Two Exemption Notifications: litigation inbuilt

Introduction: -

The hon’ble Finance Minister of India has introduced the Finance Bill, 2011 on 25.2.2011. This bill has withdrawn a no. of exemptions given to various tariff items. By this bill, a no. of entries that attracted the NIL rate of duty in tariff has also been brought under the purview of excise duty. On some tariff items, rate of duty have been fixed as 5%. These two are the major changes that have been made in the Excise Tariff vide Finance Bill, 2011. But as it mostly happens, these two exemptions have created an ambiguity amongst the assessees. This piece talks about the various spheres of these two notifications.

Notification no. 1/2011-CE dated 1.3.2011: -

Notification no. 1/2011-CE dated 1.3.2011 is the drastic change done in the history of Central Excise. This notification seeks to withdraw exemption from near-about 130 entries. It has prescribed the rate of excise duty as 1% ad valorem subject to the condition that no Cenvat Credit of duty paid on inputs and input services is taken.

This notification has brought the levy of 1% on even those goods for which tariff rate is prescribed as NIL. For the purpose of implementing this notification, the tariff value is increased to 5% by making declaration in Provisional Collection of Taxes Act, 1931. This amendment has major impact on the items falling under chapter 15, 16, 19, 21, 22, 26, 27, 30, etc. Previously, these tariff values were prescribed as NIL, which have now been increased to 5%.

Notification no. 2/2011-CE dated 1.3.2011:-

This notification prescribes the general effective rate of duty as 5% on the tariff items whose tariff rate is not NIL. There is no condition prescribed in this notification for availment of exemption. In other words, the manufacturer may avail the Cenvat Credit in terms of Cenvat Credit Rules, 2004 and pay the excise duty @ 5%.

Where is the lacuna?

Both Notification no. 1/2011-CE dated 1.3.2011 and Notification no. 2/2011-CE dated 1.3.2011 prescribes the different rate of duties as 1% and 5% respectively. The availment of Cenvat Credit is barred if the duty @ 1% is opted whereas there is no such restriction when one opts for 5% duty rate. However, there are certain goods that fall under both the notifications. Some of such goods are coffee or tea pre-mixes falling under tariff heading 2101, tender coconut water falling under tariff heading 22029090, drawing ink falling under tariff heading 32159040, recorded smart cards falling under tariff heading 852352, bicycles and other cycles falling under tariff heading 8712, etc.

Thus, there are certain goods which are covered under the purview of both the notifications. So, the question arises whether the manufacturer has option to avail any of the two notifications or he is bound to opt for notification no. Notification no. 1/2011-CE dated 1.3.2011 only?

The probable conflicts:-

The assessees whose goods fall under both the notifications will go for Notification no. 2/2011-CE dated 1.3.2011 as it allows the benefit of Cenvat Credit. The inputs/ input services will be availed @ 10% while the duty liability will only be 5% in this case. As such, there will be no/nominal cash outflow in form of excise duty on final products. On the other hand, the department will pursue the assessees for Notification no. 1/2011-CE dated 1.3.2011 as there is only cash payment of duty in this case. The situation will be more peculiar in case of the goods that previously attracted the NIL tariff value as the tariff value has been increased for the purpose of Notification no. 1/2011-CE dated 1.3.2011. But unfortunate on part of Revenue that these tariff items also fall under the Notification no. 2/2011-CE dated 1.3.2011.

Option to avail the more beneficial notification:-

The issue that the option lies with the assessee to claim the exemption that is most beneficial for him is no longer res integra. It has been decided many times by the hon’ble Supreme Court that if there are two or more exemption notifications, the assessee can claim the one that is more beneficial for him. This has been decided in the following cases:-

·  H.C.L. Limited vs Collector of Customs [2001 (130) ELT 405 (SC)]

·  Share Medical Care vs Union of India reported at 2007 (209) ELT 321 (SC)

·  Unichem Laboratories Ltd. vs Collector of Central Excise, Bombay [2002 (145) ELT 502 (SC)]

·  Collector of Central Excise, Baroda vs Indian Petro Chemicals [1997 (92) ELT 13 (SC)]:-

·   CCE vs Maruthi Foam (P) Ltd. [1996 (85) RLT 157 (Tri.) as affirmed by hon’ble Supreme Court vide 2004 (164) ELT 394 (SC)

·  ABB Ltd. vs CCE [2009 (92) RLT 665 (LB)]

·  M/s Mangalam Alloys v/s CC, Ahmedabad; vide Final Order No. A/308-314/WZB/AHD/2010 Dated 22.04.2010.

·  Indian Oil Corporation Ltd. vs CCE reported at 1991 (53) 347(Tribunal)

·  M/s Cipla Ltd. vs. Commissioner of Customs, Chennai reported at 2007 (218) ELT 547 (Tri.-Chennai)

Thus, it is set law that in case the goods of the assessee fall under two exemption notifications, he can claim any one of the two benefits that is more beneficial for him. Some of the above decisions also says that the assessee can claim the exemption under more beneficial entry even in the case where there two entries in one notification or there are two notifications; out of which one is generally while other is specifically applicable to him.

While parting:-

The intention of government seems to be in favour of Supreme Court judgments. This can only be the reason of inclusion of the tariff items under two notifications. Further, there is no restriction contained in either of the notifications as to which one is mandatory in such cases. The only indication is given by the TRU letter issued vide D.O.F. no. 334/3/2011-TRU dated 28.2.2011 which contains the language at para no. 4.1 - 

“A number of exemptions from Central Excise Duty (about 130 exemption entries are being withdrawn. These include some cases where the rate of duty is NIL by tariff. A nominal duty of 1% ad valorem is being imposed on these items with the condition that no credit of the duty paid on input and input services is taken. For ease of reference, this rate is being prescribed through a common Notification no. 1/2011-CE dated 1.3.2011. The statutory/tariff rate for those items that hitherto attracted a Nil rate (by tariff) has been fixed at 5% ad valorem. Bill entries contained in the Tenth Schedule to the Finance Bill, 2011 may be referred to for this purpose. For the remaining items in whose case the statutory/tariff rate is not Nil, a general effective rate of 5% is being prescribed (without any condition) through Notification no. 2/2011-CE dated 1.3.2011. This would enable those manufacturers who wish to avail of Cenvat Credit to pay a concessional duty of 5%.”

The above para from TRU letter indicates that the rate of 1% is applicable for those items whose tariff value was Nil prior to Finance Bill, 2011. However, for the tariff items which did not attract Nil value previously, the Notification no. 2/2011-CE dated 1.3.2011 is applicable. But there is no such clause in either of the two notifications. As such, ambiguity remains therein for the goods that fall in both of the notifications. Thus, the Finance Bill, 2011 seems to have given green light to the train of litigation.

Prepared By: -

CA. Pradeep Jain

CA. Preeti Parihar