2010 (7) TMI 324 - AT - Central Excise

Supplies to SEZ under Letter of Undertaking not treated as export under Rule 5; refund of Cenvat credit denied

CESTAT, MUMBAI - AT allowed the appeals and set aside the impugned order, holding the appellant entitled to deny refund of accumulated Cenvat credit. ... Export - deeming provision - legal fiction - rule 5 of the Cenvat Credit Rules, 2004 - refund of Cenvat credit - Special Economic Zones Act, 2005 - effect of SEZ deeming on third parties - physical export - proof of export - Bill of Export and ARE-1 - statutory purpose and limited scope of deemingRule 5 of the Cenvat Credit Rules, 2004 - refund of Cenvat credit - export - physical export - Applicability of rule 5 to clearances from a Domestic Tariff Area supplier to a SEZ unit - whether such clearances constitute 'export' for the purpose of claiming refund of unutilized Cenvat credit. - HELD THAT: - The Tribunal held that rule 5 must be read with the ordinary meaning of 'export' as understood under the Customs Act (taking goods out of India). In the absence of a definition of 'export' in the Central Excise or Cenvat Credit Rules, the Customs Act definition governs for purposes of rule 5. The deeming provision in the SEZ Act that treats supplies to a SEZ as 'export' operates to confer export status on the SEZ unit (the beneficiary of the SEZ scheme) and cannot be extended to allow a DTA supplier to claim refund under rule 5. Consequently, supplies to SEZ units under Letter of Undertaking do not amount to physical export by the DTA supplier for rule 5 purposes, and the supplier is not entitled to refund of unutilized Cenvat credit under that rule on the basis that such clearances were 'exports'. [Paras 7, 9, 11]Clearances by the DTA supplier to SEZ units are not 'exports' for the purposes of rule 5 and do not entitle the supplier to refund under that rule.Special Economic Zones Act, 2005 - effect of SEZ deeming on third parties - deeming provision - legal fiction - statutory purpose and limited scope of deeming - Whether the deeming provisions of the SEZ Act (treating supplies from DTA to SEZ as 'export') can be given effect so as to confer benefits under the Central Excise/Cenvat regime on the DTA supplier. - HELD THAT: - The Tribunal analysed the SEZ Act and Rules and concluded that the deeming fiction is a statutory device intended to benefit SEZ units by enabling them to claim export entitlements; it does not operate to confer complementary benefits on DTA suppliers unless expressly provided. Relying on the scheme, rule 30 procedures and section 51 (overriding effect), the Tribunal observed that the deeming makes the transaction an export for the SEZ unit and that any procedure (e.g., filing Bill of Export or ARE-1) is administrative convenience. The legal fiction cannot be extended beyond its statutory object to create new entitlements under unrelated statutes (here, rule 5). [Paras 8, 9, 10, 11]Deeming provisions of the SEZ Act cannot be used to confer rule 5 Cenvat refund benefits on a DTA supplier; the fiction benefits the SEZ unit alone.Administrative circulars and scope - Board's Circular No. 29/06-Cus. - interpretation of rules 18 and 19 of the Central Excise Rules, 2002 - Whether Board's Circular No. 29/06-Cus. (and related instructions) supports a DTA supplier's claim for refund under rule 5 in respect of supplies to SEZ units. - HELD THAT: - The Tribunal found that the Board's circulars and instructions address applicability of rules 18 and 19 (duty-free clearance or rebate procedures) to supplies to SEZ units and do not expressly deal with entitlement to refund under rule 5 of the Cenvat Credit Rules. The limited clarification in the circulars cannot be stretched to grant the distinct benefit of Cenvat refund under rule 5 to DTA suppliers. The Tribunal further observed that earlier Tribunal decisions relied upon by the respondent (including decisions pertaining to EOUs) are not apposite to the SEZ scheme which is governed by a separate statute. [Paras 12]Board's Circular No. 29/06-Cus. and related instructions do not entitle a DTA supplier to claim refund under rule 5 for supplies to SEZ units.Evidentiary finding - satisfaction of rule 5 conditions - Validity of the lower appellate authority's factual finding that the respondent had fulfilled all legal requirements of rule 5 and Notification No. 05/06-CE (NT). - HELD THAT: - The Tribunal observed that the Commissioner (Appeals) recorded that the respondent had established fulfilment of the legal requirements for rule 5, including inability to utilize Cenvat credit, but the impugned order contained no material to substantiate that