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Himalya International Ltd. v. Commissioner Of C. Ex., Chandigarh-I
Summary of the Opinion (Larger Bench) — Justice K.K. Usha, President
Factual and Procedural Background
The Larger Bench was called upon to decide the rate of duty applicable to goods cleared by a hundred per cent Export Oriented Unit (100% EOU) to the Domestic Tariff Area (DTA) where such clearances exceed the permission granted by the Development Commissioner. A Bench of the Tribunal at Belgaum (Kuntal Granites (P) Ltd. v. CCE) had taken the view that where an EOU cleared goods to DTA without permission, the duty payable should be in terms of Section 3(1) of the Central Excise Act, 1944 (i.e., the rate applicable to non-EOU manufacturers for domestic consumption). The referring Bench doubted the correctness of that view, noting a perceived anomaly (that an EOU might pay a higher rate when supplies are made with permission but a lower rate when goods are sold in excess of permission). The question was therefore referred to a Larger Bench for determination.
Legal Issues Presented
- Whether goods cleared by a 100% EOU to DTA in excess of the permission granted by the Development Commissioner are to be assessed to duty under the proviso to Section 3(1) of the Central Excise Act, 1944 (i.e., at duties equal to aggregate customs duties on like imported goods) or under the main provision of Section 3(1) (i.e., rates applicable to non-EOU domestic manufacturers).
- Whether the decision in Kuntal Granites (P) Ltd. v. CCE (Belgaum Bench) — which held that excess clearances should be assessed under the main Section 3(1) — is correct and should be followed.
- Whether Circular No. 618/9/2002-CX dated 13-2-2002 (issued by the Central Board of Excise & Customs) is binding on the Tribunal and constrains the legal interpretation of the proviso to Section 3(1) in this context.
Arguments of the Parties
Assessee's Arguments (Appellant)
- The proviso to Section 3(1) applies only when two conditions are satisfied: (a) the goods are produced or manufactured by a 100% EOU; and (b) the goods have been "allowed to be sold in India" (i.e., permitted by the Development Commissioner).
- If goods are sold by a 100% EOU in DTA in excess of the permission granted by the Development Commissioner, assessment must be under the main provision of Section 3(1) (the non-EOU rate), not under the proviso.
- Relied on the Supreme Court decision in SIV Industries Ltd. v. CCE & Customs and on the Tribunal decision in Kuntal Granites (P) Ltd. v. CCE (Belgaum) in support of this interpretation.
- Also relied on Circular No. 618/9/2002-CX dated 13-2-2002, which the assessee argued supports the Revenue interpretation that certain clearances are assessable under the Customs-equivalent duty only in particular circumstances, and contended that the circular binds the Revenue.
Revenue's Arguments (Respondent / Departmental Representative)
- The assessee's proposed interpretation of the proviso would defeat the purpose of the proviso, which carves out a distinct category for excisable goods produced by 100% EOUs and sold in DTA.
- The main provision of Section 3(1) applies to units other than 100% EOUs and free trade zone units; it is not meant to capture 100% EOU clearances to DTA (whether permitted or in excess).
- Reliance on the principle that courts should avoid interpretations that defeat statutory purpose; relied upon British Airways PLC v. Union of India to support that approach.
- Contended that SIV Industries Ltd. is not authority for the narrower point sought by the assessee (i.e., excess clearances while still an EOU) and that Circular No. 618/9/2002-CX misreads SIV and is not correctly interpreting the proviso.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Kuntal Granites (P) Ltd. v. CCE (Belgaum Bench) | Held that where goods are cleared to DTA by a 100% EOU without permission of the Development Commissioner, duty should be assessed under the main provision of Section 3(1) (i.e., rate payable by a non-EOU manufacturer). | The Larger Bench considered and rejected this view, holding that Kuntal Granites is not good law and that the proviso to Section 3(1) applies to clearances by 100% EOUs to DTA whether done with permission or in excess of permission. |
| SIV Industries Ltd. v. CCE & Customs (Supreme Court) | Interpreted the words "allowed to be sold in India" in the proviso to Section 3(1) to mean sales up to 25% of production allowed to be sold into India by Development Commissioner; dealt with duty on stock produced prior to debonding. | The Larger Bench relied on the Supreme Court's interpretation to the extent that the Supreme Court did not address the separate question whether sales made in excess of permission while the unit remained an EOU would fall outside the proviso; this limitation was important to the Larger Bench's analysis. |
| British Airways PLC v. Union of India (Supreme Court) | Principle that courts must consider consequences of an interpretation and give a harmonious construction of a statute to suppress the mischief and advance the remedy. | The Larger Bench invoked this principle to reject an interpretation that would produce an anomalous result (higher duty when sales are with permission but lower duty when sold in excess) and to support a construction that preserved the purpose of the proviso. |
| CCE, Vadodara v. Dhiren Chemicals Industries (Supreme Court) | Established that where the Board issues a circular properly interpreting a phrase or provision, that interpretation may be binding on the Revenue in appropriate circumstances. | The Larger Bench distinguished that case: it held the circular dated 13-2-2002 misinterpreted SIV and therefore was not a binding correct interpretation of the proviso; accordingly, the circular was not treated as constraining the Tribunal's legal interpretation in the present matter. |
Court's Reasoning and Analysis
The Court's analysis proceeded as follows:
- The Court examined the text of Section 3(1) of the Central Excise Act, 1944 and its proviso, noting that the proviso levies duties for certain excisable goods produced or manufactured by specific units (including 100% EOUs) which are "allowed to be sold in India," by reference to aggregate customs duties on like imported goods.
