Sujana Metal Products Ltd. v. Commissioner Of C. Ex., Hyderabad

[Order per : M. Veeraiyan, Member (T)]. - Appeal No. E/93/2009 is by M/s. Sujana Metal Products Ltd. challenging the demand of amount of Rs. 1,53,84,947/- relating to the period May, 2007 to March, 2008 besides interest and penalties.

1.2 Appeal No. E/1539/2010 is by M/s. Prakash Glass & Rubber Works challenging the demand of amount of Rs. 4,55,997/- relating to the period January, 2008 to August, 2008 besides interest and penalties.

1.3 Appeal No. E/1596/2010 is by M/s. Zuari Cements Ltd. challenging the demand of amount of Rs. 1,13,66,040/- relating to the period February, 2004 to November, 2008 besides interest and penalties in pursuance of show-cause notices dated 4-3-2009 and 23-10-2009.

1.4 Appeal No. E/1013/2009 is by the Department challenging the dropping of proceedings demanding an amount of Rs. 3,58,326/- relating to the period from June, 2007 to July, 2007.

1.5 Appeal No. E/1014/2009 is by the Department challenging the dropping of proceedings demanding an amount of Rs. 2,33,290/- relating to the period from May, 2007.

1.6 Appeal No. E/1022/2009 is by the Department challenging the dropping of proceedings demanding an amount of Rs. 4,06,524/- relating to the period from August, 2007 to October, 2007.

1.7 Appeal No. E/1023/2009 is by the Department challenging the dropping of proceedings demanding an amount of Rs. 1,29,100/- relating to the period from November, 2007 to January, 2008.

1.8 Appeal No. E/1099/2009 is by the Department challenging the dropping of proceedings demanding an amount of Rs. 71,722/- relating to the period from October, 2007 to March, 2008. E/CO/2/2010 is filed by the assessee, viz. M/s. Indian Timber Products Pvt. Ltd. in appeal No. E/1099/2009.

1.9 All these appeals involve common legal issues and accordingly are being disposed of by this common order.

2. Heard Mr. B.V. Kumar, Mr. Anil Kumar, B., Mr. R. Muralidhar, Mr. V. Raghuraman, ld. Advocates and Mr. N.L.N. Prasad, Consultant on behalf of the assessees and Shri R.K. Singhia, Jt. CDR for the Revenue.

3.1 The facts in appeal No. E/93/2009 are that M/s. Sujana Metal Products Ltd. are manufacturers of TNT/CTD bars, MS Angles, MS Plates. They, in addition to making clearances to DTA, are clearing the goods to developers/promoters of Special Economic Zone (SEZ) as well as to units in SEZ. The Department was of the view that the supplies made to developers/promoters of SEZ are exempted from payment of duty and therefore, the appellants who are manufacturing both dutiable and exempted final products have not maintained separate accounts/inventory of inputs used in the manufacture of exempted products. Therefore, they are required to pay 10% of the value of the exempted goods supplied to SEZ developers in terms of Cenvat Credit Rules, 2004. In pursuance of show-cause notice dated 2-6-2008 Commissioner passed the impugned order dated 3-12-2008 demanding duty of Rs. 1,53,84,947/- under Rule 14 of the Cenvat Credit Rules, 2004 (CCR) read with Section 11A of the Central Excise Act, 1944 along with interest and imposed penalty of Rs. 10 lakhs under Rule 15 of CCR, 2004.

3.2 The other appeals by the assessees (No. E/1539/10; E/1596/10) are on similar facts for supply of goods to SEZ developers except that the goods involved, the amount involved and the period involved are different.

3.3 The appeals by the Department (No. E/1013, 1014, 1022, 1023, 1099/09) are also on similar facts against the impugned orders by which the Commissioner (Appeals) have allowed the benefit to the assessees.

