SAD not leviable on goods cleared as sample by availing exemption from payment of sales tax/ VAT

Moser Baer India Ltd Vs Commissioner of Customs (CESTAT Allahabad)

CESTAT Allahabad held that SAD (Special Additional Duty) is not leviable on the goods cleared in DTA as samples from EOU by availing of exemption from payment of Sales Tax/ VAT.

Facts- Appellant is a 100% EOU engaged in the manufacture of CDR, CD Rom, DVDR, DVD Rom, SSM Devices etc, falling under Chapter Heading 8523 of the Central Excise Tariff Act, 1985. They are clearing excisable goods for DTA sales as well as for export. On the goods cleared in DTA they are paying Central Excise duty as leviable in terms of Section 3(2) of the Central Excise Act read with the Notification No.23/2003-CE dated 31.03.2003. During the course of scrutiny of ER-2, it was noticed that appellant for the month of April, 2008 onwards were paying Central Excise duty on the goods cleared in DTA sales but were not showing payment of Additional duty of Customs (SAD) as they started payment of VAT on removals from the EOU, as declared and admitted by them in their letter dated 10.09.2008. It was assumed that on clearances of the samples vide Invoice No. AGLD 9922 dated 01.02.2008 under the numbers of CDRs were cleared/marked as sample and they had not charged CST/VAT in respect of these goods, this indicating that they were not charge VAT in respect of these clearances.

From the scrutiny of the ER-2 returns for the period January, 2011 to June, 2011, it was observed that appellant had paid additional duty of SAD @ 4% adv. amounting to Rs.73,565/- under protest on clearances effected from their EOU against the samples during the period 01.01.2011 to 30.06.2011.

Conclusion- In the present case the goods in dispute are not specified in schedule I or Schedule IV of the U P VAT Act hence are not exempt from payment of VAT, but the clearance of samples from EOU are not part of the taxable turnover as per the provisions of this Section 7. The transactions in respect of sample do not fall under the category of exempt goods as defined by the U P Vat Act, 2008. These clearances were not subjected to the VAT in view of the provisions contained in Section 7. We agree with the contention of the appellant that as these goods were not exempt from payment of VAT and sales tax but were not taxable under VAT being samples. The wordings of proviso of the Notification No.23/2003-CE dated 31.03.2003. as amended by Notification No 22/2006-CE dated 01.03.2006 are unambiguous and they refer to exempt goods under VAT Act. In the present case the goods are not specified as exempt goods as defined under the VAT Act, but are not the part of taxable turnover.

FULL TEXT OF THE CESTAT ALLAHABAD ORDER

This appeal is directed against Order-in-Appeal No.70/APPL/NOIDA/13 dated 22/03/2013 passed by Commissioner (Appeals) Customs, Central Excise & Service Tax, Noida. By the impugned order following has been held:-

“4.8 Here the referred notification should not only be confined to its grammatical or ordinary parlance, but it should also be construed in the light of the contest. In the instance case the intention of the legislation to tax or to counterbalance the sales tax, VAT/CST or local tax in case the imported goods are not subjected to sales tax, VAT/CST or in other words plainly exempted from sales tax, VAT/CST as held by the hon’ble CESTAT larger bench in appellant’s own case vide Misc. Order No.411/09-EX (DB) dated 26.06.2009.

4.9 In view of the above, the impugned order of the Adjudicating Authority has no infirmity and is correct based on the law for demanding the SAD on the goods cleared from the factory in the shape of sample quoting not for sale in DTA. The clearance in the shape of “Sample” cannot be denied as clearance of goods from the factory. The contention of the appellant that the goods has been cleared in the DTA as Sample which has not been sold and Sales Tax / Vat not payable and the SAD is not leviable on the goods cleared as sample by availing of exemption from payment of Sales Tax / Vat. The SAD on the any clearance from a EOU is leviable in case where Sales Tax / Vat has not been paid either the clearance is in the shape of Sample or clearance is in the shape of Sale in DTA.

4.10 The Hon’ble CESTAT’s Larger Bench vide Misc. Order No.411/09- EX (DB) dated 26.06.2009 observed that “In respect of a 100% EOU availing sale tax exemption, for determining the excise duty payable based on aggregate value of Customs duty, the element of SAD should be taken into account.”

