By TIOL News Service

MUMBAI, JUNE 19, 2006 : THIS is yet another catastrophe of simplification. The time tested Central Excise rules 1944, which have seen nearly six decades have given their way to the new simplified rules in 2001. While the so-called simplified rules were notified, in the eagerness to reduce the size, certain unintentional errors have crept in at important places and the drastic impact could be known only when the disputes reach the judicial fora. It happened earlier with the Cenvat Credit rules when the credit was denied on the explosives used in mines which was put to rest by the Apex Court in Vikram Cements case.

This case we are reporting today, relates to the dispute whether an exporter can claim rebate of excise duty paid on the raw materials used in the manufacture of exported goods and at the same time claim the rebate of the excise duty paid on the finished goods exported under rule 18 of the "simplified" central excise rules 2002.

Brief facts of the case:

M/s Indorama Textiles Ltd exported polyester/cotton yarn on payment of duty under Rule 18 and filed rebate claims for the duty paid on the finished goods and also for the duty paid on the raw materials used for manufacture of the exported goods. The Deputy Commissioner rejected the rebate in total on the ground that it was contrary to the provisions of Rule 18. The assessee approached the Commissioner (Appeals) who held that the exporter was entitled to rebate of either duty paid on raw material used or duty paid on the goods exported. Aggrieved by the said order, the assessee filed a revision application before the Joint Secretary to the Govt of India under Section 35 EE of the Central Excise Act. In what could be described as major relief, the Joint Secretary allowed both the rebate claims, i.e. duty paid on the raw material as well as on the goods exported. But, the unrelenting revenue filed a writ petition before the Bombay High Court against the Joint Secretary's order. Let us now move on to the arguments:

Rule 18, which is the epicenter of the dispute, reads as under:

"Rule 18 - Rebate of duty - Where any goods are exported, the Central Government may, by notification, grant rebate of duty paid on such excisable goods OR duty paid on materials used in the manufacture or processing of such goods and the rebate shall be subject to such conditions or limitations, if any, and fulfillment of such procedure, as may be specified in the notification.

This Rule in earlier avatar was as under:

         Rule 12: The Central Government may, from time to time, by notification in the Official Gazette, grant rebate of--

         (a) duty paid on the excisable goods;

         (b) duty paid on materials used in the manufacture of goods;

It is the "OR" in Rule 18 which caused the havoc. The department contended that as per the above rule, since "duty paid on such excisable goods" and "duty paid on materials used in the manufacture" are separated by "OR", the assessee can claim either one of the benefits, but not both. It was also pointed out that the export under rebate of duty on final products and under rebate of duty paid on the raw materials used is governed by two separate notifications (19/2004 CE(NT) and 21/2004 CE(NT)) both benefits can not be claimed simultaneously. The revisional Authority is wholly wrong in relying upon Rule 12 of the old Rules of 1944 and old notification Nos. 40/2001 and 41/2001 in order to hold that the respondent no.1 is entitled for rebate of duty paid on both the items

The appellant argued that:

After giving anxious thought to the arguments on both sides, Hon'ble High Court had drawn reference to the erstwhile rules 12 (1)(a) and 12(1)(b) of the Central Excise rules and held:

•  Rule 12 of the Central Excise Rules, 1944 has been superseded by the Central Excise Rules, 2001. Central Excise Rules, 2001 were superseded by the 2002 Rules. It is, therefore, implicitly clear that the provisions of the Central Excise Rules, 1944 and Central Excise Rules, 2001 lost their legal force after coming into effect the 2002 Rules and, therefore, they are wholly irrelevant for deciding entitlement of the assessee for grant of rebate of duty after 1.3.2002, i.e. the date on which 2002 Rules came into force.

•  The intention of the Legislature was not to grant rebate of duty paid on exported goods as well as on inputs used in such goods simultaneously, which is evident from the language used in Rule 18 of the 2002 Rules

•  The language used in Rule 18 of the 2002 Rules is loud, clear, completely unambiguous and also capable of conveying the purpose for which Rule is evolved

•  the rebate provided in Rule 18 of the 2002 Rules is only on duty paid on one of the items, i.e. either on excisable goods or on material used in manufacture or processing of such goods and, therefore, assessee is not entitled to claim rebate on both the items simultaneously.

•  two separate and distinct notifications issued by the Central Government are consistent with the scheme of Rule 18 of the 2002 Rules to grant rebate of duty only on one item ( interestingly, even under the erstwhile rule 12, where there was no dispute about the availability of rebate under both categories, two separate notifications governed the rebate - 41/94 CENT and 42/94 CENT - TIOL research desk)

•  if the word "or" is read as "and" in Rule 18 of the 2002 Rules, then in that event, we will be doing violence with the language of the Rule and would be defeating the object to be achieved and purpose for which Rule is evolved.

•  The scheme and procedure prescribed under Rule 19 is altogether different than the one prescribed in Rule 18 and contemplates export of such excisable goods as well as material used in manufacture or processing of such goods without payment of duty subject to conditions, safeguards and procedure specified by the notification issued by the Board and, therefore, it cannot be equated with Rule 18.

•  It is difficult for us to reconcile as to how the notifications of 2001 and Rules 12 and 13 of the Central Excise Rules, 1944 are relevant for the purpose of considering entitlement of the assessee for grant of rebate of duty paid on goods after Central Excise Rules, 2002 came into force, which are framed by the Central Government in suppression of the Central Excise Rules.

•  The entire approach and the procedure adopted by the revisional Authority, in our view, is wholly misconceived and completely inconsistent with the provisions of Rule 18 of the 2002 Rules.

