CHAPTER - IV
Topics of Special Importance

4.1 Duty not realised in compliance of Finance Act, 2002

By notification dated 8 July 1999 as amended on 9 February 2000, Numaligarh Refinery was entitled to get refund of duty paid on mineral based goods. This refund has been withdrawn by notification dated 1 March 2002 with retrospective effect.

Section 142 of the Finance Act, 2002 (enacted on 11 May 2002) further provides that the amendment withdrawing the grant of refund, shall be deemed to have been made on and from 8 July 1999 to 28 February 2002 retrospectively as if the notification as amended had been in force at all material times and recovery shall be made of all amounts which have been refunded before amendment of the notification on 1 March 2002, within thirty days from the date on which the Finance Bill, 2002 receives the assent of the President, and in the event of non-payment, interest at the rate of fifteen per cent per annum shall be payable from the date immediately after the expiry of the said thirty days till the date of payment.

Test check of records of M/s. Numaligarh Refinery in Shillong Commissionerate of Central Excise, revealed that an amount of Rs.667.16 crore was refunded to the assessee on clearances of petroleum products like high speed diesel (HSD), superior kerosene oil, naptha etc. between February 2000 and February 2002. This amount was recoverable by 9 June 2002 i.e., within thirty days from the date of assent of the President to the Finance Bill, 2002. No action was taken by the Department to recover the amount. The total amount recoverable worked out to Rs.748.04 crore including interest of Rs.80.88 crore due upto 31 March 2003.

On this being pointed out (March 2003), the Ministry of Finance (the Ministry) stated (January 2004) that the retrospective amendment of the notification dated 8 July 1999 had been done only in relation to the goods mentioned in schedule to the notification and since the refinery was granted refund under amendment dated 9 February 2000 and not on the basis of the schedule to the subject notification, refund granted to the unit was not attracted for recovery.

Reply of the Ministry is not tenable as M/s. Numaligarh Refinery is the only mineral oil based unit which had availed benefit under notification dated 8 July 1999 as amended on 9 February 2000 and since this notification has been withdrawn with retrospective effect by section 142 (1) of the Finance Act, 2002, the amount is recoverable with interest.

4.2 Exemption allowed in violation of notification

Under notification dated 7 May 1997, pan masala in retail packages upto 4 grams was exempt from fifty per cent of the maximum retail price declared on the package in which such goods are sold in retail. By another notification dated 2 June 1998 pan masala packed and sold in retail packages upto 10 grams was notified for assessment of duty on the basis of tariff values which ranged from Re.1 to Rs.6 per pack depending upon the weight of the contents in the packages. By an amendment dated 8 June 1999, a sub-clause was added in both these notifications stipulating that “this notification shall not be applicable to goods containing not more than 10 per cent betel nut by weight and not containing tobacco in any proportion”. As per the amended version, these notifications were not to be applied if pan masala contained tobacco in any proportion and consequently duty was payable on them on the basis of normal price/transaction value under section 4 of Central Excise Act, 1944.

Test check of records of ten assessees in Hyderabad III, Kanpur, Lucknow, Vadodra and Valsad Commissionerates of Central Excise, revealed that these assessees manufactured pan masala which contained tobacco. They cleared their products availing benefit under the notifications ibid. Since their pan masala contained tobacco, they were not entitled to the benefit of the said notifications and were liable to pay duty under section 4 on the basis of normal prices upto 30 June 2000 and transaction values thereafter. This resulted in incorrect grant of exemption of Rs.81.78 crore between June 1999 and March 2003.

On this being pointed out (March and May 2003), the Ministry while admitting objection in principle from 1 March 2001 stated (January 2004) that for period prior to 1 March 2001 pan masala containing tobacco was eligible for exemption as it was classifiable under heading 21.06.

Reply of the Ministry is not tenable as pan masala containing tobacco was not eligible for exemption even under heading 21.06 in view of the specific restriction imposed by amending notification dated 8 June 1999 cited in sub para 1 supra.

4.3 Exemption from additional duty allowed without exemption notification

By section 133 of the Finance Act, 1999, additional duty of excise at the rate of one rupee per litre on HSD oil has been levied with effect from 28 February 1999. This rate has been increased to one rupee fifty paise per litre from 1 March 2003.

