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Juned Bilal Memon v. Commissioner Of C. Ex., Surat-Ii

CESTAT
Aug 23, 2007
Judgment
Subsequent
References
CaseIQ
Case Information
CITATION CODES
citation codes
CASE NO.

Misc. Order Nos. M/1391-1395/2007-WZB/LB(EB), in Appeal Nos. E/131, 132, 133, 153 and 154/2005

JUDGES

Jyoti Balasundaram, Vice-President

M.V Ravindran, Member (J)

K.K Agarwal, Member (T)

ACTS

provisions of Rule 26 of Central Excise Rules, 2002.

Section 3(1) of the Central Excise Act, 1944

Sec. 4 of the Central Excise Act, 1944.8.As

Sec. 3 of the Central Excise Act, 1944.

Rule 25 of Central Excise Rules, 2002

Sec. 3(1) of Central Excise Act, 1944

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Smart Summary (Beta)

Structured Summary of the Provided Opinion

Factual and Procedural Background

M/s. Kay Bee Tex Spin Ltd., a 100% E.O.U. manufacturing polyester textured yarn, twisted/sized and polyester grey fabrics, obtained permissions from the Development Commissioner, Kandla Special Economic Zone to sell grey fabrics in the Domestic Tariff Area (DTA) through EEFC accounts (three permissions dated 13-6-2001, 22-3-2002 and 20-10-2001 to sell to specified local buyers).

The permissions required payment of full Customs and Central Excise duties as applicable at clearance against EEFC accounts. However, during Feb 2002 to June 2002 the assessee cleared 15,15,141.70 linear metres of polyester grey fabrics at a lower Central Excise rate (6%), resulting in a departmental finding of short-payment of duty totalling Rs. 3,70,64,834/-, and, after accounting for duty actually paid on raw materials (Rs. 22,06,555), a proposed differential demand of Rs. 3,48,58,280/-.

A show-cause notice proposing recovery of the differential duty with interest and penal action was issued. The Commissioner of Central Excise, Surat confirmed demand under Section 3(1) of the Central Excise Act, 1944, applied interest under Section 11AB, and imposed penalties under Rules 25 and 26 of the Central Excise Rules, 2002 on the assessee and other noticees. Appeals were preferred to the Tribunal, which by order dated 19-1-2006 referred questions to a Larger Bench on whether clearances under para 9.10(b) of the Exim Policy should be treated at par with export (and hence exempt) and whether Notification No.125/84-CE applied.

Legal Issues Presented

  1. Whether DTA clearances effected by an EOU under para 9.10(b) of the Exim Policy are to be treated at par with physical exports and thereby entitled to exemption/concessional rate under Notification No. 20/98-CE (and allied notifications such as Nos. 2/95-CE and 8/97-CE) or whether the benefit is limited to clearances under para 9.9 of the Exim Policy.
  2. Whether the assessee is entitled to exemption under Notification No. 125/84-CE for the goods cleared in DTA with permission of the Development Commissioner.

Arguments of the Parties

Assessee's (Appellants') Arguments

  • Clearances in DTA effected under para 9.10(b) of the Exim Policy (against foreign exchange and with Development Commissioner permission) should be treated as being covered by para 9.9 of the Policy and therefore be entitled to benefit of the concessional/exempt notifications such as Notification No. 2/95-CE / 20/98-CE (i.e., treated like physical exports).
  • On the authority of prior decisions (as relied upon), the benefit of the notification should not be limited to 50% of such clearances; full value should be entitled to exemption where conditions are satisfied.

