100% EOU with sales tax exemption must include SAD component in excise duty calculation under Section 3(5) CTA and Notification 20/2003-CE

CESTAT, New Delhi (LB) held that for 100% EOU availing sales tax exemption, SAD component must be included while determining excise duty payable based on aggregate value of customs duty. The Tribunal ruled that Section 3(5) of CTA enables levy on imported goods to counterbalance sales tax, VAT, and local taxes, which is not assessee-specific or area-specific. For clearances from 100% EOU where sales tax is exempted, SAD components should be included in duty determination under Notification No. 20/2003-CE dated 31/3/2003 as amended.

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The core legal question referred to the Larger Bench was whether, in the case of a 100% Export Oriented Unit (EOU) availing Sales Tax exemption, the Special Additional Duty (SAD) element should be included while determining the excise duty payable based on the aggregate value of Customs duty.

Several interrelated issues arise from this question:

• Whether SAD under Section 3(5) of the Customs Tariff Act is leviable on goods cleared into the Domestic Tariff Area (DTA) by a 100% EOU that enjoys exemption from Sales Tax/VAT by virtue of location in a notified backward area.
• The interpretation and scope of Section 3(5) of the Customs Tariff Act concerning the counterbalancing nature of SAD and whether it is to be applied at a macro (notification) level or micro (case-by-case) level.
• The applicability and interpretation of Notification No. 23/03-CE dated 31/3/03 as amended by Notification No. 22/06-CE dated 1/3/06, prescribing the effective rate of excise duty on DTA clearances of EOUs, particularly the proviso relating to inclusion of SAD when goods are exempt from Sales Tax or VAT.
• The relevance of State-level Sales Tax exemptions, specifically under Section 4A of the U.P. Trade Tax Act, and whether such exemptions negate the applicability of SAD.
• The precedential value and applicability of earlier judicial decisions, including the Supreme Court's ruling in Thermax Private Ltd., and Tribunal decisions in Hanil Era Textiles, Morarjee Brembana Ltd., and Jindal Photo Film Ltd.
• The extent to which equitable considerations or assurances in budget speeches influence the interpretation of taxing statutes.

Issue-wise Detailed Analysis:

1. Nature and Scope of SAD under Section 3(5) of the Customs Tariff Act

The Court examined the statutory framework of SAD, introduced initially under Section 3A of the Customs Tariff Act by the Finance Act, 1998, and subsequently incorporated as Section 3(5) of the Customs Tariff Act w.e.f. 13/5/2005. SAD is levied by the Central Government by notification at a rate not exceeding 4% ad valorem, intended to counterbalance Sales Tax, VAT, local taxes, or other charges leviable on like goods in India.

The Court rejected the appellant's submission that SAD should be levied only if Sales Tax/VAT is payable on the goods in the state where the imported goods are sold. It clarified that unlike Additional Customs Duty under Section 3(1), where the rate is linked to Central Excise duty, SAD is an enabling provision. The Central Government fixes the SAD rate considering the overall tax environment at the macro level through notifications (e.g., Notification No. 19/2006-CUS dated 1/3/06 specifying SAD at 4%).

The Court emphasized that the assessing officers have no authority to determine SAD rates based on the actual Sales Tax/VAT payable in each individual case or state. The "counterbalance" in Section 3(5) refers to a macro-level policy decision by the Central Government, not a micro-level assessment. This interpretation avoids administrative complexity and ensures uniformity.

The Court also noted that exemptions granted by individual states, or exemptions applicable to specific areas or assessees, do not affect the SAD rate fixed nationally by the Central Government.

2. Applicability of Notification No. 23/03-CE as amended by Notification No. 22/06-CE on DTA Clearances by EOUs

Under the proviso to Section 3(1) of the Central Excise Act, 1944, DTA clearances by 100% EOUs are chargeable to excise duty equal to the aggregate customs duties (basic customs duty, additional customs duty, and SAD) that would be leviable if the goods were imported. However, Notification No. 23/03-CE, as amended by Notification No. 22/06-CE, provides that while calculating the aggregate customs duties, SAD shall be excluded unless the goods cleared into DTA are exempt from Sales Tax or VAT.

The Court held that this proviso and notification must be strictly construed. Since the appellant's goods cleared into DTA within Uttar Pradesh are exempt from Sales Tax under state law (Section 4A of U.P. Trade Tax Act), the condition for exclusion of SAD is not met, and hence SAD must be included in the aggregate customs duties for excise duty calculation.

The Court rejected the appellant's argument that the exemption under Section 4A does not amount to exemption from Sales Tax/VAT. The statutory language is unqualified, covering both unconditional and conditional exemptions, including area-based exemptions.

3. Relevance of State-Level Sales Tax Exemptions and Section 4A of U.P. Trade Tax Act

The appellant contended that the exemption under Section 4A of the U.P. Trade Tax Act, which grants exemption or reduced rate of trade tax for promoting industrial development in backward areas, means that the goods are not "exempt" from Sales Tax/VAT for the purpose of SAD exclusion.

The Court examined Section 4A and concluded that it grants actual exemption from trade tax for a specified period and subject to conditions. Therefore, the goods cleared from the appellant's unit located in a notified backward area are exempt from Sales Tax/VAT for the relevant period.

Consequently, the exemption notification under the State law triggers the condition in Notification No. 23/03-CE requiring inclusion of SAD in the aggregate customs duties for excise duty calculation.

