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2025 (5) TMI 921
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.... of the Constitution of India, the petitioners have prayed for quashing and setting aside the order-in-original for levy of goods and service tax in form of compensation Cess at the rate of 160% on branded tobacco products i.e. scented/flavoured chewing tobacco manufactured by the petitioners for export through merchant exporters which are subject to GST at 0.1% as per Notifications No. 40/2017 and 41/2017 dated 23/10/2017. 3. As the issue arising in these petitions are common, same were heard analogously and are being disposed off by this common judgment. 4. For the sake of convenience Special Civil Application No.6701 of 2023 is treated as a lead matter. 5. Factual matrix of Special Civil Application No. 6701 of 2023 can be summarised as under: FACTS 6. The petitioner is engaged in the business of manufacture of branded tobacco products falling under HSN 24039910 on which GST is payable at the rate of 28% and Compensation Cess is payable at the rate of 160%. 7. The goods manufactured by the petitioners are exported directly or through merchant exporters. 8. The procedure followed by the petitioners during different taxation regime is as under: A) As per pr....
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....Bill, 2016, which clause has, by virtue of the declaration made in the said Finance Bill under the Provisional Collection of Taxes Act, 1931 (16 of 1931), the force of law." 12. According to the procedure prescribed under the aforesaid Notification, a merchant-exporter shall furnish a bond to the Assistant/Deputy Commissioner of Central Excise Duty. After furnishing the bond, a merchant-exporter shall obtain certificates in CT-1. 13. The petitioner removed the goods from its factory under the cover of Excise Invoice to be supplied to the merchant exporter for export. As per the Notification in case of self-sealing, the owner, working partner, Managing Director etc. of the assessee is required to certify the copies of ARE-1 that goods for export have been sealed in his presence and send the original and duplicate copies along with goods at the place of export and sent the triplicate and quadruplicate copies of the application to the Superintendent or Inspector of Central Excise having jurisdiction over the factory of the petitioner. 14. Thereafter Commissioner of Customs shall certify that the goods are exported and return the original copy of ARE-1 to the exporter and the ....
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.... on the proposal for alleviating the hardship faced by the merchant exporter, Notification No. 40/2017-Central Tax (Rate), Notification No. 40/2017-State Tax (Rate) and Notification No. 41/2017 Integrated Tax (Rate) all dated 23.10.2017 were issued on the recommendation of the Council. 23. After issuance of Notification No. 40/2017-Central Tax (Rate) dated 23.10.2017, the tax payable on supplies to merchant exporter is exempted in excess of 0.1%. The said notification prescribes detailed conditions and procedures to be followed for making supplies to merchant exporter in order to claim exemption. The petitioners have complied with all the conditions which are summarised as under: a) The registered manufacturer supplier shall supply the goods to the merchant exporter on a tax invoice. b) The registered recipient shall export the said goods within a period of ninety days from the date of issue of a tax invoice by the registered manufacturer supplier. c) The merchant exporter shall indicate the GSTIN number and tax invoice number issued by the registered manufacturer supplier in the shipping bill. d) The merchant exporter shall be registered with....
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....chant exporters. 29. During the investigation, it was revealed that the petitioner has paid the applicable 0.1% GST for the period in dispute i.e. from 01.07.2017 to 31.05.2021. However, Compensation Cess applicable on the taxable value of supply was not paid by the petitioners. Thereafter, summons were issued on the Director and other CFO of the petitioner company and during the course of recording of statements, it was submitted that the issue raised for non-payment of Compensation Cess on the taxable value of supplies was an industry wide issue and there is a bona fide belief in the industry that no Compensation Cess is leviable on supplies to a merchant exporter. 30. The respondent authorities thereafter issued intimation in Form DRC-01A dated 21.07.2022 under section 74(5) of the GST Act. 31. The petitioner submitted reply dated 29.07.2022 contending inter-alia that supplies made by the petitioner is for export and the entire exercise is revenue neutral and even if the petitioner would have paid the Compensation Cess, same would have been availed as credit by the Merchant Exporter and subsequently claimed as refund. 32. Thereafter show cause notice dated 11.08.2022....
