Old practice of Government-High Court Decision undone!!

An article by: CA Pradeep Jain,

CA Neetu Sukhwani &

Bharat Rathore

Introduction:- It is a very old tactic followed by the government that when the interpretation taken by High Court or Supreme Court on an issue is consistently held against the revenue, the best solution lies with amending the statutory provision or adding explanations to it. This is the strategy that the Modi’s government has adopted in this Budget also. All the propaganda regarding ‘non-adversial and stable tax environment’ with doing away the practice of retrospective amendments were only made to lure the public to give votes. The amendment made by the government in Rule 5 of the Cenvat Credit Rules, 2004 by the notification no. 06/2015-CE (N.T.) dated 01.03.2015 is yet another example of the practice of the government to override and nullify the judicial pronouncements.

Backdrop of the issue under consideration:- Rule 5 of the Cenvat Credit Rules, 2004 pertains to the refund of accumulated cenvat credit available to the exporters. The Rule (1) states that:-

RULE 5 Refund of CENVAT Credit. – (1) A manufacturer who clears a final product or a intermediate product for export without payment of duty under bond or letter of Undertaking , or a service provider who provides an output service which is exported without payment of service tax, shall be allowed refund of CENVAT credit as determined by the following formula subject to procedure, safe guards, conditions and limitations, as may be specified by the Board by notification in the Official Gazette.

It is worth noting that Explanation no. 1 (1) to this Rule states that for the purpose of this rule,- “export service” means a service which is provided as per Rule 6A of the Service Tax Rules, 1994. However, there is no clarification for the “export of goods”. Consequently, the issue that arose was whether clearances by a manufacturer to 100% EOU would be eligible for the refund of accumulated credit under Rule 5 or the refund is to be granted only for the physical exports made without payment of duty under ‘bond or letter of undertaking’. It was contended by the assessees that clearance to 100% EOUs are effected against CT-3 that is issued by debiting the requisite amount from the bond executed by 100% EOUs and consequently, such clearances are also to be considered at par with export under bond. Moreover, the Hon’ble Gujarat High Court has held in the case of Commr of C.Ex. Vs Shilpa Copper Wire Industries [2011(269) E.L.T. 17 (Guj.)] that refund of unutilised cenvat credit in case of deemed exports is also admissible and while pronouncing this reliance has been placed on Apex Court decision. Not only this, similar view was taken by the Hon’ble Gujarat High Court in the case of Commr of C.Ex. & Customs Vs NBM Industries [2012 (276) E.L.T. 9 (Guj.)] wherein it was also concluded that refund under Rule 5 cannot be denied on the ground that it is available for physical exports only and not admissible for deemed exports. In this case, the decision was delivered by placing reliance on another Apex Court decision given in the case of Virlon Textile Mills Ltd. Vs Commr of C.Ex., Mumbai [2007(211) E.L.T. 353 (S.C.)]. It is also worth observing that recently, the same Gujarat High Court in the case of E I Dupont India Pvt. Ltd. Vs Union of India [2014(305) E.L.T. 282 (Guj.)] has confirmed the fact that even deemed exports are eligible for refund under Rule 5 of the Cenvat Credit Rules, 2004 and even proposed to issue strictures against the adjudicating authority which ignored the binding precedents laid by the High Court and Supreme Court. In pursuant to the above decision, the Board also issued Instruction no.F. No. 201/01/2014-CX.6 dated 26.06.2014wherein it has been strictly instructed to follow the judicial discipline by the adjudicating authorities when the issue is covered by decisions of High courts or Supreme court. This instruction also clearly states that if there exists any precedent judgement which has been decided against the revenue then the officers shall be bound by it. Moreover, even if the appeal has been filed against the precedent judgment by the revenue department, still the same is required to be followed for deciding the issue in case of other assessees in view of the decision given by the Supreme Court in the case of Kamalakshi Corporation Ltd.