4. Applicability of Judicial Precedents

The appellant relied on the Supreme Court's decision in Thermax Private Ltd., which held that a Central Excise exemption notification applicable to certain goods for specific uses applies similarly to Additional Customs Duty under Section 3(1). The Court distinguished the present case, emphasizing that Thermax dealt with procedural conditions for exemption and Section 3(1), whereas the present case concerns the inclusion of SAD under Section 3(5) and a substantive condition of sales tax exemption.

The appellant also cited the Supreme Court's judgment in Commissioner of Sales Tax, J & K vs. Pine Chemicals, which held that conditionally exempt goods are not to be treated as generally exempt for certain purposes. The Court found this inapplicable, as the proviso to Notification No. 23/03-CE uses the unqualified term "exempt," covering both conditional and unconditional exemptions.

The Tribunal's earlier decision in Hanil Era Textiles was examined. That decision held that no SAD was leviable on EOUs situated in backward areas enjoying full sales tax exemption, reasoning that when sales tax is nil, SAD cannot be levied. The Court distinguished Hanil Era Textiles on several grounds:

• Hanil Era Textiles related to Section 3A (now repealed) and Notification No. 22/99-CUS, whereas the present case concerns Section 3(5) and Notifications No. 19/06-CUS and 20/06-CUS.
• The exemption provisions and conditions differ between the two regimes.
• The Court found factual and legal inaccuracies in Hanil Era Textiles' reasoning, especially the assumption that SAD is equivalent to sales tax, which is not supported by the statutory provisions.
• Hanil Era Textiles did not consider the effect of the proviso in Notification No. 23/03-CE on the inclusion of SAD when goods are exempt from sales tax.

The Court also reviewed Tribunal decisions in Morarjee Brembana Ltd. and Jindal Photo Film Ltd., noting their limited applicability and distinguishing them on factual and legal grounds.

5. Equitable Considerations and Budget Speech Assurances

The appellant argued that the Finance Minister's Budget Speech indicated that SAD was imposed only to counterbalance sales tax on domestically procured goods, implying that SAD should not apply where sales tax exemption exists. The Court rejected this argument, citing settled law that equitable considerations or policy statements in budget speeches cannot override clear statutory provisions in taxing statutes.

6. Assessment Procedure and Application of Law to Facts

The Court held that since the excise duty on DTA clearances by EOUs is determined based on aggregate customs duties, including SAD where applicable, the assessment must be done clearance-wise. For clearances where sales tax is paid, SAD should not be included; for clearances where sales tax is exempted, SAD must be included.

This approach aligns with the statutory provisions and notifications and ensures correct duty determination in each case.

Conclusions on Issues:

• SAD under Section 3(5) is a levy imposed by the Central Government at a macro level and is not assesseespecific or area-specific.
• Exemptions from sales tax granted by a State Government, including area-based exemptions under Section 4A of the U.P. Trade Tax Act, amount to exemption for the purposes of Notification No. 23/03-CE, triggering inclusion of SAD in the aggregate customs duties for excise duty calculation on DTA clearances by EOUs.
• Assessing officers cannot independently determine SAD rates based on state-level sales tax applicability; they must apply the SAD rate fixed by the Central Government's notification.
• Judicial precedents cited by the appellant are either distinguishable or not applicable to the present facts and legal framework.
• Equitable considerations or budget speech assurances cannot override statutory provisions.
• Assessment of excise duty on DTA clearances by EOUs must be done clearance-wise, including SAD where sales tax is exempt and excluding SAD where sales tax is paid.

Significant Holdings:

"The word 'counterbalance' in the expression 'such additional duty as would counterbalance the sales tax, value added tax, local tax on any other charges for the time being leviable on alike article on its sale, purchase or transportation in India', in Section 3 (5) refers to the counterbalancing aspect at macro level to be considered by the Central Government while fixing the rate of SAD by issue of a notification under this section, not to the counterbalancing at micro level individual casewise by the concerned assessing officers."

"The exemption granted by some of the states cannot affect the rate prescribed under Section 3 (5) notification and similarly the exemption granted by a state government in respect of assessee in some specified areas can have no bearing on the rate of SAD, fixed by the Central Government by a notification issued under Section 3 (5)."

"Since in this case, the rate of SAD under Notification No. 19/06-CUS readwith Notification No. 20/06-CUS dated 1/3/06 is 4% adv. and since the condition for exclusion of SAD component, as specified in the Notification No. 23/03-CE dated 31/3/03 as amended by Notification No. 22/06-CE dated 1/3/06 is not satisfied in respect of DTA sales within the State of U.P., in respect of such DTA clearances, the component of SAD has to be included for determining the central excise duty equal to the aggregate of duties of customs, chargeable on the goods."

"Equitable considerations are not relevant in construing a taxing statute."

"In respect of clearances on which sales tax is exempted, SAD components should be included while determining duty in terms of the Notification No. 20/2003-CE dated 31/3/2003 as amended by Notification No. 22/2006-CE dated 1/3/06 and in respect of clearances on which sales tax is paid, the SAD component should not be included while determining duty in terms of the said Notification."

Final Determination: In respect of a 100% EOU availing sales tax exemption, for determining the excise duty payable based on aggregate value of Customs duty, the element of SAD must be taken into account. The assessment must be done clearance-wise, including SAD where sales tax is exempt and excluding SAD where sales tax is paid.

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