Export Oriented Unit not liable for Central Excise Duty on goods transferred domestically

The Tribunal held that a 100% Export Oriented Unit transferring goods to its Domestic Tariff Area unit is not required to pay Central Excise Duty, including Special Additional Duty (SAD), as there was no VAT exemption applicable to the goods. The appeals were allowed, and the impugned orders were set aside.

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Issues Involved:
1. Applicability of Central Excise Duty including Special Additional Duty (SAD) for goods transferred by a 100% Export Oriented Unit (EOU) to its Domestic Tariff Area (DTA) unit.
2. Interpretation of VAT exemption in the context of stock transfers within the same entity.

Detailed Analysis:

1. Applicability of Central Excise Duty including SAD:
The primary issue in these appeals is whether a 100% EOU transferring goods to its own DTA unit must pay Central Excise Duty, including SAD. According to the proviso to sub-section (1) of section 3 of the Central Excise Act, 1944, goods manufactured by a 100% EOU and cleared into DTA are subject to excise duty equivalent to the customs duty if such goods were imported into India. Goods imported into India are subject to Basic Customs Duty, Additional Duty of Customs, and SAD, among other duties. SAD is levied under Section 3(5) of the Customs Tariff Act, 1975 at a rate of 4% to level the playing field for domestic manufacturers who pay VAT.

Notification No. 23/2003-CE dated 31.3.2003 specifies that SAD should not be included when calculating the aggregate duties of Customs for goods cleared by a 100% EOU into DTA, unless the goods are exempt from VAT or Sales Tax. The notification clearly states that if the goods are exempt from VAT, SAD must be included in the excise duty calculation.

2. Interpretation of VAT Exemption in Stock Transfers:
The appellant argued that since no VAT was paid during the stock transfer of goods to its own DTA unit (due to the absence of a sale), it should not be construed as an exemption from VAT. The appellant cited several cases, including Micro Inks Vs. Commissioner of Central Excise & Service Tax [2014 (303) ELT 99 (Tri.-Ahmd.)], where it was held that non-payment of VAT during stock transfers does not equate to VAT exemption.

The Tribunal noted that VAT is payable only upon the sale or purchase of goods, whereas Central Excise duty is payable upon the clearance of goods from the factory, regardless of sale. Therefore, in cases where goods are transferred to the appellant's own units, Central Excise duty is payable at the time of removal from the factory, but VAT is not due until the goods are sold by the DTA unit.

The Tribunal emphasized that the crucial factor is whether the goods are exempt from VAT under any state notification. In this case, there was no such exemption. The Tribunal cited the Micro Inks case, which clarified that the absence of VAT payment during stock transfers does not imply an exemption granted by the state government.

Conclusion:
The Tribunal concluded that the appellant is not liable to pay Central Excise duty by including SAD for goods cleared to its DTA unit, as there was no VAT exemption applicable to these goods. Consequently, both appeals were allowed, and the impugned orders were set aside.

Pronouncement:
The judgment was pronounced in open court, allowing the appeals and setting aside the impugned orders.

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