Refund of Education CESS and SHE CESS under area based notifications – controversy revisited.

The issue with regard to refund of Education Cess and Secondary & Higher Education Cess (SHE Cess) under area based exemption Notifications has been examined by different forums inter-alia including by the Hon’ble Supreme Court.  The issue has been agitated by both sides i.e. assesses as well as revenue.  Before further dwelling on this issue, it is important to understand the background facts.

2. Various exemptions were provided for manufacturing units in different states i.e. Jammu & Kashmir, Sikkim, North Eastern States, Uttarakhand and Himachal Pradesh. As an example, the matter of Sikkim is being taken up in this article.
3. The Government of India in order to promote industrial development in the North Eastern Region, announced vide Office Memorandum dated 24-12-1997, specific fiscal incentives including total exemption from tax to the new industrial units and substantial expansion of existing unit in the North Eastern Region for a period of 10 years from the date of commencement of production. Government of Sikkim vide Notification dated 17-2-2003, notified new industrial policy whereby all fiscal incentives available to the industries in the North Eastern Region would be available to the units set up in the State of Sikkim.
4. The Central Government issued a Notification No.71/2003-CE dated 9-9-2003, granting exemption from payment of duty of excise for goods specified in the notification and cleared from a unit located in the Industrial Growth Centre or other specified areas within the State of Sikkim. Under the notification, a manufacturer of specified goods was required to pay excise duty on the goods cleared from its unit. The manufacturer has to first utilize the Cenvat Credit for discharging duty liability on final products, and the remaining amount of duties had to be paid through Personal Ledger Account (PLA) or Current Account, i.e., in cash. Thus, the exemption scheme was to discharge the liability on the final product and then claim or avail the refund or re-credit of the duties paid in cash. Identical Notifications were issued for the units in the States of Jammu & Kashmir, North Eastern States and Kutch region.
5. Under the scheme of these exemption Notifications, effectively the units were paying Central Excise Duty in cash over and above the CENVAT credit available to them. As per the scheme of exemption issued under Section 5A of the Central Excise Act, 1944, the exemption was granted from payment of Central Excise Duty paid over and above the CENVAT credit and the refund thereof in the subsequent month. The mechanism of exemption was designed in order to facilitate the downstream manufacturers to avail CENVAT credit of the full duty (including CENVAT and Cash) even if the cash portion of the duty has been refunded to the assessee as if no exemption has been availed. In this regard, povisions were made for special dispensation under Rule 12 of the CENVAT Credit Rules, 2004.

6. A new levy i.e. Education Cess as a duty of excise came to be imposed under the Finance Act, 2004 at the rate of two per cent of the aggregate of duties of excise. Sections 91 and 93 thereof are extracted hereunder :

“91. Education Cess. – (1) Without prejudice to the provisions of sub-section (11) of Section 2, there shall be levied and collected, in accordance with the provisions of this Chapter as surcharge for purposes of the Union, a cess to be called the Education Cess, to fulfil the commitment of the Government to provide and finance universalized quality basic education.

(2) ……….

93. Education Cess on Excisable Goods. – (1) The Education Cess levied under Section 81, in the case of goods specified in the First Schedule to the Central Excise Tariff Act, 1985 (5 of 1986), being goods manufactured or produced, shall be a duty of excise (in this section referred to as the Education Cess on excisable goods), at the rate of two per cent, calculated on the aggregate of all duties of excise (including special duty of excise or any other duty of excise but excluding Education Cess on excisable goods) which are levied and collected by the Central Government in the Ministry of Finance (Department of Revenue) under the provisions of the Central Excise Act, 1944 (1 of 1944) or under any other law for the time being in force.

(2) The Education Cess on excisable goods shall be in addition to any other duties of excise chargeable on such goods under the Central Excise Act, 1944 (1 of 1944) or any other law for the time being in force.

(3) The provisions of the Central Excise Act, 1944 (1 of 1944) and the rules made thereunder, including those relating to refunds and exemptions from duties and imposition of penalty shall, as far as may be, apply in relation to the levy and collection of the Education Cess on excisable goods as they apply in relation to the levy and collection of the duties of excise on such goods under the Central Excise Act, 1944 or the rules, as the case may be.”

