Supreme Court Clarifies Central Excise Liability for Textile Traders Using Job Workers (28 February 2019)

Date of the Judgment: 28 February 2019

Citation: Civil Appeal Nos.9740-9741 of 2018

Judges: Uday Umesh Lalit, J. and Indu Malhotra, J.

Can a textile trader be held liable for excise duty based on the aggregate value of clearances by multiple job workers, or is the liability limited to individual job workers exceeding a specific threshold? The Supreme Court addressed this question in a case involving Dinesh Textiles, clarifying the applicability of Central Excise Rules and exemption notifications related to job work in the textile industry. This judgment clarifies the duty liability of traders who get goods manufactured through job workers, particularly in the context of exemption limits.

Case Background

Dinesh Textiles, the appellant, is a trader that sources cotton fabrics and made-ups by using job workers. The Central Excise Rules, 2002, specifically Rule 12B, introduced on 25 March 2003, stipulated that traders who get textiles manufactured through job work are liable to pay excise duty as if they were the manufacturers. However, an exemption notification issued on 30 April 2003, exempted the first clearances up to a certain value (initially Rs. 20 lakhs) for home consumption, provided the aggregate value of clearances did not exceed Rs. 25 lakhs in a financial year. This limit was subsequently amended on 17 May 2003.

The appellant did not pay any duty on the clearances made between April 2003 and January 2004, arguing that the liability was on the job workers. The department issued show cause notices demanding duty, which the Joint Commissioner initially rejected. However, the Appellate Authority overturned this decision, holding the appellant liable based on a clarification issued by the government on 30 October 2003.

Timeline:

Course of Proceedings

The Joint Commissioner of Central Excise initially accepted Dinesh Textiles’ argument that the duty liability was on the job workers. However, the Revenue appealed, and the Appellate Authority overturned the decision, relying on the circular dated 30.10.2003. The Appellate Authority held that the trader was liable once any of the job workers crossed the exemption limit of Rs. 25 lakhs. The Customs, Excise and Service Tax Appellate Tribunal upheld this decision. The Tribunal dismissed both the appeal and the rectification application filed by the Appellants.

Legal Framework

The case revolves around the interpretation of Rule 12B of the Central Excise Rules, 2002, and the exemption notifications issued under Section 5A of the Central Excise Act, 1944. Rule 12B states:

“RULE 12B. Job work in textiles and textile articles. – (1) Notwithstanding any thing contained in these rules, every person (not being an export-oriented unit or a unit located in special economic zone) who gets yarns or fabrics falling under Chapter 50, 51, 52, 53, 54, 55, 58 or 60, readymade garments falling under Chapter 61 or 62 or made up textile articles falling under Chapter 63 of First Schedule to the Tariff Act produced or manufactured on his account, on job work (herein after referred to as “the said person”) shall obtain registration, maintain accounts, pay duty leviable on such goods and comply with all the relevant provisions of these rules, as if he is an assessee.”

The exemption notification issued on 30 April 2003, under Section 5A of the Central Excise Act, 1944, exempted first clearances for home consumption up to an aggregate value not exceeding Rs. 20 lakhs. This was amended to Rs. 25 lakhs by notification dated 17 May 2003. The notification specified that the exemption applies to the aggregate value of clearances and not separately for each factory or manufacturer.

Arguments

Appellant’s Submissions:

• The appellant argued that the duty liability should be on the job workers, who are the actual manufacturers.
• They contended that the circular dated 30.10.2003, should be interpreted to mean that duty is only applicable to the clearance value of the job worker who exceeded the Rs. 25 lakhs limit, not to the entire aggregate value of all job workers.
• The appellant submitted that if each job worker’s clearance was below Rs. 25 lakhs, the trader should not be liable.

Respondent’s Submissions:

• The Revenue argued that the circular dated 30.10.2003, clearly states that if the clearance value of even one job worker exceeds Rs. 25 lakhs, the trader is liable for the aggregate value of clearances from all job workers.
• They emphasized that the Exemption Notification focuses on the “aggregate value” of clearances, not individual clearances by job workers.
• The Revenue contended that the trader is considered an assessee under Rule 12B and is thus liable for duty when the aggregate clearances exceed the limit.

[TABLE] of Submissions:

Issues Framed by the Supreme Court

The main issue before the Supreme Court was:

1. Whether the appellant’s liability is only in respect of the clearance of that job worker whose clearance was greater than the limit of Rs. 25 lakhs, or in respect of the entire aggregate value of clearances.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues:

Authorities

The Court considered the following authorities:

Cases:

• Gurupad Khandappa Magdum v. Hirabai Khandappa Magdum and others [(1978) 3 SCC 383]: The Supreme Court cited this case to emphasize that a legal fiction must be taken to its logical end.
• East End Dwelling Co. Ltd. vs. Finsbury Borough Council [(1952) AC 109]: This case was quoted in the Gurupad Khandappa case, and the Supreme Court used it to support the principle that once a statute requires an assumption to be made, all consequences flowing from that assumption must follow.

