Exports – Not so zero rated?

How often do we hear exports are zero rated, like whenever an assessee think of doing an export transaction, he perceives it to be duty free, tax free and cess free (pun). Zero rated situs means no tax on inputs and no tax on output. What zero rated miss is tax freeness on intermediate.

As hard the pill it is, intermediate supply in an ultimate export in many cases, is not tax free upfront. Refund mechanism operates to compensate for the taxes levied in intermediate supply, be it in any form. In terms of excise, the refund could be through rebate, cenvat, drawback etc. But what if intermediate supply which gets taxed, don’t get refunded? The article deals with the ordeal the exporters, particularly exporters of goods have to deal with in getting the refund of excise duty (in particular).

♣ Procurement of Inputs

Duty Free: An exporter of goods can either procure goods without payment of duty under (1) Advance Authorization Scheme (2) EPCG Scheme for Capital Goods (3) In Bond under Rule 19 of Central Excise Rules, 2002 (‘the CER’)

Duty Payment: Or the exporter may wish to procure goods on payment of duty and then avail the refund of duty. The schemes include (4) Duty drawback (excise portion) under Section 74 of Customs Act, 1965 (5) Cenvat utilization or Cenvat Refund under Cenvat Credit Rules, 2004 (6) Rebate of input duty under Rule 18 of the CER. Each scheme prohibits that by availing the subjected scheme, the exporter should not avail the other scheme.

♣ Exporting the output

Duty Free: On the output side, the goods could be exported duty free under rule 19 of the CER. or

Duty Payment: The goods could be exporter by first paying duty upfront and then claiming Rebate of it under Rule 18 of the CER. Rebate claim of output is a situation when the exporter pays excise duty on the export goods either by way of cash or by way of cenvat, and then files for cash refund of this excise duty paid on output. Rebate claim is useful when the exporter has heavy amount of unutilizable cenvat of capital goods with him, so that he could claim cash refund of capital goods tax as well.

Ideally an exporter should be given the liberty to opt for (1) any one scheme for inputs duty and (2) any one scheme for output duty. There should be no condition under any input scheme which restrict the availing of an output scheme and vice versa. However, the text of the channelizing provision is as such that give rise to the conflict, let us discuss what are the disputes and the after effects of judicial scrutiny of them.

1. Rebate claim of either input or output

Consider an example, an exporter procures inputs @ R 110 (100 + 10 Excise Duty), after accounting for expenses of manufacture and his profit he removes them for R 220 (200 + 20 Excise Duty) without cenvat of input duty [20 Rs could be paid in cash or some other cenvat credit lying with him]. He has now suffered total duty of R 30 (20 + 10) because cenvat has not been availed by him, he now moves a Rebate claim both for input duty and output duty under Rule 18. Ideally, he should be given the rebate of both duties, but here arises the conflict. For ease reproduced are the relevant texts rebate provisions:

Rule 18. Rebate of duty. –

Where any goods are exported, the Central Government may, by notification, grant rebate of duty paid on such excisable goods “or” duty paid on materials used in the manufacture or processing of such goods

As can be seen above, the literal meaning of Rule 18 says that Rebate could be granted for either for (1) Duty paid on such excisable (output) goods OR (2) Duty paid on inputs used for manufacture/processing of such (output) goods. Rule 18 incurs gross injustice by inheriting the words OR. This effectively ends up in prohibiting the exporter for opting for choice of schemes for input and output. Identical facts were present before the Hon’ble High Court of Bombay in case of M/s Indorama Textiles Ltd. [2006 (200) ELT 3 Bom]. Unfortunately, the court didn’t went into the tenacity of zero rated ness of an export transaction and gave its verdict on the interpretation of word “or”. Notable observations of the judgment are as follows:

14. It was further argued by learned Senior Counsel Shri Bhangde that the above referred examples would show that if the Department’s stand is accepted, inequitable result would follow, which would result in discrimination. It is a settled law of interpretation that inequitable result should not follow while interpreting the provisions of law. In order to substantiate this contention, reliance is placed by the learned Senior Counsel on the judgment of the Supreme Court in Hindustan Petroleum Corporation Ltd. v. Collector of C. Excise . It was, therefore, contended that Rules 18 and 19 of the 2002 Rules are required to be read as complementary to each other so as to provide equitable results. This can be achieved only by permitting rebate of duty on the exported goods as well as on inputs used in the manufacture thereof.