4.1 Ld. Advocate Shri B.V. Kumar appearing on behalf of M/s. Sujana Metal Products Ltd. assailed the order of the Commissioner mainly on the following grounds :-

a.      The supplies made to the developers/promoters of SEZ would come within the meaning of the word ‘export’ as defined under Section 2(m) of the SEZ Act, 2005.

b.      In terms of Section 26 of the SEZ Act, 2005, every developer and the entrepreneur shall be entitled to the exemptions from any duty of excise under the CEA, 1944 (in addition to other exemptions, drawbacks, concessions, etc.).

c.       Rule 23 of the SEZ Rules, clearly specify that “Supplies from the Domestic Tariff Area to a Unit or Developer for their authorized operations shall be eligible for export benefits as admissible under the Foreign Trade Policy.”

d.      The supplies have been made to the promoters/developers of SEZ without payment of central excise duty on the strength of ARE1s and a legal undertaking furnished to the Asst. Commissioner of Central Excise. Therefore, such clearances without payment of duty would come within the meaning of export. The provisions of sub-rule 1(1), (2), (3) and (4) of Rule 6 of CCR, 2004 are not attracted.

e.       Supplies of excisable goods made to the developers/promoters of SEZ could not be treated as exempted goods. In support of this submission, he relies on the following decisions :-

CCE, Baroda v. Panchmahal Steel Ltd. [ (Tri. - Mumbai)]

Alpha Drug India Ltd. v. CCE, Chandigarh [ (T)]

ANZ International v. CC, Bangalore [ (Tri. Bang.)]

CCE, Indore v. SRF Ltd. [ (Tri. Del.)]

CCE, Vadodara v. STEELCO Gujarat Ltd. [ (T)]

Lloyds Metal & Engineers Ltd. v. CCE, Mumbai-III [ (Tri. - Mumbai)]

CCE, Madras v. Indian Steel Rolling Mills Ltd. [ (T)].

f.       A demand of 10% on the value of exempted supplies made to promoter of SEZ would amount to a tax in view of the ratio of decision of the Hon’ble Delhi High Court in the case of Bombay Conductors & Electricals Ltd. v. GOI [ (Delhi High Court - Full Bench)]. Therefore, demand of 10% would go against the policy of the Govt. permitting tax free procurement of materials from the DTA units.

g.      Referring to para 2 of C.B.E.C. Circular No. 92/2000-Cus., dt. 20-11-2000, he submits that the SEZ area should be deemed to be “outside the territory of India” and supplies made to promoters of SEZ should be treated as export.

h.      Referring to Section 51 of SEZ Act, 2005, he submits that in the event of conflict between the provisions of Customs Act and SEZ Act, the provisions of SEZ Act should prevail and therefore the definition of export given in the SEZ Act should be given preference and should be adopted which interpreting the provisions of CCR, 2004. He relies on several decisions in support of the said claim.

4.2 Shri V. Raghuraman appearing on behalf of M/s. Zuari Cements Ltd. in appeal No. E/1596/2010 assailed the order of the Commissioner, inter alia, on the following grounds :-

a.      Rule 6(5) of CCR, 2002 and Rule 6(6) of CCR, 2004, provides for exception from applicability of provisions of entire Rule 6 when the goods are supplied to SEZ. For claiming this exception, the supplies need not be termed as exports. In other words, provisions of Rule 6(1) to Rule 6(4) of CCR, 2002/2004 shall not be applicable to supplies made to SEZ whether such goods are exempted goods or excisable goods.

b.      As per the SEZ provisions in Chapter XA of the Customs Act, 1962, SEZ Rules, 2003 and Customs, Central Excise Duties and Service Tax Drawback Rules, 1995, the policy of the Central Government was for allowing tax exemptions/benefits both to units as well as to the developers. If SEZ developer is not treated at par with SEZ unit, the purpose of SEZ scheme shall be defeated.

c.       Supply of goods without payment of duty based on conditional exemption should not be treated as supply of exempted goods attracting provisions of Rule 6 of CCR, 2002/2004.

d.      From the date of introduction of provisions of SEZ under the Customs Act, the statutes, rules and regulations relating to SEZ, the supplies to SEZ have been treated as exports. He particularly draws our attention to the definition of exports as per the provisions of “Customs, Excise Duties and Service Tax Drawback Rules”.

e.       The decision of the Tribunal in Shoba Developers case [Order No. 435-445/2011] holding that there is no retrospective effect to be seen to the Rule 6, is not applicable to the present issue as the said case dealt with provision of services to SEZ developers under a different scheme of exemption notification issued under the Finance Act, 1994.

