JANUARY 31, 2020

By Nivedha Mohan (Associate) & Rohan Muralidharan (Principal Associate), Lakshmikumaran & Sridharan, Chennai

A deep dive into tax jurisprudence will reveal that landmark judgements having far reaching ramifications have always emerged from the interpretation of one particular 'word' or 'phrase'. One such judgement is that of the Single Judge Bench of the Hon'ble Madras High Court in Gemini Edibles & Fats India P. Ltd.,- 2020-TIOL-26-HC-MAD-CUS. The issue that came up for examination before the High Court was whether Social Welfare Surcharge (SWS) which is levied as a percentage of Basic Customs Duty (BCD) is payable on imports made against Merchandise Exports from India Scheme (MEIS) and Service Exports from India Scheme (SEIS) duty credit scrips.

Legal Background

MEIS and SEIS were introduced as export incentives under Chapter 3 (Exports from India Schemes) of the Foreign Trade Policy 2015-20 (FTP). On undertaking exports from India, the exporter will be entitled to a scrip viz. MEIS or SEIS computed as a percentage of FOB value of exports which can be debited for claiming exemptions from payment of customs duty on future imports. To operationalize the said schemes, the Central Government issued Notifications No. 24/2015-Cus and 25/2015-Cus dated 08.04.2015 in exercise of the powers conferred under Section 25 of the Customs Act, 1962, to inter alia, provide for exemption from the whole of BCD to goods imported against MEIS and SEIS scrips respectively. However, the exemption is subject to the condition that the scrips will have to be debited at the time of import to the extent of the exemption claimed.

SWS was introduced under Chapter VI of the Finance Act, 2018. Section 110(1) of the Finance Act provides for the levy and collection of SWS on the goods specified in the First Schedule to the Customs Tariff Act, 1975 being imported into India, to fulfil the commitment of the Government to provide and finance education, health and social security. Section 110(3) provides that the SWS shall be calculated at the rate of 10% on the aggregate of duties, taxes and cesses which are "levied and collected" by the Central Government under Section 12 of the Customs Act.

Dispute

Various Importers across the country have adopted a position that debit of BCD from scrips tantamount to an exemption and the levy of SWS, being calculated as a percentage of BCD, will not be attracted. On the other hand, the Revenue has been contending that for discharging SWS liability, the importer will have to debit the scrip to the extent of the SWS amount payable in addition to his BCD liability.

This issue came up before the Hon'ble Madras High Court in Gemini Edibles, - 2020-TIOL-26-HC-MAD-CUS wherein the Court held that debit of BCD from the scrips does not lead to a conclusion that the goods are exempted from BCD, and as a consequence, SWS which is levied as a percentage of BCD, is payable by the importer. Going a step further and over and above the contention of the Revenue, the High Court, by placing reliance on the recent decision of the Apex Court in Unicorn Industries, - 2019-TIOL-528-SC-CX-LB, held that SWS must be paid in cash or through some other mode and cannot be paid by debiting the scrip.

This decision will have huge implications on the industry and may lead to acute working capital impact. Through this article, the authors attempt to summarize the findings of the Hon'ble High Court and provide their views on the same.

Observations made by the Madras High Court

1. While analysing whether SWS is an independent levy or whether it is the same as the parental levy viz., the BCD, the Court held that, in light of the recent decision of the Apex Court in Unicorn Industries, SWS will be considered as an independent levy under Section 110 of the Finance Act, 2018 and will not be treated as BCD levied under Section 12 of the Customs Act, 1962.

2. The Court negated the argument of the importers that debit of BCD from the scrips tantamount to an exemption. In this regard, the Court observed that Notifications 24 & 25 of 2015 dated 08.04.2015 which provide for the debit of MEIS and SEIS scrips is not an exemption from BCD per se, rather it is an exemption from payment of BCD in cash. Thus, it was held that BCD is still payable albeit by way of debit in the scrips. Further, relying on Para 3.02 of the FTP 2015-2020, it was held that debit in the scrip amounts to 'payment'.

3. The Court further observed that the MEIS and SEIS are incentives provided by the Government to the importers, by way of neutralizing the incidence of customs duty on the import component of the export product. Though it may give an impression that it is an act of 'duty foregone', it is just a manner of giving back the duty amount already suffered by the importer. The Court pointed out that, if duty was exempted, there would have been no requirement to pay the duty in any form, which includes debiting the scrip.

4. To draw support for the above view, the Court placed reliance on the decision of Hon'ble Madras High Court in Tanfac Industries,- 2009-TIOL-291-HC-MAD-CUS which has been affirmed by Hon'ble Supreme Court, wherein it was held that debits made under the DEPB scheme is a mode of payment of duty on the imported goods and cannot be treated as exempted goods.

