CBEC Protects Differential Duty Regime- Against Imports, For Domestic Manufacturing

• Three Notifications Released on 17 July to Over Ride March 2015 Supreme Court Ruling in SRF Case

• Zero duty Inputs Eligible for Duty Paid Clause, Dhiren Chemicals Judgement Overruled

-Arun Goyal-

The CBEC issued three notifications on 17 July to strengthen the differential duty regime and protect domestic manufacturing in India. In this, a high 12.5 percent duty is levied on imported goods compared to two percent on those made in India without availing CENVAT credit on taxes paid on inputs. This gives a differential duty benefit of 10.5 percent to domestic manufacture compared to imports.

Three excise notifications were issued on 17 July to strengthen the “CENVAT not availed” condition so as to give the low duty benefit only to domestic manufactures. It may be recalled that the Supreme Court ruling in the March 2015 SRF case allowed the low two percent duty benefits to imported goods. The Court held that the discrimination against imported goods was bad in law and imported goods must be given the same concessional duty as applicable to domestically produced goods since imported goods too do not avail CENVAT credit.

The 17 July notifications say that only manufacturers can benefit from the “CENVAT not availed” condition. Mere buyers are specifically excluded. Further, the excise on inputs going into manufacture must be paid in cash. The changes in the condition for low duty seek to over ride the concept of “deeming fiction” which underlies the Supreme Court ruling.

According to research on the implications of the notifications conducted in the Academy of Business Studies (ABS), 144 entries in excise notifications are covered by the differential duty strengthening measure. The entire textile industry is in the differential duty regime where imports are charged 12.5 percent CVD of excise while domestically produced goods move in a parallel zero excise duty stream. Other major items in the differential duty stream include Mobile Phones and Tablets, Coal, Fertilizers, HR and CR Steel Coils, Jewellery articles, Aluminium plates and sheets, and Copper for handicrafts. Another 132 items from the small and medium industry sector are charged only two percent excise in the differential duty regime under excise notification 1/2011 with the CENVAT not availed condition.

The challenge to the differential duty regime arose in the Supreme Court Judgement of 26 March 2015 in the SRF case in which two Members Bench of Justice AK Sikri and Rohington Nariman held that imported goods are deemed manufactured in India and are eligible to the concessional duty applicable to goods manufactured in India which do not avail of Cenvat Credit. The Supreme Court interpreted the Section 3(1) of Customs Tariff Act to say that if CVD can be levied on imported goods not manufactured in India under the deeming provision, these goods can also be deemed to be manufactured in India. Once imports get the “made in India” label, they fulfill the “CENVAT not availed” condition and thus get the concessional CVD of excise benefit of two percent duty instead of the normal 12.5 percent.

The SC judgement forced many customs field formations to clear imports at the low rate of duty applicable to goods manufactured in India without Cenvat Credit. It dealt a blow to the differential duty regime to protect domestic manufacturing. Customs revenue from countervailing duty went for a sixer, specially on high volume imports of HR coils, fertilizers and mobile phones which were cleared at low rate of duty instead of the default rate of 12.5 percent.

The stage is now set for a massive recovery of CVD at 12.5% for the month February-July period for consignments where low CVD of 2% or less was charged following the SRF ruling. Confrontation between Supreme Court and the Government is expected as the importers go to the Supreme Courier with the prayer to strike down the 17 July notification.

The expression “appropriate duty paid” in the new condition became a source of major confusion since the Nil duty on inputs did not fall under the expression following the 2001 Dhiren Chemicals judgement of the Supreme Court. There were contrary views in the matter as the practices on the subject varied in the field and the Court Rulings on the subject too were also debatable.

For example, in the case of mobile industry, the inputs are exempt from both customs as well as excise duty so the concessional rate of duty at one percent on mobiles made in India will be denied. In other words, the concession is not available due to the expression “appropriate duty paid”.