•  The approach of the revisional Authority that introduction of new Rules was only for the purpose of simplification and they have to be read in the context of old Rules is perverse.

•  the present new Central Excise Rules, 2002 is only an exercise of simplification of the Central Excise Rules is also misconceived approach of the revisional Authority

And for the reasons mentioned above, the High Court has quashed the order of the Revisional Authority and remanded the matter to allow either one of the rebates i.e. either on the raw material or on the goods exported.

Points to ponder:

When the Government had allowed the rebate under both the categories under the erstwhile Rule 12(1) (a) and 12(1)(b), what could be the reason for sudden change from 2001? Had the Government really wanted to curtail simultaneous availment of both the benefits and consciously inserted "OR" in rule 18, the same would have brought to the notice of trade as well as departmental officers by way of circular. This was not done. Be that as it may, does the Government lose any revenue or is there any double benefit if both the rebates are allowed simultaneously? Absolutely no, as the exporters can as well procure the raw material without payment of duty and then claim rebate of duty paid on exports.

Let us look at the possibilities open for an exporter. Assume the duty on raw materials is Rs. 100/- And the duty on finished goods is Rs. 150/- . Now nobody needs to pay Rs. 250/- as duty even for domestic clearance. To fulfill the basic concept that duties should not be exported, the Government has come up with various schemes to refund to the exporter all the duties paid on the export goods right from input stage to the final products. The exporter has several options within Rules 18 and 19:-

•  He can get the inputs without payment of duty and clear the final products for export without payment of duty under Rule 19.

•  He can get inputs free under Rule 19 and clear final products on payment of duty later claiming rebate of the duty paid.

•  He can get inputs on payment of duty, take cenvat credit and clear the final products on payment of duty and claim rebate on the duty paid on the final products

•  He can get inputs on payment of duty, take cenvat credit and clear the final products without payment of duty and use that cenvat credit for payment of any other duty and if that is not possible claim refund of the un utilised credit.

•  He can get inputs on payment of duty, not take credit and clear the final products without payment of duty and claim rebate of the duty paid on the raw materials.

•  He can get inputs on payment of duty and clear the final products on payment of duty and claim rebate of the duty paid on the raw materials and final products. No, this is not allowed by the High Court, while the other five situations are happily allowed.

Is there any substantial difference or loss in the 6 th situation mentioned above? All are for the common goal that neither the inputs nor the final product should suffer excise duty when the goods are exported. But the High Court says that the scheme under Rule 19 is totally different from the one under Rule 18! The High Court found, the findings of the Revisional authority that the new rules are only an exercise in simplification and were introduced only for simplification, perverse and misconceived. Let us look at what the Government said on the new rules:- This is from the DO letter D.O.F.No.334/1/2001-TRU dated the 28th February,2001 from the   Joint Secretary (TRU) explaining the new rules.

The Central Excise Rules, 1944 have been in existence for long. It is widely perceived that quite a few of them have lost relevance or utility in the context of the changes that have since taken place in the administration of excise duties. Also, many of the rigidities and technicalities engulfing some of the rules are not compatible with the spirit of tax reforms. Quite a few rules seem to owe their birth to our succumbing to pressure to resolve trivial or peripheral issues. Some others appear to justify their existence to our weakness to remain attached to past, oblivious of the needs of present or future. It is in this context that the Central Excise Rules, 1944, are proposed to be replaced by a new set of Central Excise Rules, 2001. We have tried to keep in mind the aspects of simplicity and brevity in drafting the new rules. We have also been guided by the consideration that the rules need to act as a facilitator to the trade and industry and not be a material comprising complex and complicated reading.

So instead of writing two sentences, for the sake of brevity they made it into one with an "or" in between and the same government takes the matter to the High Court. And this is how the rules are going to act as a facilitator!

A very important fact was perhaps unfortunately not brought to the notice of the High Court. The CBEC' manual in para 7 of part V of Chapter 8 will throw a little more light on the issue.

7. Presentation of claim of rebate ( for inputs)

7.1       The claim for rebate of duty paid on materials used in the manufacture or processing of goods shall be lodged only with the Deputy/Assistant Commissioner of Central Excise having jurisdiction of the place approved for manufacture or processing of such export goods. The following documents shall be presented with the claim: -

•  Original copy of the ARE2 duly endorsed by the Customs Officer;

•  Duly self-attested copy of Shipping Bill (Export Promotion Copy)

•  Duly self-attested copy of Bill of lading/ Air way bill

•  Duplicate copy of the Central Excise Invoice under which Central Excise duty was paid/accounted as payable on goods cleared for export. [where rebate of finished goods are also being claimed]

•  Duplicate copy of the ARE.2 received from the customs officer in a sealed cover (if obtained).

Sl. No. 1v above would clearly show that rebate can be claimed both on raw materials and finished goods.

The High Court might have interpreted the law, the badly drafted law, but the government, the Board, everyone in customs and excise department know that the intention of the government is to allow rebate on both the inputs and final products. Government trying to take legal advantage of the word "or" in a badly drafted law is totally unfair. It is not as if the government is going to make a lot of money or the exporters are going to lose badly; they can follow any of the five situations above and still not pay a paisa of excise duty. All that we are agitated about is a procedure - and of course a little amount of money involved in past cases.

The Board should take the issue seriously and remove the (un)wanted "OR" from Rule 18 which could result in such decisions ultimately affecting the exporters.

( See 2006-TIOL-148-HC-MUM-CX in 'Excise')