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....T on intra state supplied and inter-state supplied of goods is required to be paid by the Petitioner. ii) Exemption has been provided from GST on supply of goods vide Notification No. 40/2017-Central Tax (Rate) and 41/2017 IGST (Rate) both dated 23.10.2017, but no exemption for compensation cess has been provided. The supply at concessional rate under the said notifications are optional and not mandatory in nature. If the Petitioner has not opted for supply at concessional rate, it will be liable to pay GST and compensation cess on that supply. iii) The CBIC has clarified vide Circular No. 1/1/2017-Compensation Cess dated 26.07.2017 that Compensation cess is payable even on exported goods being inter-state supply. However, it will be refunded under Section 16 of the IGST Act. Further, if the exports are made under bond, no compensation cess will be charged. iv) The CBIC Board has clarified vide circular 37/11/2018-GST dated 15.03.2018, clarified that the benefit of Supplies at concessional rate is optional and are subject to certain conditions prescribed therein. v) The Petitioner has supplied goods to the merchant exporter who has exported then ....
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....itioners are not liable to pay the Compensation Cess on the goods supplied to merchant exporter. 41. It was submitted that the Compensation Cess Act is to provide for compensation to the States for loss of revenue arising on account of the implementation of the goods and service tax. It was pointed out that section 11 of the Compensation Cess Act provides that the provisions of the GST Act and IGST Act and the rules made thereunder would apply mutatis mutandis in relation to levy and collection of the Cess leviable under section 8 of the Compensation Cess Act. It was therefore, submitted that as per the provisions of section 2 (5) of the IGST Act which defines export of goods as taking goods out of India to a place outside India, would also be applicable for the purpose of levy of Compensation Cess. Therefore, sale made by the merchant exporter to overseas customer is export of goods and therefore, is zero rated supply under section 16 of the IGST Act, not liable to GST and Compensation Cess when supplied against LUT. 42. It was submitted that however, it is not necessary that in a particular chain of transactions only one supply can be an export of goods as in the facts of t....
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....aid section would mean actual delivery and when the sales were made by the assessee Mills, therefore, is actual delivery outside Uttar Pradesh through selling agents. 45. Learned Senior Advocate Mr. Sridharan therefore submitted that similar analogy would apply to the petitioners who supplied the goods to merchant exporters for the purpose of actual export and therefore, petitioners would also be entitled to the same benefit as merchant exporter would be entitled to under the provisions of GST Act, IGST Act or Compensation Cess Act. 46. It was submitted that as per Rule 19 of the Central Excise Rules, 2002 along with the provisions of Central Excise Act, 1944 also recognizes supplies to merchant exporter as export supplies. 47. Reference was made to Notification No. 42/2001-CE(NT) dated 26.06.2001 which provides for the conditions, safeguards and procedure for the purpose of export. It was submitted that the petitioners have followed the prescribed procedure and removed the goods for export under the cover of Form ARE-1. 48. It was further submitted that Foreign Trade Policy also recognizes the supplies made to merchant exporters as an export supply by EOU as per para 6....
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....e decision of Hon'ble Supreme Court in case of Unicorn Industries v. Union of India reported in 2019 (370) ELT 3 (SC) wherein it was held that the exemption granted to Central Excise duty will not apply to NCCD and Cess is erroneous. It was submitted that Compensation Cess is at par with CGST, SGST and IGST and therefore, stand taken by the respondents that the recommendation of GST Council cannot be applied to compensation Cess would frustrate the entire purpose of the recommendation and therefore, strict interpretation of exemption notification issued by the Government in relation to CGST and SGST would equally apply to the Compensation Cess and the respondents were not justified in levy of Compensation Cess at the rate of 160% which ultimately is required to be refunded to the merchant exporter as the goods supplied by the petitioners to merchant exporter is zero rated supply. It was therefore, submitted that Notification No. 40/2017 and Notification No. 41/2017 dated 23.10.2017 will also include exemption from Compensation Cess in excess of 0.1%. 54. It was submitted that without prejudice to the above contentions, not granting exemption from Compensation Cess on supplies ma....
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....facts of the case, the object sought to be achieved is to relieve merchant exporters from the problem of working capital blockage as the taxes paid at input stage are ultimately refunded and keeping this object in mind, the classification sought to be made between the basic GST and Compensation Cess is not based on any intelligible differentia and the only permissible classification is between supplies meant for exports including to merchant exporters and other domestic supplies. It was therefore, submitted that for levy of Compensation Cess on such supplies made to merchant exporters is arbitrary, discriminatory and violative of Article 14 of the Constitution of India. 59. It was further submitted that entire exercise of payment of Compensation Cess at the rate of 160% on the supplies made to merchant exporter is revenue neutral as even nominal tax which is 0.1% to be paid by the petitioners is also refunded to merchant exporter, therefore, even Compensation Cess levied at 160% by the respondent authorities on the supplies of merchant exporter is also to be refunded resulting into revenue neutral exercise. 60. Reliance was placed on Circular No. 37/11/2018-GST dated 15.03.20....
