Supreme Court clarifies Terminal Excise Duty Refund under Foreign Trade Policy: Sandoz vs. Union of India (2022) INSC 1

Date of the Judgment: January 4, 2022
Citation: (2022) INSC 1
Judges: A.M. Khanwilkar, J., Dinesh Maheshwari, J., Krishna Murari, J.
Can a supplier of goods to an Export Oriented Unit (EOU) claim a refund of Terminal Excise Duty (TED) under the Foreign Trade Policy (FTP), or is this benefit exclusively for the EOU? The Supreme Court of India recently addressed this complex issue, clarifying the entitlements of both EOUs and their suppliers regarding TED refunds. This judgment clarifies the interplay between the Foreign Trade Policy and the Central Excise Act, providing much-needed guidance on the refund process. The judgment was authored by A.M. Khanwilkar, J., on behalf of a three-judge bench including Dinesh Maheshwari, J., and Krishna Murari, J.

Case Background

This case involves multiple appeals concerning the refund of Terminal Excise Duty (TED) under the Foreign Trade Policy (FTP). The core issue revolves around whether Export Oriented Units (EOUs) and/or their suppliers, the Domestic Tariff Area (DTA) units, are entitled to a refund of TED on goods supplied to EOUs.

The appellants, Sandoz Private Limited, and other similarly placed EOUs, are engaged in manufacturing goods for export. They procure excisable goods from their DTA units. These DTA units pay TED on these goods. The EOUs then claim a refund of this TED, asserting that these supplies are considered “deemed exports” under the FTP.

The respondent, Union of India, and other authorities, initially granted these refunds. However, a policy circular issued by the Director General of Foreign Trade (DGFT) on March 15, 2013, stated that no TED refunds should be provided as supplies from DTA to EOU are exempt from excise duty. This led to the rejection of refund claims by the Development Commissioners.

The High Courts of Bombay, Delhi, and Karnataka delivered conflicting judgments on the issue. The Bombay High Court ruled against the EOUs, while the Delhi and Karnataka High Courts ruled in favor of the DTA suppliers. This led to the Supreme Court hearing these appeals to settle the legal position.

Timeline

Course of Proceedings

The EOUs initially filed writ petitions in the Bombay High Court challenging the DGFT circular and the rejection of their refund claims. The Bombay High Court, however, upheld the circular and dismissed the writ petitions.

In contrast, DTA suppliers who were denied refunds approached the Delhi and Karnataka High Courts. The Delhi High Court directed the DGFT to consider the refund applications, relying on previous judgments that held the DGFT circular to be prospective in nature. The Karnataka High Court also ruled in favor of the DTA suppliers, stating that the policy circular was not clarificatory.

These conflicting decisions prompted the Union of India and the affected parties to appeal to the Supreme Court, leading to the present judgment.

Legal Framework

The Supreme Court considered the following key legal provisions:

• Section 5 of the Foreign Trade (Development and Regulation) Act, 1992: This section empowers the Central Government to formulate and amend the Foreign Trade Policy (FTP). The court noted that the FTP is a special dispensation aimed at promoting exports and earning foreign exchange.
• Chapter 6 of the FTP: This chapter deals with Export Oriented Units (EOUs), specifying their eligibility criteria and entitlements. Para 6.2(b) allows EOUs to import goods from DTA without payment of duty. Para 6.11(c)(ii) provides an exemption from payment of Central Excise Duty on goods procured from DTA.
• Chapter 8 of the FTP: This chapter deals with “Deemed Exports.” Para 8.2(b) specifies that supplies of goods to EOUs are considered deemed exports. Para 8.3 outlines the benefits for deemed exports, including exemption or refund of Terminal Excise Duty (TED). Para 8.4 details the benefits to the supplier, while Para 8.5 specifies the eligibility for refund of TED/drawback.
• Section 3 of the Central Excise Act, 1944: This section levies a duty of excise on all excisable goods manufactured in India.
• Section 5A of the Central Excise Act, 1944: This section empowers the Central Government to grant exemptions from excise duty. Sub-section (1A) states that if an exemption is granted absolutely, the manufacturer shall not pay the duty.

The Court emphasized that the FTP operates independently of the Central Excise Act, 1944. The concessions and entitlements under the FTP cannot be restricted by the provisions of the taxing statute.

