By TIOL News Service

AHMEDABAD, JUNE 24, 2008: THE first order on the dispute is out. And it went in favour of the revenue. In a significant judgement, which will have wide ramifications, the Tribunal upheld the order of Commissioner (Appeals) confirming the demand of education cess on DTA clearances made by the EOUs. Let us see why this dispute arose in the first place.

The goods manufactured by EOUs and cleared in DTA are subjected to duty of excise. In terms of proviso to Section 3 of the Central Excise Act, the duty payable is equivalent to the aggregate duties of Customs leviable on like goods if imported into India. However, Notification 2/95 CE ( current Notification 23/2003 CE dated 31.3.2003) provided exemption in excess of 50% of the aggregate duties of customs. While computing the total duty, education cess is levied on the CVD part of the duty and again cess is paid on the total customs duty. The department has taken a view that the total amount of duty computed under Notification 2/95 CE is only EXCISE duty payable under Section 3 of the Central Excise Act read with Notification 2/95 CE and since education cess is levied under clause 83 of the Finance Act 2004, the EOUs have to pay education cess again on the total duty. The computation of the duties under the present Notification 23/2003 would be as under: 

Now, as per the Department, Rs 19.97/- is only excise duty under Section 3 and in addition to this, 2% Education Cess and another 1% towards Secondary and Higher Education Cess is payable on Rs 19.97/-

A 100% EOU is liable for payment of duty under proviso Section 3(1) read with exemption Notification. In the instant case, the appellants are liable for payment of excise duty equivalent to 50% of customs duty. There is no dispute about computation of 50% of customs duty and appellants have duly considered the element of education cess as part of CVD as well as part of customs duty.  The education cess demanded on amount of duty required to be discharged under proviso to Section 3(i) is totally baseless and erroneous. A 100% EOU cannot be made liable for payment of duty in excess of duty specified under proviso to Section 3(i). As per the scheme of 100% EOU the duty required to be discharged under proviso to Section 3 is on the basis of customs duty leviable on like goods being imported. In other words, no duty in excess of customs duty can be demanded. In the instant case, there is no dispute about the computation of customs duty and what is demanded is in excess of customs duty required to be discharged under proviso to main section 3.

However, the Tribunal upheld the view of the Commissioner (Appeals) in confirming the duty demand on the ground that :

The Larger Bench decision of the Tribunal in case of Vikram Ispat Vs. CCE Mumbai 2002-TIOL-32-CESTAT-DEL-LB has held that the said duty is duty of excise, though the measure of the same is customs duty. The education cess @ 2% is levaiable in terms of Clause 83 of 2004 Bill on the goods manufactured or produced and is required to be calculated on aggregate of all duties of excise. The education cess is to be levied on all dues of excise. As such, whatever duty of excise the appellants are required to pay, the education cess is in addition to the same and a fact that the customs education cess stands paid, will not alter the position.

Before parting :

Please see a detailed analysis on this issue by R. Raghavendra Rao at Education cess payable by EoUson DTA sale : Willthis Budget clarify? . The author had drawn attention to the CBEC Circular issued in 1984 on an identical and peculiar situation of double levy of additional duties under allied Acts. The Board itself had accepted that “When working out additional (customs) duty, one has to add up the basic excise duty, additional excise duty and special excise duty and cess leviable on like goods imported from abroad. It is therefore seen that special excise duty, additional excise duty and cess would be payable once again on the said goods. In order to avoid double levy, excisable goods produced /manufactured in the undertakings and cleared to domestic tariff area have been exempted from Special Excise Duty and Additional Duty vide Notification No 126/84 CE and 127/84 CE both dated 26th May 1984. However, special excise duty and additional excise duty would be payable as part of additional (customs) duty”.

There is another interesting angle to the whole issue. The problem in the instant case is education cess is levied twice - once under section 3 of the CE Act as aggregate duties of customs and again as cess levied under the Finance Act 2004 in addition to the duty of excise levied under Section 3 of the Central Excise Act.

Let us call the Sec 3 cess on aggregate duties of customs as first cess and the cess levied under the Finance Act 2004 as second cess. 

The first cess gets included in the aggregate duties of customs levied under Section 3 

Now Notification 23/3003 CE provides an exemption.

It exempts

“In excess of the amount equal to the aggregate of duties of customs leviable on like goods, as if,-

(a) the duty of customs specified in the First Schedule to the Customs Tariff Act, 1975 (51 of 1975), read with any other notification in force was reduced by 50%, and

(b) no additional duty of customs was leviable under sub-section (5) of section 3 of the said Customs Tariff Act:

Provided that while calculating the aggregate of customs duties, additional duty of customs leviable under sub-section (5) of section 3 of the said Customs Tariff Act shall be included if the goods cleared into Domestic Tariff Area are exempt from payment of sales tax or value added tax.

Thus, the first cess under Section 3 gets exempted under Notification 23/2003 and the net aggregate duties payable under Section 3 is only 50% of the BCD and CVD. This also gets support from the illustration under the Notification 23/2003 as under:

Illustration: - Assuming product X has the value Rs. 100/- under section 14 of the Customs Act, 1962, and for the purposes of this illustration, is chargeable to basic customs duty of 10% ad valorem and additional duty of 20% ad valorem only, then the computation of duty required to be
paid would be as follows:

Basic Customs duty but for this exemption = Rs. 10/-

Basic Customs duty because of this exemption = Rs. 5/-

Value for the purposes of calculation of additional duty = Rs. 100/- + Rs. 5/- = Rs. 105/-

Additional duty = 20% of Rs. 105/- = Rs. 21/-.

Total duty payable after this exemption= Rs. 5/- + Rs. 21/- = Rs 26/-”.

So the first cess gets exempted under Notification 23/2003 and there is only one Education Cess payable, i.e. the Second Cess mentioned above under the Finance Act 2004.

Had these finer points been brought to the notice of the learned Members of the Tribunal, things would have been clearer. In any case, it is high time revenue gave clarification and put an early end to this controversy which has all the ingredients to travel to the Larger Bench.

(See 2008-TIOL-985-CESTAT-AHM in 'Excise' + 2008-TIOL-985-CESTAT-AHM in 'Legal Corner')