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....65. It was therefore, submitted that in facts of the case, merchant exporter is entitled to full input tax credit and further entitled to refund of entire amount so claimed as credit and for the purpose of the Compensation Cess Act, the value declared in the invoice is Nil and hence, the said value will be accepted in accordance with the second proviso to Rule 28 of the CGST Rules. 66. Reliance was also placed on Circular No. 199/11/2023-GST dated 17.07.2023 in which proviso to Rule 28 is clarified. It was therefore, submitted that no Compensation Cess will be payable by the petitioners and therefore, the impugned order is required to be quashed and set aside. 67. Learned Senior Advocate Mr. Sridharan also referred to sections 8 and 10 (1) of the Compensation Cess Act to submit that the Compensation Cess, if any, collected from the petitioners will be available as credit to the merchant exporters and will be refunded to them as the goods are exported and such Compensation Cess would not be credited to the Goods and Services Tax Compensation Fund to be distributed to the States as compensation for loss of revenue. It was therefore, submitted that the amount which cannot be dis....
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.... with an intent to evade payment of tax is on the revenue as per the decision of Hon'ble Apex Court in case of Continental Foundation v. Commissioner of Central Excise reported in 2007 (216) ELT 177 (SC) wherein it is held that mere omission to give correct information is not suppression of facts within the meaning of section 11A of the Central Excise Act, 1944 unless it was deliberate to stop payment of tax and the burden is cast upon the Revenue to prove such suppression to invoke extended period of limitation. 74. It was therefore, submitted that in facts of the case no penalty is leviable under section 74 and section 122 (2) (b) of the CGST Act. It was further submitted that no interest is also recoverable from the petitioners under section 50 of the CGST Act as the demand is not sustainable. 75. Learned advocate Mr. Paresh M. Dave appearing for the petitioner in Special Civil Application No. 15708 of 2024 adopted the submissions and contentions made by learned Senior Advocate Mr. Sridharan and further emphasised upon the contention that supply made by the petitioner of branded tobacco product to merchant exporter would be equivalent to export of goods as per the provisio....
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....sation Cess at 160% on supply of the goods for export to merchant exporter is contrary to the provisions of GST Act, IGST Act and the Compensation Cess Act and the petitioner should not be saddled with such huge liability resulting into blockage of working capital as such exercise would not result in payment of any compensation to State which is the object of the levy of Compensation Cess. Submissions of the respondents: 79. Learned advocate Mr. C.B. Gupta and learned advocate Mr. Utkarsh Sharma appearing for the respondents submitted that there is no exemption notification issued by the Central Government to for exemption from levy of Compensation Cess on the inter-state supply and the same rate would be applicable to the goods which are sold by the petitioners to the merchant exporter for exports. 80. It was submitted that the petitioners have an alternative remedy to challenge the order-in-original passed by the respondent authorities by filing an appeal before the appellate authority as per the provisions of section 107 of the GST Act and as such, the petitions should not be entertained while exercising the jurisdiction under Article 227 of the Constitution of India. ....
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....charged on goods exported by an exporter under bond and he would be eligible for refund of input tax credit of compensation cess relating to goods exported. 16. With reference to the prayer for issuance of writ of mandamus or any other appropriate writ extending exemption to compensation cess on supplies made to merchant exporters similar to exemptions under the notifications dated 23.10.2017, I submit that grant of the said prayer by this Hon'ble Court would tantamount to formation of a policy decision. I submit that in matters of formation of policies and more particularly fiscal policy, this Hon'ble Court would ordinarily refrain from exercising extraordinary writ jurisdiction and intervening. Hence, on this ground alone, the said prayer is liable to be rejected. 17. I submit that it is amply clear that compensation cess is completely and independent and distinct from GST, it has been introduced for a limited period for a specific purpose and the supply effected by the Petitioner to merchant exporter attracts levy of compensation cess. I state that the products of the Petitioner are covered under the notification being Notification No. 1/2017-Compensati....
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....ng inter-State supply as per section 7 (5) of the IGST Act which is 160% as per Notification No. 1/2017. 89. It was further submitted that the adjudicating authority has rightly invoked the provisions of section 74 for the extended period of limitation as the petitioners have not paid Compensation Cess on the goods supplied to the merchant exporters and failed to declare the correct information and returns under the provisions of GST Act which was detected only after investigation was initiated by the officers of the DGGI. It was therefore, submitted that the petitioners have been rightly saddled with interest and penalty in the impugned order-in-original. 90. It was further submitted that as per Notifications No. 40/2017 and Notification No. 41/2017, no exemption for Compensation Cess has been provided and supply at the nominal rate under the said notifications is not mandatory and it is optional and the assesse will be liable to pay GST and Compensation Cess on supply at normal rate if such option of supply at exemption/nominal rate is not exercised. 91. It was therefore, submitted that since exemption/nominal rate of GST and IGST has been provided by the said notificati....
