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  • Anil Choudhary
  • B. Ravichandran
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  • provisions of Rule 25 of Central Excise Rules, 2004
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  • Anil Choudhary
  • B. Ravichandran
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  • provisions of Rule 25 of Central Excise Rules, 2004
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Smart Summary

Tribunal Order Summary — B. Ravichandran, Member (T) (Pronounced 6-6-2017)

Factual and Procedural Background

The Commissioner of Central Excise, Jaipur-II issued an order dated 31-3-2011 against an assessee engaged in the manufacture of cotton yarn and knitted fabrics. The assessee had earlier operated as a 100% Export Oriented Unit (EOU) and subsequently applied to exit the EOU scheme and operate under the EPCG scheme. The Development Commissioner, Noida permitted exit from EOU and conversion to EPCG under para 6.18 of the Foreign Trade Policy (FTP). The EPCG authorisation listed textile and power-plant machinery along with spare parts and accessories.

On verification it was noticed the assessee had paid duty at 3.09% on capital goods and spares in terms of Notification No. 64/2008-Cus. Revenue alleged that indigenously procured capital goods/spares were not correctly debonded and that no Central Excise exemption notification allowed clearance to a unit availing EPCG. Revenue alleged that capital goods/spares originally procured duty-free under Notification No. 22/2003-C.E. (at the time of setting up the EOU) ought to be debonded under para 8(1) of that Notification.

A show-cause notice dated 13-5-2009 sought Central Excise duty of Rs. 7,31,57,629/-, and a customs duty demand of Rs. 22,26,129/- was made in respect of imported spare parts. The original adjudicating authority issued an order (OIO dated 29-3-2011) deciding three main issues: (1) differential duty on indigenously procured capital goods (demand Rs. 6,63,54,420 — confirmed against the assessee); (2) depreciation calculation and classification of certain items as capital goods (demand Rs. 68,03,209 — dropped in favour of the assessee); and (3) inclusion of imported spare parts in the EPCG licence (demand Rs. 22,26,129 — dropped in favour of the assessee).

The assessee appealed the original order to the Tribunal contesting the points decided against it; the department appealed against the findings favourable to the assessee on issues 2 and 3. The Tribunal heard both sides and reserved its decision (pronounced 6-6-2017).

Legal Issues Presented

  1. Whether indigenously procured capital goods can be debonded under the EPCG scheme on payment of concessional duty (3% / 3.09%) instead of full Central Excise duty (14.42%), when those goods were originally brought into the EOU duty-free under Notification No. 22/2003-C.E.?
  2. Whether depreciation (for debonding value calculation) is to be calculated based on rates prevailing on the date of debonding or on the date of receipt of the capital goods; and whether certain items (fire control systems, water storage tanks, etc.) qualify as capital goods for depreciation?
  3. Whether imported spare parts claimed by the assessee were properly included within the EPCG authorisation and thus eligible for concession.

Arguments of the Parties

Appellant-assessee's Arguments

  • Notification No. 22/2003 (as amended) allows capital goods to be debonded under the prevailing EPCG scheme provided the unit has achieved positive NFE; the assessee had achieved positive NFE and was eligible under para 6.18 of FTP to exit to EPCG.
  • The EPCG scheme permits import of capital goods at a 3% duty rate; since Notification No. 22/2003 allows debonding in accordance with FTP, debonding should be on payment of 3% duty only, without differential Central Excise charge.
  • Even if full excise duty (14.42%) were payable at debonding, the assessee would be able to take Cenvat credit of that duty, creating revenue neutrality — thus no effective revenue accrual to the department.
  • Notification No. 22/2003-C.E. is a self-contained code for EOUs and its para 8 prescribes debonding procedure that supports the assessee's position.
  • A final debonding order was issued by the Deputy Commissioner, and the Commissioner could not issue a further demand without reviewing that final order.
  • Certain items such as fire control systems and water storage tanks are capital goods and eligible for depreciation; the assessee relied on case law supporting this classification.
  • Imported and indigenous spare parts were detailed in the EPCG authorisation and should be covered by the EPCG concession.