7.      Identical provisions were made when the Central Government introduced the Secondary and Higher Education Cess (SHE Cess) at the rate of one per cent of the aggregate of duties of excise under Sections 126 and 128 of the Finance Act, 2007.

8. Question arose whether Education Cess and SHE Cess levied under the respective Finance Acts were payable as a percentage of the basic excise duty so paid and subsequently refunded under the exemption notifications. A plea was raised that the area based exemption notifications do not refer to exemption of Education Cess and SHE Cess as those exemption notifications were issued prior to the levy of Education Cess and SHE Cess. The assessees started paying 2% Education Cess and 1% SHE Cess on the Basic Excise Duty payable by the units availing area based exemption. The Education Cess and SHE Cess were paid on the entire amount of excise duty (Cash as well as CENVAT portion). However, some of the assessees started filing refund claims of the Education Cess and SHE Cess paid on the cash portion and on the ground that since the refund of basic excise duty paid in cash was available under the notifications, the refund of Education Cess and SHE Cess paid in cash being a percentage of Basic Excise Duty was also refundable. In other simple words, since the Basic Excise Duty of the cash portion was exempted albeit by way of refund mechanism, percentage of that duty also being zero, the Education Cess and SHE Cess were not payable or refundable along with basic duty paid in cash.

9. Here the controversy started. Department entertained a view that since there was no reference to Education Cess and SHE Cess under the area based exemption notification, the refund thereof is not available whereas the assessees contended that since the levy is as a percentage of basic excise duty, same is not payable and hence is refundable if paid. The first matter was decided by the Hon’ble Tribunal in the case of Bharat Box Factory Vs. CCE Jammu reported at 2007 (214) E.L.T. 534 (Tri. – Del.) and Cyrus Surfactants Pvt. Ltd., Vs. CCE Jammu reported at 2007 (215) E.L.T. 55 (Tri. – Del.)  wherein the Hon’ble Tribunal’s decided the issue in favour of the assessees by holding that the Education Cess is a piggy back duty and since there was exemption under the area based notification of the basic excise duty, the Education Cess was not leviable being a percentage of Excise duty which was NIL. These decisions were being followed subsequently in a number of matters. However, department took this matter before the Hon’ble Supreme Court.  

10. Another set of matters on the same issue came before the Bench of equal strength of Hon’ble Tribunal in the case of Jindal Drugs Ltd. reported at 2011 (267) E.L.T. 653 (Tri. – Del.). Judicial propriety required to either follow the decision of the coordinate Bench of Hon’ble Tribunal in the case of Bharat Box Factory and Cyrus Surfactants Pvt. Ltd. (supra) or if the new Bench didn’t agree with the earlier decisions, should have referred the matter to Larger Bench to settle the matter. Law is well settled on this issue where another Bench of equal strength takes a different view, it has to refer to Larger Bench which unfortunately was not done in that case.
11. Be that as it may, this matter also was taken by assessees before the Hon’ble Supreme Court. Therefore, both the sides were before the Hon’ble Supreme Court.
12. Hon’ble Supreme Court in the matter of SRD Nutrients Pvt. Ltd., reported at 2017 (355) E.L.T. 481 (S.C.) settled the issue in favour of the assesses by holding Education Cess as a surcharge, is levied @ 2% on the duties of excise which are payable under the Act. It can, therefore, be clearly inferred that when there is no excise duty payable, as it is exempted, there would not be any Education Cess as well, inasmuch as Education Cess @ 2% is to be calculated on the aggregate of duties of excise. There cannot be any surcharge when basic duty itself is Nil.
13. Review Petition filed by the Revenue was also dismissed by the Hon’ble Supreme Court vide Order dated 11.07.2018. Consequently, matters pending before lower forums were decided in favour of the assessees following the judgement of the Supreme Court in the case of SRD Nutrients Pvt. Ltd., (supra).  Pending refunds were also granted to the assessees.

14. One more form of Excise duty namely National Calamity Contingent Duty (NCCD) was imposed under the provisions of Section 136 of the Finance Act, 2001 in the nature of a duty of excise, in addition to any other duties of excise chargeable under the 1944 Act. The relevant portion is extracted as under :                                                           136. National Calamity Contingent Duty.-

(1) In the case of goods specified in the Seventh Schedule, being goods manufactured or produced, there shall be levied and collected for the purposes of the Union, by surcharge, a duty of excise, to be called the National Calamity Contingent duty (hereinafter referred to as the National Calamity duty), at the rates specified in the said Schedule.