Legal Provisions:

• Rule 12B of the Central Excise Rules, 2002: This rule mandates that a person getting goods manufactured through job work is treated as an assessee.
• Section 5A of the Central Excise Act, 1944: This section empowers the government to issue exemption notifications.

[TABLE] of Authorities Considered:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• Gurupad Khandappa Magdum v. Hirabai Khandappa Magdum and others [(1978) 3 SCC 383]* was used to support the principle that a legal fiction must be taken to its logical end.
• East End Dwelling Co. Ltd. vs. Finsbury Borough Council [(1952) AC 109]* was quoted with approval to reinforce the idea that all consequences of a legal assumption must follow.

The Court held that the emphasis in the Exemption Notification is on the “aggregate value” of clearances. The Court also noted that Rule 12B introduces a legal fiction, treating the trader as an assessee, and this fiction must be taken to its logical end. The Court found that the second illustration in the circular dated 30.10.2003 was more appropriate, which states that once clearances go beyond the limit, the liability gets fastened in respect of the aggregate value of clearances.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following:

• The plain language of Rule 12B of the Central Excise Rules, 2002, which treats the trader as an assessee if they get goods manufactured through job work.
• The emphasis on “aggregate value” in the Exemption Notification, which does not differentiate between individual clearances by job workers.
• The principle that a legal fiction, once introduced, must be taken to its logical conclusion, as established in Gurupad Khandappa Magdum v. Hirabai Khandappa Magdum and others [(1978) 3 SCC 383].
• The need to prevent traders from circumventing the rules by distributing manufacturing among multiple job workers to stay below the individual clearance limits.
• The second illustration in the circular dated 30.10.2003, which clarifies that liability is fastened on the aggregate value of clearances once the limit is crossed.

Sentiment Analysis of Reasons Given by the Supreme Court:

Fact:Law Ratio:

The court’s reasoning was heavily influenced by the interpretation of legal provisions and precedents, with a lesser emphasis on the specific facts of the case.

Logical Reasoning Flowchart:

The Court rejected the argument that liability should be limited to the clearances of individual job workers exceeding the limit. The Court emphasized the legal fiction introduced by Rule 12B, which treats the trader as an assessee for all purposes. The Court also considered the second illustration in the circular dated 30.10.2003, to be more appropriate, which states that the moment the clearances go beyond the limit, the liability gets fastened in respect of the aggregate value of clearances.

The Court observed, “If Rule 12B introduces a premise that if the conditions in said Rule are satisfied, the person concerned is an assessee for all purposes, it does not stand to reason how third illustration fits in the scheme of Rule 12B as well as the Exemption Notification.”

The Court also noted, “The Exemption Notification again does not put the matter at individual clearances of job workers and what is to be considered is an aggregate value of the clearances.”

Further, the Court stated, “It is well settled that if a legal fiction is introduced that legal fiction must be taken to the logical end.”

Key Takeaways

• Textile traders who get goods manufactured through job workers are liable to pay excise duty as if they were the manufacturers, once the aggregate value of clearances exceeds the exemption limit.
• The exemption is not based on individual clearances by job workers but on the aggregate value of clearances made by the trader.
• The legal fiction introduced by Rule 12B must be taken to its logical end, meaning the trader is fully liable as an assessee.
• Traders cannot circumvent the rules by distributing manufacturing among multiple job workers to stay below individual clearance limits.

Directions

No specific directions were given by the Supreme Court in this judgment.

Development of Law

The ratio decidendi of this case is that textile traders are liable for excise duty on the aggregate value of clearances when they get goods manufactured through job workers, and the exemption limit is to be applied on the aggregate value of clearances and not on individual clearances. This judgment clarifies that the legal fiction introduced by Rule 12B must be taken to its logical end, and the emphasis on aggregate value in the exemption notification must be upheld. This decision reinforces the principle that traders cannot avoid duty by distributing manufacturing among multiple job workers.

Conclusion

The Supreme Court dismissed the appeals, affirming the decision of the Tribunal. The Court clarified that textile traders are liable for excise duty based on the aggregate value of clearances from all job workers, once the exemption limit is crossed. This judgment reinforces the principle that the legal fiction introduced by Rule 12B must be taken to its logical end, and the emphasis on aggregate value in the exemption notification must be upheld.