Revenue's Arguments

  • No Central Excise exemption notification exists that grants concessional duty to an EPCG unit for procuring capital goods from DTA; therefore indigenously procured capital goods debonded to DTA should attract Central Excise duty (14.42%).
  • Depreciation should be calculated based on rates prevailing on the date of procurement/receipt of the capital goods (invoking Notification No. 1/95-C.E.), not on the date of debonding.
  • Certain items like fire-fighting systems do not qualify as capital goods for depreciation purposes.
  • Imported spare parts were not includible in the EPCG licence for concession.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Pudumjee Plant Laboratories Ltd. v. CCE, Pune-III (Tri.-Mum.) Held that the rate of duty on the depreciated value of capital goods should be determined as on the date of debonding under the EPCG scheme. The Tribunal relied on this decision to uphold the approach that depreciation rates prescribed in Notification No. 22/2003-C.E. (i.e., rates applicable at debonding) were correctly applied by the original authority when calculating debonding value.

Court's Reasoning and Analysis

The Tribunal analysed each contested point by reference to the governing policy provisions (Foreign Trade Policy and its Handbook of Procedure), the relevant Notifications issued by the Ministry of Finance, and the factual record (EPCG application, debonding documents and adjudication). The court's analysis proceeded as follows:

  1. On the key contention that debonding under Notification No. 22/2003 and para 6.18 FTP entitled the assessee to pay only the concessional EPCG duty (3%/3.09%) for indigenously procured capital goods, the Tribunal emphasised the separation between policy statements in the FTP and fiscal relief which must be granted by specific notifications or tariff entries issued by the Ministry of Finance. The court found no Central Excise exemption notification that specifically allowed the claimed exemption to capital goods cleared to a unit availing EPCG. Notification No. 22/2003 was identified as designed to provide exemption to goods brought into EOUs, and does not itself create an exemption for supplies under EPCG; para 8 of that Notification sets out debonding procedure and depreciation methodology but does not operate as an exemption notification substituting for Ministry of Finance measures. Consequently, the Tribunal agreed with the original authority that the assessee's claim for exemption from Central Excise duty on indigenously procured capital goods lacked any supporting exemption notification and could not be accepted.
  2. The Tribunal rejected the assessee's argument based on "revenue neutrality" — i.e., that any duty paid would be creditable so there would be no effective gain to the Revenue. The court explained that revenue neutrality cannot be invoked as a legal bar to payment of tax otherwise due; availability of Cenvat credit is governed by Cenvat Credit Rules, 2004, and cannot be presumed to negate a duty liability or to avoid interest for non-payment. Revenue neutrality may bear on assessing bona fides but is not a substitute for legal entitlement to avoid tax.
  3. The Tribunal also rejected the submission that a final debonding order by the Deputy Commissioner precluded the Commissioner from initiating further proceedings. The court noted that the debonding was granted based on the assessee's submissions and FTP permission, and after subsequent scrutiny of documents and items claimed to be converted to EPCG scheme, proceedings could be initiated. Thus the demand following scrutiny was not infructuous or improper.
  4. On the depreciation issue (appeal by Revenue), the Tribunal accepted the approach adopted by the original authority: where debonding is carried out in terms of Notification No. 22/2003-C.E., the prescribed rates of depreciation applicable under that Notification (i.e., assessed as on date of debonding) are to be applied. The Tribunal relied on the Pudumjee decision which held that the rate of duty on the depreciated value should be on the date of debonding under the EPCG scheme, and concluded the depreciation rates used by the original authority were correct.
  5. Regarding whether items such as fire control systems, water storage tanks, cord can, etc., qualify as capital goods, the Tribunal reviewed the policy definitions in FTP para 9.12 (definition/scope of capital goods), para 9.2 (scope of accessories) and para 6.6.1(b) of the Handbook of Procedure. The original authority had examined the factual nature of the items and concluded these items fall within the trade understanding of "capital goods"; the Tribunal agreed with that factual and legal conclusion and upheld the allowance of depreciation and the dropping of the associated demand.
  6. As to imported and indigenous spare parts and accessories, the Tribunal noted the EPCG application of 14-4-2008 listed various spares, and after analysis the original authority had recorded categorical reasons for treating these items as eligible under the EPCG authorisation. The Revenue did not demonstrate any substantial question of fact or law to overturn those findings; the Tribunal affirmed the original authority on this point.
  7. On the Revenue's contention about non-imposition of penalty under Rule 25 of the Central Excise Rules, 2004, the Tribunal accepted the original authority's finding that the assessee had not contravened the Rules by removing excisable goods in breach; therefore penalty was not warranted. The Tribunal found no reason to interfere.