(2) The National Calamity duty chargeable on the goods specified in the Seventh Schedule shall be in addition to any other duties of excise chargeable on such goods under the Central Excise Act, 1944 or any other law for the time being in force.

(3) The provisions of the Central Excise Act, 1944 and the rules made thereunder, including those relating to refunds and exemptions from duties and imposition of penalty, shall, as far as may be, apply in relation to the levy and collection of the National Calamity duty leviable under this section in respect of the goods specified in the Seventh Schedule as they apply in relation to the levy and collection of the duties of excise on such goods under that Act or those rules, as the case may be.”

15. There was another kind of area based exemption available to the units located in the States of Himachal Pradesh and Uttarakhand, whereby outright exemption from payment of excise duty was available to the goods manufactured in a unit in the specified areas of these States for the period of 10 years from the date of commencement of the commercial production. This area based exemption Notification No. 50/2003-CE dated 10.06.2003 was different from the exemption available to J & K, Sikkim and Northern Eastern States, wherein the exemption was granted by way of a refund mechanism of the duty paid in cash and in excess of Cenvat Credit, whereas for the States of Himachal Pradesh and Uttarakhand it was an outright exemption.

16. The controversy arose whether there was also an exemption from payment of NCCD duty under the exemption notifications meant for Himachal Pradesh and Uttarakhand where there was no reference in those notifications to NCCD duty imposed under the Finance Act, 2001. Also there was no reference to the exemption with reference to the Education Cess and SHE Cess under these notifications. Assessees challenged that since no Basic Excise Duty is payable under the notification, no duty in the form of NCCD duty or Education Cess was payable. This matter ultimately went up before the Supreme Court in the matter of Bajaj Auto Ltd., reported at 2017 (366) E.L.T.577 (SC). The Hon’ble Supreme Court following the judgment in the case of SRD Nutrients Pvt. Ltd. did not incline to take a different view from the one taken for Education Cess and Secondary & Higher Education Cess, even while considering the issue of NCCD.

17. Another matter came up before the Hon’ble Supreme Court in the case of Unicorn Industries V/s UOI reported at 2019 (370) E.L.T. 3 (S.C.) with reference to NCCD Duty wherein the Hon’ble Supreme Court took a different view holding that the judgments in the case of SRD Nutrients Pvt. Ltd., and Bajaj Auto Ltd., are clear per incuriam in as much as the judgments of Modi Rubber and Rita Textiles Pvt. Ltd., were not placed for consideration.

18. As a result it follows that in the case of Unicorn Industries, the judgment in the case of Bajaj Auto Ltd., and SRD Nutrients Pvt. Ltd., have been held per incuriam, those do not have a precedential value and the Unicorn Industries judgment will prevail. For this purpose of this article, the pre incuriam issue is not being discussed herein which is another topic altogether and the effect thereof is to be examined separately.

19. The department had already implemented the judgment of the Hon’ble Supreme Court in the case of SRD Nutrients Pvt. Ltd. after its review was also dismissed. Subsequent decisions of the Hon’ble High Court and Tribunals and following the judgment of the SRD Nutrients Pvt. Ltd. were also implemented. Refunds under dispute with regard to refund of Education Cess and SHE Cess were paid to the assessees.

