CHAPTER - VI
Exemptions

Under section 5A(1) of the Central Excise Act, 1944, government is empowered to exempt excisable goods from the whole or any part of the duty leviable thereon either absolutely or subject to such conditions as may be specified in the notification granting the exemption. Some of the major cases of incorrect allowance of exemption noticed in audit are detailed in the following paragraphs:

6.1    Incorrect grant of exemption on goods manufactured on job work

By notification dated 25 March 1986, as amended, specified goods manufactured in the factory on job work basis and used in relation to the manufacture of final products falling under Central Excise Tariff, are exempt from the whole of the duty leviable thereon. Electricity does not fall under Central Excise Tariff. However, rule 2 of the Cenvat Credit Rules, provides Cenvat credit facility to inputs used for generation of electricity which in turn is used for manufacture of final products, within the factory of production.

M/s. Haldia Petrochemicals Limited, in Kolkata II Commissionerate of Central Excise, manufactured naptha returned stream/pyrolysis gas, C6 raffinate, cyclopentane and cleared them outside the factory without payment of duty for generation of electricity on job work basis, and a major portion of such electricity was returned to the assessee who used the same in the manufacture of final products. Clearance of goods without payment of duty was not correct as electricity was not specified as excisable good in the Tariff. This resulted in evasion of duty of Rs.21.89 crore from November 2000 to October 2002.

On this being pointed out (November 2002), the Ministry admitted the objection (December 2003).

6.2    Incorrect grant of exemption on intermediate goods

6.2.1    By notification dated 2 June 1998 as amended on 1 March 2000, processed tyre cord fabrics (heading 59.02) are exempted from additional duty under Additional Duties of Excise (Goods of Special Importance) Act, 1957, if manufactured out of unprocessed tyre cord fabrics on which the appropriate duty or as the case may be, the additional duty leviable under the Customs Tariff act, 1975 has already been paid.

Test check of records of M/s. Birla Tyres, in Bhubaneswar I Commissionerate of Central Excise, revealed that the assessee purchased grey (unprocessed) tyre cord fabrics (TCF) which were dipped in a chemical to produce dipped (processed) tyre cord fabrics. This dipped TCF was being cleared for rubberisation without payment of duty under notifications dated 16 March 1995 and 2 June 1998 as it was manufactured from unprocessed tyre cord fabric. Later on, the dipped TCF was coated with rubber on a calendering machine to produce rubberised tyre cord fabrics, which was again being cleared for manufacture of tyres without payment of excise duty as well as additional excise duty. Since the rubberised (processed) tyre cord fabric was produced from dipped (processed) tyre cord fabric, exemption under notification dated 2 June 1998 was not available. This resulted in non-levy of duty of Rs.14.33 crore during the period from April 2000 to November 2002.

On this being pointed out (January 2003), the Ministry stated (December 2003) that the assessments were provisional in view of the fact that the department had filed appeals against the Tribunal’s decisions with regard to the classification of rubberised tyre cord fabrics under heading 59.05.

6.2.2    By notification dated 16 March 1995, specified excisable goods manufactured in a factory and used within the factory for the manufacture of final products are exempt provided that the final products are not exempt from whole of the duty or chargeable to nil rate of duty.

M/s. Niphad SSK Limited, in Nasik Commissionerate of Central Excise, manufactured and cleared 8320.27 tonne of molasses for captive consumption without payment of duty during the period from March 2002 to January 2003 for manufacture of ethyl alcohol (sub-heading 2204.90) which was chargeable to nil rate of duty. Since the final product was chargeable to nil rate of duty, exemption from duty on molasses was not applicable. This resulted in incorrect availment of exemption of Rs.51.90 lakh.

On this being pointed out (January 2003), the Ministry admitted the objection (November 2003).

6.3    Incorrect grant of exemption on final products

6.3.1    By notification dated 1 March 2000, excisable goods specified in chapters 72 and 73 which are manufactured in and cleared from an integrated steel plant and are intended to be sold at a place other than the said integrated steel plant are exempt from so much of the duty of excise leviable thereon under the Central Excise Act, 1944, as is in excess of the duty leviable on such goods as if they were sold and delivered to a buyer in the course of whole sale trade at the integrated steel plant. Explanation in this notification states that “integrated steel plant means a manufacturer or a producer who starting from the stage of iron ore, manufactures or produces within the same premises the excisable goods specified in chapter 72 or chapter 73”.