Department's (Respondent's) Arguments

  • The benefit of Notifications such as No. 2/95-CE and No. 20/98-CE was available only to clearances made in DTA under paras 9.9(a),(b),(c),(d) or (f) or para 9.20 of the Exim Policy; clearances under para 9.10 are a different category and thus not entitled to the concessional benefit.
  • Because the assessee had obtained permission and cleared the goods in India, the proviso to Section 3(1) of the Central Excise Act, 1944 applies and duty is leviable; hence Notification No.125/84-CE does not apply.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Tribunal decision in Virlon Textiles (as referred in the opinion) The Tribunal had held that clearances effected in DTA against foreign exchange under para 9.10 of the Exim Policy were entitled to the benefit of Notification No. 2/95-CE (and related notifications) but (per the Tribunal) limited that benefit to 50% of such clearances. The court recounts the Tribunal's view and explains that the Tribunal treated para 9.10 clearances as covered by para 9.9 for the purpose of notification benefit (subject to the Tribunal's 50% limitation), and uses that factual posture in considering the Supreme Court's treatment of the issue.
Supreme Court decision in Virlon Textiles (referred to as "Virlon Textiles" / S.C.) The Supreme Court held that clearances effected in DTA against free foreign exchange under para 9.10 are entitled to exemption under the relevant notification (Notification No. 2/95-CE) and that there is no warrant to limit the exemption to 50% — the entire value would be entitled to exemption if conditions are satisfied. The court treats the Supreme Court's ruling as directly applicable and controlling: it applies that principle to the present case to hold that clearances under para 9.10(b) are to be treated as physical exports for purposes of Notification No. 20/98-CE and are entitled to its benefit subject to the notification's conditions.

Court's Reasoning and Analysis

The court proceeded in a stepwise analytical manner, closely following the text of the Exim Policy and the binding precedent of the Supreme Court in Virlon Textiles:

  1. Relationship between paras 9.9 and 9.10 of the Exim Policy:

    Paras 9.9 and 9.10 both deal with DTA clearances by EOUs. The court reasoned that clearances effected under para 9.10 are referable to para 9.9 and are a category of DTA clearances contemplated by para 9.9. It emphasized that para 9.10 clearances count towards fulfilment of export obligation and for calculation of NFEP, and are therefore to be treated at par with physical exports for relevant purposes. The court illustrated this with a numerical example showing how para 9.10 clearances are treated separately from the 50% DTA entitlement under para 9.9(b).

  2. Applicability of Notification No. 20/98-CE (and related notifications):

    Relying on the Supreme Court's decision in Virlon Textiles, the court held that even if Notification No. 20/98-CE is phrased to refer to para 9.9 clearances, the Supreme Court had already ruled that clearances under para 9.10(b) effected against foreign exchange qualify for exemption under the notification and that there is no permissible limitation to 50% of such clearances. Consequently, the court concluded that clearances under para 9.10(b) should be treated as physical exports and are entitled to the benefit of Notification No. 20/98-CE, subject to the notification's own conditions.

  3. Conditions for benefit under Notification No. 20/98-CE:

    The court noted that entitlement under Notification No. 20/98-CE is subject to specific conditions, in particular: (a) that the goods are manufactured wholly out of indigenous raw materials; and (b) that value of the goods is determined in terms of Section 4 of the Central Excise Act, 1944. The court explicitly recorded these conditions as part of its answer on entitlement.

  4. Applicability of Notification No. 125/84-CE:

    The court analyzed the proviso to Section 3(1) of the Central Excise Act, 1944 and the fact that the assessee had cleared the goods with permission of the Development Commissioner. Because the clearances were "allowed to be sold in India" with such permission, the court concluded that excise duty is leviable under the proviso to Section 3(1) and that Notification No.125/84-CE is not available to the goods in question.

  5. Conclusion on the reference:

    In light of the above, the court held that the reference questions are to be answered in favour of the view that para 9.10(b) clearances are to be treated as physical exports for the purpose of Notification No. 20/98-CE (subject to its conditions) and that Notification No.125/84-CE does not apply where clearances were granted with the Development Commissioner's permission.

Holding and Implications

The court's core ruling: The reference is answered: clearances effected in DTA under para 9.10(b) of the Exim Policy are to be treated as physical exports and are entitled to the benefit of Notification No. 20/98-CE (and, by parity, related notifications relied upon), subject to the conditions of that Notification (notably that the goods are manufactured wholly out of indigenous raw materials and valuation under Section 4). Conversely, Notification No. 125/84-CE is not available to the goods cleared with the Development Commissioner's permission because such clearances are "allowed to be sold in India" and excise duty is leviable under the proviso to Section 3(1) of the Central Excise Act, 1944.

Direct consequences and next steps:

  • The reference questions have been answered in accordance with the court's reasoning.
  • The papers are returned to the Original Bench for further orders in the light of these findings (i.e., the Original Bench must proceed to apply these answers to the specific adjudicatory facts and outstanding issues in the appeals before it).
  • No new legal principle beyond the application of the Supreme Court's ruling in Virlon Textiles was announced; the decision applies that precedent to the facts before the court and records the governing conditions for notification benefit.

Show all summary ...