20. Now after the decision of the Hon’ble Supreme Court in the case of Unicorn Industries (Supra), the department has started taking a view that since the earlier judgments in the case of SRD Nutrients Pvt. Ltd., and Bajaj Auto Ltd., have been held be per incuriam, the refunds granted following the SRD Nutrients are recoverable back within a period of two years in terms of Section 11A of the Central Excise Act, 1944. Show cause notices are being issued left and right for recovery of refunds so granted. It is also learnt that Department is challenging the decisions of the Hon’ble Tribunal to the next higher forum on the ground that since SRD Nutrients has been held be per incuriam, those decisions are to be set aside. Be that as it may, the controversy needs to be examined, once again.
21. Hon’ble Supreme Court in the matter of Unicorn Industries has held that the decisions in the case of Modi Rubber reported at 1986 (25) E.L.T. 849 (S.C.) and Rita Textiles Pvt. Ltd. 1988 (35) E.L.T. 611 (S.C.), were not placed before the Hon’ble Supreme Court in the case of Bajaj Auto Ltd., and SRD Nutrients, therefore, those are to be held as per incuriam.
22. With utmost respect, it appears that the true distinction has not been made by either side as to why Modi Rubber is not relevant to the issue. In this case, the issue was exemption from payment of duty of special excise duty where basic excise duty was exempted. Special Excise Duty was levied and collected equal to the 5% of the “amount chargeable” on such goods, whereas the Education Cess and SHE Cess were levied @ 2% and 1% of the aggregate of all duties of Excise “levied and collected” by the department. Thus, in Modi Rubber case, special excise duty of 5% was levied on the amount so chargeable (even though exempted).  Therefore, it follows that the Modi Rubber judgment is not relevant or at best it is distinguishable. It appears that this distinction not been pointed out before the Hon’ble Supreme Court and the controversy has again started. It follows that in the judgment of Unicorn Industries, the judgment in the case of Bajaj Auto Ltd., has been correctly held be per incuriam so far as the duty of NCCD and cesses payable thereon is concerned, since NCCD is chargeable on the value and not as a percentage of the basic duty. Cesses were payable as a percentage of NCCD duty so payable.  Therefore, even if there is an exemption from Basic Excise duty under Notification No.50/2003-CE, there is no exemption of NCCD duty which is chargeable on the value and not as percentage of the basic excise duty. Thus it perforce follows that the judgment of the Hon’ble Supreme Court in the case of Bajaj Auto Ltd., (Supra) has been correctly held to be per incuriam so far as NCCD duty and cesses payable thereon is concerned.
23. With regard to Education Cess and SHE Cess payable as a percentage of basic excise duty which is exempted, the distinction of the phraseology used i.e. “on the amount chargeable” from Modi Rubber case and “on the aggregate of duties of excise levied and collected” has not been pointed out. In Bajaj Auto, the issue was confined to levy of Education Cess and SHE Cess payable as percentage of the amount of NCCD duty. This is explained hereinafter. Levy of Education Cess and SHE Cess is as a percentage of the aggregate of duties levied and collected under the Central Excise Act or any other law for the time in force. Therefore, if the NCCD duty is payable under the Finance Act, 2001, Education Cess @ 2% and SHE Cess @ 1% is payable as percentage on the amount of NCCD duty. Therefore, it is clear that the controversy was limited only with regard to the amount of Education Cess and SHE Cess as a percentage of NCCD duty and not otherwise as a percentage of Basic Excise duty that was exempted under Notification No. 50/2003-CE.  This is clearly evident from the judgment of Single Judge of Uttarakhand High Court reported at 2015 (317) E.L.T. 12 (Uttarakhand) at para 9 and also Division Bench of the same High Court reported at 2017 (352) E.L.T. 147 (Uttarakhand) para 16.
24. If it has to be held that there is no reference to Education Cess and SHE Cess under the area based notification where refund mechanism has been provided, it is respectively submitted that there is no reference to Education Cess and SHE Cess with regard to exemption from payment of Excise duty under Notification No.50/2003-CE pertaining to the States of Himachal Pradesh and Uttarakhand. If truly, the judgment of Hon’ble Supreme Court in the case of Unicorn Industries is being interpreted in the manner by issuing show cause notices for recovery of refunds of Education Cess and SHE Cess already granted in terms of SRD Nutrients, it would mean that Education Cess and SHE Cess is payable by the units of Himachal Pradesh and Uttarakhand also even if they have availed exemption of basic excise duty under Notification 50/2003-CE. But the department has never collected any Education Cess and SHE Cess as a percentage of Excise Duty exempted under this notification. Therefore, it is a respectful interpretation of the author that the judgment of the Hon’ble Supreme Court in the case of SRD Nutrients is a correct law so far as the Education Cess and SHE Cess is concerned and the judgment of the Hon’ble Supreme Court in the case of Modi Rubber as distinguished above is not applicable.

The author is Chief Advisor at GSTaxperts and can be reached at rkhasija@gmail.com