Arguments

Arguments by the EOUs:

• The EOUs argued that they are entitled to a refund of TED because the supply of goods from DTA units to EOUs is considered a “deemed export” under the FTP.
• They contended that they had paid TED on the goods procured from their DTA units, and thus, they should be eligible for a refund.
• They asserted that the policy circular issued by the DGFT was invalid as it was contrary to the provisions of the FTP.
• They relied on past practice where they were granted refunds of TED.
• They argued that the DGFT circular cannot have retrospective effect and should only apply prospectively.
• They submitted that the FTP provides for a refund of TED in cases of deemed exports, and the circular cannot take away that right.

Arguments by the Government:

• The government argued that the supplies made by DTA units to EOUs are ab initio exempted from payment of excise duty under the FTP.
• They contended that the policy circular was merely clarificatory in nature and did not introduce any new policy.
• They submitted that the EOUs are not entitled to a refund of TED because they are not required to pay it in the first place.
• They argued that the FTP provides for an exemption from TED for supplies to EOUs, and thus, there is no question of a refund.
• They asserted that the circular was issued to ensure prudent financial management and adherence to budget discipline.
• They argued that the refund of TED should be claimed by the DTA supplier and not the EOU.

Arguments by DTA Suppliers:

• The DTA suppliers argued that they are entitled to a refund of TED as they have paid the duty on the goods supplied to EOUs.
• They contended that the supply of goods to EOUs is considered a deemed export under the FTP, entitling them to a refund.
• They relied on the provisions of the FTP, which provide for a refund of TED in cases of deemed exports.
• They argued that the DGFT circular cannot take away their right to claim a refund under the FTP.
• They submitted that the refund of TED should be granted to them as they have borne the burden of the duty.

Innovativeness of the Argument: The EOUs’ argument that they should be entitled to the refund because they are the ones who are ultimately exporting the goods, and the DTA suppliers’ argument that they are entitled to the refund because they have borne the burden of the duty, both demonstrate an innovative approach to interpreting the provisions of the FTP.

Issues Framed by the Supreme Court

The Supreme Court framed the following key issues:

1. Whether the entities herein are entitled to refund of amount purportedly towards TED in respect of specified goods procured or supplied, as the case may be, being deemed exports and from which authority, either under applicable Foreign Trade Policy (FTP) or the 1944 Act?
2. Whether Circular No.16 (RE-2012/2009-14) dated 15.03.2013 is merely clarificatory regarding TED refund and exemption and the efficacy thereof?

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Cases:

• IFGL Refractories Limited vs. Joint Director General of Foreign Trade, 2001 (132) ELT 545 (Cal): The Calcutta High Court held that DTA suppliers are entitled to a refund of TED under the FTP, irrespective of the provisions of the Central Excise Act. This case was affirmed by the Division Bench in Joint Director General of Foreign Trade vs. IFGL Refractories Limited, 2002 (143) ELT 294 (Cal).
• Commissioner of Central Excise and Customs vs. NBM Industries, 2012 (276) ELT 9 (Guj): The Gujarat High Court held that DTA suppliers are entitled to a refund of CENVAT credit under the FTP, even if not eligible under the Central Excise Act.
• Kandoi Metal Powders Manufacturing Company Private Limited vs. Union of India, (2014) 302 ELT 209 (Del): The Delhi High Court held that DTA suppliers are entitled to a refund of TED under the FTP.
• Raja Crowns and Cans Pvt. Limited vs. Union of India, 2015 (317) ELT 40 (Mad): The Madras High Court held that DTA suppliers are entitled to a refund of TED under the FTP.
• Lenovo (India) Pvt. Ltd. vs. Union of India, (2017) 346 ELT 12 (Mad): The Madras High Court reaffirmed the entitlement of DTA suppliers to TED refunds.
• Acer India Pvt. Ltd. vs. Union of India, 2018 (361) ELT 44 (Kar): The Karnataka High Court held that DTA suppliers are entitled to a refund of TED under the FTP.
• Commissioner of Central Excise vs. Shilpa Copper Wire Industries, 2011 (269) ELT 17 (Guj.): The Gujarat High Court held that the claim for refund was in reference to the applicable FTP and not on the basis of the provisions of the 1944 Act and the rules framed thereunder.
• Union of India vs. Alstom India Limited, 2015 (325) ELT 72 (Del.): The Delhi High Court followed its decision in Kandoi Metal Powders and held that DTA suppliers are entitled to a refund of TED under the FTP.
• Commissioner of Central Excise, Delhi II vs. Welspring Universal, 2018 (359) ELT 635 (Del.): The Delhi High Court followed its decision in Kandoi Metal Powders and held that DTA suppliers are entitled to a refund of TED under the FTP.
• Deepak Enterprises vs. Union of India, 2018 (360) ELT 905 (Del.): The Delhi High Court followed its decision in Kandoi Metal Powders and held that DTA suppliers are entitled to a refund of TED under the FTP.
• Alstom Transport India Ltd. vs. Union of India, 2018 (363) ELT 69 (Del.): The Delhi High Court followed its decision in Kandoi Metal Powders and held that DTA suppliers are entitled to a refund of TED under the FTP.
• Motherson Sumi Electric Wires vs. Union of India, 2018 (364) ELT 91 (Del.): The Delhi High Court followed its decision in Kandoi Metal Powders and held that DTA suppliers are entitled to a refund of TED under the FTP.
• Multitex Filtration Engineers Limited vs. Union of India, 2020 (373) ELT 68 (Del.): The Delhi High Court followed its decision in Kandoi Metal Powders and held that DTA suppliers are entitled to a refund of TED under the FTP.
• Hindustan Tin Works Limited vs. Union of India, 2020 (373) ELT 217 (Del.): The Delhi High Court followed its decision in Kandoi Metal Powders and held that DTA suppliers are entitled to a refund of TED under the FTP.
• Manali Petrochemical Limited vs. Additional Director General of Foreign Trade, New Delhi & Anr., W.P. No.23194 of 2009: The Madras High Court reaffirmed the entitlement of DTA suppliers to TED refunds.

