (SHE, for short) should be allowed to be utilised for payment of service tax leviable and payable on telecommunication services.

EC and SHE were abolished and were not payable on excisable goods with effect from 1st March, 2015 vide Notification Nos. 14/2015-CE and 15/2015-CE. They were also abolished and ceased to be payable on taxable services when Section 95 of Finance Act (No. 2) 2004 and Section 140 of Finance Act, 2007 were omitted by Finance Act, 2015.

As a result, levy of EC and SHE on excisable goods was withdrawn with effect from 1st March, 2015 and in respect of taxable services with effect from 1st June, 2015 [ 14/2015-ST refers].

The grievance of the petitioners is and they claim a vested right to avail benefit of the unutilized amount of EC or SHE credit, which was available and had not been set off as on 1st March, 2015 and 1st June, 2015 for payment of tax on excisable goods and taxable services respectively.

The contention is that EC and SHE were subsumed in the Central Excise Duty, the general rate of which was increased from 12% to 12.5%, and service tax, which was increased from 12.36% to 14%. Reliance is placed upon the Budget Speech of the Finance Minister and the memorandum explaining provisions of Finance Bill, 2015.

Reference is also made to the TRU letter F.No. 334/5/2015-TRU dated 28th February, 2015, which reads:-

"The rate of Service Tax is being increased from 12% plus Education Cesses to 14%. The 'Education Cess' and 'Secondary and Higher Education Cess' shall be subsumed in the revised rate of Service Tax. Thus, the effective increase in Service Tax rate will be from the existing increase in Service Tax rate will be from the existing rate of 12.36% (inclusive of cesses) to 14%, subsuming the cesses"

Support is drawn for their submission from the decisions in Eicher Motors Limited and Another - 2002-TIOL-149-SC-CX-LB and Samtel India Limited - 2003-TIOL-40-SC-CX .

They also advert to the letter No. 96/85/2015-CX.I dated 7th December, 2015 wherein it is conveyed thus -

"B.21 Discussion & Decision

The conference after discussion and briefing from the officers from the Board noted that it was Government's conscious policy 'decision to withdraw the Education Cess and Secondary & Higher Education Cess. It is a policy decision to not allow utilization of accumulated credit of education cess and secondary and higher education cess after these Cesses have been phased out. As these Cesses have been phased out and no new liability to pay such Cess arises, no vested right can be said to exist in relation to the accumulated credit of the past. The rule and notifications as they exist need to be followed and do not need any amendment."

Inasmuch as it is submitted that the aforesaid reasoning is fallacious and contrary to law in view of the admission that EC and SHE were subsumed in the increased or higher excise duty and service tax rates applicable, which coincide with the withdrawal of EC and SHE.

In support, reference is made to the amended CENVAT Credit Rules, 2004, by the second amendment of 2015 and the fifth amendment of 2015 which partially permit utilization of EC and SHE by adding six provisos in Rule 3, sub-rule (7) in clause (b) [Notifications 12/2015-CX(NT) and 22/2015-CX(NT) refers].

The High Court inter alia observed -

++ The repeal/omission in the present case was not made retrospectively, but applied prospectively. Manufacturers and output service providers were entitled to take benefit of EC and SHE credit on the EC and SHE payable on manufactured goods and output services on or before the cut off date, i.e., 1st March, 2015 in case of manufactured goods and 1st June, 2015 in case of taxable services. They have not been allowed to take credit after the said two dates for the simple reason that EC and SHE ceased to be applicable and were no longer payable after the said dates.

++ The provisos added to Rule 3, sub-rule (7) in clause (b) are really in the nature of concessions confined to a limited and narrow set of cases and are not of general application. Noticeably, they expand the scope and give benefit of utilization of accumulated EC and SHE against payment of excise duty and service tax, which was not the position prior to 1st March, 2015 and 1st June, 2015, respectively. It is also easily apparent as to why the said benefit or concession was granted. These cases certainly fall in a distinct and separate class. The said classification would not fall foul of vice of discrimination. Article 14 is not offended. In fact the petitioners do not challenge and question the provisos, albeit seek additional benefit and concession beyond those granted, even though they were never available earlier.

++ It would not be correct to understand and interpret the word "subsumed" used as asserted by the petitioners … Any exercise of increasing taxes and withdrawing a cess or a tax is undertaken keeping in mind several aspects. This can include revenue collection in the form of increased taxes on one hand, and withdrawal or reduction of cess or another tax so as to curtail the adverse impact due to increase. Budgets do, and are, a balancing exercise.

++ We would not read and hold that EC and SHE for excisable goods and taxable services had continued and were applicable even after 1st March, 2015 or 1st June, 2015 respectively, in the manner that they got included in, and formed a part of, the higher tax rate applicable to excise duty and service tax. Noticeably, the service tax rate had gone up by 2%, from 12% to 14%, with the intent to increase it further in view of implementation of the General Goods and Services Tax in future . In the case of excise duty, the increase was only marginal, from 12% to 12.50%.

++ Pertinently, no statement or assertion was made that the benefit of unutilized EC and SHE credit would be given against excise duty and service tax. The use of the words "subsumed" with reference to the two cesses could well indicate that there would not be an increased tax burden being put on the payers or the consumers, as EC and SHE were being withdrawn. Noticeably, the two cesses and the excise duty and the service tax were always treated as different and separate and cross-utilization was never permitted.

++ Use of the word "subsumed" in the context of the present case does not help and assist the petitioners in the manner asserted. No promise and statement that cross utilization of EC and SHE would be permitted was made. The petitioners seek an addition and expansion to what was stated and intended.

Viewing that the decision in Eicher Motors Limited and Another (supra) (distinguished in the case of Osram Surya (P) Ltd. - 2002-TIOL-64-SC-CX and Samtel India Limited (supra) are distinguishable and inapplicable, the Writ Petition was dismissed as being bereft of any merits.

In passing: To know more about the issue, kindly read - The Board's Bombshell - Balance of Credit of Education Cess will LAPSE!!!!

(See 2018-TIOL-310-HC-DEL-ST)