factual conclusion. Since the principal legal conclusion (that supplies were 'exports' for rule 5) was negatived, the appellate finding on fulfilment of rule 5 conditions could not sustain the order. [Paras 14]The finding that the respondent satisfied rule 5 and related notification requirements is not supported by evidence and does not sustain the appellate order.Final Conclusion: The appeals are allowed; the Commissioner (Appeals) order is set aside. The Tribunal held that supplies by a DTA supplier to SEZ units do not constitute 'export' for purposes of rule 5 of the Cenvat Credit Rules, 2004, the SEZ Act deeming provisions do not confer rule 5 refund benefits on the DTA supplier, and the Board's circulars relied upon do not alter this conclusion. Issues Involved:1. Definition and applicability of 'export' under Rule 5 of the Cenvat Credit Rules, 2004.2. Eligibility for refund of unutilized Cenvat Credit for supplies made to SEZ units.3. Interpretation and relevance of SEZ Act and Rules in relation to Cenvat Credit Rules.Detailed Analysis:1. Definition and Applicability of 'Export' under Rule 5 of the Cenvat Credit Rules, 2004:The core issue revolves around whether the term 'export' in Rule 5 of the Cenvat Credit Rules, 2004, includes supplies made to SEZ units. The respondent argued that their supplies to SEZ units should be considered 'exports' based on the SEZ Act's definition. The SEZ Act, under Section 2(m)(ii), defines 'export' to include supplying goods from the Domestic Tariff Area (DTA) to an SEZ unit. The Commissioner (Appeals) supported this view, relying on the SEZ Act and related provisions, which deem such supplies as exports.However, the department contended that 'export' for Rule 5 purposes should align with the Central Excise Act and the Customs Act, where 'export' means taking goods out of India. The Tribunal sided with the department, emphasizing that the SEZ Act's deeming provisions are intended to benefit SEZ units, not DTA suppliers. The Tribunal concluded that the term 'export' in Rule 5 should be interpreted as 'physical export' out of India, as per the Customs Act's definition.2. Eligibility for Refund of Unutilized Cenvat Credit for Supplies Made to SEZ Units:The respondent claimed refunds under Rule 5 of the Cenvat Credit Rules, 2004, for inputs used in manufacturing goods supplied to SEZ units. The original authority rejected these claims, arguing that the goods supplied to SEZ units were capital goods, not inputs, and that such supplies did not constitute physical exports. The Commissioner (Appeals) overturned this decision, asserting that supplies to SEZ units qualify as exports under the SEZ Act, thus entitling the respondent to refunds.The Tribunal, however, disagreed, stating that Rule 5's benefits are not applicable to deemed exports. It emphasized that the SEZ Act's deeming provisions do not extend to granting refunds of unutilized Cenvat Credit to DTA suppliers. The Tribunal highlighted that the SEZ Act and Rules are designed to benefit SEZ units, not DTA suppliers, and thus, the respondent's refund claims were not justified.3. Interpretation and Relevance of SEZ Act and Rules in Relation to Cenvat Credit Rules:The Tribunal examined the SEZ Act and Rules, noting that these provisions are meant to benefit SEZ units. The SEZ Act's definition of 'export' creates a legal fiction for SEZ units, not for DTA suppliers. The Tribunal emphasized that deeming provisions should not be extended beyond their statutory purpose. It referenced the Supreme Court's judgments in Clariant International Ltd. and Swarn Rekha Cokes & Coals (P.) Ltd., which support the view that legal fictions should be limited to their intended scope.The Tribunal also considered the High Court's decision in Essar Steel Ltd., which held that for the levy of export duty, goods must be physically exported out of the country. Applying this rationale, the Tribunal concluded that the SEZ Act's deeming provisions do not apply to Rule 5 of the Cenvat Credit Rules, 2004. It reiterated that the term 'export' in Rule 5 should be interpreted in line with the Customs Act, meaning physical export out of India.Conclusion:The Tribunal set aside the Commissioner (Appeals)'s order, ruling that the respondent's supplies to SEZ units do not qualify as exports under Rule 5 of the Cenvat Credit Rules, 2004. Consequently, the respondent is not entitled to refunds of unutilized Cenvat Credit for these supplies. The Tribunal's decision underscores that the SEZ Act's deeming provisions are intended solely for the benefit of SEZ units and do not extend to granting benefits to DTA suppliers under the Cenvat Credit Rules.