f.       The demand relating to the period Feb. 2004 to Jan. 2008 amounting to Rs. 66,00,988/- is barred by limitation as the appellants have given necessary intimation to the Department about the fact of clearance without payment of duty before clearance.

g.      He also draws our attention to para 17 of the decision of the Tribunal in the case of Shoba Developers and submits that the appeals were allowed on the basis of the decision of the Tribunal in the case of Bajaj Tempo Ltd. v. CCE, Pune [ (Tri. - Bom.)] and Sterlite Industries India Ltd. v. CCE, Pune [ (Tri.-LB)] and that it has been clarified that other issues submitted and discussed are not relevant.

4.3 Ld. Advocates representing other assessees basically adopted the above arguments.

5. Ld. Jt. CDR made the following submissions :-

a.      Relying on the decision of Hon’ble Gujarat High Court in the case of ESSAR Ltd. v. UOI [ (Guj.)] and the decision of the Hon’ble High Court of Karnataka in the case of Shyamaraju & Co. (India) Pvt. Ltd. v. Union Of India.)], he submits that provisions of SEZ Act cannot be generalized and applied to each and every Act and therefore the supplies made to SEZ or its developers cannot be treated as export in terms of the Customs Act.

b.      Relying on the decision in the case of Kirloskar Oil Engines Ltd. v. CCE&C, Aurangabad [ (Tri.-Mumbai)], he submits that the meaning of the term of export in Central Excise law should be treated as export in terms of definition of the Customs Act.

c.       Regarding the submission on behalf of the assessees that the Notification No. 50/2008 should be treated as retrospective, he submits that notification cannot be given retrospective effect. He relies on the decision in the case of Govt. v. Indian Tobacco Association [ (S.C.)].

d.      Supplies made to SEZ units can only be treated as deemed exports for the purpose of certain benefits and the same cannot be treated as export under Rule 19 of the Central Excise Rules, 2002.

e.       Regarding the claim about the consistent policy of the Govt. to treat supplies to SEZ and developers as exports, he submits that it is only a case of deemed exports for the purpose of benefits like rebate, drawback and other IT benefits and cannot be treated as export under Rule 19 of the Central Excise Rules, 2002. He further submits that the amendment to definition of the term “export” w.e.f. 3-3-2003 to drawback rules is only for the limited purpose of granting drawback to such deemed exports.

f.       Demand of amount in terms of Rule 6 of the Cenvat Credit Rules cannot be equated as levy of tax. There is no ambiguity in this regard.

g.      Section 51 of the SEZ Act, no doubt provides for overriding effect but the same is only in cases of inconsistency. However, there is no inconsistency in the present case. He refers to para 11 of the decision of the Tribunal in the case of Sobha Developers Ltd.

h.      The claim of the assessees to not to treat conditionally exempted goods as not exempted amounts to reading the expression “exempted goods” in Rule 6 as “unconditionally exempted goods” and the same is not warranted. This will also be contrary to Rule 3(a)(vii) where conditionally exempted goods are also included.

6.1 We have carefully considered the submissions from both sides and perused the records. In all these cases, the assessees have supplied the excisable goods without payment of duty to developers/promoters of SEZ. There is no dispute that the SEZ developers/promoters were entitled to get the goods supplied by the manufacturers in DTA without payment of duty. There is also no dispute that when exempted goods are supplied to SEZ units, the exception under Rule 6(5) of Cenvat Credit Rules, 2002 and Rule 6(6) of Cenvat Credit Rules, 2004 shall apply. In the content of applying the exceptions in the said Rules, the dispute relates to the “status” of goods supplied by the DTA units to the SEZ developers/promoters as to whether the same is to be treated as “goods exported” or otherwise, whether such supplies are to be treated as “dutiable goods” or as “exempted goods”.

6.2 If the goods are treated as exported, then exception under Rule 6(5) of the Cenvat Credit Rules, 2002 and Rule 6(6) of Cenvat Credit Rules, 2004 shall apply.