[Order per : Jyoti Balasundaram, Vice-President]. - M/s. Kay Bee Tex Spin Ltd. (100% E.O.U hereinafter referred to as the assessee) who are engaged in the manufacture of polyester textured yarn, twisted/sized and polyester grey fabrics, were granted the following permission by the Development Commissioner, Kandla Special Economic Zone for sale of the goods in DTA through EEFO Account:-

1.      No. KASEZ/100% EOU/11/553/99/1158, dtd. 13-6-2001 to sell grey fabrics to M/s. Almas Textiles
2.      No. KASEZ/100% EOU/11/553/99, dtd 22-3-2002 to sell grey fabrics to M/s. Anmol Traders, Surat
3.      No. KASEZ/100% EOU/11/553/99/1686, dtd 20-10-2001 to sell grey fabrics to M/s. Dhawal Exports, Surat.

2. As per the conditions laid down in the above permissions, the assesses were required to pay full duties of Customs and Central Excise as applicable at the time of clearance of goods against EEFC account. However, clearances were effected against Foreign Exchange at the lower rate (6%) of Central Excise duty during the period from Feb., 2002 to June, 2002. Supplies of polyester grey fabrics in DTA were also effected by the assessees in terms of erstwhile para 9.10(b) of the Exim Policy 1997-2002 [now para 6.9(b) of 2002-2007 Exim Policy] but at the lower rate of Central Excise duty. Polyester fabrics measuring 15,15,141.70 L. Mtrs had been cleared at lower rate of duty than the actual rate leviable thereon, resulting in short-payment of duty of Rs. 3,70,64,834/-. The department was of the view that the benefit of Notification No. 2/95-CE, dtd. 4-1-95; 8/97-CE, dtd. 1-3-97 and 20/98-CE, dtd. 18-7-98 was available only to clearance made in DTA under the provisions of 9.9(a),(b), (c), (d) or (f) or para 9.20 of the Exim Policy 1997-2002 whereas, the clearance has been effected by the assessee under the provisions of para 9.10(b) of the Exim Policy and therefore, the benefit of concessional rate of duty under the above Notification was not available and duty was to be charged at full rate as prescribed under the proviso to Sec. 3 of the Central Excise Act, 1944. The assessee had availed full exemption from duty on raw materials procured by them in the form of yarn (POY/PFY) out of which they manufactured and cleared goods to DTA and paid duty of Rs. 22,06,555 and were therefore, liable to pay differential duty of Rs. 3,48,58,280/- (Rs. 3,70,64,835/- - 22,06,555).

3. On the above basis, show cause notice was issued proposing recovery of Rs. 3,48,58,280/- together with interest and proposing penal action. Penal action was also proposed against the Director of the assessee and on authorized signatories of M/s. Almas Textiles and M/s. Dhawal Exports and the proprietor of M/s. Anmol Traders. The notice was adjudicated by the Commissioner of Central Excise, Surat, who confirmed the demand under Sec. 3(1) of Central Excise Act, 1944 together with interest @ 24% per annum under the provisions of Sec. 11AB of the Act and imposed penalties of Rs. 50 lakhs upon the assessee under Rule 25 of Central Excise Rules, 2002 and Rs. 20 lakhs on its proprietor and Rs. 5 lakhs each on the other 3 noticees under the provisions of Rule 26 of Central Excise Rules, 2002. Appeals were filed before the Tribunal which by its Order No. M/155-159/WZB/06-III, dated 19-1-2006 - (Tribunal) referred the issues, as to whether clearances in terms of para 9.10(b) of the Exim Policy should be treated at par with export and no duty should be charged and whether the assessees are entitled  to exemption in terms of Notification No. 125/84-CE, dtd. 26-5-2004, to the Larger Bench.

