Excise Duty Tehelka - Concessional Rate

Take away with one hand what you have given with another - On 17th July, 2015, CBEC has introduced Notification No. 34/2015 C.E., 35/2015 C.E. and 36/2015 which amends Notification No. 30/2004 C.E., 01/2012 C.E. and 12/2012 C.E.respectively.

Notification 30/2004 exempts goods like Yarn, ready made garments etc from excise duty

Notification 01/2012 levies 2% effective rate of excise duty on 130 items including soups, supari, candles, spectacles etc.

Notification 12/2012 levies concessional rate of excise duty 6% on certain items subject to certain conditions

In all the aforesaid notifications, exemption or concessional rate was subject to a condition, inter alia, that no cenvat credit of inputs/capital goods and input services has been taken.

Notification No. 34/2015 C.E., 35/2015 C.E. and 36/2015 seeks to amend the conditions by stating that the excisable goods should be manufactured from inputs or input services on which appropriate excise duty or service tax has been paid.

One interpretation could be that appropriate excise duty has been paid on inputs, i.e. if the appropriate rate of excise duty is nil by virtue of exemption, the same has been paid and hence there is no violation of condition. Courts have held that even nil rate of duty is a duty of excise. However the aforesaid interpretation has been dissented to by the Hon'ble Supreme Court.

The Constitutional bench of Hon'ble Supreme Court in Dhiren Chemical, 2002 (139) E.L.T. 3 (S.C.) held that if benefit of an Exemption Notification is subject to the condition that the appropriate duty on inputs have already been paid, than the benefit of the said notification will not be available to the goods manufactured out of the inputs attracting Nil rate of duty.

The said amendments have constricted the benefits conferred under these notifications and shall be a breeding ground for litigations.

 Some of the manufacturers availing benefit of aforesaid notifications, are procuring exempted goods. To illustrate, manufacturers of ready made garments are procuring exempted cotton as inputs.Ready made garments are exempt under Notification 30/2004. Post amendment, the manufacturers have to either pay duty on raw materials or on finished goods.

This appears to be a weird amendment as the Government is taking away with one hand what it has given with another. 

Another grey area is as to whether the inputs purchased from the open market are to be considered as duty paid, without insisting for documentary evidence of payment of duty, for the purpose of aforesaid notification or not. One could purchase from trader who could purchase from another trader. 

One more points of dispute will be as to whether all the inputs, input services used by the manufacturers availing the said benefits are to duty paid, or duty paid character of any of the input service will satisfy the conditions of the said notifications. All the manufacturers uses various inputs services. If all the inputs and input services have to be duty paid than it is such condition, which no manufacture will be able to satisfy. for example, a manufacturer avails the services of mechanic for repair of the machine and such mechanic is not paying service tax, being a small service provider. On the other hand, if the duty paid character of any of the input or input service will suffice, than the vary purpose of the aforesaid amendments, if any, will be defeated.

We expect that CBEC would come out with clarifications soon.