6.3 If clearances are treated as clearance of dutiable goods, then Rule 6 of the Cenvat Credit Rules, 2002 and Cenvat Credit Rules, 2004 shall not apply. On the other hand, if they are treated as clearance of exempted goods, then the said Rules apply, subject, further to the exceptions provided therein.

7.1 The contention of the Department is that the goods are not exported as they have not left the territory of India, as ‘export’ in terms of Customs Act means taking from India to any place outside India. Supplying to SEZ area does not mean that the goods have been taken to any place outside India. Relying on the decisions of the Hon’ble High Court of Gujarat in the case of ESSAR Steel Ltd. and the decision of the Hon’ble High Court of Karnataka in the case of Shyamaraju & Co. cited supra, it is the contention of the Department that if for levy of export duty, supply to SEZ cannot be treated as export under Customs Act, the same cannot be treated as export for availing the benefit of Cenvat credit. It is also the contention of the Department that Central Excise Act being an allied Act closely connected to Customs Act, the term “export” in the Central Excise Act/Rules should be given the meaning as per definition of export under the Customs Act.

7.2 On the other hand, on behalf of the assessees, it was submitted that prior to enactment of SEZ Act, 2005, Chapter XA of the Customs Act contained the SEZ provisions and supplies made to SEZ were treated as export. It is also submitted that the drawback rules governing Customs, Central Excise Duties and Service Tax was specifically amended to treat the supplies made to 100% EOU as exports. Further it was contended that various circulars of the CBEC issued when the SEZ provisions were under the Customs Act and after the enactment of SEZ Act, 2005 clearly treated such supplies as exports only. In this regard, Circular No. 24/2003-Cus., dated 1-4-2003 issued from F. No. 602/2/2002/DBK, Circular No. 2/2004-Cus., dated 8-1-2004 issued from F. No. 602/2/2002-DBK and Circular No. 29/2006-Cus., dated 27-12-2006 issued from F.No. DGEP/SEZ/331/2006 were referred to. Further, it was contended that if there was a conflict between the meaning of the term export under the SEZ Act and meaning of the term under other Acts like the Customs Act or the Central Excise Act, in view of Section 51 of the SEZ Act, 2005 the definition given under SEZ Act should be given preference and therefore the goods should be treated as export goods.

7.3 In the light of rival contentions as above, it is appropriate to consider whether supply of goods to SEZ should be treated as export both in terms of SEZ provisions under Chapter XA of the Customs Act and in terms of SEZ Act. The term export has not been defined in the Central Excise Act or in the Central Excise Rules or in the Cenvat Credit Rules. The term export under the Customs Act means “taking out of India to a place outside India” and the term “export goods” means “any goods which are to be taken out of India to a place outside India”.

7.4 W.e.f. 3-3-2003, by Notification No. 19/2003-Cus., the term export in Customs, Central Excise Duties and Service Tax Drawback Rules, 1995, the definition of the term export has been amended to read as follows -

Rule 2

(a)………………

(b) ………………

(c) “export”, with its grammatical variations and cognate expressions, means taking out of India to a place outside India or taking out from a place in Domestic Tariff Area (DTA) to a special economic zone and includes loading of provisions or store or equipment for use on board a vessel or aircraft proceeding to a foreign port;

………………

It is relevant to note that this amendment has been brought out to expand meaning of the term “export” to include “taking out from a place in Domestic Tariff Area to a special economic zone” by an issuance of a notification under the Customs Act.

7.5 Section 76F of Chapter XA of the Customs Act reads as under :-

Levy of duties of customs. — Subject to the conditions as may be specified in the rules made in this behalf, -

(a)     any goods admitted to a special economic zone from the domestic tariff area shall be chargeable to export duties at such rates as are leviable on such goods when exported;

(b)     any goods removed from a special economic zone for home consumption shall be chargeable to duties of customs including anti-dumping, countervailing and safeguard duties under the Customs Tariff Act, 1975 (51 of 1975), where applicable, as leviable on such goods when imported; and

(c)     the rate of duty and tariff valuation, if any, applicable to goods admitted to, or removed from, a special economic zone, shall be the rate and tariff valuation in force as on the date of such admission or removal, as the case may be, and where such date is not ascertainable, on the date of payment of the duty.