- The assessee's legal position was summarized: the proviso applies only when goods are produced by a 100% EOU and have been allowed to be sold in India; if an EOU sells to DTA in excess of the Development Commissioner's permission, the main Section 3(1) would apply.
- The Departmental Representative argued that accepting the assessee's interpretation would defeat the statutory purpose of the proviso, which creates a separate charging rule for goods produced by 100% EOUs and sold in DTA; the Court considered the rule that interpretations that defeat statutory purpose should be avoided (invoking British Airways).
- The Court reviewed the SIV Industries Ltd. decision: the Supreme Court had addressed duty on stock produced prior to debonding and had construed "allowed to be sold in India" as sales up to 25% permitted by the Development Commissioner; crucially, the Supreme Court did not decide the specific point whether sales made in excess of permission while the unit remained an EOU fall outside the proviso.
- Applying the statutory scheme and purposive considerations, the Larger Bench reasoned that the main provision of Section 3(1) was intended for units other than 100% EOUs and FTZs; an interpretation that takes clearances by a 100% EOU in excess of permission out of the proviso and into the main Section 3(1) would produce an anomalous result inconsistent with the structure and purpose of the proviso.
- The Court considered Circular No. 618/9/2002-CX (13-2-2002). That circular, issued after SIV, had attempted to instruct field formations that some clearances not "allowed to be sold in India" should be charged under the Customs-equivalent proviso or otherwise under main Section 3(1). The Larger Bench found that the circular misconstrued the SIV decision and was therefore not a correct, binding interpretation that could preclude the Tribunal from adopting a different legal construction.
- Synthesizing these points, and applying the purposive-construction principle, the Court concluded that as long as a unit continues to be a 100% EOU, its clearances to the DTA remain governed by the proviso to Section 3(1), and mere violation of the permission limit does not take the goods outside the proviso.
Holding and Implications
Holding: The Court held that the proviso to Section 3(1) of the Central Excise Act, 1944 applies to all excisable goods cleared by a 100% EOU to the DTA whether such clearances were within the permission granted by the Development Commissioner or in excess of that permission. In explicit terms: the rate as per the proviso to Section 3(1) is applicable for assessing all excisable goods which were cleared by 100% EOU to DTA, whether in terms of permission granted or in excess of the permission granted.
Implications:
- The view taken in Kuntal Granites (P) Ltd. v. CCE (that excess clearances by an EOU should be assessed under the main Section 3(1)) is held not to be good law.
- Circular No. 618/9/2002-CX (13-2-2002), insofar as it misinterprets the Supreme Court's SIV decision, is not binding upon the Tribunal for the purpose of determining the correct legal interpretation of the proviso to Section 3(1).
- The direct practical effect is that assessments of duty on clearances by 100% EOUs to DTA (including those in excess of permission) must be made in accordance with the proviso to Section 3(1) (i.e., at the aggregate customs duty equivalent), and the earlier contrary decision is overruled.
- The reference was answered accordingly, and the appeals were remitted to the Regular Bench for hearing on other issues (i.e., this decision resolves only the rate-of-duty question posed by the reference).
[Order per : Justice K.K. Usha, President]. - The issue that has come up for consideration before the Larger Bench relates to the rate of duty applicable to goods which are cleared from an hundred per cent EOU to DTA in excess of the permission of Development Commissioner. In Kuntal Granites (P) Ltd. v. CCE, Belgaum - Bangalore Bench of this Tribunal has taken the view that in cases where goods are cleared to DTA by an EOU without the same being allowed by Development Commissioner the duty applicable would be in terms of Section 3(1) of the Central Excise Act, 1944, that is to say, the rate of duty payable by a non-EOU manufacturer in respect of sales for domestic consumption. The correctness of the above view is doubted by the referring Bench. The Bench felt that such an interpretation would create an anomalous situation where an EOU would pay a higher rate of duty in respect of supplies made to DTA with the permission of Development Commissioner and a lesser rate of duty in respect of goods sold in excess of the permission for clearance to DTA. It was under these circumstances the issue has come up for consideration before a Larger Bench.
