Exemption from Cess-Controversy and Analysis

The term “exemption” in respect of taxation statutes indicates freedom from an obligation which the subject is otherwise liable to discharge.¹ In other words, it is a privilege granting an advantage not available to others or freedom from liability, tax or duty.² Section 25 of the Customs Act, 1962 (Act) grants power to the Central Government to exempt, generally, in whole or part of the duty of customs leviable in the interest of public. This is done by way of an exemption notification or order. Section 25(2) of the Act provides that such exemption may be either absolute or conditional.

“Cess” is defined under English law as an assessment of tax as also observed by the Supreme Court.³ Recently, the Supreme Court⁴, reiterated that “cess” is a tax levied for some special purpose, which may be levied as an increment to an existing tax. The cess is either an independent levy or is dependent upon the aggregate of duties levied under any particular legislation. The question that arises in such a scenario would be levy of cess in cases where the main duties such as excise duty or customs duty are exempted?

For the purposes of the present article, the authors are confining the discussion to levy of Education Cess (“EC”), Secondary and Higher Education Cess (“SHEC”), Social Welfare Surcharge (“SWS”) and National Calamity Contingent Duty (“NCCD”) on excisable/imported goods.

Levy of EC, SHEC, SWS and NCCD

The EC was introduced by Section 91 read with Sections 92, 93 and 94 of the Finance Act, 2004 at the rate of 2% of the aggregate of duties of excise/customs which are levied and collected under the provisions of Central Excise Act, 1944 or Section 12 of the Customs Act, 1962. In a similar fashion, the SHEC was introduced by Section 136 read with Sections 137, 138 and 139 of the Finance Act, 2007 at the rate of 1% of the aggregate of duties of excise/customs which are levied and collected under the provisions of Central Excise Act, 1944 or Section 12 of the Customs Act, 1962.

Similarly, the SWS introduced by Section 110 of the Finance Act, 2018 at the rate of 10% of the aggregate of duties, taxes and cesses which are levied and collected under Section 12 of the Customs Act, 1962. Unlike the EC and SHEC which are levied on both excisable and imported goods, the SWS is levied only on imported goods. The collection of the above cesses would be dependent upon the aggregate of duties collected on the assessable value of the goods.

On the other hand, the NCCD, which is in the nature of excise duty, was introduced by Section 134 read with Section 136 of the Finance Act, 2001 at the rates specified in the Seventh Schedule. NCCD was levied on the assessable value of the goods and not on the aggregate of the duties which are collected on the assessable value of the goods. NCCD was, therefore, an independent levy.

Decisions rendered by the Supreme Court and resulting ambiguity

With respect to levy and collection of EC and SHEC, the Supreme Court of India, in SRD Nutrients (P) Ltd. v. CCE⁵ relied upon Circular No. 345/2/2004-TRU (Pt.) dated 10-8-2004⁶, and Circular No. 134/3/211/ST dated 8-4-2011⁷, which clarified that no EC would be payable when or whenever service tax is “nil” by virtue of exemption. The Supreme Court pointed out that the circulars are binding on the Department and allowed the refund of EC and SHEC which was paid along with the excise duty, once the excise duty itself was exempted from levy.

The question as to whether the EC/SHEC and NCCD will be liable to be paid when the excise duty is exempt came up for consideration before the Supreme Court in Bajaj Auto Ltd. v. Union of India⁸. The Division Bench of the Court held that once the excise duty is exempted, the cesses which are levied as an aggregate of duties of excise duty cannot partake a different character. Thus, EC, SHEC and NCCD would also be entitled to the benefit of the exemption notification, particularly because the exemption notification under consideration⁹ provided for exemption from whole of duty of excise or additional duty of excise.

At this juncture, it is pertinent to note that the dispute before the Court in Bajaj Auto case¹⁰ pertained to levy of EC, SHEC and NCCD. While the manner of calculation/computation of EC and SHEC is on the aggregate of duties of excise/customs, the NCCD is payable at the rates specified in the schedule. It appears that the inherent difference in manner of calculation of EC/SHEC and NCCD was not particularly pointed out to the court, thus, a straitjacket formula was applied for all the cesses viz. EC/SHEC and NCCD.