A careful reading of Section 76F as above reveals that goods admitted to SEZ from the DTA is treated as exports and if any duty is leviable on goods exportsd out of India, when the said goods are admitted to SEZ then export duty is also leviable. Similarly, any goods removed from a SEZ to DTA has been treated as import and held liable to import duties including anti-dumping, countervailing and safeguard duties.

7.6 The Section 76-I of erstwhile SEZ provisions dealing with drawback on goods admitted to a SEZ reads as under-

“Any goods admitted to a special economic zone from the domestic tariff area for the purpose of authorized under this Chapter shall be eligible for drawback under Section 75 as if such goods are export goods for the purpose of that section.”

It is to be noted that goods admitted to SEZ are treated “as if such goods are export goods”. The drawback rules also stands amended under the Customs Act by enlarging the scope of the term “export” to include “taking out from a place in DTA to a SEZ”, making such supplies eligible for drawback under Section 75 of the Customs Act.

7.7 Viewed in this background, the SEZ provisions contained in Chapter XA of the Customs Act clearly treated goods admitted to SEZ as export not only for grant of export benefits but also for levying of export duties. In view of the above, the goods admitted to SEZ from DTA has to be treated only as exports till 9-2-2006 when the said provisions were in vogue.

8.1 SEZ Act came into effect from 10-2-2006. The definition of “Export” under the SEZ Act in relation to supplying of goods or providing of services to a unit or developer is at variance with the definition of the term Export under the stems Act.

8.2 The SEZ Act defines the term ‘export’ in Section 2(m) as follows-

“Export” means -

a. …………..

b. Supplying goods or providing services, from the Domestic Tariff Area to a Unit or Developer; or

c ………………”

Further Section 51 of the SEZ Act, 2005 provides preference to the provisions of the said Act as follows -

“The provisions in this Act shall have effect notwithstanding anything inconsistent therewith contained in any other law for time being in force or in any instrument having effect by virtue of any law other than this Act.”

8.3 It is to be noticed that when the supply of goods to SEZ is treated as export, it is necessarily in the context of supply by the DTA units and to extend all the benefits available in respect of export goods. In other words, the units supplying goods from DTA are the ‘exporters’ and the goods supplied by the DTA units are the ‘export goods’. Therefore, the definition in the SEZ Act should be applicable in respect of supplies made by DTA units to the SEZ units. Otherwise the said definition becomes redundant.

8.4 In the light of the above and in view of the overriding effect of Section 51 of the SEZ Act, the supplies made by DTA units to SEZ units will amount to export for the purpose of all export benefits. The benefit shall include benefits available in respect of exports provided by exception to Rule 6 of Cenvat Credit Rules, 2004.

8.5 Incidentally, there is no provision in the SEZ Act for levying export duties on goods supplied to SEZ units from DTA units unlike in Section 75-I of the Customs Act in the SEZ provisions which were in vogue till 10-2-2006 under Chapter XA of the Customs Act. Further, this issue stands decided in favour of the assessee by the decision of Hon’ble High Court of Gujarat in the case of ESSAR Steel Ltd. and the decision of the Hon’ble High Court of Karnataka in the case of Shyamaraju & Co. (India) Pvt. Ltd.

Whether supplies made to SEZ developers and promoters, attract exceptions to Rule 6 of Cenvat Credit Rules, 2002/2004 :

9.1.1 Rule 6 of the CCR, 2002 reads as under :-

Rule 6. Obligation of manufacturer of dutiable and exempted goods - (1) The CENVAT credit shall not be allowed on such quantity of inputs which is used in the manufacture of exempted goods, except in the circumstances mentioned in sub-rule (2).

(2) Where a manufacturer avails of CENVAT credit in respect of any inputs, except inputs intended to be sued as fuel, and manufactures such final products which are chargeable to duty as well as exempted goods, then, the manufacturer shall maintain separate accounts for receipt, consumption and inventory of inputs meant for use in the manufacture of dutiable final products and the quantity of inputs meant for use in the manufacture of exempted goods and take CENVAT credit only on that quantity of inputs which is intended for use in the manufacture of dutiable goods.

