2013 (5) TMI 460 - HC - Central Excise

Sub-rule 6(6)(i) of 2004-Rules on Cenvat Credit in SEZs is Clarificatory and Retrospective

Union of India Versus, COMMISSIONER OF CENTRAL EXCISE & CUSTOMS M/s Steel Authority of India Ltd.

The HC held that the substituted sub-rule 6(6)(i) of the 2004-Rules, which removes discrimination between developers and units in SEZs regarding Cenvat ... Cenvat Credit - Supply to SEZ - Amendment to rule 6 - Meaning of word 'Excise' - Whether the benefit provided by the substituted sub-rule 6(6)(i) in the 2004-Rules can be availed on a date prior to its substitution in the 2004-Rules or in other words, whether the substituted sub-rule 6(6)(i) is retrospective or not? Held that:- The Assessee had supplied goods from the domestic tariff area to a developer and it is to be treated as an export in view of sub-section 2(m) of the SEZ Act. In case it is treated to be export then all benefits as given to export under any other law should be given. Rule 6 of the 2004-Rules is titled 'obligation of a manufacturer of dutiable and exempted goods and provider of taxable and exempted services'. It provides certain obligation on the manufacturer of such goods. The Assessee is one such manufacturer. It not only manufactures dutiable goods but exempted goods as well. 2004-Rules as initially envisaged provided benefit to the goods cleared to a unit in SEZ only and not to the developer though under the SEZ Act the position of the developer as well as the unit was one and the same they were in the same class, entitled to the same treatment. This appears to be an inadvertent omission. It appears that the aforesaid mistake was realised by the Government and rule 6(6)(i) of the 2004-Rules was substituted by the following new sub-rule & after substitution of rule 6(6)(i) by the Amended Rules, the discrimination between the developer and a unit in SEZ has been obliterated. Both stand in the same footing. It is now in consonance with the Article 14 of the Constitution of India. It is settled rule of interpretation that rule or notification takes effect from the date it is issued and not from any prior date. However, Justice GP Singh in his book 'Principles of Statutory Interpretation' 12th Edition, 2010 at page 1021 observes that a rule, which is not in terms retrospective, may have retrospective operation because of the retrospective operation of the enactment in respect of which it is made. So is the case here. The substituted sub-rule 6(6)(i) of the 2004-Rules should have retrospectivity in order not to discriminate and to be in consonance with the nature of excise duty. Thus the rule is clarificatory, corrects an obvious mistake, removes discrimination, and provides correct legal principle. Its prospective enforcement would leave it to be suspect at the touchstone of Article 14 of the Constitution. Considering this aspect it is proper to hold that the substituted sub-rule 6(6)(i) is came into force from the date the 2004-Rules were enforced. The Excise Duty is imposed on the manufacture of the product that is to be consumed in the country whereas a customs duty is imposed on the product that is manufactured within the country but is to be used outside the country i.e exported as well as manufactured outside the country and brought into the country for use i.e imported. The amended rule is merely clarificatory, corrects an obvious mistakes, removes discrimination between developers and units in special area zones. It merely clarifies or explains the existing law of providing non-imposition of excise duty on goods that are held to be export under the Special Area Zone Act. The substituted sub-rule 6(6)(i) is enforced from the date the 2004-Rules came into force. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether the substituted sub-rule 6(6)(i) of the Cenvat Credit Rules, 2004 (the 2004-Rules) has retrospective effect and can be applied to goods cleared prior to its substitution. 2. Whether supplies made to developers of Special Economic Zones (SEZs) prior to the substitution date can be treated as exempted goods under rule 6(3)(b) of the 2004-Rules and as exports under the SEZ Act and Customs Act. 3. Whether the amendment notification substituting sub-rule 6(6)(i) is prospective or retrospective in operation, considering it came into force on the date of publication in the official gazette. 4. Whether the initial omission of developers from sub-rule 6(6)(i) of the 2004-Rules constituted discrimination violative of Article 14 of the Constitution. 5. The legal nature and scope of excise duty versus customs duty, particularly in relation to goods cleared to SEZ units and developers. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Retrospective Effect of Substituted Sub-Rule 6(6)(i) Legal Framework and Precedents: The Cenvat Credit Rules, 2004, impose obligations on manufacturers of dutiable and exempted goods, including maintenance of separate accounts or payment of a percentage of exempted goods' value. Sub-rule 6(6)(i) originally exempted clearance to SEZ units but did not include developers. The substitution by Notification No. 50/2008-Central Excise (N.T.) added developers to the exemption clause. Justice GP Singh's principle on statutory interpretation allows for retrospective operation of rules not expressly retrospective if the parent enactment has retrospective effect. Court's Reasoning: The Court recognized that the substitution corrected an obvious omission and removed discrimination between SEZ units and developers. The substituted sub-rule 6(6)(i) aligns with the nature of excise duty and the SEZ Act's treatment of developers and units on equal footing. The Court rejected the Department's argument that the amendment is strictly prospective, effective only from the date of gazette publication (31.12.2008), holding that such prospective operation would perpetuate unconstitutional discrimination under Article 14. Key Findings: The substituted sub-rule 6(6)(i) is clarificatory, removes discrimination, and reflects the true