COMPENSATION CESS RATE FOR GROUND CLEARANCE OF MOTOR VEHICLES

In Mercedes-Benz India Pvt. Ltd., & Another Versus Union of India & Others. - 2025 (5) TMI 552 - BOMBAY HIGH COURT, the first petitioner is the Mercedez-Benz India Private Limited and the second petitioner is the employee of the first petitioner.  The first petitioner is engaged in the manufacture and trading of passenger cars of various models and variants of the Mercedez-Benz brand falling under chapter heading 8703 of Customs Tariff Act, 1975 made applicable to the provisions of the Central Goods and Services Tax Act, 2017 (‘Act’ for short). 

The petitioners were issued show cause notice by the Department on 09.12.2022.  In the show cause notice it was alleged that the petitioner No.1 has short paid compensation cess leviable and Goods and Services (Compensation to States) Act, 2017 read with Notification No. 1/2017-Compensation Cess (Rate), dated 28.06.2017 as amended vide Notification No. 5/2017-Compensation Cess (Rate), dated 11.09.2017.  According to the said notifications the tax rates for each head are as below-

• 52 – 8703 – Motor vehicles of engine capacity not exceeding 1500 cc – tax rate is 18%;
• 52A – 8703 - Motor vehicles of engine capacity exceeding 1500 cc other than motor vehicles specified against entry at S. No 52B – tax rate is 20%;
• 52B – 8703 - Motor vehicles of engine capacity exceeding 1500 cc, popularly known as Sports Utility Vehicles (‘SUV’ for short) including utility vehicles. – tax rate is 22%.

Explanation to this entry provides that SUV includes a motor vehicle of length exceeding 4000 mm and having ground clearance of 170 mm. and above.

The petitioner claims the rate of 20% under the entry 52A of the Notification.  The view of the Department is that the petitioner covered under the entry 52B of the Notification and accordingly passed the order levying Cess @ 22% under Entry No. 52B on 21.01.2025 and rectification order dated 13.03.2025.

The petitioners challenged the said order especially as how to measure the ground clearance i.e., whether in a laden (fully) loaded condition or in an unladen (empty) condition, before the High Court in a writ petition.  The petitioners prayed the following before the High Court-

• To issue a writ of mandamus or any other appropriate writ, declaring ‘ground clearance’ as measured under Entry 52B of the Notification No. 01/2017-Compensation Cess (Rate), dated 28.06.2017 as amended by Notification No.05/2017-Compensation Cess (Rate), dated 11.09.2017 means in ‘laden condition’;
• To issue a writ of mandamus or any other appropriate writ, declaring that the petitioner No. 1 is liable to pay compensation Cess @20% for the disputed period from September 2017 to July 2022.
• To call for the records pertaining to the petitioner’s case and quash and set aside the Order-in-Original dated 21.01.2025 and/or rectification order dated 13.03.2025 both issued by Respondent No. 3;
• To call for the records pertaining to the order-in-Original and set aside penalty imposed on the petitioner No.2.

Before the High Court the petitioners submitted the following-

• Prior to 26.07.2023 the law was silent as how to measure the ground clearance – whether in a laden condition or in an unladen condition.
• The petitioners, based on their interpretation supported by industry practice, regulatory requirements under the Motor Vehicles Act and the practice being followed by them and accepted by the Department since the Central Excise regime, measured in a laden condition.
• The Appellate Authority for Advance Ruling in ‘In Re: M/s. Tata Motors Limited - 2019 (11) TMI 421 - APPELLATE AUTHORITY FOR ADVANCE RULING MAHARASHTRA, held that the ground clearance be computed in a lader condition of the vehicle.
• The impugned motor vehicle bore ground clearance of less than 170 mm in laden condition, they were correctly paying the compensation cess @ 20%.
• The GST Council agreed with the recommendations of the fitment committee and agreed to amend the Entry 52B to clarify that for the purposes of the Notification, ‘ground clearance’ in Entry 52B means ground clearance in an un-laden condition.
• Further the GST Councill clarified that the explanation inserted vide amendment dated 26.07.2023, which would take effect from that date.
• Based on the recommendation of the GST Council the Board issued the circular dated 14.02.2025 and clarified that the amendment would apply only on or after 26.07.2023.
• The petitioner has been paying compensation Cess @ 22% or the vehicles with ground clearance of 170 mm or above in an un-laded state and supplied on or after 26.07.2023.

The Revenue submitted the following before the High Court-

• In the absence of a specific mandate, the ground clearance should be measured in an un-laden condition.
• Since the impugned vehicles are in an unladen condition, bore ground clearance of 170 mm or above, they would attract compensation cess @ 22% under Sl. No. 52B of the Cess Notification.
• The respondent did not have the advantage of the circular dated 14.02.2025 as the impugned order was passed and issue prior to this date.  Therefore, the respondent has rightly denied the benefit of lower compensation cess to the petitioner.

The High Court considered the submissions of both the parties.  The High Court observed that the only basis for confirming the compensation cess @ 22% is based on the Notification No. 3/2023-Compensation Cess (Rate), dated 26.07.2023 to be retrospective effect in its application.  The Board clarified that the amendment would be effective from 26.07.2023 which is in prospective nature.  The dispute period is between September, 2017 to July 2022.  The circular is binding on the Department.  Therefore, the ground clearance of motor vehicles for the above said period the rate of compensation cess had to be considered in a laden condition, as done by the petitioners.