20. The contention canvassed by the learned Senior Counsel for the respondent no. 1 that the word “or” may be read as “and” is misconceived since it is wholly inconsistent with the intention of the Legislature as well as object of Rule 18 of the 2002 Rules. Even at the cost of repetition, we want to express that if the word “or” is read as “and” in Rule 18 of the 2002 Rules, then in that event, we will be doing violence with the language of the Rule and would be defeating the object to be achieved and purpose for which Rule is evolved. Such construction of Rule, in our view, is impermissible in law. On the other hand, in view of the language used, scheme of the Rule and intention of the Legislature, assessee is granted rebate of duty paid either on excisable goods or material used in the manufacture or processing of such goods and, therefore, word “or” used in Rule 18 cannot be read as “and”.

21. Another contention canvassed by Shri Bhangde, learned Senior Counsel for the respondent no. 1, that Rules 18 and 19 of the 2002 Rules are required to be read as complementary to each other so as to provide equitable result is also misconceived. The area of operation and the situation in which these Rules operate are totally different and distinct and, therefore, cannot be equated with each other. So far as Rule 18 is concerned, it deals with entitlement of assessee for grant of rebate of duty already paid on excisable goods or material used in the manufacture or processing of such goods. It is, therefore, evident that Rule 18 is attracted only after payment of excise duty on excisable goods or on material used in the manufacture or processing of such goods for the purpose of getting rebate of duty subject to such conditions and limitations, if any and after fulfilment of such procedure as may be prescribed in the notification. The scheme and procedure prescribed under Rule 19 is altogether different than the one prescribed under Rule 18 and contemplates export of such excisable goods as well as material used in manufacture or processing of such goods without payment of duty subject to conditions, safeguards and procedure specified by the notification issued by the Board and, therefore, it cannot be equated with Rule 18. Rule 18 is attracted after payment of duty whereas Rule 19 provides for exemption from duty at the threshold and, therefore, by very nature of contingencies mentioned in these two Rules, the benefits provided to the assessee are in two different situations and at two different stages and, therefore, contention canvassed by the learned Senior Counsel for the respondent no. 1 in this regard cannot be accepted.

A similar situation was present before the Hon’ble High Court of Rajasthan in case of M/s Rajasthan Textile Mills [2013 (298) ELT `183 (Raj.)], but the verdict was same i.e. denial of simultaneous rebates on inputs and outputs, review petitions were also dismissed by the Court [2014 (302) ELT 343]. At last the dispute was finally put to rest in favour of the assessee by the Hon’ble Supreme Court in case of M/s Spentex Industries in late 2015 [Civil Appeal Nos. 2025-2026, 2527 and 10534 of 2013].

“27) The aforesaid discussion leads us to inevitable conclusion, namely, that the exporters/appellants are entitled to both the rebates under Rule 18 and not one kind of rebate. The impugned judgments are, accordingly, set aside allowing these appeals.”

2. Drawback of Inputs and Rebate of Output

After the judgment in case of M/s Spentex Industries (supra), it was felt that dispute has finally settled and exports could finally be treated as zero rated, however a recent judgment of Hon’ble Madras High Court in case of M/s Raghav Industries [W.P.No.1226 of 2016] has again disputed the zero rated ness term.

Before understanding the context of dispute, it is worthwhile to have a look at the relevant text of governing provisions of Drawback provisions. Proviso to Rule 3 of Customs, Central Excise Duties and Service Tax Drawback Rules, 1995 reads as

Provided that where any goods are produced or manufactured from imported materials or excisable materials or by using any taxable services as input services, on some of which only the duty or tax chargeable thereon has been paid and not on the rest, or only a part of the duty or tax chargeable has been paid; or the duty or tax paid has been rebated or refunded in whole or in part or given as credit, under any of the provisions of the Customs Act, 1962 (52 of 1962) and the rules made there under, or of the Central Excise Act, 1944 ( 1 of 1944) and the rules made there under, or of the Finance Act, 1994 ( 32 of 1994) and the rules made there under, the drawback admissible on the said goods shall be reduced taking into account the lesser duty or tax paid or the rebate, refund or credit obtained.

Relevant text of then effective AIR Drawback Notification 68/2011-Customs (N.T.) containing conditions for claiming drawback is as follows:

(6) The figures shown under the drawback rate and drawback cap appearing below the column “Drawback when Cenvat facility has not been availed” refer to the total drawback (customs, central excise and service tax component put together) allowable and those appearing under the column “Drawback when Cenvat facility has been availed” refer to the drawback allowable under the customs component. The difference between the two columns refers to the central excise and service tax component of drawback. If the rate indicated is the same in both the columns, it shall mean that the same pertains to only customs component and is available irrespective of whether the exporter has availed of Cenvat or not.

