SC upholds capping excise duty refund to actual value addition

The Supreme Court has upheld restrictions on area-based exemption to actual value addition. These restrictions were meant to limit the refund of erstwhile central excise to manufacturing units set up in industrially backward areas such as Kutch (Gujarat) and the north-eastern regions.

Experts feel that this order will have impact on exemption/refund mechanism as applicable in the GST (Goods & Services Tax) regime.

Promotion of industrial activities

The matter relates to two initiatives to promote industrial activities in specific regions, and the rulings of various high courts on those initiatives. One initiative was notified by the Centre in 2001 after a devastating earthquake on January 26, 2001, destroyed the existing infrastructure in Kutch. In order to revive economy in the said district, the scheme prescribed 100 per cent exemption from central excise duty to a new industrial unit set up in the Kutch district prior to July 31, 2003 (which was subsequently extended to December 31, 2005).

This exemption from central excise duty was made available for a period of five years from the date of commencement of commercial production. The State government also chipped in with sales tax exemption.

Later, in order to curb the misuse, the Central government limited the benefit to value addition through two notifications in 2008. Accordingly, refund was first capped to 34 per cent of the duty paid which was later enhanced to 75 per cent. Aggrieved by the capping, the industry approached the Gujarat High Court, which held that incentive as originally envisaged (100 per cent exemption) required to be implemented and the differential amount was directed to be refunded to the writ petitioners. Following this, the tax authority moved the Supreme Court.

The second initiative was related to 100 per cent excise duty exemption was provided on the products manufactured in the north-eastern region through the revised industrial policy dated April 1, 2007. Here too, the benefit restricted on the basis of notifications in 2008.

A number or pleas were filed in High Courts in the North-East, who . ruled against the Tax Department following which an appeal was filed in Supreme Court.

‘Preventing tax evasion’

After hearing all concerned parties, the Supreme Court quashed orders by the respective high courts. According to a division Bench of the apex court, on a fair reading of the earlier notifications/industrial policies, it is clear that the object of granting the refund was to refund the excise duty paid on genuine manufacturing activities. The intention would not have been that irrespective of actual manufacturing/manufacturing activities.

And, even if the goods are not actually manufactured, but are manufactured on paper, there shall be refund of excise duty which are manufactured on paper.

Therefore, “it can be said that the object of the subsequent notifications/industrial policies was the prevention of tax evasion. It can be said that by the subsequent notifications/industrial policies, they only rationalise the quantum of exemption and proposing rate of refund on the total duty payable on the genuine manufactured goods.”

Abhishek A Rastogi, Partner at Khaitan & Co, felt that while the high courts granted much-needed relief on the basis of principles of promissory estoppel and legitimate expectations, the Supreme Court has taken a diametrically opposite view and upheld the amendments restricting the benefit, by stating that the intended purpose of the incentive schemes have to be carried out and such amendments should have retrospective operation.

“This has a huge financial impact on industrial units who would have received the differential refunds on a provisional basis following the favourable high courts, which have now ultimately been overturned,” he said.

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