Holding and Implications

Core Ruling: The Tribunal upheld the impugned order in substance and dismissed both appeals.

Direct consequences for the parties:

  • The differential Central Excise duty demand on indigenously procured capital goods (Rs. 6,63,54,420 as recorded in the original order) was confirmed by the original authority and the Tribunal found no infirmity in that finding — the assessee's appeal on this point is rejected.
  • The original authority's decisions in favour of the assessee on (a) depreciation calculation (applying rates as on debonding) and (b) classification of certain items (fire control system, water storage tank, etc.) as capital goods, and (c) inclusion of specified imported and indigenous spare parts within the EPCG authorisation, were upheld; the associated demands (Rs. 68,03,209 and Rs. 22,26,129) were dropped and the Revenue's appeal on those points was rejected.
  • No penalty under Rule 25 was imposed and the Tribunal upheld that conclusion.

Broader legal implication: The Tribunal emphasised that policy provisions in the FTP do not themselves substitute for fiscal notifications issued by the Ministry of Finance; fiscal relief must be traceable to specific tariff entries or exemption notifications. The decision also affirms the application of depreciation rates as on date of debonding (following Pudumjee), but the Tribunal did not purport to lay down a new general rule beyond the facts and legal instruments considered.

Disposition: Impugned order upheld; appeals of both assessee and Revenue rejected. (Pronounced on 6-6-2017.)

Show full summary ...

    Nitin Spinners Ltd. v. Commissioner of C. Ex., Jaipur-II

    [Order per : B. Ravichandran, Member (T)]. - Both Revenue and the assessee are in appeal against the order dated 31-3-2011 of Commissioner of Central Excise, Jaipur-II. The appellant-assessee are engaged in the manufacture of cotton yarn and knitted fabrics. They were earlier operating under 100% EOU scheme. Later they have applied for opting out of the scheme. The Jurisdictional Development Commissioner, Noida allowed the appellant-assessee to opt out of EOU scheme and to operate under EPCG scheme in terms of para 6.18 of Foreign Trade Policy. In the EPCG licence, list of textile and power plant machinery along with spare parts and their accessories were given. During the course of verification of records of the appellant-assessee, it was noticed that they have paid duty @ 3.09% on the capital goods and spares/accessories in terms of Notification No. 64/2008-Cus., dated 9-5-2008. It appeared that the appellant have not discharged correct duty on the capital goods/spare parts procured indigenously. The case of the Revenue is that there is no specific Central Excise notification which provides exemption from payment of duty when cleared to unit availing EPCG scheme. The capital goods/spare parts which were originally procured duty free in terms of Notification No. 22/2003-C.E., dated 31-3-2003 while setting up of EOU, would have to be debonded in terms of para 8(1) of the said Notification.

    2. Accordingly, the Revenue proceeded against the appellant-assessee, alleging short payment of Central Excise duty on indigenous capital goods/spare parts/accessories, during the course of debonding of EOU unit. Show cause notice dated 13-5-2009 was issued to the appellant-assessee to demand Central Excise duty of Rs. 7,31,57,629/-. A demand of Rs. 22,26,129/- towards customs duty was also made in respect of imported spare parts alleging the same were not includible in the EPCG benefit. The appellant-assessee contested the demand. The original authority adjudicated the case resulting in the impugned order.