(3) The manufacturer, opting not to maintain separate accounts shall follow either of the following conditions, as applicable to him, namely :-

(a) if the exempted goods are -

1 to 8 ……………………………..

the manufacturer shall pay an amount equivalent to the CENVAT credit attributable to inputs used in, or in relation to, the manufacture of such final products at the time of their clearance from the factory; or

(b) if the exempted goods are other than those described in condition (a), the manufacturer shall pay an amount equal to eight per cent of the total price, excluding sales tax and other taxes, if any, paid on such goods, of the exempted final product charged by the manufacturer for the sale of such goods at the time of their clearance from the factory.

Explanation I - The amount mentioned in conditions (a) and (b) shall be paid by the manufacturer by debiting the CENVAT credit or otherwise.

Explanation II - If the manufacturer fails to pay the said amount, it shall be recovered along with interest in the same manner, as provided in rule 12, for recovery of CENVAT credit wrongly taken.

(4) No CENVAT credit shall be allowed on capital goods which are used exclusively in the manufacture of exempted goods, other than the final products which are exempt from the whole of the duty of excise leviable thereon under any notification where exemption is granted based upon the value or quantity of clearances made In a financial year.

(5) The provisions of sub-rule (1), sub-rule (2), Sub-rule (3) and sub-rule (4) shall not be applicable in case the exempted goods are either -

1.       cleared to a unit in a free trade zone; or

2.       cleared to a unit in a special economic zone; or

3.       cleared to a hundred per cent export-oriented undertaking; or

4.       cleared to a unit in an Electronic Hardware Technology Park or Software Technology Park; or

5        …………………

6.       cleared for export under bond in terms of the provisions of the Central Excise Rules, 2002.

7.       …………………

9.1.2 Rule 6 of the CCR, 2004 reads as under :-

Rule 6. Obligation of manufacturer of dutiable and exempted goods and provider of taxable and exempted services. - (1) The CENVAT credit shall not be allowed on such quantity of Input or input service which is used in the manufacture of (exempted goods or for provision of exempted services,) except in the circumstances mentioned in sub-rule (2).

[Provided that……………….]

(2) Where a manufacturer or provider of output service avails of CENVAT credit in respect of any inputs or input services (****), and manufactures such final products or provides such output service which are chargeable to duty or tax as well as exempted goods or services, then, the manufacturer or provider of output service shall maintain separate accounts for receipt, consumption and inventory of input and input service meant for use in the manufacture of dutiable final products or in providing output service an the quantity of input meant for use in the manufacture of exempted goods or services and take CENVAT credit only on that quantity of input or input service which is intended for use in the manufacture of dutiable goods or in providing output service on which Service Tax is payable.

(3) Notwithstanding anything contained In sub-rules (1) and (2), the manufacturer of goods or the provider of output service, opting not to maintain separate accounts, shall follow either of the following options, as applicable to him, namely : -

[(i)     the manufacturer of goods shall pay an amount equal to five per cent of value of the exempted goods and the provider of output service shall pay an amount equal to six per cent of value of the exempted services; or]

(ii)     the manufacturer of goods or the provider of output service shall pay an amount equivalent to the CENVAT Credit attributable to inputs and input services used in, or in relation to, the manufacture of exempted goods or for provision of exempted services subject to the conditions and procedure specified in sub-rule (3A).

Explanation I - If the manufacturer of goods or the provider of output service, avails any of the option under this sub-rule, he shall exercise such option for all exempted goods manufactured by him or, as the case may be, all exempted services provided by him, and such option shall not be withdrawn during the remaining part of the financial year.

Explanation II - For removal of doubt, it is hereby clarified that the credit shall not be allowed on inputs and input services used exclusively for the manufacture of exempted goods or provision of exempted service.

(3A) …………………..

(4) No CENVAT credit shall be allowed on capital goods which are used exclusively in the manufacture of exempted goods or in providing exempted services, other than the final products which are exempt from the whole of the duty of excise leviable thereon under any notification where exemption is granted based upon the value or quantity of clearances made in a financial year.

(5) …………………..