5. After holding the above, the Court proceeded to analyze if the Revenue is justified in making debit entry towards SWS out of the value of the scrips, apart from debiting the BCD.

6. The Court noted that Notifications 24 & 25 of 2015 entitle the importer/permit the Revenue to debit only BCD and Additional Duties under Section 3 of the Customs Tariff Act. Thus, even assuming that the Notifications provide exemption from the payment of BCD, by placing reliance on Unicorn Industries, the Court observed as follows - SWS being an independent levy, that too under a different enactment, can still be determined on the BCD value and hence would be payable, and the exemption from BCD will not bar the determination of SWS.

7. It was finally concluded that since the exemption Notifications do not provide for debit of SWS from the Scrip, the Revenue is not empowered to debit the scrip for discharging the SWS liability and the same will have to be paid in cash or any other manner.

Analysis of the Judgement:

(I) Whether debit from MEIS and SEIS Scrips amount to payment?

The Court held that Notifications 24 and 25 of 2015 dated 08.04.2015 exempts only payment of BCD in cash, nonetheless BCD is still payable by way of debiting the value of the scrips on each incidence of import.

In our humble view, while making the above observations, the Court has not considered the provisions of Section 25 in its letter and spirit. A Notification issued under Section 25 cannot provide for an exemption from manner of payment by providing for an alternate mechanism for payment. Section 25 of the Customs Act empowers the Central Government to issue notifications - conditional or unconditional to provide exemption from whole or part of BCD. Notifications 24 & 25 of 2015 provide for exemption from whole of BCD, subject to the condition that the scrip has to be produced before the officer of customs for debit of the duties leviable on the goods. Therefore, Notifications 24 & 25 of 2015 indeed provide exemption from payment of BCD and the scrip is just a mechanism to quantify the exemption and does not amount to payment of duty.

(II) Whether MEIS and DEPB Scrips are similar in nature?

The Court observed that the DEPB scheme is akin to MEIS and SEIS scrips and, therefore, held that both these schemes provide incentives to the importers by way of duty neutralization. In our view, the analogy drawn between MEIS/SEIS and DEPB scrips may be misplaced as the former (unlike the latter) is not towards duty neutralization; rather it is an export reward. MEIS, was introduced under Chapter 3 of the FTP 2015-2020 under the heading "Export from India Schemes" whereas the DEPB scheme was introduced under Chapter 4 of the FTP 2004-09, under the heading "Duty Exemption and Remission Schemes". The objective of the DEPB scheme was to neutralize the incidence of customs duty on import content of the export product, whereas the objective of the MEIS is to provide rewards to exporters to offset infrastructural inefficiencies and associated costs. Therefore, the Court has undoubtedly erred in juxtaposing MEIS/SEIS Scrips with DEPB Scrips and treating both the scrips at par with each other.

(III) Whether reliance placed on Tanfac Industries by the Court is correct?

By drawing an analogy with DEPB scrips, the Court has relied on the decision of the Hon'ble Madras High Court in Tanfac Industries (supra) to hold that imports made under the MEIS and SEIS cannot be treated as exempted goods, and debit of duty credit scrips issued under these schemes amount to payment of duty. The Court has also proceeded on the assumption that Tanfac Industries has been affirmed by Hon'ble Supreme Court. In our view, it is incorrect to state that Tanfac Industries was affirmed by Hon'ble Supreme Court as the same was a case of SLP dismissal. It is a settled principle of law that Appeals dismissed by the Hon'ble Apex Court at SLP stage will not lead to a conclusion that the judgement has been affirmed/upheld by the Supreme Court. The Apex Court has elaborately dealt with the effect of acceptance or rejection of an SLP in the case of Kunhayammed .v. State of Kerala, - 2002-TIOL-50-SC-LMT-LB and has held that, when there is a refusal of special leave to appeal, in a non-speaking order, i.e. an order that does not assign reasons for dismissal of the SLP, it does not amount to a declaration of the law as laid down by the SC, since there is no law that has been declared.

At this point, it becomes relevant to peruse the judgement of Kedia Overseas, - 2011-TIOL-1063-HC-AP-CUS wherein the Hon'ble High Court of Andhra Pradesh has observed that Education Cess was not leviable in respect of duty free imports under the DEPB scheme. The Appeal against the above judgement was also dismissed by the Supreme Court at the SLP stage - 2012-TIOL-142-SC-CUS. It is pertinent to note that the facts in the case of Tanfac Industries dealt with the interest payable on delayed clearance of warehoused goods when duty was paid by way of debit in the DEPB scrip; whereas in Kedia Overseas the issue was whether a surcharge on BCD will be payable when BCD is debited against the DEPB Scrip. Therefore, if Tanfac Industries is said to have been affirmed by the SC, so should be the case with respect to Kedia Overseas which is similar to the facts of the present case.