Under rule 13 of the Central Excise Rules, 1944, read with notification dated 22 September 1994 as amended, excisable goods meant for export outside India may be cleared from the factory of a manufacturer or from a warehouse without payment of duty under bond. In the new Central Excise Rules, 2002, similar provision for duty free clearance of export goods is provided under rule 19 read with notification dated 26 June 2001 issued thereunder. In rule 2(7) of the Central Excise Rules, 1944/rule 2(e) of the Central Excise Rules, 2002, the term ‘duty’ means duty payable under section 3 of the Central Excise Act. Additional duty leviable under Finance Act, is not exempt from payment on goods cleared for export under said notification/rule 13, since this duty is distinct and different from those leviable under section 3 of the Central Excise Act.

The Supreme Court in the case of M/s. Modi Rubber Limited {1986(25) ELT 849 SC} held that “where a notification granting exemption is issued only under sub rule 1 of rule 8 of the Central Excise Rules, 1944, without reference to any other statute making the provisions of the Central Excise Act, 1944 and the rules made there under applicable to the levy and collection of special, auxiliary or any other kind of excise duty levied under such statute, the exemption must be read as limited to the duty of excise payable under the Central Excise Act, 1944 and cannot cover such special, auxiliary or other kind of duty of excise”.

Test check of records revealed that 10 assessees in 7 Commissionerates of Central Excise, engaged in the manufacturing/marketing of petroleum products, cleared under bond 543286.265 kilo litres of HSD and low sulphur heavy flash (LSHF) for export or for consumption on board a ship bound for foreign port during the period from May 1999 to March 2003 without payment of additional duty leviable under the Finance Act. Since additional duty leviable under the Finance Act was not covered under rebate/exemption, clearance of HSD and LSHF without payment of duty was incorrect. This resulted in non-payment of duty of Rs.54.34 crore. It was also noticed in audit that show cause notices for Rs.46.70 lakh issued by Mangalore and Tirunelveli Commissionerates of Central Excise in November 2000, May and September 2002 were dropped in adjudication as the cases were decided in favour of the assessees, in January 2001, September and November 2002 respectively. No appeal was filed in these cases as the Department was of the view that notification dated 22 September 1994 would apply in relation to levy and collection of additional duty of excise leviable under Finance Act. Audit also noticed that in the case of M/s. Indian Oil Corporation, Korukkupet, the Chennai I Commissionerate of Central Excise confirmed the demand of Rs.3.12 lakh in February 2000, deciding that the additional duty leviable under the Finance Act was not covered by said notification. The Commissioner (Appeals) had also upheld the decision of Chennai I Commissionerate in January 2001. Revenue not realised in 10 cases alone amounted to Rs.54.34 crore.

The Ministry stated (December 2003) that the provisions relating to rebate of central excise duty were applicable to additional duty also as section 133 (3) of the Finance Act, 1999 extended the applicability of the provisions of Central Excise Act and the Rules for the levy and collection of additional duty of excise.

Reply of the Ministry is not tenable as Central Excise Act and Rules stipulate that rebate of duty may be granted by issue of notification. In the absence of such a notification, rebate of additional duty was not admissible. The government specifically provided for rebate of additional duty of excise as levied under section 157 of the Finance Act, in 2003. Similar provision should have been inserted in the notification for grant of rebate of additional duty of excise on HSD oil.

4.4 Loss of revenue due to delay in amendment of rules

Under rule 57A of the Central Excise Rules, 1944, (rule 57AB(2) from 1 April 2000 and rule 3(6) of the Cenvat Credit Rules, 2001, as it stood before 1 March 2002), Cenvat credit in respect of inputs or capital goods produced and cleared to a domestic tariff area by a hundred per cent export oriented unit (EOU), shall be restricted to the amount which is equal to the additional duty as leviable on like goods under section 3 of the Customs Tariff Act, 1975, paid on such inputs.

While interpreting the above rule, the Tribunal, in the case of M/s. Vikram Ispat {2000 (120) ELT 800 (Trib - LB}, had held on 9 August 2000 that if additional duty was less than the actual duty paid on the inputs cleared from hundred per cent EOUs, the manufacturer in India would be eligible for credit equivalent to additional customs duty leviable on such goods.

The relevant amendment in rule 3 (6) of Cenvat Credit Rules was brought out later on 1 March 2002 through the Finance Act, 2002 so as to allow credit of additional customs duty actually paid by hundred per cent EOU.

