2025 (10) TMI 259 - AT - Central Excise

CENVAT credit of sugar cess on input sugar allowed for Ayurvedic medicine manufacturer; denial, recovery and penalties set aside

M/s. Mehta Herbals Pvt. Limited Versus Commissioner of GST & Central Excise, Rajkot

CESTAT AHMEDABAD (AT) allowed the appeal, holding that CENVAT credit of sugar cess paid on input sugar is admissible to the manufacturer of Ayurvedic ... Disallowance of CENVAT Credit - credit of Sugar Cess payable availed on the input sugar - manufacture of Ayurvedic medicines - recovery alongwith interest and penalty - credit of sugar cess is available to the appellant who manufactures final product and pays duty of central excise thereon or not - HELD THAT:- The decision in Renuka Sugar [2014 (1) TMI 1469 - KARNATAKA HIGH COURT] squarely covers the controversy in hand, also that the appeal filed by the Revenue challenging the said order has been dismissed by the Supreme Court, thereby affirming the view of the Karnataka High Court. More particularly, the decision is based on elaborate discussion on the statutory provisions of law and the interpretation placed in the decisions of the Apex Court and being in later point of time, it is opined that the present appeal needs to be allowed following the law laid down in this decision. The issue considered by the Karnataka High Court was whether the assessee is entitled to CENVAT Credit on the cess under section 3(4) of the Sugar Cess Act, 1982, as the same is not one of the duties allowed for CENVAT Credit under Rule 3(1) of the Cenvat Credit Rules,2004? In order to appreciate the issue, the High Court considered whether cess paid under the Act is a fee or tax and referring to the decisions of the Constitution Bench of the Apex Court in Hingir Rampur Coal Company Limited vs. State of Orissa [1960 (11) TMI 115 - SUPREME COURT], State of West Bengal versus Kesoram Industries Limited & Ors [2004 (1) TMI 71 - SUPREME COURT], the High Court, held that tax recovered by public authority invariably goes into the Consolidated Fund, which is ultimately utilized for all public purposes, whereas a Cess is levied by way of fee and is not intended to be and does not become a part of the Consolidated Fund. It is earmarked and set apart for the purpose of services for which it is levied. The High Court then considered the provisions of Article 266 of the Constitution of India, providing for the Consolidated Funds and Public Accounts of India and of the States. The Tribunal in Bengal Beverages [2022 (2) TMI 1118 - CESTAT KOLKATA] took the view that the issue is directly covered by the decision of the Karnataka High Court in Renuka Sugar case and also in similar case of Diamond Beverages Pvt. Limited [2019 (8) TMI 1517 - CESTAT KOLKATA] and therefore, allowed the CENVAT Credit of Sugar Cess. The impugned order is set aside and the appeal is allowed. 1. ISSUES PRESENTED AND CONSIDERED Whether CENVAT/Credit is available for sugar cess levied under the Sugar Development Fund Act, 1982 where the assessee is a manufacturer of final excisable goods and pays central excise duty on those goods. Whether the sugar cess constitutes a 'fee' (not eligible for CENVAT credit) or a 'duty of excise / tax' (eligible for CENVAT credit) having regard to its destination to the Consolidated Fund and the statutory scheme governing the cess and the Cenvat Credit Rules. Whether prior judicial authorities relied upon by Revenue (holding contrary view) remain binding or are distinguishable on the facts and statutory scheme before the Tribunal. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Availability of CENVAT Credit for sugar cess paid on input (manufacturer of final product) Legal framework: Cenvat Credit Rules, 2004 (Rule 3(1) and sub-clauses) set out duties/levies eligible for credit; Sugar Development Fund Act, 1982 (Section 3 levy; Section 4 proceeds to Consolidated Fund; appropriation by Parliament to Sugar Development Fund) governs levy and destination of sugar cess. Precedent treatment: The Tribunal followed a later High Court decision that examined whether the cess is a fee or tax and concluded it is a duty of excise/tax entitling the manufacturer to credit; the Tribunal also relied on subsequent Tribunal orders adopting that High Court view. A contrary High Court decision was cited by Revenue but was considered distinguishable on context (different issue of levy of an education cess upon sugar cess). Interpretation and reasoning: The Court examined whether the cess is earmarked as a fee (quid pro quo and credited to a special fund not part of Consolidated Fund) or whether proceeds are credited to the Consolidated Fund and thereafter appropriated by Parliament (indicating tax/duty character). Section 4 explicitly credits proceeds to the Consolidated Fund and Section 3(2) contemplates appropriation by Parliament to the Sugar Development Fund. Because proceeds go into the Consolidated Fund and are not directly and exclusively earmarked as quid pro quo for services to the payer, the levy partakes the character of a duty of excise (tax) rather than a fee. Ratio vs. Obiter: Ratio - where statutory provisions direct proceeds of a cess into the Consolidated Fund with appropriation by Parliament, such cess is properly characterized as a duty of excise/tax for purposes of Cenvat eligibility. Obiter - general commentary on distinctions between fees and taxes derived from older constitutional decisions and the conceptual analysis of earmarking, though supportive, serve as explanatory reasoning rather than novel holdings beyond the statutory application. Conclusions: CENVAT credit on sugar cess is allowable to a manufacturer of final products who pays central excise duty, since the sugar cess is a duty of excise/tax (not a fee) under the statutory scheme and therefore falls within the scope of duties eligible for credit under the Cenvat Credit Rules as interpreted by the Court. Issue 2 - Effect and precedential weight of earlier decisions relied upon by parties Legal framework: Principles of precedent and hierarchical weight of judicial decisions; assessment of decisions requires examining context, statutory provisions considered, and whether factual or legal matrices align with the present controversy. Precedent treatment: The Court expressly followed a later High Court decision that conducted an elaborate statutory and constitutional analysis and was subsequently affirmed by dismissal of an appeal (thereby leaving the High Court view intact). The Tribunal's prior orders adopting that High Court reasoning were treated as persuasive and directly on point. A jurisdictional High Court decision advanced by Revenue was distinguished on its facts and context - specifically because it concerned the leviability of an education cess upon sugar cess rather than the direct characterization of sugar cess under the Sugar Development Fund Act. Interpretation and reasoning: The Court gave controlling effect to the later, fully reasoned High Court decision which applied constitutional and statutory analysis to determine the nature of the cess; the dismissal of an appeal against that decision by the apex forum was treated as affirming the correctness and finality of that reasoning for present purposes. The earlier contrary decision was found to address a materially different legal question and therefore was not followed. Ratio vs. Obiter: Ratio - a later reasoned and effectively affirmed judicial pronouncement that a cess directed to the Consolidated Fund and appropriated by Parliament is a duty/tax should govern identical controversies unless distinguishable. Obiter - remarks about procedural posture of appeals and general observations about precedence were ancillary to the dispositive comparative analysis. Conclusions: The later High Court decision and the Tribunal orders following it are bindingly persuasive for present controversy and justify allowing CENVAT credit; the contrary decision relied on by Revenue is distinguishable and therefore does not prevent granting credit. Issue 3 - Characterization of cess as fee v. tax: constitutional and statutory considerations Legal framework: Constitutional provisions concerning Consolidated Fund and Public Accounts; jurisprudence distinguishing fees (earmarked, quid pro quo, not part of Consolidated Fund) from taxes/duties (credited to Consolidated Fund and appropriated for public purposes). Precedent treatment: The Court relied on established authoritative principles distinguishing fees from taxes and applied them to the statutory language of the Sugar Development Fund Act to determine destination and earmarking. Interpretation and reasoning: The decisive factor is whether the levy is intended to be a fee - i.e., credited to a special fund and appropriated specifically for services exactly corresponding to the levy - or whether it is credited to the Consolidated Fund and may be appropriated for general public purposes by Parliament. The statutory scheme explicitly credits proceeds to the Consolidated Fund and contemplates appropriation by Parliament; hence, the characteristics of a fee (direct quid pro quo and non-merger into public funds) are absent. Ratio vs. Obiter: Ratio - statutory direction of proceeds to Consolidated Fund and Parliamentary appropriation transforms the levy into a duty/tax for legal characterisation relevant to Cenvat eligibility. Obiter - reiteration of constitutional principles and illustrative discussion of earmarking vs. appropriation are explanatory support for the ratio. Conclusions: On constitutional and statutory analysis, sugar cess (as levied under the Act and routed to the Consolidated Fund) is a duty of excise/tax and not a fee, supporting entitlement to CENVAT credit. Final Disposition (linked conclusion) Because the sugar cess is characterized as a duty of excise/tax under the statutory scheme and in light of binding later judicial reasoning adopted by the Tribunal, the impugned order disallowing CENVAT credit was set aside and credit of sugar cess allowed; contrary authority relied upon by Revenue was distinguished on context and did not prevent allowance of credit.