CA Lalit Munoyat
For latest update refer comments at the bottom of the article. Notification No. 30/2004-CE dated 09-07-2004 further amended by Notification No. 37/2015-CE dated 21-07-2015 so as to restore the legal position as it stood before the amending notification No. 34/2015-CE dated 17-07-2015. Raw materials levied at NIL rate of duty also allowed to avail exemption notification
The products of the textiles industry like woven and knitted grey and finished fabric, garments etc. which are covered under chapters 50 to 63 were optionally exempt from duty under Notification No. 30/2004-CE Dated 09/07/2004. The only condition subject to which this exemption was available was :
“Provided that nothing contained in this notification shall apply to the goods in respect of which credit of duty on inputs has been taken under the provisions of the CENVAT Credit Rules, 2004”
However the government of India vide Notification No. 34/2015 – Central Excise New Delhi, the 17th July, 2015 has substituted the above condition with a new condition which runs as under:
“Provided that the said excisable goods are manufactured from inputs on which appropriate duty of excise leviable under the First Schedule to the Central Excise Tariff Act or additional duty of customs under section 3 of the Customs Tariff Act, 1975 (51 of 1975) has been paid and no credit of such excise duty or additional duty of customs on inputs has been taken by the manufacturer of such goods (and not the buyer of such goods), under the provisions of the CENVAT Credit Rules, 2004.”.
This amendment has sent shivers down the spine of all big and small textile manufactures because due to the amendment in the condition, it would be virtually impossible for the textile manufactures to avail the beneficial exemption notification no. 30/2004 – Central Excise, dated the 09-07-2004 before its amendment as above.
Before the amendment it was sufficient for the manufacture to comply with the condition of not availing the cenvat credit of excise duty paid on its input raw materials and he was not required to see if any duty of excise has been paid or not paid , due to some exemption notification, on the said inputs. Obviously the condition was required to prevent double benefit being availed by manufacturers, firstly by availing cenvat credit on inputs and secondly, by not paying excise duty on the final products by virtue of some exemption notification.
However after the amendment a manufacturer of textiles shall have to fulfill two conditions for availing the exemption notification.
1) He shall not take credit of duty paid under the provisions of the CENVAT Credit Rules, 2004 on inputs. AND
2) He shall ensure that the inputs acquired by him are duty paid and not exempt from payment of duty.
The first condition was already there but it is the second condition that has put an embargo on the availability of the notification for clearing the final product without payment of duty. This has resulted in many unintended anomalies some of which are as under:
1) This amendment would not affect those manufacturers who are not availing the benefit of the exemption notification and are clearing the final products on payment of duty because they would get the credit of the duty paid on inputs at each stage of production.
2) This amendment would hit all those manufacturers who were clearing their final product under exemption notification 30/2004 as it stood before its amendment.
a) If a manufacturer who acquires duty paid inputs and clears the final product on payment of duty without claiming the benefit of any exemption notification will not be affected as he would get the credit of full cenvat duty paid on purchasing inputs.
b) If a manufacturer who acquires duty paid inputs and clears the final product without payment of duty by claiming the benefit of any exemption notification will have to forego his claim for cenvat credit paid on acquisition of his inputs. In such a case, the cost of manufacture for the manufacturer will increase by the amount equal to the amount of cenvat credit foregone for clearing the final product without payment of duty.
c) A manufacturer who acquires duty free/exempt inputs shall not be able to clear final products except on payment of duty.
3) It appears that the above amendment has virtually undone the beneficial exemption notification no. 30/2004 which provides exemption from duty to final textiles product.
4) In the case of a Job Worker, it is not clear as to who shall be liable to pay the duty i.e. the Principal manufacturer on whose behalf the job worker manufacture final textile products or the Job Worker himself shall be treated as the principal manufacturer.
5) The whole purpose of the SSI notification no. 08/2003 will be compromised because to the extent of the turnover of Rs. 150 Lakhs, the manufacturer of final product may avail the benefit of exemption available to SSI units under notification no. 08/2003 and clear the final product without payment of excise duty. In this case the purchaser of these non duty paid inputs shall not be eligible to clear the final product without the payment of duty because appropriate duty has not been paid on the inputs.
6) What would happen to vertically integrated textiles manufacturer who have in-house facility of spinning, weaving, knitting, garmenting, dyeing & processing. As per the existing notification 30/2004 before amendment, all the intermediate products consumed in the production of final products are not charged to duty. The notification no. 67/95-CE, Dated 16-3-95 providing exemption to all capital goods and specified inputs if captively consumed within the factory of production shall not be available if the intermediate inputs used in or in relation to the manufacture of final products are exempt from the whole of the duty of excise or additional duty of excise leviable thereon or are chargeable to nil rate of duty. In this case, the manufacturer of intermediate product shall have to pay the duty on transfer of final products from one factory to another factory wherein these final products are used as inputs in the production of final product. Though it is a revenue neutral exercise because the duty paid on prior production will be immediately claimed as cenvat credit by the subsequent manufacturer but the fact of matter is that it will result in a temporary cash crunch to the prior manufacturer if it does not have sufficient cenvat credit available on the date of transfer. It will have to pay the duty in cash while the same will remain accumulated with the subsequent manufacturer who could use the same only at the time of clearance of its final products. For this intervening period the working capital requirement of the manufacturer will increase to the extent of the duty paid in cash at the prior stage of production.
7) In case of bought out inputs purchased by the manufacturer from the open market, the status of such bought out products as duty paid or exempt from duty will be very difficult to determine. In such a case whether the cardinal principal of “treating all the goods available in the open market as duty paid” shall be applicable or not will not be easy to determine.