Legal Provisions:

• Section 5 of the Foreign Trade (Development and Regulation) Act, 1992: Empowers the Central Government to formulate and amend the Foreign Trade Policy.
• Section 3 of the Central Excise Act, 1944: Levies a duty of excise on all excisable goods manufactured in India.
• Section 5A of the Central Excise Act, 1944: Empowers the Central Government to grant exemptions from excise duty.
• Para 6.2(b) of the FTP: Allows EOUs to import goods from DTA without payment of duty.
• Para 6.11 of the FTP: Specifies entitlements for supplies from DTA to EOU, including deemed export status.
• Para 6.11(c)(ii) of the FTP: Provides an exemption from payment of Central Excise Duty on goods procured from DTA by EOU.
• Para 8.2(b) of the FTP: Specifies that supplies of goods to EOUs are considered deemed exports.
• Para 8.3 of the FTP: Outlines the benefits for deemed exports, including exemption or refund of Terminal Excise Duty (TED).
• Para 8.4 of the FTP: Details the benefits to the supplier.
• Para 8.5 of the FTP: Specifies the eligibility for refund of TED/drawback.

Judgment

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

How each authority was viewed by the Court?

The Supreme Court analyzed various authorities to arrive at its decision. The court affirmed the rulings of the Calcutta, Delhi, and Gujarat High Courts, which held that DTA suppliers are entitled to a refund of TED under the FTP.

• IFGL Refractories Limited vs. Joint Director General of Foreign Trade [CITATION]*: The Supreme Court agreed with the Calcutta High Court’s view that the FTP provides a separate dispensation for refund of TED, and that DTA suppliers are entitled to this benefit.
• Commissioner of Central Excise and Customs vs. NBM Industries [CITATION]*: The Supreme Court agreed with the Gujarat High Court’s view that the FTP provides a separate dispensation for refund of CENVAT credit, and that DTA suppliers are entitled to this benefit.
• Kandoi Metal Powders Manufacturing Company Private Limited vs. Union of India [CITATION]*: The Supreme Court agreed with the Delhi High Court’s view that the FTP provides a separate dispensation for refund of TED, and that DTA suppliers are entitled to this benefit.

What weighed in the mind of the Court?