M/s Monnet Ispat Limited, Raipur, in Raipur Commissionerate of Central Excise, manufactured M.S. ingots using 14000 tonne pig iron, 1000 tonne M.S. scrap, 4800 tonne of C.I. scrap/skull, 29 tonne of sponge iron and 1200 tonne of ferro alloys. These input materials were purchased from the market. The final product was cleared to the depots on payment of duty on assessable value which excluded the freight charges from factory gate to the depots under notification dated 1 March 2000. Exclusion of the freight charges was not correct since the final product was not manufactured starting from the stage of iron ore within the same premises. Moreover, the assessee did not have a plant to produce pig iron. Thus, availing of exemption of Rs.54.43 lakh between the period January 2001 and October 2002 was incorrect.

On this being pointed out (December 2002), the Ministry admitted the objection in principle (December 2003).

6.3.2    By notifications dated 7 May 1997 and 16 March 1995 (as amended), goods supplied as stores for consumption on board a vessel of the Indian Navy are exempt from payment of the whole of the duty leviable thereon.

The Tribunal in the case of M/s. Moosa Haji Patrawala Private Limited {1999 (114) ELT 620} held that if the goods are not supplied as stores for consumption on board a vessel directly to the Indian Navy, then the benefit of exemption is not applicable on such goods. The Supreme Court also upheld the judgement on 3 March 2000.

M/s. Nicco Corporation Limited, 24 Parganas, in Kolkata III Commissionerate of Central Excise, manufactured ‘insulated wires and cables’ and cleared the goods without payment of duty availing exemption under the aforesaid notification. Test check of records revealed that these goods were not supplied to the Indian Navy for consumption as stores on board a vessel but were cleared to ship builders like M/s Garden Reach Ship Builders and Engineers Limited directly. Hence, exemption availed was incorrect. This resulted in short levy of duty of Rs.20.93 lakh between April 1999 and March 2002.

On this being pointed out (October 2002), the Ministry while admitting the objection stated (October 2003) that central excise duty involved was Rs.1.51 crore from April 1999 to March 2002 and the Department had initiated enquiry on September 2001.

The fact remains that no show cause notice has been issued to protect government revenue.

6.4    Incorrect grant of exemption of national calamity contingent duty

By section 136 of the Finance Act, 2001, as effective from 1 March 2001, a surcharge by way of duty of excise called the national calamity contingent duty (NCCD) has been levied on goods specified under heading 21.06 (pan masala) and heading 24.04 (other manufactured tobacco products).

Under notification dated 16 March 1995 and 11 August 1994, specified intermediate goods, if captively consumed in the manufacture of specified final products, are exempt from (i) duty of excise leviable under the Central Excise Tariff Act, 1985, and (ii) Additional Duty of Excise leviable under the Additional duties of Excise (Goods of Special Importance) Act, 1957.

Six assessees in Chandigarh I Commissionerate of Central Excise, manufactured ‘additive mixture’ viz., tobacco essence (heading 24.04) and ‘unbranded pan masala’ (heading 21.06) and used them captively in the manufacture of final product viz., zarda, gutka etc. and branded pan masala, without payment of duty, after availing exemption under notifications ibid. Since NCCD was not specified under the aforesaid notification, exemption availed was incorrect. This resulted in short levy of duty of Rs.7.76 crore during 1 March 2001 to 16 October 2002.

On this being pointed out (January 2002), the Ministry admitted the objection in principle (December 2003).

6.5    Incorrect grant of small scale industry exemption

Under notification dated 28 February 1993, specified goods are not eligible for exemption if they bear a brand name or trade name (registered or not) of another person, who himself is not eligible for grant of exemption, under the notification ibid.

M/s. Mehak Chemicals (P) Limited, in Chandigarh I Commissionerate of Central Excise, manufactured bleaching powder (heading 28.28) and cleared it by affixing brand name ‘Shri Ram’ as per instructions from their customer. Since the brand name belonged to another person who was not eligible for grant of exemption, availment of exemption by the assessee was incorrect and resulted in short levy of Rs.18.30 lakh during the period from October 1996 to March 1998.

On this being pointed out (March 2001), the Ministry admitted the objection (November 2003).

6.6    Other cases

In 50 other cases of exemptions, the Ministry/the Department had accepted objections involving duty of Rs.53 lakh and reported recovery of Rs.22 lakh in 46 cases till February 2004.