8) In the case Collector of C. Ex., Vadodara versus Dhiren Chemical Industries the Hon’ble Supreme Court had the occasion to interpret the phrase “on which the appropriate amount of duty of excise has already been paid”. The Hon’ble Court has ruled that “an exemption notification that uses the said phrase applies to goods which have been made from duty paid material. In the said phrase, due emphasis must be given to the words “has already been paid”. For the purposes of getting the benefit of the exemption under the notification, the goods must be made from raw material on which excise duty has, as a matter of fact, been paid, and has been paid at the “appropriate” or correct rate. Unless the manufacturer has paid, the correct amount of excise duty, he is not entitled to the benefit of the exemption notification. Where the raw material is not liable to excise duty or such duty is nil, no excise duty is, as a matter of fact, paid upon it. To goods made out of such material the notification will not apply”.
9) However the phrase used in the current amending notification is a bit different than the one used in the case cited (supra). The phrase as used in the case of Dhiren Chemical Industries is
“on which the appropriate amount of duty of excise has already been paid”.
While the phrase as used in the amending notification 34/2015 is:
“on which appropriate duty of excise leviable under the First Schedule to the Central Excise Tariff Act or additional duty of customs under section 3 of the Customs Tariff Act, 1975 (51 of 1975) has been paid”
In the above phrase the additional words “leviable…………” are of wide import. Under the current scheme of levy of central excise, the rates of duty on different products is prescribed in the CETA which are generally static. However the actual rates of duty are generally lower than the tariff rates because the Central government exercising powers conferred on it by subsection (1) of section 5A, in the public interest, by notification reduces or exempts the tariff rates from time to time. Therefore the rates so notified become the actual rates at which the duty is charged and when the duty is so discharged it can be said that ” the appropriate amount of duty of excise has already been paid” on the said final product and the exemption notifications which are conditional on payment of appropriate amount of duty become available to the manufacturer. Can it lead to the implication that the notified rates take the character of the tariff rate at which the duty is leviable ? Had it not been so then no product which is leviable to duty at tariff rates would have been capable of availing any exemption notification because ” the appropriate amount of duty of excise could not be treated as having already been paid.(i.e. paid on lower notified rate in place of Tariff rates). However if the excise duty leviable at tariff rates are reduced to NIL rate by any notification issued in public interest then the second part of the condition of actual payment of duty will not be satisfied and the exemption will not be permitted.
Confusion was all compounding and to put all controversies to rest a clear clarification explaining the rationale and scope of the notification was expected from the central government at the earliest. However Trade Notice No : 03/2015 Dated 20/07/2015 issued by the Office Of The Commissioner Of Central Excise & Customs, SURAT-I directs that all such manufactures affected by the recent notification 34/2015-CE dated 17-07-2015
a) are required to get registered themselves under the Rule 9 of the Central Excise Rule 2002 and
b) also directed to declare the stock of the inputs and finished goods separately, as on 17thJuly, 2015, (in duplicate) to the Jurisdictional Range Office on or before 24/07/2015.
Copy of the Trade Notice can be accessed at the below link :-
FURTHER UPDATE ON THE ABOVE ARTICLE ON 22.07.2015
Latest Update: Notification No. 30/2004-CE dated 09-07-2004 further amended by Notification No. 37/2015-CE dated 21-07-2015 so as to restore the legal position as it stood before 17-07-2015
In the article I had tried to reason out in para (9) starting with “in the above phrase the additional words “leviable…………” are of wide import”– that if the duty leviable at tariff rates are reduced by a notification and duty is paid on the reduced rate, it was considered that appropriate duty has been paid and any exemption conditional upon payment of duty becomes available to a manufacturer. The condition is that such notification shall be in overall public interest. For example if tariff rate for a product is 12.5% which has been reduced to 1% by a notification issued in public interest then duty paid on notified reduced rate of 1% is to be considered that appropriate duty has been paid. However in more compelling situations if the duty is reduced to NIL then this Nil rate should be given more merit over say, 1% rate as it aims to further reduce the burden of excise on such products. However, as per the judgment of the SC such inputs charged at Nil rate are to be treated as non duty paid:- “Where the raw material is not liable to excise duty or such duty is nil, no excise duty is, as a matter of fact, paid upon it. To goods made out of such material the notification will not apply”. –
The recent notification 37/2015 –CE dated 21-07-2015, attempts to correct the above anomaly by inserting the following explanation
“In the said notification, in the opening paragraph, after the proviso, the following Explanation shall be inserted, namely:-
“Explanation.- For the purposes of this notification, appropriate duty or appropriate additional duty includes nil duty or concessional duty, whether or not read with any relevant exemption notification for the time being in force.”.
The addition of the above explanation to the notification 30/2004- CE-09-07-2004 has put to rest all controversies and the legal position as it stood before the amendment notification 34/2015-CE-17-07-15 has been restored. Interestingly, to be on the safe side, the explanation also covers the concessional duty, which was never in question.
Conclusion: No exemption from payment of duty shall be denied to any manufacturer on the ground that the inputs acquired by him are leviable/chargeable with Nil rate of duty. Such exemption notification has been made uniformly applicable to all inputs irrespective of the rate of duty they are charged with including NIL rate.
The above write up is the absolute personal opinion of the writer and does not amount to an expert legal opinion. It may or may not depict the legal position sought to be conveyed by the statute. Readers are cautioned to evaluate the actual legal position before acting on this write up. Further, this write up is meant only for an academic interest and not for any other purpose .
Compiled by: CA LALIT MUNOYAT, B.Com.(Hons.),CS,FCA, DISA, @ firstname.lastname@example.org # 98201 93508