The Department issued an explanation by notification 39/2015-CE dated 21 July 2015. In this, it has amplified that the Nil duty on inputs is also eligible to be covered the expression “appropriate duty paid”. The text of the insertion in the notification is given below:

(a) in Condition No. 16, under the heading “Conditions”, after the entries, the following Explanation shall be inserted, namely:-

“Explanation.- For the purposes of this condition, 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 Department also issued a Circular on 21 July 2015 wherein the background of the differential duty regime and the department’s actions is explained.

The following points in the clarification may be noted:

1. The department is very clear that the domestic manufacturer should not be placed under disadvantage vis-a-vs imports under the “Make in India” policy of the Government.

2. A review petition has been filed against the SRF judgement so as to uphold the original differential duty policy. The current set of amendments is only to strengthen the condition, it is only making the “intention (of the government) abundantly clear”. In other words, the government reserves its right to recover the concessional CVD paid by importers in the period between 25 March 2015 SRF judgement and 17 July 2015 series of notification amending the condition for the concessional duty.

We expect that litigation on the subject in the Supreme Court and elsewhere will result in changing positions. There is little hope for manufacturing from imported inputs. Too many cooks are spoiling the broth.

-ABS News Service-

[Central Excise Notification No. 39 dated 21^st July 2015]

In exercise of the powers conferred by sub-section (1) and sub-section (2A) of section 5A of the Central Excise Act, 1944 (1 of 1944), the Central Government being satisfied that it is necessary in the public interest so to do, hereby makes the following further amendments in the notification of the Government of India in the Ministry of Finance (Department of Revenue), No. 12/2012-Central Excise, dated the 17th March, 2012, published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (i), vide number G.S.R. 163(E), dated the 17th March, 2012, namely:-

In the said notification, in the ANNEXURE,-

(a) in Condition No. 16, under the heading “Conditions”, after the entries, the following Explanation shall be inserted, namely:-

(b) in Condition No. 20, under the heading “Conditions”, after the proviso, the following Explanation shall be inserted, namely:-

(i) for the word and figures “section 66”, the word, figures and letter “section 66B” shall be substituted;

(ii) after the entries, the following Explanation shall be inserted, namely:-

“Explanation.- For the purposes of this condition, appropriate duty or appropriate additional duty or appropriate service tax includes nil duty or nil service tax or concessional duty or concessional service tax, whether or not read with any relevant exemption notification for the time being in force.”;

(d) in Condition No. 52A, , under the heading “Conditions”,-

(i) for the word and figures “section 66”, the word, figures and letter “section 66B” shall be substituted;

(ii) after the entries, the following Explanation shall be inserted, namely:-

“Explanation.- For the purposes of this condition appropriate duty or appropriate additional duty or appropriate service tax includes nil duty or nil service tax or concessional duty or concessional service tax, whether or not read with any relevant exemption notification for the time being in force.”.

[F. No. 336/4/2015-TRU]

[Central Excise Notification No. 38 dated 21^st July 2015]

In exercise of the powers conferred by sub-section (1) and sub-section (2A) of section 5A of the Central Excise Act, 1944 (1 of 1944), the Central Government being satisfied that it is necessary in the public interest so to do, hereby makes the following further amendments in the notification of the Government of India in the Ministry of Finance (Department of Revenue) No. 1/2011-Central Excise, dated the 1st March, 2011, published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (i), vide number G.S.R. 116(E), dated the 1st March, 2011, namely: -

In the said notification, in the opening paragraph, -

(A) in the proviso, for the word and figures “section 66”, the word, figures and letter “section 66B” shall be substituted.

(B) after the proviso, the following Explanation shall be inserted, namely:-

“Explanation.- For the purposes of this notification, appropriate duty or appropriate additional duty or appropriate service tax includes nil duty or nil service tax or concessional duty or concessional service tax, whether or not read with any relevant exemption notification for the time being in force.”.

