MAY 29, 2019

By Kalirajan D, Advocate

WILL there be any duty liability when the value on which such duty payable is Zero? Can the export incentives be reduced without any authority of law? Whether the exemption notification can be read to exempt the tax element which is not appearing in such notification? The obvious answer to these questions is 'No'. However, the Customs House at several ports are taking a view that the answer can be 'Yes' with respect to payment of Social Welfare Surcharge when the imports are against the Duty Credit Scrips.

The Central government, under the Foreign Trade Policy 2015 - 20 (in short 'the FTP') has announced the Merchandise Export from India Scheme (in short, 'the MEIS') and the Service Export from India Scheme (in short, 'the SEIS '). Incentives under the MEIS and SEIS are given in the form of Duty credit scrips (in short, 'Scrips'). These scrips facilitate inter alia duty-free import of the goods other than those specified under Appendix 3A of Handbook of Procedures (in short, 'the HBP '). The Central Government has issued Notification No. 24/2015-Cus., and 25/2015-Cus., both dated 08.04.2015 exempting the goods imported against the Scrips from Basic Customs duty (BCD), Countervailing duty (CVD) and Special Additional Duty (SAD). The said exemption notifications do not cover any other duty and tax elements viz., IGST, Social Welfare Surcharge (SWS), etc.

Now the question is whether SWS is payable when the goods are imported against these Scrips. The Central government has imposed a duty of customs called 'SWS' vide Section 110 of the Finance Act, 2018, w.e.f. 02.02.2018. The said Section also prescribes the value on which the SWS should be calculated. SWS should be calculated @ 10% on the aggregate of duties, taxes and cesses which are levied under Section 12 of the Customs Act, 1962 and any sum chargeable as an addition to a duty of customs, except IGST, Compensation cess, Safeguard duty, Countervailing duty and anti-dumping duty. In effect, SWS is calculated @ 10% on the value of BCD.

In the case of SRD Nutrients Pvt Ltd., v. Commissioner of Central Excise, Guwahati reported in - 2017-TIOL-416-SC-CX, the Hon'ble Supreme Court has held that Education Cess as a surcharge, is levied @ 2% on the duties of excise. When there is no excise duty payable, as it is exempted, there would not be any Education Cess as well, inasmuch as Education Cess @ 2% is to be calculated on the aggregate of duties of excise. There cannot be any surcharge when basic duty itself is Nil.

It was clarified by the CBIC vide Circular dated 10.08.2004 that if goods are fully exempted from excise duty or customs duty, or chargeable to NIL duty or are cleared without payment of duty under specified procedure such as clearance under bond, there is no collection of duty. Thus, no education cess would be leviable on such clearances. The CBIC has reiterated the same under the Circular dated 08.04.2011 and clarified that since Education Cess is levied and collected as percentage of service tax, when and wherever service tax is NIL by virtue of exemption, Education Cess would also be NIL.

SWS is also levied as a surcharge on the value of BCD. When the value of BCD becomes Nil, no SWS would be payable. It can, therefore, be inferred that when the BCD is exempt while importing goods against the MEIS Scrip, no SWS is payable and accordingly, no debit of SWS in Scrips is warranted.

However, as mentioned, certain Customs Houses are debiting the value of SWS which is arrived based on the notional value of BCD, while debiting the value of BCD in the Scrips. It reduces the duty credit entitlement of an importer which, otherwise, could have been used for claiming exemption of BCD on subsequent imports. A few customs houses have even issued letters demanding SWS which is debited in the Scrips on the ground that the said notifications do not exempt SWS.

Debiting Education cess in DEPB Scrips

Similar issues arose under the pre-GST regime too with respect to debiting the value of Education cess in the DEPB scrips. The CBIC vide Circular No. 5/2005-Cus., dated 31.01.2005 had clarified that in the case of imports under DEPB Scheme, Education Cess @ 2% would also be debited from the DEPB scrip, while debiting the value of duties of customs viz., BCD, SVD & SAD. However, in plethora of cases, the Hon'ble High Courts have held that debiting the value of Education cess in the DEPB scrip is not warranted since the value of BCD would become 'nil' when goods are imported against the DEPB Scrip. The Hon'ble High Court of Gujarat in the case of Gujarat Ambuja Exports Ltd., v GOI reported in - 2012-TIOL-546-HC-AHM-CUS has quashed the portion of circular dated 31.01.2005 (supra) to the extent it insists for debiting the value of Education cess in the DEPB Scrips, on the ground that no Customs duty is payable when goods are imported under the DEPB Scrips. Subsequently, the Hon'ble High Court of Gujarat has followed aforesaid decision in the case of Commissioner of Customs v. Pasupati Acrylon Ltd., reported in - 2012-TIOL-1228-HC-AHM-CUS, which has been affirmed by the Hon'ble Supreme Court.

It is evident that these Customs Houses are taking a view which is contrary to the settled position of law. It will lead to unnecessary litigation on multiple aspects viz., whether SWS is payable on the notional value of BCD, whether the SWS can be debited/paid by utilising scrips which is not specifically exempt by the relevant notifications, and if SWS is not payable, then claims for refund of SWS debited in the Scrips, etc. In order to avoid such trade difficulties and unnecessary disputes, the Board may issue appropriate clarification on the subject matter in light of the judgements of various High Courts and its earlier circulars.

(Author is associated with Lakshmikumaran and Sridharan and views expressed in the article are strictly personal.)