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.... (c) a State and a Union territory, shall be treated as a supply of goods in the course of inter-State trade or commerce. xxx (5) Supply of goods or services or both,- (a) when the supplier is located in India and the place of supply is outside India; (b) to or by a Special Economic Zone developer or a Special Economic Zone unit; or (c) in the taxable territory, not being an intra-State supply and not covered elsewhere in this section, shall be treated to be a supply of goods or services or both in the course of inter-State trade or commerce. 16. Zero-rated supply (1) "zero-rated supply" means any of the following supplies of goods or services or both namely:- (a) export of goods or services or both; or (b) supply of goods or services or both [for authorised operations] to a Special Economic Zone developer or a Special Economic Zone unit. xxx (3) A registered person making zero-rated supply shall be eligible to claim refund under either of the following options, namely:- (a) he may supply goods or services or both under bond or Letter of Undertaki....
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....es or both with reference to their value, for each such supply the value shall be determined under section 15 of the Central Goods and Services Tax Act for all intra-State and inter-State supplies of goods or services or both: PROVIDED FURTHER that the cess on goods imported into India shall be levied and collected in accordance with the provisions of section 3 of the Customs Tariff Act, 1975 (51 of 1975), at the point when duties of customs are levied on the said goods under section 12 of the Customs Act, 1962 (52 of 1962), on a value determined under the Customs Tariff Act, 1975 (51 of 1975). 11. Other provisions relating to cess (1) The provisions of the Central Goods and Services Tax Act, and the rules made thereunder, including those relating to assessment, input tax credit, non-levy, short-levy, interest, appeals, offences and penalties, shall, as far as may be, mutatis mutandis, apply, in relation to the levy and collection of the cess leviable under section 8 on the intra-State supply of goods and services, as they apply in relation to the levy and collection of central tax on such intra-State supplies under the said Act or the rules made thereund....
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.... (c) if the value is not determinable under clause (a) or (b), be the value as determined by the application of rule 30 or rule 31, in that order: PROVIDED that where the goods are intended for further supply as such by the recipient, the value shall, at the option of the supplier, be an amount equivalent to ninety percent of the price charged for the supply of goods of like kind and quality by the recipient to his customer not being a related person: PROVIDED FURTHER that where the recipient is eligible for full input tax credit, the value declared in the invoice shall be deemed to be the open market value of the goods or services." 96. It would also be germane to refer to various circulars/notifications at this stage as under: Circular No. 199/11/2023-GST dated 17.7.2023 S.No. Issues Clarification 2. In respect of internally generated services, there may be cases where HO is providing certain services to the BOs for which full input tax credit is available to the concerned BOs. However, HO may not be issuing tax invoice to the concerned BOs with respect to such services, or the HO may not be including the cost of a particular component s....
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....concessional rate of 0.05% and 0.1% respectively, subject to certain conditions specified in the said notifications. 13.1 It is clarified that the benefit of supplies at concessional rate is subject to certain conditions and the said benefit is optional. The option may or may not be availed by the supplier and/or the recipient and the goods may be procured at the normal applicable tax rate. 13.2 It is also clarified that the exporter will be eligible to take credit of the tax @ 0.05% /0.1% paid by him. The supplier who supplies goods at the concessional rate is also eligible for refund on account of inverted tax structure as per the provisions of clause (ii) of the first proviso to sub-section (3) of section 54 of the CGST Act. It may also be noted that the exporter of such goods can export the goods only under LUT/bond and cannot export on payment of integrated tax. In this connection, notification No. 3/2018-Central Tax, dated 23.01.2018 may be referred. Circular No. 1/1/2017-Compensation Cess dated 26.7.2018 8. In view of the above, it is hereby clarified that provisions of section 16 of the IGST Act, 2017, relating to zero rated supply will a....