The issue pertaining to levy of EC/SHEC and NCCD was again considered by the Supreme Court in Unicorn Industries v. Union of India¹¹, wherein a three-Judge Bench of the Supreme Court after relying upon the decision of Union of India v. Modi Rubber Ltd.¹², held that the exemption notification cannot be said to grant exemption to EC/SHEC and NCCD, as there is no reference to the notifications under which EC/SHEC and NCCD were levied. While observing so, the Court also held that the decision passed by Division Bench in SRD Nutrients case¹³ and Bajaj Auto Ltd. case¹⁴ was per incuriam, as it failed to consider a previous binding precedent of the Supreme Court in Modi Rubber Ltd. case¹⁵.

Clarification issued by CBIC for SWS

With respect to levy of SWS, vide Circular No. 03/2022-Cus. dated 1-2-2022¹⁶, CBIC clarified that as SWS is levied and collected as a duty of customs at the rate of 10% on the aggregate of customs duties, hence, SWS would be “nil” in cases where the aggregate of the customs duties (which forms the base for computation of SWS) is zero even though SWS has not been exempted.

A recent decision in Emami Agrotech Ltd. v. Commr. of Customs (Port), Kolkata¹⁷, discussed the applicability of SWS in case where the assessee had availed the benefit of exemption from payment of customs duty MEIS Scheme under Notification No. 24/2015-Cus. and SEIS Scheme under Notification No. 25/2015-Cus. dated 8-4-2015. The Tribunal, after relying upon the judgment of the Bombay High Court in La Tim Metal & Industries Ltd. v. Union of India¹⁸ held that since the basic customs duty is “nil”, SWS being computed at the rate of 10 per cent of BCD shall also be “nil”.

While differentiating the judgment in Unicorn Industries case¹⁹, the Tribunal observed that the issue therein pertained to refund of specified duties under the notification from liability of cesses which are not specifically included in the exemption notification and not the question as to non-leviability of the cesses in absence of collection mechanism.

Analysis

After going through the three decisions passed by the Supreme Court with respect to levy of EC/SHEC, SWS and NCCD, it appears that the judgments rendered in SRD Nutrients case²⁰, Bajaj Auto case²¹ and Unicorn Industries case²² dealt with different issues. While the issue in SRD Nutrients case²³ confined to levy of EC and SHEC which is levied on aggregate of duty of excise/customs, the judgment in Bajaj Auto case²⁴ discussed levy of all the three cesses viz. EC/SHEC and NCCD and Unicorn Industries case²⁵ discussed exemption from NCCD in the absence of specific notification exempting the same.

With due respect, it appears that the inherent difference in manner of computation of EC/SHEC and NCCD was not particularly pointed out to the court in Bajaj Auto case²⁶ and Unicorn Industries case²⁷. Thus, a straitjacket formula was applied in respect of EC/SHEC and NCCD, without considering the language of the provision levying EC/SHEC and NCCD, resulting into plight for the assesses. As earlier indicated, EC/SHEC is levied on aggregate of duties of excise/customs, while NCCD is levied on the value of the excisable/imported goods.

In cases where the cess is on the aggregate of the duties of excise/customs and the main duty is exempt, the computation of cess would also be nil. With due respect, the authors are of the opinion that Supreme Court in Bajaj Auto case²⁸ and Unicorn Industries case²⁹ may have reached a different conclusion had the manner of levy and collection/computation of EC/SHEC and NCCD was pointed out before the Court. Although the judgment in La Tim Metal case³⁰ did give a sigh of relief to the assesses as it observed that in cases where the BCD was “0”, SWS shall be nil, however, there remains ambiguity when it comes to payment of EC/SHEC when the BCD is exempt.

In some cases, the tribunals have given a wider interpretation to the 2022 Circular issued by CBIC for SWS by extending the same principle to EC and SHEC, even in cases where the duty has been paid through MEIS/SEIS scrips. However, until the larger Bench of the Supreme Court decides the review application in SRD Nutrients (P) Ltd. v. CCE³¹, it is advisable that the Government steps in and resolves the uncertainty by way of suitable retrospective legislation to the effect that the exemption from EC/SHEC will be available in cases where it is to be computed on aggregate of duties of excise/customs and the duty is exempt.