2.1 Appellant is a 100% EOU engaged in the manufacture of CDR, CD Rom, DVDR, DVD Rom, SSM Devices etc, falling under Chapter Heading 8523 of the Central Excise Tariff Act, 1985. They are clearing excisable goods for DTA sales as well as for export. On the goods cleared in DTA they are paying Central Excise duty as leviable in terms of Section 3 (2) of the Central Excise Act read with the Notification No.23/2003-CE dated 31.03.2003.. During the course of scrutiny of ER-2, it was noticed that appellant for the month of April, 2008 onwards were paying Central Excise duty on the goods cleared in DTA sales but were not showing payment of Additional duty of Customs (SAD) as they started payment of VAT on removals from the EOU, as declared and admitted by them in their letter dated 10.09.2008. 2.2 It was assumed that on clearances of the samples vide Invoice No. AGLD 9922 dated 01.02.2008 under the numbers of CDRs were cleared/marked as sample and they had not charged CST/VAT in respect of these goods, this indicating that they were not charge VAT in respect of these clearances.

2.3 From the scrutiny of the ER-2 returns for the period January, 2011 to June, 2011, it was observed that appellant had paid additional duty of SAD @ 4% adv. amounting to Rs.73,565/- under protest on clearances effected from their EOU against the samples during the period 01.01.2011 to 30.06.2011.

2.4 Show cause notice dated 16.09.2011 was issued to the appellant asking them to show as to why-

i) Central Excise duty, i.e. SAD @ 4%, amounting to Rs.73,565/-(Rs seventy three thousand five hundred sixty five only) – involved on free samples cleared from E.O.U. to DTA during the period 01.1.2011 to 30.6.2011, as detailed in Annexure – A, to the show cause notice should not be demanded and recovered from them under first proviso to Section-I 1A(1) of the Central Excise Act, 1944 read with provisions of Notification no 23/2003-CE dated 31.03.2003 as amended. Since M/s MBIL, has paid 4% SAD duty amounting to Rs. 73,565/. (Rs seventy three thousand five hundred sixty five only) under protest during respective months as detailed in Annexure-A, the same should not be appropriated towards demand of Central Excise duty mentioned above.”

2.4 This show cause notice was adjudicated as per the Order-in-Original dated 31.10.2012 and appeal has been dismissed by the Commissioner (Appeals) by the impugned order as referred in para-1 above. Hence, this appeal.

3.1 The matter was listed for hearing on various dates and no one has appeared for the appellant. Hence, in terms of Rule, 20 of CESTAT Procedure Rules, 1982, this matter has been taken up for consideration and decision exparte after hearing the learned Authorized Representative.

3.2 Learned Authorized Representative appearing for the revenue submits that the issue involved in the present case is a very narrow compos as the same is covered under the Notification no 23/2003-CE dated 31.03.2003 was amended by Notification No.22/2006-CE by which it was provided that the SAD was to be included in the aggregate of Customs duty if the goods cleared into GTA are exempt from payment of sales tax. In the impugned Order-in-Original it has been held that the said goods on which no VAT is paid are exempt from payment of VAT, hence this value is to be included. Accordingly, he submits that impugned order may be upheld.

4.1 We have considered the impugned order along with the submissions made in the appeal and during the course of argument.

4.2 For holding against the appellant Adjudicating Authority has recorded as follows:-

“13. Regarding removal against invoice No. 9922 dt. 01.02.2008 M/s MBIL vide their letter dt. 18.11.2009 submitted that goods cleared was a free sample and not for sale. They relied upon section 3 of UP VAT Act and pleaded that VAT is payable only on taxable turnover the same. Since there is no levy of VAT on free sample therefore there is no question of payment of SAD as per Notification no 23/2003-CE dated 31.03.2003 as amended. They further submitted that under new scheme exemption is not granted but VAT is being paid through Challans to state Govt., where they are availing exemption under erstwhile UP Trade Tax Act,

14. I find that plea of M/s MBIL is not tenable as the goods cleared by them under DTA as sample does not bear levy of sale tax as the sale tax is levied on the happening of sale of goods and the sale tax is ultimately passed on to the consumer. Notification no 23/2003-CE dated 31.03.2003 grants exemption from SAD provided Sales Tax/ VAT is paid on the goods cleared in D.T.A. In this case party has cleared samples from their unit and no VAT ‘is paid by theft. Here the crucial aspect for consideration of inclusion of SAD is payment of sales tax as pre-condition

15. As per section 3(5) of Customs Tariff Act, 1975, the Central Government levies the Addl. Duty on the imported goods to counterbalance Sales Tax / VAT etc. The levy of SAD is applicable to all cases at the time of clearance of goods in D.T.A., if the goods do not suffer the burnt of Sales Tax. Thus in the absence of levy of sales tax/VAT, the SAD is applicable on all the goods cleared under D.T.A. Therefore I am of the view the samples cleared by M/s MBIL during the period 01.1.2011 to 30.6.2011, without payment of VAT is liable for ‘Payment of SAD as per provision of para 6.8 of Foreign Trade Policy read with Notification no 23/2003-CE dated 31.03.2003 as amended and Section 11A of Central Excise Act, 1944.