    3. The original authority decided on the following issues :

    Sl. No. Issue Duty demand Effect of the O-I-O
    1. Whether indigenously procured capital goods could be de-bonded under the EPCG scheme on payment of 3% duty instead of 14% excise duty. Rs. 6,63,54,420/- Issue decided against the appellant and demand confirmed with interest.
    2. (i) Whether depreciation is to be calculated based on rates prevailing on the date of debonding or on the date of receipt of the capital goods? (ii) Whether certain items (like fire control systems, water storage tank, etc.) fall under the definition of capital goods and eligible for depreciation? Rs. 68,03,209/- Issue decided in favour of the appellant and demand dropped.
    3. Whether imported spare parts were included in the EPCG licence? Rs. 22,26,129/- Issue decided in favour of the appellant and demand dropped.

    The present appeal by the appellant-[assessee] is challenging the said OIO dated 29-3-2011 to the extent it is against them. The appeal filed by the department is challenging the findings given on issues 2 and 3.

    4. Ld. Counsel for the appellant-assessee submitted that Notification No. 22/2003 as amended, provides that capital goods may be debonded under the prevailing EPCG scheme provided the unit has achieved positive NFE. There is no dispute about fulfilment of positive NFE by the appellant-assessee. Ld. Counsel submitted that the EPCG scheme permits import of capital goods @ 3%. Notification No. 22/2003-C.E., clearly stipulates that EOU may debond any capital goods in accordance with provision of Foreign Trade Policy. It necessarily follows, that the said debonding shall be made on payment of 3% duty only.

    5. Even if the excise duty is to be paid @ 14.42% at the time of debonding, the appellant-assessee would have been eligible for taking credit of the same. Effectively, no revenue will accrue to the department. In case of such revenue neutrality the demand shall not survive. It is further contended that Notification No. 22/2003-C.E., is a self contained code for EOUs. Para 8 therein gives the procedure for debonding. Since the appellant-assessee fall clearly under the provisions of the said Notification, the extra duty liability as demanded by the lower authority is not sustainable.

    6. Ld. Counsel also submitted that the Deputy Commissioner has issued a final debonding order and without reviewing the said order no further demand can be issued by the Commissioner. Further, it is also contended that EOU being a custom bonded warehouse is considered as a place outside India. As such, there is no reason for not charging customs duty for goods cleared in DTA.

    7. Regarding the appeal filed by the Revenue, the appellant-assessee submitted that the original order was passed in terms of provisions of para 8 of Notification No. 22/2003-C.E. The various items like fire control system, water storage tank etc. are to be considered as capital goods. The appellant-assessee relied on certain case laws in which this issue has been decided in their favour.

    8. Ld. AR for the Revenue while opposing the submissions of the appellant-assessee submitted that the Commissioner erred in allowing the depreciation based on the rates, prevailing at the time of debonding. He should have followed the rates as prevailing on the date of receipt of capital goods. Further, it is also contended that certain items like fire fighting etc., cannot fall under the category of capital goods, for depreciation. The imported spare parts were not to be included in the EPCG licence for concession.

    9. We have heard both the sides and perused appeal records.

    10. We take up appeal by the appellant-assessee first. The original authority held that there is no Notification granting concessional rate of duty to EPCG unit for procuring capital goods from DTA. He held that in case where EOU is debonded the same is required to pay, in respect of capital goods at the time of debonding, applicable customs duty @ 3.09% in cases where capital goods that have been imported and Central Excise duty @ 14.42% adv. in cases where capital goods were procured from indigenous units. The appellant-assessee contested the findings of the original authority on the ground that the debonding is done after following the stipulated procedure of the Foreign Trade Policy. Permission has been granted in terms of para 6.18 of the Foreign Trade Policy 2004-09. The relevant provisions of para 6.18 of Foreign Trade Policy is as below :

    “(d) An EOU/EHTP/STP/BTP unit may also be permitted by Development Commissioner, to exit from the scheme at any time on payment of duty on capital goods under the prevailing EPCG Scheme for DTA Units. This will be subject to fulfilment of positive NFE criteria under EOU scheme, eligibility criteria under EPCG Scheme and standard conditions indicated in HBP v 1.”

