CA Pradeep Jain, Preeti Parihar
“Proviso”: when it is added to an exemption notification, brings out some conditions on fulfillment of which the benefit of notification will be allowed. Therefore, as and when there is any amendment in a proviso, the scope of a notification is either restricted further or it leads to expansion in its scope. However, sometimes the amendments to these provisos bring utter confusion which shivers a particular industry to which the notification relates. This is the exact situation of the textile sector which is being shivered by the recent amendments made in the proviso to notification no. 30/2004-CE dated 9.7.2004. Similar amendments have been made in two more notifications – 1/2011-CE & 12/2012-CE covering a number of other industries too. In this article, an effort has been made to analyze these three amendments and their impact on the industry as a whole.
Textile sector: Proviso in issue
Notification no. 30/2004-CE dated 9.7.2004 grants exemption to the textile articles specified in it. The proviso to this notification prior to amendment reads as follows:-
“ 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”
Thus, the benefit of notification no. 30/2004-CE is not allowed to the goods which are being manufactured by the inputs on which credit has been taken under the provisions of Cenvat Credit Rules, 2004. Thus, the exemption was not applicable if the credit of inputs was taken by the manufacturer.
The said proviso to notification no. 30/2004-CE has been amended by Notification No. 34/2015 CE dated 17.07.2015. The new proviso reads 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.”.
The analysis of new proviso makes it clear that the exemption is available subject to following conditions:-
The final products should be manufactured from such inputs:-
Thus, the benefit of this notification will be allowed only if the above stated two conditions are satisfied by the manufacturer.
Analysis of amendment
The proviso after amendment states that the INPUTS should be those on which APPROPRIATE DUTY of excise or additional duty of customs has been paid and the manufacturer should not have taken credit of such duty suffered by the inputs. The language uses the words “appropriate duty”. The word “appropriate” has been explained by the hon’ble Supreme Court in the case of COLLECTOR OF C. EX., VADODARA Versus DHIREN CHEMICAL INDUSTRIES [2002 (139) E.L.T. 3 (S.C.)]. The head note of this decision reads as follows:-
Exemption – Notification exempting finished goods if made from materials “on which the appropriate amount of duty of excise has already been paid” – Interpretation of – Word “appropriate” in the context means is the correct or the specified rate of excise duty – 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” – 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 – Collector of Central Excise, Patna v. Usha Martin Industries [1997 (94) E.L.T. 460 (S.C.) = 1997 (7) SCC 47] overruled – Section 5A(1) of Central Excise Act, 1944. [paras 3, 6, 7]
The analysis of above decision of hon’ble Supreme Court makes it clear that the phrase “appropriate duty of excise has been paid” means the correct or specified rate of excise duty. If the raw material is not liable to duty or attracts NIL rate of duty, “appropriate duty of excise” has not been paid. Thus, the condition of payment of appropriate duty of excise is not satisfied. As such, benefit of notification on which this condition is attached is not allowed where the exempted inputs have been used by the manufacturer.
Similar amendments have been made to Notification Nos. 01/2011-CE dated 1.3.2011 (vide Notification No. 35/2015-CE dated 17.7.2015) and Notification No. 12/2012-CE dated 17.3.2012 (vide Notification No. 36/2015-CE dated 17.7.2015). In these notifications, the same condition has been attached. The text of the proviso reads as follows:-
“Provided that the said excisable goods are manufactured from inputs or by utilising input services on which appropriate duty of excise leviable under the First Schedule to the Central Excise Tariff Act, 1985 (5 of 1986) or additional duty of customs under section 3 of the Customs Tariff Act, 1975 (51 of 1975) or service tax under section 66 of the Finance Act, 1994 (32 of 1994) has been paid and no credit of such excise duty or additional duty of customs on inputs or service tax on input services 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.”.
Therefore, now if the assessee wants to claim benefit of these notifications, the duty paid inputs should be used by them and no Cenvat Credit should be taken on such inputs. This condition equally applies on the input services, i.e. for claiming the benefit of these two notifications, the manufacturer should use only taxable input services and no credit of such input service should have been taken. Else the benefit of exemption notification would be denied.
Similar notification came for the 12/2012 but with difference that for certain entries the condition was also prescribed for capital goods also.
Supreme Court decision in the case of SRF Ltd. : Reason behind amendments
These three amendments have been done to overcome the impact of Supreme Court decision in the case of M/s SRF LTD Vs COMMISSIONER OF CUSTOMS, CHENNAI [2015-TIOL-74-SC-CUS]. In this case, M/s SRF Ltd. had claimed Nil rate of additional duty of customs under Serial No. 122 of Notification No. 6/2002-CE dated 01.03.2002. This exemption was allowed subject to fulfillment of condition no. 20 of the Notification which read as follows:-
“20. If no credit under rule 3 or rule 11 of the CENVAT Credit Rules, 2002, has been taken in respect of the inputs or capital goods used in the manufacture of these goods.””
In this case, in fact no such credit was admissible under Cenvat Credit Rules, 2004. The Tribunal ruled that when the credit under the CENVAT Rules is not admissible, question of fulfilling the aforesaid condition does not arise. By holding this, Tribunal came to conclusion that condition which was not possible of satisfaction had to be treated as not satisfied. However, Supreme Court reversed this decision and decided in favour of assessee by allowing the benefit of Nil CVD even when the inputs used therein were not duty paid.
