Juhi Bansal (Lawyer)

Retrospective Amendment of CENVAT Credit Rules, 2004 – Notification No. 01/2016 – CE (NT)

Recently, vide the Notification No. 01/2016 – Central Excise (N.T) dated 01 February, 2016 (hereinafter referred to as “the Notification”), the Central Government omitted the proviso to Rule 3, in sub-rule (1), in clause (vii), of the CENVAT Credit Rules, 2004 (hereinafter referred to as “the CCR”) vide which the importer was entitled to avail CENVAT credit upto a limit of 85% of the CVD paid on the import of ships, boats and other floating structures for breaking up. A noticeable point of the above amendment vide the Notification is that it has been issued with retrospective effect from 01 March 2015. In this regard, the relevant rule along with the proviso are reproduced as follows:

(vii) the additional duty leviable under section 3 of the Customs Tariff Act, equivalent to the duty of excise specified under clauses (i), (ii), (iii), (iv), (v), (vi) and (via) ;

Provided that CENVAT credit shall not be allowed in excess of eighty-five per cent. of the additional duty of customs paid under sub-section (1) of section 3 of the Customs Tariff Act, on ships, boats and other floating structures for breaking up falling under tariff item 8908 00 00 of the First Schedule to the Customs Tariff Act;

In view of the above, the provision restricting the CENVAT credit to 85% of the CVD paid by the importers (under proviso to Rule 3(i)(vii) of the CCR) has been deleted. Accordingly, w.e.f., 01 March 2015, the importers have been made eligible to avail full credit of CVD paid on import of ships, boats and other floating structures, for breaking up.

As a precursor of the said amendment, the issue of leviability of CVD on the activity of import of vessels and other floating material, for breaking up, came up before the High Court of Gujarat. Answering this issue, the High Court, vide it’s judgement in the case of M/s. Shivam Engineering Company v. Union of India, [2014-TIOL-1563-HC-AHM-CUS] (hereinafter referred to as “the Gujarat High Court judgement”), found that since vessels and other floating material for breaking up, were not manufactured in India, thus, no excise duty would be leviable on the above activity. As an upshot of the above, the High Court held that in the absence of any manufacturing activity, no CVD would be leviable under Section 3(1) of the Customs Tariff Act, 1975, on the import of the afore said goods.

Challenging the above judgement, the Department filed a Special Leave Petition (hereinafter referred to as “SLP”), which is currently pending before the Supreme Court of India.

In furtherance of the said judgement read with the Notification, the Department has hastily issued a Circular No.-1014/2/2016-CX Dated the 01 February, 2016 (hereinafter referred to as “the Circular”) clarifying that the show cause notices issued to importers demanding CVD (in cases wherein the said importers have not paid CVD at the time of import of ships/vessels/floating material), shall be kept in call book. This is owing to the fact that the Department has filed a SLP against the Gujarat High Court judgement, which is currently pending before the Supreme Court of India.

At this juncture, it is noteworthy that it is a settled legal position that mere filing of an appeal before the Supreme Court against an order of the High Court, does not act as a fetter against the binding value of the High Court’s judgement unless, the Supreme Court either stays such an order or overrules such an order. In the absence of applicability of either of the above mentioned possibilities, the ratio laid down by the High Court vide it’s judgement remains good law and thus, continues to be binding.

In this view, it seems that instead of keeping the above referred show cause notices in the call book (till the passing of an order by the Supreme Court), the correct and legal way may be to decide the pending matters by relying upon the ratio laid down by the Gujarat High Court judgement. However, further dwelling upon the Circular makes it evident that the Circular being a beneficial one (for the reason that the Circular has allowed 100% CENVAT credit of CVD paid as against the erstwhile restriction of 85%, subject to the condition of abiding by the provisions of Rule 6 of the CCR), no assesse may be willing to raise the afore referred issue.

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