The raging dispute on levy of piggy-back cesses such as education cesses, where duty payments were made by debit to the duty credit scrips such as DEPB scrips, is yet to settle down. The controversy has come back with a renewed vigor under the present MEIS duty credit regime and the Social Welfare Surcharge (SWS) levy.
The questions remain the same even now as they were viz.,
- Whether SWS can be considered/said to be exempt in consequence to exemption from BCD provided under the MEIS Notification?
- Whether the mode of exemption, viz. debit of duty in the scrips amounts to ‘payment of duty’ and not an exemption from duty?
- Can the principles laid down by the courts under the DEPB scheme be applied in the context of SWS?
Arguments for and against collection of SWS
The levy of SWS is sustainable:
Para 3.02 of Foreign Trade Policy (FTP) indicates that the intention of the Government of India is to permit the utilization of duty credit scrips for making ‘payment’ of customs duties and other fees payable under the FTP. Further, drawback is permissible for the BCD paid by way of debit to the scrip, and similarly, Cenvat credit is also available for the additional duty paid by way of debit to the scrip.
The charging section for the SWS levy is Section 110 of the Finance Act, 2018. Under this provision, SWS is calculated on the aggregate duties of customs “levied and collected” and any sum chargeable on such goods. It is important to note the usage of different expressions “levied” and “charged”. The difference between the terms leviable and chargeable has been clearly brought out in Section 25 (3) of the Customs Act, 1962, with the duty leviable being the ‘statutory duty or the standard rate of duty’ and the duty ‘chargeable’ being the duty post exemption or concession provided under Section 25 ibid.
Applying this to Section 110(1) of the Finance Act, 2018, the position which emerges is that, so long as the imported goods attract a ‘levy’ of customs duty, such duty shall be reckoned for the purposes of computing the SWS levy. Further, while analysing the effect of an exemption notification, the Supreme Court in Union of India v. Indian Charge Chrome, (1999) 7 SCC 314 held that, “An exemption notification issued under Section 25 of the Act had the effect of suspending the collection of customs duty. It does not make items which are subject to levy of customs duty etc. as items not leviable to such duty. It only suspends the levy and collection of customs duty, etc., wholly or partially and subject to such conditions as may be laid down in the notification by the Government in ‘public interest’.”
Notification No 11/2018-Cus., dated 2-2-2018 exempts specified goods from SWS. The goods so exempted from SWS, either did not attract any statutory levy of customs duty, or were exempt from such levy. In other words, SWS levy will be attracted so long as the goods attracted a statutory levy of customs duty, unless specifically exempt. In fact, the interpretation that, when BCD is exempted, SWS should automatically be exempted will render the act of exempting the levy of SWS specifically, as under Notification No. 11/2018-Cus., dated 02-02-2018 null and void, or even otiose. Worse, it would mean extending the scope of SWS exemption beyond what is legislated under Notification No. 11/2018-Cus.
The Madras High Court in the case of Tanfac Industries, 2009 (240) ELT 341 (Mad), held that the debit to the scrip is only a mode of payment of duty and the imported goods cannot be treated as exempted goods. The SLP filed by the importer against this decision was also dismissed by the Supreme Court as reported in 2009 (244) ELT A121 (SC). A Division Bench of the Madras High Court, in Commissioner of Central Excise, Chennai-I .v. SPIC Ltd. [2014 (305) ELT 484 (Mad.)], placing reliance on the High Court decision in Tanfac Industries cited supra, also observed that the imported goods are not exempted from payment of duty in stricto sensu.
Arguments against - Levy of SWS is not sustainable:
The position that emerges from the decisions of the Gujarat and Mumbai High Courts in 2013 (289) ELT 273 (Guj); 2013 (296) ELT 182 (Guj) and 2005 (188) ELT 449, one which had the approval of the Supreme Court also, is that, the DEPB scheme operates as an exemption, and when the BCD is exempt, the Education Cesses are also exempt.
Applying the same ratio to the SWS scenario, in a situation where exemption notification under Section 25 of the Customs Act has been issued providing full exemption to goods cleared against scrips under MEIS, such goods are not chargeable to customs duty. As already seen, Section 110 of the Finance Act, 2018 uses the expression “levied and collected”. During the existence of an exemption notification issued under section 25, no duty is “levied and collected”. When such is the case, SWS which is calculated at 10% of the duty that is “levied and collected” must also be nil.
Other issues requiring attention
Interestingly, the question of education cess being computed on the customs duty ‘leviable’ and not ‘chargeable’, as required by the law, was not considered in any of the cases where the courts ruled that education cess would be exempt when BCD is paid by debit to the scrip. Nor was the significance of the exemption notification for education cesses considered while reaching such conclusions.
However, the final word on this issue has not been said yet, and the question is still open for debate. However, any demand from the Revenue department to pay the SWS by cash could be challenged by way of an appeal, after paying the duty under protest.
[The author is an Associate in Tax Practice, Lakshmikumaran and Sridharan, Chennai]