2. The relevant statutory provision reads as follows :-
“SECTION 3. Duties specified in the First Schedule and the Second Schedule to the Central Excise Tariff Act, 1985 to be levied. - (1) There shall be levied and collected in such manner as may be prescribed,-
(a) a duty of excise on all excisable goods which are produced or manufactured in India as, and at the rates, set forth in the First Schedule to the Central Excise Tariff Act, 1985 (5 of 1986);
(b) a special duty of excise, in addition to the duty of excise specified in clause (a) above, on excisable goods specified in the Second Schedule to the Central Excise Tariff Act, 1985 (5 of 1986) which are produced or manufactured in India, as, and at the rates, set forth in the said Second Schedule.
Provided that the duties of excise which shall be levied and collected on any excisable goods which are produced or manufactured,-
(i) in a free trade zone and brought to any other place in India; or
(ii) by a hundred per cent export-oriented undertaking and allowed to be sold in India,
shall be an amount equal to the aggregate of the duties of customs which would be leviable under section 12 of the Customs Act, 1962 (52 of 1962), on like goods produced or manufactured outside India if imported into India, and where the said duties of customs are chargeable by reference to their value; the value of such excisable goods shall, notwithstanding anything contained in any other provision of this Act, be determined in accordance with the provisions of the Customs Act, 1962 (52 of 1962) and the Customs Tariff Act, 1975 (51 of 1975).”
It is the case of the assessee which is an hundred percent EOU that for assessing the goods to duty under proviso to Section 3(1) two conditions have to be satisfied, namely, (a) that the goods should have been produced or manufactured by a 100% EOU and (b) that the goods should have been allowed to be sold in India. If the goods are sold by an hundred percent EOU in DTA in excess of permission of the Development Commissioner as is the allegation in the present case, the assessment has to be under the main provision of Section 3(1). In support of the above contention, the learned counsel for the assessee placed reliance on the decision of Supreme Court in SIV Industries Ltd. v. CCE & Customs - (S.C.) and that of the Tribunal in Kuntal Granites (P) Ltd. v. CCE, Belgaum - . Reliance is also placed on Circular No. 618/9/2002-CX., dated 13-2-2002 issued by Central Board of Excise & Customs.
3. The learned DR would contend that the interpretation sought to be given on the proviso to Section 3(1) by the appellant would defeat the very purpose of the proviso, namely to carve out a separate category of excisable goods produced or manufactured by a 100% EOU and sold in DTA. In support of her contention that no interpretation which would have the effect of defeating the very statutory provision shall be given. She relies on British Airways PLC v. Union of India - (S.C.). The learned DR would further contend that the decision of the Supreme Court in SIV Industries Ltd. is not an authority on the issue concerned. It is also submitted that the circular dated 13-2-2002 has been issued wrongly understanding the above decision of the Supreme Court. So also the Kuntal Granites is not good law for the same reason.
4. The issue that came up for consideration before the Supreme Court in SIV Industries Ltd., was one relating to the rate of duty applicable to 100% EOU on its stock of finished products produced prior to its debonding. The Revenue contended that rate should be equal to aggregate of Customs duty leviable on like goods imported into India under the proviso to Section 3(1). Permission to withdraw from 100% Export Oriented Units Scheme granted to the assessee is equivalent to permission to sell the goods produced in India. On the other hand, the assessee contended that no permission is required to sell the goods manufactured by 100% EOU lying at the time approval for debonding was granted. It was further contended that it is immaterial as to when the goods were manufactured, the date of removal for sale in India is the relevant date. Central Excise duty could be charged at the rate prevalent at the time when the goods were sold by the assessee in India. On such date of sale, the 100% EOU was debonded and therefore, the rate as per the proviso will have no application to the sale. While rejecting the contention raised by the Revenue that the permission granted to debond 100% EOU will amount to permission granted by the Development Commissioner to sell the finished goods in India, the Supreme Court held the words “allowed to be sold in India” in the proviso to Section 3(1) means sales upto 25% of the production of 100% EOU in the DTA with the permission of Development Commissioner. The question whether sales made by an EOU while it continued as EOU but in excess of the permission granted would be outside the proviso to Section 3(1) was not before the Supreme Court.