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

• Independent Operation of FTP: The Court emphasized that the Foreign Trade Policy (FTP) operates independently of the Central Excise Act, 1944. The benefits and entitlements under the FTP cannot be restricted by the provisions of the taxing statute.
• Promotion of Exports: The Court noted that the FTP was formulated to promote exports and earn foreign exchange. The benefits provided under the FTP should be interpreted liberally to achieve this objective.
• Deemed Exports: The Court recognized that the supply of goods from DTA units to EOUs is considered a “deemed export” under the FTP. This status entitles the DTA supplier to certain benefits, including a refund of TED.
• Ab Initio Exemption: The Court clarified that EOUs are entitled to an ab initio exemption from payment of Central Excise duty on goods procured from DTA units. This means that they are not required to pay the duty in the first place.
• Entitlements of DTA Suppliers: The Court held that DTA suppliers are entitled to a refund of TED under the FTP, subject to certain conditions. This entitlement is distinct from the exemption granted to EOUs.
• Policy Circular: The Court held that the DGFT’s policy circular was not merely clarificatory and had the effect of altering the existing policy. Such a change could only be made through a formal amendment to the FTP and not through a policy circular.
• Vested Rights: The Court recognized that DTA suppliers had a vested right to claim a refund of TED under the FTP. This right could not be taken away retrospectively by the policy circular.

Fact:Law Ratio Analysis: The ratio of fact to law is 30:70. This indicates that while the factual aspects of the case (such as the nature of transactions and the payment of TED) were important, the legal considerations (such as the interpretation of the FTP and the Central Excise Act) played a more significant role in the Court’s decision.

Logical Reasoning

Ratio Decidendi

The core legal principle established by the Supreme Court in this case is that the Foreign Trade Policy (FTP) operates independently of the Central Excise Act, 1944. The benefits and entitlements under the FTP cannot be restricted by the provisions of the taxing statute.

The Court held that the supply of goods from a Domestic Tariff Area (DTA) unit to an Export Oriented Unit (EOU) is considered a “deemed export” under the FTP. This status entitles the DTA supplier to a refund of Terminal Excise Duty (TED). The EOU, on the other hand, is entitled to an ab initio exemption from payment of Central Excise duty on such goods.

The Court also held that the policy circular issued by the Director General of Foreign Trade (DGFT) was not merely clarificatory and had the effect of altering the existing policy. Such a change could only be made through a formal amendment to the FTP and not through a policy circular. The circular was deemed to be prospective in nature and could not retrospectively deny vested rights of DTA suppliers.

Obiter Dicta

While the main focus of the judgment was on the entitlement to TED refunds, the Supreme Court also made some observations that, while not essential to the decision, provide additional guidance:

• The Court emphasized the importance of promoting exports and earning foreign exchange. The FTP should be interpreted liberally to achieve this objective.
• The Court acknowledged the need for prudent financial management and adherence to budget discipline. However, this should not come at the cost of denying legitimate entitlements under the FTP.
• The Court suggested that the government should consider amending the FTP to provide clarity on the refund process and avoid future disputes.
• The Court observed that while a policy circular can clarify existing provisions, it cannot introduce new policy or take away existing rights.

Final Order

The Supreme Court allowed the appeals filed by the DTA suppliers and dismissed the appeals filed by the Union of India. The Court issued the following specific directions:

1. The DTA suppliers are entitled to a refund of Terminal Excise Duty (TED) on goods supplied to Export Oriented Units (EOUs) under the Foreign Trade Policy (FTP).
2. The policy circular issued by the Director General of Foreign Trade (DGFT) on March 15, 2013, is not merely clarificatory and has prospective effect. It cannot retrospectively deny vested rights of DTA suppliers.
3. The authorities are directed to process the refund applications of the DTA suppliers in accordance with the provisions of the FTP and the judgment of the Supreme Court.
4. The EOUs are not entitled to a direct refund of TED but can avail DTA supplier’s entitlements under Chapter 8 of the FTP, with a disclaimer.

Conclusion

The Supreme Court’s judgment in Sandoz Private Limited vs. Union of India has significant implications for Export Oriented Units (EOUs) and their suppliers in the Domestic Tariff Area (DTA). The judgment clarifies the interplay between the Foreign Trade Policy (FTP) and the Central Excise Act, 1944, and provides much-needed guidance on the refund process.

The key takeaways from the judgment are:

• EOUs are entitled to an ab initio exemption from payment of Central Excise duty on goods procured from DTA units.
• DTA suppliers are entitled to a refund of Terminal Excise Duty (TED) on goods supplied to EOUs under the FTP.
• The policy circular issued by the DGFT on March 15, 2013, is not merely clarificatory and has prospective effect.
• The FTP operates independently of the Central Excise Act, and the benefits under the FTP cannot be restricted by the provisions of the taxing statute.
• The judgment emphasizes the importance of promoting exports and earning foreign exchange.

This judgment provides clarity and certainty to businesses involved in export activities. It ensures that the benefits provided under the FTP are available to both EOUs and their suppliers, thereby promoting exports and encouraging economic growth.