    11. The contention of the appellant is that the Policy did not make a distinction between capital goods imported or procured from domestic sources. It was further contended that Notification No. 22/2003-C.E., dated 31-3-2003 is a self contained code for debonding of EOU and para 8 of the said Notification read with the above mentioned provisions of the Policy will make them entitled to pay concessional rate of customs duty on such capital goods and the Central Excise duty of 14.42% is not applicable to them. On careful examination of the legal provisions, we find that the claim of the appellant-assessee is not supported by any exemption Notification issued by the Ministry of Finance. Para 8 of the said Notification stipulates that no such clearance or debonding of capital goods under EPCG Scheme of Chapter 5 of Foreign Trade Policy shall be allowed if the user industry has not fulfilled the positive NFE criteria at the time of clearance or debonding in terms of para 6.18 (d) of the Foreign Trade Policy. Thereafter, the procedure for such clearance and method of calculation of depreciation are mentioned in the said Notification. Admittedly, in the present case, the appellant-assessee are entitled for debonding as they have achieved positive NFE. Accordingly, debonding was permissible in terms of the said Notification. It is to be noted that Notification No. 22/2003-C.E. is for providing exemption to goods brought into EOU. This Notification does not provide any exemption to the capital goods, spare parts etc., for supply under EPCG Scheme. We are in agreement with the original authority regarding absence of any exemption Notification covering the situation as explained above, to support the claim of the appellant-assessee for an exemption from Central Excise duty.

    12. It should be noted that the Foreign Trade Policy is for enunciating the Policy of the Government with reference to export/import and trade promotion. Various schemes and procedures were stipulated under the Policy. The rates of duty applicable to any goods either manufactured in India, imported into or exported out of India are to be governed by specific tariff entries and notifications issued by Ministry of Finance who are incharge of tax collection on such goods. The rates applicable to any goods should have a clear legislative provision by way of rate in the tariff or by a supporting exemption notification. We note that no specific exemption Notification could be cited by the appellant-assessee to claim exemption for the capital goods which are being debonded to avail EPCG Scheme. In such situation, we are not able to accept the claim of the appellant-assessee. We find no infirmity in the findings recorded by the original authority.

    13. The appellant-assessee emphasised that the demand is not tenable as there is revenue neutral situation resulting no addition to the Government revenue. We find that the concept of revenue neutrality cannot be considered as a bar for non-confirmation of tax dues, otherwise payable by the appellant-assessee. If that be so, then in many of the cases the appellant themselves can choose whether to pay duty on goods or services, when the credit is available; or to pay duty only on final product. Such discretion is not vested with taxpayer. This is very much against the concept of value added taxation. The argument that the appellant-assessee need not pay duty as the same is available for credit is against the appellant-assessee’s own case. If that is the position, there is no need to fight against the present demand. Apparently, the point of revenue neutrality is being raised only to avoid interest payment as the duty has not been discharged in time. The concept of revenue neutrality may have relevance in order to determine the mala fide or bona fide intent of the assessee. The same cannot be pleaded for non-payment of tax itself. Even the availability of credit itself is subject to various conditions in terms of Cenvat Credit Rules, 2004. The availability of such credit cannot be presumed in order to contest the duty liability of the appellant-assessee, which is in terms of applicable provisions of the Act and the Notification thereunder. We have perused case laws relied upon by the appellant-assessee. No general law has been laid down in these decisions to support the case of the appellant-assessee. The decisions are on the facts applicable to the said case.

