Supreme Court Clarifies Terminal Excise Duty Refunds for Export-Oriented Units and Domestic Tariff Area Suppliers: Sandoz Private Limited 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 Export Oriented Units (EOUs) directly claim refunds for Terminal Excise Duty (TED) on goods procured from Domestic Tariff Area (DTA) units, or is this benefit exclusively for DTA suppliers? The Supreme Court of India addressed this question, clarifying the entitlements of both EOUs and DTA suppliers regarding TED refunds under the Foreign Trade Policy (FTP). This judgment resolves conflicting views from various High Courts, providing much-needed clarity on the matter. The judgment was authored by Justice A.M. Khanwilkar, with Justices Dinesh Maheshwari and Krishna Murari concurring.

Case Background

The case involves four appeals concerning disputes over Terminal Excise Duty (TED) refunds under the Foreign Trade Policy (FTP). The core issue revolves around whether Export Oriented Units (EOUs) or Domestic Tariff Area (DTA) suppliers are entitled to refunds of TED paid on goods supplied to EOUs. The disputes arose after the Directorate General of Foreign Trade (DGFT) issued a circular on March 15, 2013, clarifying that no TED refunds should be provided for supplies to EOUs, as these were considered ab initio exempted from excise duty.

Sandoz Private Limited, an EOU, filed two appeals (Civil Appeal Nos. 3358 and 3359 of 2020) after the Bombay High Court rejected their claims for TED refunds. Sandoz argued that they had paid TED on goods procured from their DTA units and were entitled to a refund, as had been the practice between 2006 and 2012.

The other two appeals (Civil Appeal Nos. 3360 and 3705 of 2020) were filed by the Union of India, challenging decisions of the Delhi High Court and the Karnataka High Court, which had ruled in favor of DTA suppliers seeking TED refunds on goods supplied to EOUs. These DTA suppliers contended that they were entitled to refunds under the FTP, as their supplies were deemed exports.

Timeline

Course of Proceedings

The Bombay High Court initially directed the competent authority to reconsider Sandoz Private Limited’s (EOU) refund claim. However, after the refund claim was rejected again, the Bombay High Court upheld the rejection of the TED refund claims of Sandoz Private Limited, stating that the policy circular was merely a clarification of the existing policy.

The Delhi High Court, in contrast, ruled in favor of the DTA supplier, directing the DGFT to consider the refund application and grant the refund with interest. The Delhi High Court relied on previous judgments that held the impugned circular to be prospective in nature.

Similarly, the Karnataka High Court also ruled in favor of the DTA supplier, holding that they were entitled to a refund of TED, and directed the competent authority to consider the refund claim.

Legal Framework

The Supreme Court examined the Foreign Trade Policy (FTP) formulated under Section 5 of the Foreign Trade (Development and Regulation) Act, 1992, and the Central Excise Act, 1944. The court noted that the FTP aimed to promote exports and earn foreign exchange, and its provisions were independent of the taxing statute of 1944.

Key provisions of the FTP considered by the court include:

• Para 6.1: Eligibility criteria for Export Oriented Units (EOUs).
• Para 6.2(b): Allows EOUs to import/procure goods from DTA without payment of duty.
• Para 6.11: Specifies entitlements for supplies from DTA to EOUs, treating them as “deemed exports.”
  • Para 6.11(a): DTA suppliers are eligible for entitlements under Chapter 8 of the FTP, and EOUs can also claim these entitlements with a disclaimer from the DTA supplier.
  • Para 6.11(c)(ii): EOUs are exempt from payment of Central Excise Duty on goods procured from DTA.
• Para 8.1: Defines “deemed exports” as transactions where goods do not leave the country.
• Para 8.2(b): Includes supply of goods to EOU as deemed exports.
• Para 8.3: Lists benefits for deemed exports, including:
  • Para 8.3(c): Exemption from terminal excise duty for supplies against International Competitive Bidding (ICB) and refund of terminal excise duty in other cases.
• Para 8.4: Specifies benefits to the supplier.
• Para 8.5: Eligibility for refund of terminal excise duty/drawback, provided the recipient of goods does not avail CENVAT credit/rebate.

The court also referred to Section 5A of the Central Excise Act, 1944, which empowers the Central Government to grant exemptions from excise duty.

Arguments

Arguments by the EOUs (Sandoz Private Limited):

• The EOUs argued that they had paid Terminal Excise Duty (TED) on goods procured from their DTA units and were entitled to a refund.
• They contended that they had been receiving refunds for TED in the past, and the new circular should not deny them this benefit.
• They relied on para 6.11(a) of the FTP, which states that EOUs are eligible for obtaining entitlements specified in Chapter 8 of FTP, on production of a suitable disclaimer from the DTA supplier.