legal position intended since the inception of the 2004-Rules. Application of Law to Facts: The Assessee cleared goods to developers before 31.12.2008 and claimed exemption under the substituted sub-rule. The Court held that the substituted sub-rule applies retrospectively to the date of the 2004-Rules' enforcement, allowing the Assessee's claim. Treatment of Competing Arguments: The Department's strict prospective interpretation was rejected to avoid discrimination. The Assessee's argument that the amendment is clarificatory and removes discrimination was accepted. Conclusion: The substituted sub-rule 6(6)(i) has retrospective effect from the date of the 2004-Rules and applies to goods cleared before 31.12.2008. Issue 2: Treatment of Supplies to SEZ Developers as Exports and Exempted Goods Legal Framework and Precedents: The SEZ Act defines 'developer' and treats supplies from the domestic tariff area to SEZ units or developers as 'exports' (section 2(m)). The Excise Act imposes duty on manufacture of goods for domestic consumption but exempts exports. The Customs Act imposes duty on imports and exports. Court's Reasoning: The Court emphasized that although goods supplied to SEZ developers do not leave the country, they are legally treated as exports under the SEZ Act. Consequently, excise duty should not be levied on such goods, consistent with the principle that excise duty applies only to goods consumed domestically. The Court noted that the SEZ Act places developers and units on the same footing, entitling both to export benefits. The initial exclusion of developers in the 2004-Rules was an inadvertent omission. Key Findings: Supplies to SEZ developers are exports for excise and customs law purposes and thus exempt from excise duty. The substituted sub-rule 6(6)(i) correctly reflects this position. Application of Law to Facts: The Assessee's supplies to SEZ developers qualify as exports and are exempt from excise duty under the substituted sub-rule 6(6)(i). Treatment of Competing Arguments: The Department argued that the benefit applies only after the amendment date. The Assessee argued for equal treatment of developers and units as per the SEZ Act and constitutional principles. The Court sided with the Assessee. Conclusion: Supplies to SEZ developers before the substitution date are to be treated as exports and exempted goods under the 2004-Rules. Issue 3: Effectiveness Date of the Amendment Notification Legal Framework and Precedents: The Amending Rules state they come into force on the date of publication in the official gazette (31.12.2008). Generally, rules and notifications are prospective unless expressly retrospective. Court's Reasoning: While the notification's language indicates prospective operation, the Court held that the substituted sub-rule is clarificatory and corrects an omission, thus having retrospective effect to avoid discrimination and uphold constitutional equality. Key Findings: The Court distinguished between substantive amendments and clarificatory amendments, holding the latter may operate retrospectively if they clarify existing law and remove anomalies. Application of Law to Facts: The substituted sub-rule is a clarificatory amendment correcting an inadvertent omission and hence applies from the date of original rule enforcement. Treatment of Competing Arguments: The Department's reliance on the date of gazette publication was rejected in favor of a purposive interpretation consistent with constitutional mandates. Conclusion: The amendment notification substituting sub-rule 6(6)(i) is retrospective from the date the 2004-Rules came into force. Issue 4: Alleged Discrimination Violating Article 14 of the Constitution Legal Framework and Precedents: Article 14 guarantees equality before law and prohibits arbitrary discrimination. Classification under law must be reasonable and not arbitrary. Court's Reasoning: The initial 2004-Rules exempted clearance to SEZ units but not to developers, despite both being similarly situated under the SEZ Act. This created an unjustifiable classification and discrimination. The Court held that such discrimination could not be sustained and must be remedied by interpreting the substituted sub-rule 6(6)(i) as retrospective. Key Findings: The omission of developers from the initial sub-rule was an inadvertent error resulting in unconstitutional discrimination. Application of Law to Facts: The Court applied Article 14 to hold that the substituted sub-rule must be read retrospectively to remove discrimination. Treatment of Competing Arguments: The Department's argument for prospective application would perpetuate discrimination. The Court rejected this. Conclusion: The substituted sub-rule 6(6)(i) removes discrimination and must be given retrospective effect to comply with Article 14. Issue 5: Nature and Scope of Excise Duty and Customs Duty in Relation to SEZ Supplies Legal Framework and Precedents: Excise duty is a tax on manufacture of goods for domestic consumption, whereas customs duty applies on imports and exports. The Excise Act and Customs Act follow this principle. Court's Reasoning: The Court elaborated that excise duty is not leviable on goods exported from the country. Although goods supplied to SEZ developers do not physically leave the country, the SEZ Act treats such supplies as exports. Therefore, excise duty should not be levied on goods cleared to SEZ units or developers; customs duty principles apply instead. Key Findings: The legal treatment of supplies to SEZ developers as exports exempts them from excise duty obligations. Application of Law to Facts: The Assessee's goods supplied to SEZ developers are correctly treated as exports and exempt from excise duty under the substituted sub-rule. Treatment of Competing Arguments: The Department's position that excise duty applies was rejected based on the statutory framework and SEZ Act definitions. Conclusion: Excise duty is not payable on goods supplied to SEZ units or developers as such supplies are exports under the SEZ Act.