[F. No. 336/4/2015-TRU]

[Central Excise Notification No. 37 dated 21^st July 2015]

In exercise of the powers conferred by sub-section (1) and sub-section (2A) of section 5A of the Central Excise Act, 1944 (1 of 1944), read with sub-section (3) of section 3 of the Additional Duties of Excise (Goods of Special Importance) Act, 1957 (58 of 1957), the Central Government being satisfied that it is necessary in the public interest so to do, hereby makes the following further amendment in the notification of the Government of India in the Ministry of Finance (Department of Revenue), No 30/2004-Central Excise, dated the 9th July, 2004, published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (i), vide number G.S.R. 421(E), dated the 9th July, 2004, namely :-

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.”.

[F. No. 336/4/2015-TRU]

[CBEC Circular No. 1005 dated 21^st July 2015]

Subject: Judgment of the Supreme Court in the case of M/s SRF Ltd. versus Commissioner of Customs. Chennai - Clarification relating to notifications No.30/2004-Central Excise dated 09.07.2004. No. l/2011-Central Excise dated 01.03.2011 and No. 12/2012-Central Excise dated 17.03.2012. as amended.

It may recalled that the Hon'ble Supreme Court, in the case of M/s SRF Ltd. versus Commissioner of Customs. Chennai and M/s ITC Ltd. v/s Commissioner of Customs (I&G), New Delhi relating to CVD exemption, has held that the benefit of excise duty exemption [available to final products manufactured by the domestic manufacturer, subject to the condition of non-availment of CENVAT credit of duty on inputs or capital goods used by such manufacturer for manufacture of such final products] will also be available to the importers of such final products for the purposes of CVD on the ground that the importer was not availing the credit of duty on inputs or capital goods.

2. The implication of the Hon'ble Supreme Court judgment was that all such final products when imported by manufacturer importer would have attracted concessional excise duty as CVD, while the domestic manufacturer of such final products had to forgo input tax credit to be eligible for such concessional rate. This would put the domestic manufacturers at a disadvantage vis-a-vis imports and would adversely impact the Make in India Policy of the Government.

3. The Judgment of the Hon'ble Supreme Court was examined in CBEC and it was found that there were certain errors apparent on record / interpretational issues and, with the concurrence of the Ld. Attorney General, a Review Petition /Revision Application has been filed against the same.

4. However. keeping in view the adverse implications of the aforesaid judgment on the domestic industry, legal opinion was sought from the Ministry of Law & Justice as to whether pending the aforesaid Review Petition / Revision Application, such conditions in the relevant notifications be suitably amended so as to make the intention abundantly clear (that these conditions are to be satisfied by the manufacturers of such goods and not the buyer / importer of such goods).

5. In this context, opinion of the Ministry of Law & Justice was also sought. With the concurrence of the Ld. Attorney General, notifications No.34/2015-CE, No.35/2015-CE and No.36/2015-CE all dated 17.7.2015 were issued amending the conditions in notifications 30/2004-CE dated 09.07.2004, No. 1/2011-CE dated 01.03.2011 and No. 12/2012-CE dated 17.03.2012, respectively.

6. In the above context, apprehensions have been raised about the use or the phrase or “appropriate duty”. In this regard, Explanations have been inserted in the notifications No.30/2004-CE dated 09.07.2004, No. 1/2011-CE dated 01.03.2011 and No. 12/2012-CE dated 17.03.2012 so as to clarify that the appropriate duty or appropriate additional duty or appropriate service tax for the purposes of the said notifications / entries includes nil duty or tax or concessional duty or tax, whether or not read with any relevant exemption notification for the time being in force.

7. It may, therefore, be noted that the domestically manufactured goods covered under these notifications / entries continue to be exempt from excise duty or subject to concessional rate of excise duty, as the case may be, as they were prior to 17^th July. 2015.

8. Trade Notice/Public Notice may be issued to the field formations and taxpayers.

9. Difficulties faced, if any, in implementation of this Circular may be brought to the notice of the Board.

F.No. 336/4/2015-TRU