To overcome the impact of this decision, these above discussed three notifications have been amended and conditions have been inserted to the effect that to claim the benefit of Nil rate, the inputs should have suffered duty and no credit of such duty should have been taken by the manufacturer. The situation in case of Notification no. 1/2011-CE & 12/2012-CE is even worse as it covers input services also.
Drastic Reduction in scope of notifications
The above discussed three amendments have exactly same consequences. As from 17.7.2015, the benefit of Notification no. 30/2004-CE, 1/2011-CE & 12/2012-CE will not be allowed if the appropriate duty of excise or additional duty of customs is not paid on inputs (input services also, in later two notifications) or if the credit of such duty/service tax has been taken by the manufacturer.
Therefore, now the manufacturer will have to keep a check on each and every input/ input service; each of those used by him is duty paid. Now taking a practical example; suppose for manufacturing an item X (say fabric), nine types of inputs (like yarn, lubricating oil, colour, printing ink, etc.) and six types of input services (say telephone, courier, financing, auditing, etc.) are used. If the manufacturer wants to claim exemption under notification no. 30/2004-CE; he has to ensure that all the inputs used by him in manufacture of X are duty paid. In other words, irrespective of the % / component in the final product, these have to be duty paid. Thus, even those inputs which are negligibly used (like lubricating oil) have to be duty paid. If the manufacturer receives any of the bill on which no duty is charged by the supplier, department will deny the benefit of this notification by taking shed of above stated proviso.
If the item X in the above example is an article eligible for benefit of notification no. 1/2011-CE & 12/2012-CE, the situation will be even harsher as even the input services have to satisfy the criteria of being tax paid. In such cases, if the manufacturer receives a bill of a minor amount of any service, say courier, on which no service tax is charged; the benefit of these two notifications will be denied, irrespective of the fact that the bill of courier is not even 0.0001% of the cost of production of item X.
The above discussion clearly states that it would be very difficult for the manufacturer to justify that all the inputs/input services are duty/tax paid. All the suppliers are not charging the duty/tax. There can be many reasons for not charging the duty/ tax, one significant reason being that the supplier/ service provider is availing the benefit of SSI exemption. Now, pursuant to above amendments, if the manufacturer wants to claim the benefit of these notifications, he would be forced to purchase the inputs and avail input services only from the giant suppliers/ service providers. In other words, the small manufacturing units or service providers will be dumped. This is obviously not the intention of the government.
Going further, no other interpretation of the amendments so made is possible. Perhaps the said amendments have been done so as to make a Cenvat chain and government intends to allow benefit of exemption from duty payment only at one stage. However, it is also worthwhile to note that the manner in which the said amendments have been done is not proper as it has almost made impossible to avail the benefit of these notifications.
After the hassle confusion of around five days, Government has come up with the solution to above referred problem. The solution has been given by further amendment to these three notifications. This time the amendment has been done by adding explanation to the respective provisos. The explanation added to proviso to notification no. 30/2004-CE reads as follows:-
“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.”.
Thus, now appropriate duty will include NIL rate of duty also. This will bring the situation same as it was prior to 17.7.2015. Similar explanation has been added in notification no. 1/2011-CE & 12/2012-CE. However, in these two notifications, provision related to service tax on input service has also been added. These three amendments have been done vide notification no. 37/2015-CE, 38/2015-CE and 39/2015-CE; all dated 21.07.2015.
Further, Circular no. 1005/12/2015-CX dated 21.7.2015 have also been issued which clarifies the above stated amendments. In this circular, it has been clarified that the said amendments have been done to make the domestic manufacturers survive and that these conditions are to be satisfied by the manufacturers of the goods, not the buyers/importers. It is therefore clarified that the domestically manufactured goods will continue to be exempted under these three notifications as they were exempted prior to 17.7.2015.
These three amendments had almost shaken the various industries (particularly textile sector) to which Notification no. 30/2004-CE, 1/2011-CE & 12/2012-CE are applicable. The said amendments have been talk of the town since 17.7.2015 until 21.7.2015 when the further amendments have been made and circular has been issued. However, it is worth noting here that the condition of notifications has not been changed. Hence, the inputs/input services should have to be duty paid (whether it is NIL or some positive figure). However, in the case where any of the inputs is received without duty paying document then the condition of notification will not be satisfied. Accordingly, the benefit of notification will not be allowed in such a case. Therefore, now the manufacturer will have to be conscious about the duty paying documents of the inputs or input servcies procured by him. But this industry were not taking the credit on input since a long time. The inputs are normally not coming from manufacturer but through dealers. Since the dealer are not registered, hence duty paying documents are not received by the manufacturer. Hence, it will create a lot of problems. Even if the dealer start taking registration with the department, it will take some time. Moreover, even if small dealer of lubricating oil (it is also input) does not registered with the department then the complete exemption will be denied. Supposing, one bill in a particular month does not have duty paying character then the exemption of that month will not be allowed. Else, the manufacturer has to establish that the this input without duty paying document has been used for particular lot then duty is to be paid on that particular lot. This problem will get more worst when the service tax is not paid. One to one correlation will be impossible. Supposing, a security guard agency having turnover of more than ten lakh is liable to pay service tax but he does not raise the bill with service tax and pay the tax also then the manufacturer will be denied the exemption. It is very difficult for manufacturers to implement this notification.
Also, consciousness of manufacturer will have to be more than that of departmental officers who are all set to take advantage of these amendments and contribute towards government exchequer.