(6) The provisions of sub-rules (1), (2), (3) and (4) shall not be applicable in case the excisable goods removed without payment of duty are either -

[(i)     cleared to a unit in a special economic zone or to a developer of a special economic zone for their authorized operations: or]

(ii)     cleared to a hundred per cent exported-oriented undertaking; or

(iii)    cleared to a unit in an Electronic Hardware Technology Park or Software Technology Park; or

(iv) ………….

(v)     cleared for export under bond in terms of the provisions of the Central Excise Rules, 2002; or

(vi)    ………….

(vii)   ………….

9.2 Rule 6(1) in both the Rules stipulates that cenvat credit shall not be allowed on such quantity of inputs which is used in the manufacture of exempted goods except in circumstances mentioned in sub-rule (2). Sub-rule (2) stipulates that the manufacturer shall maintain separate accounts for receipt, consumption and inventory of inputs meant for use in the manufacture of dutiable final products and similar accounts for inputs meant for use in the manufacture of exempted goods. In such a situation, cenvat credit shall be taken only on the quantity of inputs which is intended for use in the manufacture of dutiable goods. Sub-rule (3) provides for option not to maintain separate accounts if amounts are paid as stipulated in the said Rule on the total price of exempted goods. Sub-rule (5) of the Rule 6 of CCR, 2002 and sub-rule (6) of Rule 6 of CCR, 2004 provide exception from applying the provisions of sub-rule (1), (2), (3) and (4). Such exceptions have been granted in respect of clearances made for export under bond and also in respect of goods cleared to a unit in SEZ. If the supplies made to SEZ are treated as supply of dutiable goods, then the question of present assessees manufacturing both dutiable and exempted goods does not arise and therefore, the provisions of Rule 6 of Cenvat Credit Rules, 2002/2004 are not at all attracted. The question of applying exception arises only when the supplies are treated as exempted goods.

9.3 Insofar as Rule 6 (6) relating to the SEZ was concerned, the same was amended w.e.f. 31-12-2008. The provisions prior to amendment was :

“The provisions of sub-rule (1), (2), (3) and (4) shall not applicable in case the excisable goods removed without payment of duty (1) cleared to a unit in SEZ.”

The provisions after amendment was :

“The provisions of sub-rule (1), (2), (3) and (4) shall not applicable in case the excisable goods removed without payment of duty or either cleared to a unit in SEZ or to a developer of SEZ for their authorized operations.”

9.4 According to the Department the amendment effective from 31-12-2008 Rule 6 of Cenvat Credit Rules, 2004 is enlarging the scope of exception to the supplies made to a developer of SEZ for their authorized operation and the same is only prospective in nature and the same cannot be applied retrospectively. Relying on the decision of the Tribunal in the case of Gujarat Sidhee Cement Ltd. v. CCE, Rajkot [2007 (216) E.L.T. 55 (Tri. Ahmd.)] and the decision of the Hon’ble High Court in the case of Vasu Knitwear v. CCE, Ludhiana reported in (P & H), it was submitted that while interpreting statutes plain language was to be given effect and in the absence of specific provisions for retrospective effect the notification should be read only as in prospective in nature. It was also submitted that the clarification of the Board in F.No. 267/52/2008-CX., dated 7-1-2009 was to the effect that the amendment dt. 31-12-2008 was applicable only from the date of notification. On the other hand, on behalf of the assessees, it was submitted that it was the consistent policy of the Central Govt. to provide concession and exemption to SEZ units as well as SEZ developers. Therefore, there was omission in the CCR, 2002/2004 to give effect to the said policy of the Central Govt. Therefore, the amending Notification has been issued by way of “substitution”. When the policy was consistent, retrospective effect has to be given to such provisions as per dictum of Supreme Court in the cases of W.P.I.L. Ltd. v. Commissioner [ (S.C.)] and GOI v. Indian Tobacco Association [ (S.C.)].

10.1 It is not disputed that the Notification No. 50/2008-C.E. (N.T.), dated 31-12-2008 brings in amendment to Rule 6(6)(i) of the CCR, 2004, ‘by way of substitution’. It is true that every case of amendment by substitution cannot be deemed to be having retrospective application. However, the judgments of the Hon’ble Supreme Court in the case of WPIL Ltd., Indian Tobacco Association and Zile Singh v. State of Haryana & Ors. [(2004) 8 SCC 1] provide guidelines as to when an amendment made by way of substitution has to be given retrospective effect.