Three assessees, in Mumbai VII and Aurangabad Commissionerates of Central Excise, engaged in the manufacture of iron and steel products and capacitors were receiving certain inputs from hundred per cent EOUs. Assessees availed credit of additional duty payable on such goods even though additional duty actually paid was only 50 per cent. During the period from September 2000 to February 2002, assessees availed credit of Rs.25.27 crore as against Rs.13.24 crore actually paid by them. Delay by 17 months in amending the rule, even after the issue had been raised in the Tribunal, resulted in loss of revenue of Rs.12.03 crore in three cases alone.

The Ministry while admitting the objection in principle stated (December 2003) that an appeal had been filed in Mumbai High Court against the Tribunal’s decision in the case of M/s. Vikram Ispat, ibid.

4.5 Grant of deemed credit of duty in contravention of rules

4.5.1 Rule 57AB of the Central Excise Rules, 1944, and rule 3 of the Cenvat Credit Rules, 2002, prescribes that credit in respect of the additional duty of excise leviable under section 3 of the Additional Duties of Excise (Goods of Special Importance) Act, 1957 shall be utilized only towards payment of excise duty leviable under the Additional Duties of Excise (Goods of Special Importance) Act, 1957, on any final product manufactured.

By issue of notification dated 1 March 2001 (as amended on 29 June 2001) and 1 March 2002, the Government allowed deemed credit ranging from 20 per cent to 66 2/3 per cent of the aggregate of duty of excise leviable under the Central Excise Act, 1944 and the additional duty of excise leviable under the Additional Duties of Excise (Goods of Special Importance) Act, 1957, on the final products declared therein.

Test check of records of 27 assessees in Chandigarh I & II, Jaipur II and Surat I Commissionerates of Central Excise, engaged in production of processed fabrics, revealed that credit of additional duty of Rs.24.72 crore had been availed between March 2001 and November 2002. The credit so availed was utilized for payment of additional duty on final products though no additional duty was paid on inputs used in their manufacture. Inclusion of additional duty payable under the Additional Duties of Excise (Goods of Special Importance) Act, 1957, in the said notification, for grant of deemed credit, was not correct as this duty was not leviable on the declared inputs (viz. yarn). Additional duty was also exempt on the intermediate product - grey fabrics. Therefore, as no additional duty was payable on the inputs, the grant of credit of the same was incorrect in the light of the restrictions in the Cenvat Credit Rules.

On this being pointed out (between April 2002 and February 2003), the Ministry stated (December 2003) that deemed credit scheme was introduced to complete the Modvat chain and in no way provided credit where no duty incidence had been suffered on the inputs. It was further stated that this issue had recently been taken up in litigation and the CEGAT, New Delhi had held (November 2002) that the assessee was entitled to deemed credit.

Reply of the Ministry does not address the points raised in audit.

4.5.2 By notifications dated 1 March 2001 and 29 June 2001 issued under rule 11 of the Cenvat Credit Rules (erstwhile rule 57G(2) of the Central Excise Rules), deemed credit to fabric processors from 25 per cent to 50 per cent of duty paid on final product has been allowed. Yarn, dyes, chemicals, consumables and packing material were declared inputs in these notifications. Grey fabrics have not been declared as eligible inputs in these notifications.

While interpreting rule 57G(2), the Tribunal in the case of M/s. Machine Builders {1996 (83) ELT 576} held that ‘the intention is not to deem that the inputs which actually did not suffer duty are inputs which suffered duty. The purpose is to ensure the benefit to those who use inputs in the manufacture of which, duty has actually been paid, but it might not be possible to produce duty paying documents’.

Test check of records of 16 assessees in Chandigarh I & II and Jaipur II Commissionerates of Central Excise, engaged in the manufacture of processed fabrics revealed that the assessees purchased and used grey fabric which was exempt from duty. Deemed credit of basic excise duty of Rs.24.95 crore between March 2001 to November 2002 was availed and utilized despite the exclusion of grey fabrics as an eligible input. Hence, allowing of deemed credit in these cases was not correct.

On this being pointed out (between April 2002 and February 2003), the Ministry stated (December 2003) that deemed credit was admissible even though the declared inputs were not directly used by the manufacturers of declared final products. It was introduced to complete the Modvat chain and in no way provided credit where no duty incidence had been suffered on the inputs. As such Tribunal’s ruling in M/s. Machine Builders case had no bearing on this matter. It was further stated that this issue had recently been taken up in litigation and Tribunal New Delhi had held (November 2002) that the assessee was entitled to deemed credit.