16. Further I find that M/s MBIL were well aware of the fact that they were not paying sales tax on samples cleared under D.T.A. and therefore were not eligible for exemption from SAD even then they resorted to wrong assessment of duty. They also never declared that they were not paying VAT on the goods cleared in D.T.A. as samples. This action of the party was a willful suppression on their part and thus the SAD not paid by the party is recoverable along with appropriate rate of interest under extended provisions of Section 11A and 11AB respectively of Central Excise Act, 1944 Since they failed to assess and discharge proper Central Excise duty and suppressed this fact from the department, therefore they have rendered themselves liable for penal action under rule 25 of Central Excise Rules, 2002 read with Section 11AC of Central Excise Act, 1944.”

4.3  Sr No 2 of the exemption Notification no 23/2003-CE dated 31.03.2003 as amended by Notification No 22/2006-CE dated 01.03.2006, reads as follows:

“In excess of the amount equal to the aggregate of duties of Customs leviable on like goods, as if,-

(a) duty of customs specified in the First Schedule to the Customs Tariff Act, 1975 (51 of 1975), read with any other notification in force was reduced by 75%, and

(b) no additional duty of customs was leviable under sub­section (5) of the section 3 of the said Customs Tariff Act: Provided that while calculating the aggregate of customs duties, additional duty of customs leviable under sub­section (5) of the section 3 of the Customs Tariff Act shall be included if the goods cleared into Domestic Tariff Area are exempt from payment of sales tax or value added tax.” Proviso to Section 3 (1) reads as follows:

“Provided that the duty of excise which shall be levied and collected on any excisable goods which are produced or manufactured

(i) ….

(ii) by a hundred per cent. export-oriented undertaking and brought to any other place in India,

shall be an amount equal to the aggregate of the duties of customs which would be leviable under the Customs Act, 1962 (52 of 1962) or any other law for the time being in force, on like goods produced or manufactured outside India if imported into India, and where the said duties of customs are chargeable by reference to their value, the value of such excisable goods shall, notwithstanding anything contained in any other provision of this Act, be determined in accordance with the provisions of the Customs Act, 1962 and the Customs Tariff Act, 1975 (51 of 1975).”

4.4 For interpreting the above notification as amended by Notification No 22/2006-CE dated 01.03.2006 Commissioner (Appeals) has observed as follows:-

“4.8 Here the referred notification should not only be confined to its grammatical or ordinary parlance, but it should also be construed in the light of the contest. In the instance case the intention of the legislation to tax or to counterbalance the sales tax, VAT/CST or local tax in case the imported goods are not subjected to sales tax, VAT/CST or in other words plainly exempted from sales tax, VAT/CST as held by the Hon’ble CESTAT larger bench in appellant’s own case vide Misc. Order No.411/09-EX (DB) dated 26.06.2009.

4.9 In view of the above, the impugned order of the Adjudicating Authority has no infirmity and is correct based on the law for demanding the SAD on the goods cleared from the factory in the shape of sample quoting not for sale in DTA. The clearance in the shape of “Sample” cannot be denied as clearance of goods from the factory. The contention of the appellant that the goods has been cleared in the DTA as Sample which has not been sold and Sales Tax / Vat not payable and the SAD is not leviable on the goods cleared as sample by availing of exemption from payment of Sales Tax / Vat. The SAD on the any clearance from a EOU is leviable in case where Sales Tax / Vat has not been paid either the clearance is in the shape of Sample or clearance is in the shape of Sale in DTA.

4.10 The Hon’ble CESTAT’s Larger Bench vide Misc. Order No.411/09- EX (DB) dated 26.06.2009 observed that “In respect of a 100% EOU availing sale tax exemption, for determining the excise duty payable based on aggregate value of Customs duty, the element of SAD should be taken into account.”

