2016 (8) TMI 128 - SC - Central Excise

Supreme Court rules in favor of knitted garment manufacturers on duty exemption, rejecting Revenue's stance

The Supreme Court analyzed the grant of exemption under Notification No. 14/02-CE and 15/02-CE to knitted garment manufacturers. The Court held that ... Whether market purchase goods can be treated as duty paid goods - manufacture of knitted or crocheted fabrics of cotton - benefit of concessional rate or nil rate of duty to the knitted garment manufacturers allowed on certain conditions - Notification No. 14/02-CE and 15/02-CE both dated 01.03.2002 - divergent view is taken by the different Benches of the Tribunal. - One of the conditions is for full exemption is that knitted garments are exempt if manufactured out of knitted fabrics on which appropriate duty of excise has been paid and no cenvat credit of duty paid on inputs or capital goods has been taken. If Cenvat credit is taken, the duty is at concessional rate. - Held that:- A reading of the Budget Explanatory Note makes it clear that those who did not want to avail MODVAT facility were allowed to clear the goods without payment of any excise duty. It is in this context that the authorities were asked not to insist upon any documentary proof for payment of duty and this was transported into the notification, in the form of Explanation II. It, therefore, becomes clear that when Explanation II states that the duty shall be deemed to have been paid even without production of documents evidencing payment of duty thereon, it was clearly meant that no duty was required to be paid by the manufacturers of knitted garments. Such an intention is clearly reflected in the Government's own Budgetary Notes extracted above. We, thus, hold that Explanation II to the said exemption Notification Nos. 14/2002 and 15/2002 create legal fiction and that was the precise purpose for which this explanation was added. It is trite law that a fiction created by a provision of law is to be given its due play and it must be taken to its logical conclusion. It would be pertinent to mention here that Condition No. 3 which uses the words “read with any notification for the time being in force” was put in place to overcome the interpretation that was given by this Court in Dhiren Chemical Industries case. Benefit of exemption notification would be available to all these assessees. - Decided against the revenue. Issues:Grant of benefit of exemption under Notification No. 14/02-CE and 15/02-CE dated 01.03.2002.Detailed Analysis:Issue 1: Grant of Benefit of ExemptionThe appeals involved a common issue regarding the grant of benefit of exemption under Notification No. 14/02-CE and 15/02-CE dated 01.03.2002 to knitted garment manufacturers. The notifications provided concessional or nil rates of duty under certain conditions, one being that knitted garments should be manufactured from fabrics on which appropriate excise duty has been paid without availing Cenvat credit on inputs or capital goods.Issue 2: Interpretation of NotificationsThe Revenue contended that the benefit of the notifications is only available if garments are made from duty-paid fabrics. On the other hand, assessees argued that Explanation II creates a legal fiction deeming textile yarn or fabrics as duty paid even without proof of payment. The Tribunal had divergent views on this interpretation, leading to two sets of appeals by both Revenue and assessees.Issue 3: Tribunal's DecisionThe Tribunal upheld the Commissioner's decision to deny the benefit of Notification No. 15/2002-CE to the apparels, citing the requirement for actual payment of excise duty. The Tribunal also rejected the contention based on Explanation II, stating that it does not waive the condition of payment of duty.Issue 4: Supreme Court's AnalysisThe Supreme Court examined the notifications, Budget Explanatory Notes, and relevant case law. It noted that the notifications provided for two schemes - concessional rates for MODVAT credit availed manufacturers and full exemption for those not availing MODVAT credit. The Court emphasized that Explanation II created a legal fiction of duty payment without documentation, aligning with the government's intention as reflected in the Budgetary Notes.Issue 5: Legal Fiction and Purpose of Explanation IIThe Court held that Explanation II was added to exempt manufacturers from paying duty if they did not avail MODVAT facility, as indicated in the Budget Explanatory Notes. The legal fiction created by Explanation II was meant to be given its due effect, leading to the logical conclusion that no duty was required to be paid by knitted garment manufacturers.Issue 6: Tribunal's Reference and DecisionThe Court mentioned a larger Bench of the Tribunal's detailed judgment accepting the plea of assessees and rejecting the Revenue's stand. Independently examining the issue, the Court concluded that the benefit of exemption notification should be available to the assessees.In conclusion, the Court allowed the appeals filed by the assessees and dismissed those filed by the Revenue, with no order as to costs.