Reliance placed on DCW Ltd., - 2013-TIOL-1298-HC-MAD-CUS and Gujarat Ambuja, - 2012-TIOL-546-HC-AHM-CUS by the Petitioner has not been accepted by the Madras High Court based on the affirmation of Tanfac Industries by the SC. This in our view is incorrect as the same was a case of SLP dismissal only and cannot be construed as an affirmation by the SC.

(IV) Whether reliance placed on Unicorn Industries is correct?

The Court has placed heavy reliance on the decision of the Larger Bench of the Supreme Court in Unicorn Industries to state that SWS is an independent levy and does not take the colour of the parent levy, viz. BCD, and therefore the same is not exempted and will have to be paid independent of the exemption available (if any) for BCD.

In our view, Unicorn Industries is sub-silentio on the point as to whether, when the parent duty is exempted, the levy of surcharge (calculated as a percentage of the parent duty which is levied and collected) is attracted. The Court in Unicorn Industries was only dealing with the issue as to when parent duty is exempted, whether the surcharges (Education Cess and SHE Cess in that case) are also exempted from payment. The decision did not consider the point that there will be no levy of surcharge as the parent duty was not never collected in first place by virtue of exemption. At this point, it may be noted that the Petitioner in the case of Gemini Edibles did not argue that the exemption from BCD under the Notifications would extend to SWS as well; rather, the Petitioner put forth the submission that when BCD collected is 'zero', the levy of SWS would be on 'zero'. The said distinction was apparently not noted by the Hon'ble Madras High Court. It is a settled principle of law that when a judgment is silent on a particular point, the same cannot be considered to be binding precedent qua that point or issue. Therefore, a view is possible that reliance placed on Unicorn Industries by the Hon'ble Madras High Court may not be apposite.

Going beyond the dispute:

It may also be noted that the Hon'ble Madras High Court has gone beyond the scope of dispute between the parties in holding that the Revenue is not empowered to debit the SWS amount from the scrips. Even the Revenue did not object to the factum of an importer debiting the scrip to discharge his SWS liabilities.

In our view, the observation of the High Court that exemption from BCD under the Notifications will not automatically exempt SWS is not under dispute. However, the Court has not considered the fact that SWS is computed as a percentage of BCD which is "levied and collected" and once BCD is not collected by virtue of exemptions under Notifications 24 & 25 of 2015, the levy of SWS will also be 'zero' arithmetically.

Developments after the decision of the Hon'ble Madras High Court

Subsequent to the decision of Gemini Edibles & Fats India P. Ltd.,- 2020-TIOL-26-HC-MAD-CUS, Circular No. 02/2020-Customs dated 10.01.2020 on the same subject matter has been issued but, interestingly, without making a reference to the said decision. The said circular states that since there is no exemption from SWS under Notifications 24 & 25 of 2015, in light of the decision in Unicorn Industries, the same cannot be debited from the scrips the scrip and SWS will have to be paid by the importer in cash. However, with regard to past imports, debits of SWS already made in the scrips have been decided to be kept undisturbed for ensuring ease of doing business, and it has been stated that recovery in cash will not be insisted in such cases.

Conclusion

Prior to the decision of Gemini Edibles (supra) and issuance of the Circular 02/2020-Customs, the position adopted by some of the importers was that when BCD is exempted under the Notification, SWS, which is a piggybacked levy, would not be attracted. Alternatively, the importers were debiting the scrips for the SWS component as well.

The said second option was not being disputed by the Revenue. However, post the decision of Gemini Edibles and the Circular No. 02/2020-Customs 10.01.2020, the importers are left with no option but to pay the SWS amount in cash. Thus, the importers have been put in a worse off position wherein they will have no option but to pay the SWS in cash which will have a huge working capital impact.

For imports made within the territory of Tamil Nadu, until the order is operative, the decision of Gemini Edibles will be binding and, therefore, the importers will not be in a position to argue that SWS is not payable. In other jurisdictions, the decision in Gemini Edibles would have persuasive value only and would not be binding. However, based on the Circular (supra), the Revenue is going to mandate payment of SWS in cash for all future imports.

Considering the above, it becomes imperative for the importers located across India to analyze and adopt specific positions with respect to the above developments. At this point, it is highlighted that a judicial challenge on the vires of the Circular cannot be ruled out. Interesting times are ahead for all the stakeholders and a judicial battle is on the horizon to secure something that was already there with the importers.

Only time will tell which Zodiac sign shines brighter - Gemini or Aquarius (Unicorn)!

[The views expressed are strictly personal.]