4.4 The only dispute in the matter is with regards to interpretation of the word ‘exemption’. It is settled principle in law after the decision of the Hon’ble Apex Court in the case of Dilip Kumar & Co, [2018 (361) ELT 577 (SC)] wherein following has been held:

“52. To sum up, we answer the reference holding as under –

(1) Exemption notification should be interpreted strictly; the burden of proving applicability would be on the assessee to show that his case comes within the parameters of the exemption clause or exemption notification.

(2) When there is ambiguity in exemption notification which is subject to strict interpretation, the benefit of such ambiguity cannot be claimed by the subject/assessee and it must be interpreted in favour of the revenue.

(3) The ratio in Sun Export case (supra) is not correct and all the decisions which took similar view as in Sun Export case (supra) stands overruled.”

Admittedly in the present case there is no ambiguity in the notification and the issue needs to be considered by interpreting the notification strictly not by referring to the context etc as stated by the impugned order. Undisputedly the goods in dispute were not taxable because only that turnover was subject to tax which was a commercial transaction and the clearance of the samples was excluded from the taxable turnover as per Section 7 of the U P Vat Act, 2008. The relevant provisions U P Vat Act are reproduced below:

2. Definitions In this Act, unless there is anything repugnant in the subject or context;

(l) “exempt goods” means any of the goods mentioned or described in column 2 of the Schedule I;

(v) “non-vat goods” means any of the goods mentioned or described in column 2 of Schedule-IV;

(an) “taxable turnover of sale” means turnover obtained after deducting from the gross turnover of sale such amounts as may be prescribed;

(aq) “turnover of sale” means the aggregate of amount of sale prices of goods, sold or supplied or distributed by way of sale by a dealer, either directly or through another, whether on his own account or on account of others;

7. Tax not to be levied on certain sales and purchases No tax under this Act shall be levied and paid on the turnover of–

(a) sale or purchase where such sale or purchase takes place –

(i) in the course of inter-state trade or commerce; or

(ii) outside the State; or

(iii) in the course of the export out of or in the course of the import into, the territory of India;

(b) sale or purchase of any goods named or described in column 2 of the Schedule I or;

(c) such sale or purchase; or sale or purchase of such goods by such class of dealers, as may be specified in the notification issued by the State Government in this behalf:

Provided that while issuing notification under clause (c), the State Government may impose such conditions and restrictions as may be specified.

In the present case the goods in dispute are not specified in schedule I or Schedule IV of the U P VAT Act hence are not exempt from payment of VAT, but the clearance of samples from EOU are not part of the taxable turnover as per the provisions of this Section 7. The transactions in respect of sample do not fall under the category of exempt goods as defined by the U P Vat Act, 2008. These clearances were not subjected to the VAT in view of the provisions contained in Section 7. We agree with the contention of the appellant that as these goods were not exempt from payment of VAT and sales tax but were not taxable under VAT being samples. The wordings of proviso of the Notification no 23/2003-CE dated 31.03.2003 as amended by Notification No 22/2006-CE dated 01.03.2006 are unambiguous and they refer to exempt goods under VAT Act. In te present case the goods are not specified as exempt goods as defined under the VAT Act, but are not the part of taxable turnover.

4.5 In case of Dhiren Chemical Industries [2002 (139) E.L.T. 3 (S.C.)] a five judges bench of Hon’ble Supreme Court has held as follows:

“4. In the case of Motiram Tolaram, reliance was placed upon the case of Usha Martin to contend that the appropriate duty being nil, because the raw material was not manufactured in India, it must be taken that appropriate duty has been paid and the appellants would be entitled to the benefit of the Exemption Notification in question, which used the said phrase. The Court was unable to agree. It said that the raw material being an item which was manufactured in India, a rate of excise duty was leviable thereon. On the raw material which had been imported, the appropriate amount of duty had not been paid. It was only if this payment had been made that the exemption notification would be applicable.

5. In our view, the correct interpretation of the said phrase has not been placed in the judgment in the case of Usha Martin. The stress on the word “appropriate” had been mislaid. All that the word “appropriate” in the context means is the correct or the specified rate of excise duty.

6. 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.

7. 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.

8. The notification is intended to give relief against the cascading of excise duty – on the raw material and again on the goods made therefrom. There is no cascading effect when no excise duty is payable upon the raw material and the hardship that the notification seeks to alleviate does not arise.”

4.6 The decision of larger bench of Tribunal referred in the impugned order is in respect of conditional exemption given to certain clearance of goods under VAT Act and is not applicable to the facts of present case. In our view impugned order is without any merits.

5.1 Appeal is allowed.

(Dictated and pronounced in open court)