    14. The appellant-assessee also raised the point regarding final order being issued by the Deputy Commissioner and the present demand being not tenable in the absence of review of such final order. We are not in agreement with such assertion. We note that the debonding has been issued based on the submissions made by the appellant and relying on the permission granted by the licensing authorities for conversion into EPCG Scheme. Letter dated 16-5-2008 is for exit of the appellant-assessee from EOU Scheme. After detailed scrutiny of the documents of the appellant-assessee and various nature of items claimed to have been converted to EPCG Scheme, the present proceedings were initiated. We find no infirmity in such proceedings. Similarly, we find no relevance in the assertion of the appellant-assessee regarding EOU bonded area to be considered as being outside India. As already noted, we are dealing with debonding on EOU unit and the rate of duty applicable on the capital goods, spare parts etc. upon such debonding and conversion to EPCG Scheme. As such, we find no merit in the appeal filed by the appellant-assessee against demand for differential duty on capital goods as confirmed by the impugned order.

    15. We have considered the appeal filed by the Revenue also. The Revenue is aggrieved on the rate of depreciation allowed for calculating the value of capital goods at the time of debonding. We note that the assessment has been made in terms of Notification No. 22/2003-C.E., which allowed conversion of EOU and procedure for treatment of capital goods. We find the Revenue in the appeal, seeks to apply the depreciation rate as applicable at the time of procurement of capital goods in terms of Notification No. 1/95-C.E. We note that similar issue came for consideration before the Tribunal in Pudumjee Plant Laboratories Ltd. v. CCE, Pune-III - (Tri.-Mum.). The Tribunal held that the rate of duty on the depreciated value should be on the date of debonding under EPCG Scheme. We note that when the debonding is done in terms of Notification No. 22/2003-C.E., then the rates of depreciation as prescribed in the Notification has been correctly applied.

    16. The Revenue also contested the inclusion of items like fire control system, water storage tank etc. in capital goods for the purpose of assessment. In this connection, we note that the original authority had examined the issue in detail. It was observed that in terms of para 9.12 of Foreign Trade Policy ‘capital goods’ covered various items. Para 9.2 of the Policy gave the scope of accessories. On careful consideration of these provisions as well as para 6.6.1(b) of Handbook of Procedure of Foreign Trade Policy, the original authority concluded that the items like cord can, fire control system, water storage tank etc. will fall within the scope of “capital goods” as understood in the trade parlance. Accordingly, the original authority allowed depreciation applicable to capital goods and dropped the demand for differential duty on this account. We are in agreement with the reasons recorded by the impugned order.

    17. Regarding, the spare parts and accessories procured from domestic sources and also imported, we find the original authority has recorded categorical reasons for extending the benefit to these items. The application dated 14-4-2008 filed by the appellant-assessee for EPCG authorisation gave details of various spares imported as well as procured locally. On analysis of the authorisation as well as nature of items as recorded in the impugned order, we are in agreement with the findings of the original authority regarding the eligibility of these items under EPCG Scheme. In the present appeal, the Revenue could not bring out any substantial issue either in fact or in law to interfere with the finding of the original authority.

    18. The Revenue also raised the point regarding non-imposition of penalty under Rule 25 by the original authority. We have perused the impugned order on this aspect also. It is clearly recorded that the appellant-assessee have not breached any of the provisions of Rule 25 of Central Excise Rules, 2004 as they have not removed the excisable goods in contravention of any of the Rules. We find no reason to interfere with the categorical finding of the original authority. As such, we find no merit in the appeal filed by the Revenue.

    19. In view of the above discussions and analysis, we find that the impugned order is as per law and same is to be upheld. The appeals filed by the appellant-assessee as well as Revenue are rejected.

    (Pronounced on 6-6-2017)

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    Comments

    Nitin Spinners Ltd. v. Commissioner of C. Ex., Jaipur-II
    (Jun 6, 2017)