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....ment of duty. Similarly, after the GST Act coming into force, the basic concept of export of goods without payment of duty or tax is continued and as per Circular No. 37/11/2018-GST dated 15.03.2018 supply of goods to merchant exporters is considered as an export of goods in consonance with decision of Hon'ble Apex Court in case of Amritsar Sugar Mills Co. Ltd.(supra) and in case of Lord Krishna Sugar Mills (supra), wherein it is held that in a transaction of taking goods out of Utter Pradesh, in facts of the case to a place out of India more than one supply can qualify as export supply and therefore, supply by the petitioners to the merchant exporters would qualify as export supply. Reliance is placed on the following observations of the Hon'ble Apex Court in case of Amritsar Sugar Mills Co. Ltd.(supra) : "The first question which arises in these appeals is whether the word "delivery" in the expression "sales of Such goods for delivery outside Uttar Pradesh" occurring in section 5 of the Act means actual delivery or constructive delivery. If it means constructive delivery then there is no doubt that on the facts as stated by the Judge (Revisions) the contract provided for....
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....in such circumstances, levy of Compensation Cess at the rate of 160% on supply of goods to merchant exporters by the petitioners would not be sustainable as held in case of Coca-Cola India Pvt. Ltd.(supra). 101. GST Council in its 22nd Meeting held on 06.10.2017 while considering Agenda Item 5 of Report and Recommendations of the Committee on Exports regarding working capital blockage for manufacturer exports including EOUs due to requirement of upfront payment of GST on inputs/capital goods and for merchant exporters due to requirement of upfront payment of GST on finished goods discussed the issue as under: "12.17. The Hon'ble Minister from Jammu & Kashmir reiterated that if exemption mechanism was to be kept for exports till March 2018, then exemption scheme for Special Category States should also be continued till March 2018. The Hon'ble Chairperson stated that exporters formed a different category and for them too, exemption would be phased out. The Senior Joint Commissioner (Commercial Taxes), West Bengal reiterated that supplies to merchant exporters should not be subject to a tax of 1%. The Hon'ble Minister from Karnataka raised a question whether th....
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....41/2017 while exercising powers under section 6 of the IGST Act to grant exemption on IGST leviable upon export in excess of amount calculated at the rate of 0.1% meaning thereby that maximum 0.1% IGST is payable. 104. However, no notification is issued by the Central Government or State Government under the Compensation Cess Act and therefore, the petitioners are made liable to pay Compensation Cess at normal rate i.e. 160% on the supply of goods to merchant exporters for export. 105. It is true that in absence of any notification, the respondent authorities were justified in passing the impugned order for levy of Compensation Cess at the normal rate of 160% on the supply made by the petitioners to merchant exporters. However, considering the provisions of section 11 of the Compensation Cess Act, which provides for applicability of provisions of CGST and IGST Act, mutatis mutandis for levy of Cess as per section 8 of Compensation Cess Act, notification issued under the provisions of GST and IGST Act are required to be applied for levy of Cess also for the following reasons: 1) The petitioner is saddled with levy of Compensation Cess at the rate of 160% considering t....
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....Government. 109. The contention raised on behalf of the respondents that it is a policy decision of the Government seems to be out of place as provisions of Compensation Cess Act are to be applied mutatis mutandis to that of GST Act and IGST Act and in that view of the matter, there cannot be any discrepancy of levy of GST, IGST and Compensation Cess. The Government is therefore, required to issue similar notification for granting exemption under the Compensation Cess Act also or extend the benefits of Exemption Notification No. 40/2017 and Notification No. 41/2017 for levy of Compensation Cess also on supply of goods by the petitioners to the merchant exporters on fulfillment of various conditions as prescribed therein. 110. With regard to the objection raised on behalf of the respondents that there is an alternative efficacious remedy, the appellate authority would not be able to decide the issue of grant of exemption from Compensation Cess in absence of any similr notification issued by the Government for exemption of Compensation Cess or by extending the benefit of Notification No. 40/2017 and Notification No. 41/2017. 111. It is not in dispute that the goods manufactu....
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....imilarly placed manufactures, cannot be accepted in absence of notification of exemption from payment of Compensation Cess issued by the Government. It is also true that no notification under Compensation Cess can be issued in absence of any recommendation from GST Council. 114. Therefore, in facts of the case, as the petitioners have a valid case for exemption from payment of Compensation Cess, GST Council is required to consider recommending exemption from levy of Compensation Cess in line with exemption approved for levy of GST and IGST for supply of export or supply to merchant exporters by the manufactures. The Hon'ble Apex Court in case of Union of India v. VKC Footsteps India Private Limited reported in (2022) 2 SCC 603 has held as under so as to urge the GST Council to reconsider the formula and take a policy decision regarding the same for removing anomaly in Rule 89 of the GST Rules : "142. The above judicial precedents indicate that in the field of taxation, this Court has only intervened to read down or interpret a formula if the formula leads to absurd results or is unworkable. In the present case however, the formula is not ambiguous in nature or unworkabl....