Inspite of the above cited decisions pronounced by the High Court, the assessees claiming refund under Rule 5 for deemed exports were harassed by taking contention that the revenue department has filed Special Leave Petition against the decision given by the Hon’ble Gujarat High Court in the case of E I Dupont India Pvt. Ltd. Vs Union of India [2014(305) E.L.T. 282 (Guj.)] . It is also worth mentioning here that the stay application filed by the revenue department was heard on 28.11.2014 wherein no stay was granted by the Apex Court and the matter was posted for final hearing on 24.02.2015 and the final outcome is still pending in this case.

Amendment made in Rule 5 vide this Budget:- In this budget, a new clause (1A) has been inserted in the Explanation to Rule 5 which specifies that “export goods” means any goods which are to be taken out of India to a place outside India. This insertion by way of explanation has nullified the ratio of the above cited judicial pronouncements of the Gujarat High Court. This explanation has clearly mentioned that export goods means any goods which are to be taken out of India to a place outside India thereby meaning that the deemed exports will be out of the purview of the provision of Rule 5 of the Cenvat Credit Rules, 2004. Hence, the outcome of the SLP in the case of E I Dupont India Pvt. Ltd. will be of less relevance.

Before Parting:- The above analysis clearly reflects that the government is vested with discretionary powers to undo decisions pronounced against them by amending the statutory provision in their interest. Not only this, the assessees may be prepared to face litigations even for the prior period on the ground that the explanation inserted vide Budget, 2015 is clarificatory in nature and is to be applied retrospectively. Well, all the hapless assessees can do is to face the torture of litigation even on settled issues! 

With the GST implementation deadline of April 2016 becoming a non-event, questions are up once again on the fate of the Goods and Services Tax. In this year’s budget speech in the Parliament, there was not much ado on the GST. This was in stark contrast to the last year’s budget session when there was a firmness to move towards GST regime within a year. Is it that the government is resigned to the fact that they do not have a majority in the Upper house and till they get it, the GST bill cannot be passed?

No, the government does not seem to be sitting idle on the GST issue. A recent statement from the finance minister that he is in agreement that the highest rate of GST Tax should not go beyond 18% had raised hopes that the bill may be passed in the budget session. However, the Congress party demand for a cap of 18% in the constitutional amendment bill was not heeded to. With the second part of the Parliament session beginning from the 25th of April there is hope once again that the government is likely to push through the tax reform.

Another noticeable action that reiterates the government’s resolve to go ahead with the GST is the focus on the administrative reforms on the tax front. The items that had been enjoying exemptions are being brought under the tax regime. This includes the jewellery items with the exception of silver jewellery and the branded apparel & clothing accessories with a retail sale price of INR 1000 and above. The reaction from the jewellers was an agitation where they said they were not willing for a 1% and 12.5% excise duty rates. The government is firm on its stand to bring this sector under taxation.

The concessional notification on the apparel and clothing accessories have been withdrawn and excise duty is proposed. It is very clear that the excise duty will be subsumed under the GST. The tax changes at this time are an indicator that irrespective of the passage of the GST bill in the parliamentary session, the government is busy with the groundwork for the reform. It is doing away with the concessions and getting more and more sectors under the tax ambit. It is now very clear to them that higher the number of concessions, more will be the Revenue Neutral Rate (RNR) of the GST.

Over the years, the Service Tax rate has also gone up. The government had upped the rate to 14.5% in the budget this year and a krishi Kalyan cess of 0.5% from June 2016 will take it up to 15%. This move is also an indicator that the government is bringing the service tax rate closer to the RNR rate of 17 to 18% in the GST. This will avoid a steep hike for the service tax rate when the Goods and Services Tax is finally implemented.

The indicators from the government are firm and clear that it is going ahead with its GST reform process. They are utilizing the time delays to set the tax administration in order. The industry, trade and dealerships would do well to iron out their tax issues and gear up their infrastructure and resources for the biggest tax reform of the times, in India.