(15) The expressions “when Cenvat facility has not been availed”, used in the said Schedule, shall mean that the exporter shall satisfy the following conditions, namely:-

(i) the exporter shall declare, and if necessary, establish to the satisfaction of the Assistant Commissioner of Customs or Assistant Commissioner of Central Excise or Deputy Commissioner of Customs or Deputy Commissioner of Central Excise, as the case may be, that no Cenvat facility has been availed for any of the inputs or input services used in the manufacture of the export product;

(ii) if the goods are exported under bond or claim for rebate of duty of central excise, a certificate from the Superintendent of Customs or Superintendent of Central Excise in-charge of the factory of production, to the effect that no Cenvat facility has been availed for any of the inputs or input services used in the manufacture of the export product, is produced:

Format of Drawback Schedule

From the above provisions, it can be understood that;

• Drawback against inputs/input services is allowable at higher rate provided no Cenvat/Rebate of inputs is claimed thereof
• If Cenvat/Rebate has been taken (fully or partially), lesser Drawback will be allowed
• Cenvat facility inter alia means Cenvat of Inputs and Inputs Services credit

Coming back to the case of M/s Raghav Industries (supra), the petitioner assessee in the said case had exporter the goods under the claim of drawback and had simultaneously claimed rebate of excise duty paid on exported goods (which was paid by cenvat of Capital Goods). Undisputedly, the petitioner had not claimed the Cenvat facility i.e. cenvat of inputs and cenvat of input services, all the petitioner had taken credit for was against capital goods which is absolutely not a bar for claiming drawback under the higher rate. Still this apparent thing skipped past the attention of Madras High Court and the decision was rendered against the assessee. Relevant extracts may be noted:

12. After clearing the goods on payment of duty under claim for rebate, the petitioners should not have claimed drawback for the central excise and service tax portions, before claiming rebate of duty paid and they should have paid back the drawback amount availed before claiming rebate. When this was not done, availing both the benefits would certainly result in double benefit.

13………………When the petitioners had availed duty drawback of Customs, Central Excise and Service Tax on the exported goods, they are not entitled for the rebate under Rule 18 of the Central Excise Rules, 2002 by way of cash payment as it would result in double benefit.

Dismissing the ratio of Supreme Court case of M/s Spentex Industies (supra), the High Court opined

15. In the judgment relied upon the learned counsel for the petitioner, the Hon’ble Supreme Court has held that the benefits of rebate on the input on one hand as well on the finished goods exported on the other hand shall fall within the provisions of Rule 18 of Central Excise Rules, 2002 and the exporters are entitled to both the rebates under the said Rule.

16. In the case on hand, the benefits claimed by the petitioners are covered under two different statutes one under Customs, Central Excise Duties and Service Tax Drawback Rules 1995 under Section 75 of the Customs Act, 1962 and the other under Rule 18 of the Central Excise Rules, 2002. Since the issue, inivolved in the present writ petition, is covered under two different statutes, the judgment relied upon by the learned counsel for the petitioner is not applicable to the facts of the present case.

17. As per the proviso to Rule 3 of the Central Excise Duties and Service Tax Drawback Rules 1995, the petitioner is not entitled to claim both the rebates.

Gross injustice was done and that too ignoring the apparent language of law. Further the issue was no longer res integra in view of the Spentex Industries judgment that both refunds of inputs and refunds of outputs are different. In personal view of the author, the judgment has every characteristics to be quashed, the fate will be known only in future.

To conclude the part of discussion, the enabling provisions of law should be interpreted logically as well apart from mere strict language of law. Export is a free transactions, it brought valuable forex for the nation, it expands the brand “Make in India”, then why should these kind of loose strings be let happen. Both the judicial as well as the administrative authorities should give thought to the fact that, any tax in the export transaction is against the law. Again, with the barrier of language in the enabling provision, assessee should also be careful while opting the inputs and output schemes in an export transaction. Going forward, in the GST regime, the intent provided in the public documents is – elimination of the upfront exemptions vis-à-vis procurement for exports and making these exemptions available through refund route. And as seen above, in the refund route, it is important that the enabling provisions must be very precise and be true to their intent.

(Author can be reached at manish619sachdeva@yahoo.in)