10.2 In the case of WPIL Ltd., it has been held that when the policy of the Govt. was not to impose excise duty on the parts of power driven pumps used in the factory premises for manufacture of power driven pumps, the subsequent notification should be treated as clarificatory in nature and making explicit what was implicit.

10.3 In the case of India Tobacco Association, Hon’ble Supreme Court invoking the doctrine of fairness for treating the amendment retrospective in para 28 held as under :-

“28. The doctrine of fairness also is now considered to be a relevant factor for construing a statute. In a case of this nature where the effect of a beneficent statute was sought to be extended keeping in view the fact that the benefit was already availed of by the agriculturists of tobacco in Guntur, it would be highly unfair if the benefit granted to them is taken away, although the same was meant to be extended to them also. For such purposes the statute need not be given retrospective effect by express words but the intent and object of the legislature in relation thereto can be culled out from the background facts.”

10.4 In the case of Zile Singh v. State of Haryana & Ors, the Hon’ble Supreme Court held that the substitution of one text for the other pre-existing text is one of the known and well-recognized practices employed in legislative drafting and ‘Substitution’ has to be distinguished from ‘supersession’ or a mere repeal of an existing provision. It has been further held that the process of substitution consists two steps : 1 the old rule is made to cease to exists and, 2 the new rule is brought into existence in its place.

11. In the present case, taking into account the provisions of the erstwhile SEZ in Chapter XA of the Customs Act, the provisions in the SEZ Act and the clarifications of the Board (except the clarification dated 7-1-2009), it is apparent that the intention was to make available the benefits to SEZ developer for the authorized operations in addition to SEZ units and therefore the amendment No. 50/2008-C.E. (N.T.), dated 31-12-2008 Cenvat Credit Rules, 2004 is applicable retrospectively. However, as the amendment by No. 50/2008 is only to Rule 6 of Cenvat Credit Rules, 2004, the question of extending the benefit of amendment to Cenvat Credit Rules, 2002 does not arise.

12. As the issues involved relate to interpretations of SEZ provisions under the Customs Act, SEZ Act and provisions of the Central Excise Rules and the Cenvat Credit Rules, no charge of suppression by the assessees can be sustained and, therefore, the question of invoking the extended period of limitation and also imposing penalties does not arise.

13. From the above, the following emerges.

a.      For the period upto 9-2-2005, the supplies made to SEZ units are to be treated as export both for extending export benefits and for levy of duty in terms of SEZ provisions contained in Chapter XA of the Customs Act.

b.      For the period from 10-2-2006, the definition of the term “export” under the Customs Act is not consistent with the definition of the term “export” under the SEZ Act. However, the definition of the term “export” under the SEZ Act shall prevail over the definition of term “export” under the Customs Act. Therefore, supplies made to SEZ from DTA units shall be treated as export.

c.       Since both during the period prior to and w.e.f. 10-2-2006, the supplies made to SEZ are held to be “export”, the application of provisions of Cenvat Credit Rules for recovery of amounts on goods supplied to SEZ units in terms of Rule 6 of CCR, 2002/CCR, 2004 does not arise.

d.      The amendment to Rule 6(1) of the CCR, 2004 by the amending Notification No. 50/2008-C.E. (N.T.), dated 31-12-2008 shall be applicable w.e.f. 10-9-2004 when the CCR, 2004 came into existence and, therefore, exception provided under Rule 6(6) of Cenvat Credit Rules, 2004 shall be applicable to supply of exempted goods both to SEZ units and SEZ developers/promoters.

e.       Appeals of the assessees deserve to be allowed and the appeals of the Department deserve to be rejected.

f.       Incidentally, in the facts and circumstances of the case, the question of invoking extended period of limitation for demand of amounts and imposition of penalties does not arise.

14. Accordingly the appeals of the assessees are allowed with consequential relief as per law and the appeals of the Department are rejected. Cross Objection No. E/CO/02/2010 is also disposed off.

(Pronounced on 5-9-2011)