5. We find merit in the contention raised by the learned DR that in the nature of the conditions under which an hundred percent EOU is functioning, an interpretation suggested by the assessee would defeat the purpose of the proviso. As far as 100% EOU is concerned its entire production is expected to be sold under export. Whenever it is permitted to sell its goods in DTA, provisions under the proviso would be applicable. The main provision in Section 3(1) is applicable to excisable goods which are produced or manufactured by the units other than 100% EOU and units in free trade zone. Therefore, goods produced and manufactured by 100% EOU and sold in DTA in excess of the permission granted cannot come under the main Section 3(1). If the interpretation sought to be given on the proviso by the assessee is accepted, it would lead to an anomalous situation wherein an EOU would pay higher rate of duty in respect of supplies made to DTA with the permission of Development Commissioner and a lesser rate of duty in respect of goods sold in excess of the permission for clearance to DTA. In British Airways PLC Supreme Court has observed that while interpreting the statute the courts are required to keep in mind the consequences which are likely to flow upon the intended interpretation. It has been also observed therein that it is the duty of the court to give a harmonious construction of a statute and that such construction shall suppress the mischief and advance the remedy. Therefore, we hold that so long as an hundred percent EOU continues as an EOU it will be within the proviso mere violation of the permission in the matter of sale to DTA will not take it outside the proviso.
6. We will now consider another argument put forward by the learned counsel for the assessee on the basis of the circular dated 13-2-2002 which reads as follows :-
“EOU-removals of DTA-levy of duty
It is directed to invite reference to Supreme Court’s judgment in case of SIV Industries v. CCE [2000 (117) E.L.T. (281) S.C.] vide which the Apex Court had held that ‘Proviso to Section 3(1) regarding the duty chargeable on goods cleared by EOUs shall be applicable only to sales made in DTA upto 25% of production which are allowed to be sold into India as per provision of EX1M Policy’. In other words, Hon’ble Court decided that if the goods are ‘not allowed’ to be sold in India, the proviso to Section 3(1) of Central Excise Act, 1944 shall not be applicable. The expression ‘allowed to be sold’ has since been replaced with ‘brought to any other place’ w.e.f. 11-5-2001 vide Section 120 of Finance Act, 2001(14 of 2001).
2. It has come to the notice of the Board that field formations are interpreting the judgment of Apex Court to the effect that if the goods cleared by EOUs are not allowed to be sold into India, the Section 3(1) of Central Excise Act, 1944 is not applicable and duty can be demanded under the provisions of Customs Act, 1962 only. Board has taken a serious view of this mis-interpretation. The provisions of Central Excise Act, 1944 shall apply to all goods manufactured or produced in India for which Section 3 is the charging section. EOUs are also situated in India and the chargeability under Central Excise Act is never in doubt. Therefore, it is clarified that prior to 11-5-2001, the clearances from EOUs if not allowed to be sold in India, shall continue to be chargeable to duty under main Section 3(1) of Central Excise Act, 1944.
Appropriate action may be taken immediately to safeguard revenue and all pending decisions may be settled accordingly.
[Circular No. 618/9/2002-CX., dt. 13-2-2002 vide F.No. 268/69/2001-CX.8 issued by Ministry of Finance]
A reading of the above circular would show that it was issued pursuant to the decision of the Supreme Court in SIV Industries Ltd., but without understanding the position that the Supreme Court did not deal with a case where clearance was made to DTA by 100% EOU in excess of the permission granted. It is contended on behalf of the assessee that the interpretation given in the circular referred to above is binding on the Revenue and therefore, this Tribunal cannot give a different interpretation to Section 3(1) and the proviso at the instance of the Revenue. In support of the above contention reliance was placed on a decision of the Supreme Court in CCE, Vadodara v. Dhiren Chemicals Industries - (S.C.). We find no merit in the above contention of the assessee. In CCE, Vadodara v. Dhiren Chemicals Industries the Supreme Court observed that regardless of the interpretation placed by it on the expression in the notification ‘on which appropriate duty of excise has already been paid’ if there are circulars which have been issued by the Central Board of Excise & Customs placing a different interpretation upon the said phrase that interpretation will be binding upon the Revenue. In the present case, we are not dealing with any circular of Central Board of Revenue interpreting the meaning of the proviso to Section 3(1) and which had been in force. On the other hand, the circular dated 13-2-2002 is one issued giving a wrong interpretation to the decision of the Supreme Court. We have no hesitation to hold that an interpretation thus given by the Board to the decision of the Supreme Court will not be binding.
7. In the light of the above, we hold that the rate as per the proviso to Section 3(1) would be applicable for assessing all the excisable goods which were cleared by 100% EOU to DTA whether in terms of permission granted or in excess of the permission granted. We further hold that the view taken to the contra in Kuntal Granites (P) Ltd. is not good law. The reference is answered as above and appeals are sent back to the Regular Bench for hearing on other issues.
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