4. We have heard both sides and record our findings hereunder :-

5. DTA clearances are covered by paras 9.9 and 9.10 of the Policy.  Therefore, clearances effected in terms of para 9.10 are also referable to paras 9.9 of the Policy. In terms of para 9.9(b) of the Policy 1992-97, EOU is entitled to clear in DTA, 50% of the FOB value of exports effected by it. In terms of para 9.10 of the Policy, the EOU is also entitled to clear the goods produced by it, in DTA. Various categories of suppliers are covered by para 9.10 of the Policy. The clearances effected in DTA in terms of para 9.10 are counted towards fulfilment of the export obligation of EOU and also for calculation of NFEP. In other words, the clearances effected by the EOU in DTA in terms of para 9.10 of the Policy are treated at par with the physical exports. Therefore, the clearances effected in DTA in terms of para 9.10 are also DTA clearances referred to in para 9.9 of the Policy. Clearance effected in the DTA in terms of para 9.10 is a category of DTA clearances referred to in para 9.9, the only difference being that DTA clearances effected in terms of para 9.10 of the Policy will not eat into the 50% of the DTA entitlement mentioned in para 9.9(b) of the Policy. This can be illustrated with an example. The EOU has exported goods worth US$ 1000/. In terms of para 9.9(b) of the Policy, the EOU is entitled to clear in DTA, goods worth US$ 500/-. If the EOU, clears the goods worth US$ 400/- in terms of para 9.10(b) of the Policy against foreign exchange and goods worth US$ 100/- in terms of para 9.9(b), the clearances worth US$ 400/- will not be taken into account and will not be debited in the DTA entitlement of US$ 500/-. The EOU would still be entitled to clear goods worth US$ 400/- in DTA, in terms of para 9.9(b).

6. Even if Notification No. 20/98-CE is applicable to DTA clearances effected in terms of para 9.9 of the Policy, in view of the above submissions and in view of the decision of Supreme Court in Virlon Textiles - , the appellants are entitled to the benefit of Notification No. 20/98-CE. In the case of Virlon Textiles, the assessee had cleared the goods in DTA, against foreign exchange, in terms of para 9.10 of the Policy. The submission of the appellants was that such clearances are also covered by para 9.9 of the Policy. This submission was accepted by the Tribunal and it was held in para 8 of the decision [] that the clearance effected in DTA against foreign exchange is entitled to the benefit of Notification No. 2/95-CE which is available to DTA clearances effected by the EOU in terms of para 9.9(a), (b), (c), (d) and para 9.20 of the Policy. However, the Tribunal held that only 50% of such clearances effected against foreign exchange would be entitled to the benefit of Notification No. 2/95-CE. Against the Tribunal’s decision, both the assessee as well as the department filed appeal to Supreme Court. The Supreme Court allowed the appeal of the assessee and dismissed the appeal of the department, as seen from (S.C.). In para 7, the Apex Court held that these clearances would be entitled to exemption under Notification No. 2/95-CE. The Supreme Court also held that there is no warrant to limit the exemption to 50%. The Supreme Court held that entire value of clearances effected in DTA against free foreign exchange would be entitled to the benefit of exemption under Notification No. 2/95-C.E.

7. The decision of Virlon Textiles squarely applies to the present case. In the present case, the clearances were effected after obtaining permission from the Development Commissioner. The clearances were effected against free foreign exchange, in terms of para 9.10(b) of the Policy. At the time of clearance, the appellants paid duty in terms of Notification No. 20/98-C.E. Notification No. 28/98-CE covered DTA clearances effected by the EOU in terms of para 9, 9(a), (b), (c), (d) or (f) of para 9.9. or para 9.20 of the Policy. According to the department, the clearances covered by Notification No. 20/98-C.E. are those affected in terms of para 9.9 and hence, clearances effected in terms of para 9.10 of the Policy are not covered. This very contention of the department has been specifically rejected by the Supreme Court in Virlons case. There also, the clearances were effected in terms of para 9.10(b) of the Policy, while Notification No. 2/95-C.E., the benefit of which was denied, covered clearances effected in terms of para 9.9 of the Policy. We, therefore, hold that clearances in terms of para 9.10(b) of the Exim Policy are to be treated as physical exports and consequently, entitled to the benefit of Notification No. 20/98-C.E. subject to fulfilment of the other conditions of the Notification viz -

(a)     that the goods are manufactured wholly out of indigenous raw materials,
(b)     value of the goods is determined in terms of Sec. 4 of the Central Excise Act, 1944.

8. As regards the benefit of exemption in terms of Notification No. 125/84-CE, we find that the goods have been cleared after obtaining permission from the Development Commissioner at Kandla Special Economic Zone. In other words, the goods have been cleared with the permission of Development Commissioner and therefore, the clearances of goods are “allowed to be sold in India” and consequently, excise duty is leviable in terms of the proviso to Section 3(1) of the Central Excise Act, 1944 and the benefit of Notification No. 125/84-CE is not available to the goods in question.

9. The reference is answered accordingly. The papers are now returned to the Original Bench for further orders in the light of the above.

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