Arguments by the DTA Suppliers:

• The DTA suppliers argued that they were entitled to a refund of TED on goods supplied to EOUs, as these supplies were considered deemed exports under the FTP.
• They contended that the DGFT circular was prospective and could not deny them benefits that were available at the time of the supply.
• They relied on para 8.3(c) of the FTP, which states that refund of terminal excise duty will be given in cases other than supplies made against ICB.
• They also relied on para 8.4.2 of the FTP, which states that in respect of supply of goods to EOU, the supplier shall be entitled to benefits listed in paragraphs 8.3(a), (b) and (c) of FTP, whichever is applicable.

Arguments by the Government:

• The government argued that the supplies to EOUs were ab initio exempted from excise duty, and therefore, no refund was admissible.
• They relied on the DGFT circular, which clarified that no TED refunds should be provided in cases where supplies are ab initio exempted.
• They contended that the EOUs were not entitled to claim refund of TED on their own accord, as the mandate to EOU is to procure or import goods from DTA supplier, without payment of duty in view of the express ab initio exemption provided in terms of para 6.2(b) read with para 6.11(c)(ii).

Submissions Table

Issues Framed by the Supreme Court

The Supreme Court framed the following key issues:

1. Whether the entities are entitled to a refund of the 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 the applicable Foreign Trade Policy (FTP) or the Central Excise Act, 1944?
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

Legal Provisions

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 the authorities as follows:

• IFGL Refractories Limited vs. Joint Director General of Foreign Trade [2001 (132) ELT 545] and Joint Director General of Foreign Trade vs. IFGL Refractories Limited [2002 (143) ELT 294]: The Supreme Court affirmed the view taken by the Calcutta High Court, which held that DTA suppliers are entitled to a refund of TED under the FTP.
• Commissioner of Central Excise and Customs vs. NBM Industries [2012 (276) ELT 9]: The Supreme Court agreed with the Gujarat High Court’s view that the claim for refund was in reference to the applicable FTP and not on the basis of the provisions of the 1944 Act.
• Kandoi Metal Powders Manufacturing Company Private Limited vs. Union of India [(2014) 302 ELT 209]: The Supreme Court affirmed the view taken by the Delhi High Court, which held that DGFT having formulated the FTP, the claim of the assessee was governed by the entitlements specified therein in paras 8.2, 8.3, 8.4 and 8.5 as applicable at the relevant time.
• Other decisions of the Delhi High Court, Madras High Court, and Karnataka High Court, which followed the view taken in IFGL Refractories Limited and Kandoi Metal Powders Manufacturing Company Private Limited, were also affirmed by the Supreme Court.

What weighed in the mind of the Court?

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

• The intent of the FTP: The court emphasized that the FTP was formulated to promote exports and earn foreign exchange. The provisions of the FTP were to be interpreted liberally to achieve this objective.
• Distinction between EOU and DTA supplier: The court recognized that EOUs were entitled to ab initio exemption from payment of central excise duty, while DTA suppliers were entitled to a refund of TED, subject to certain conditions.
• The nature of the DGFT circular: The court held that the DGFT circular was not merely clarificatory but introduced a new dimension for DTA suppliers. Such a change could not be introduced by a policy circular and needed to be given prospective effect.
• The principle of mutually exclusive remedies: The court held that the fact that the concerned entity had unsuccessfully applied for refund to the Authorities under the 1944 Act and the rules made thereunder, that would not denude it of its entitlement to get refund of TED under the FTP, as may be applicable being mutually exclusive remedies.

Sentiment Analysis Table

Ratio Table (Fact:Law)

Logical Reasoning

The Supreme Court’s reasoning was based on a detailed analysis of the relevant provisions of the FTP, the Central Excise Act, and the judicial precedents. The court emphasized the importance of promoting exports and earning foreign exchange, and it interpreted the provisions of the FTP in a manner that would achieve this objective. The court also recognized the distinction between the entitlements of EOUs and DTA suppliers, and it held that both were entitled to certain benefits under the FTP.

The court also considered the argument that the DGFT circular was merely clarificatory and should apply retrospectively. However, the courtheld that the circular introduced a new dimension for DTA suppliers and was not merely clarificatory. Therefore, it could only be given prospective effect.

Final Ruling

The Supreme Court ruled in favor of the DTA suppliers, holding that they were entitled to a refund of Terminal Excise Duty (TED) on goods supplied to Export Oriented Units (EOUs). The Court also held that the DGFT circular was not merely clarificatory and should be given prospective effect.

The Court ordered that the refund claims of the DTA suppliers be processed by the authority responsible for implementing the Foreign Trade Policy (FTP). The Court also clarified that EOUs are entitled to ab initio exemption from payment of central excise duty.

Implications

The Supreme Court’s judgment has significant implications for both Export Oriented Units (EOUs) and Domestic Tariff Area (DTA) suppliers:

• For EOUs:
  • EOUs are entitled to ab initio exemption from payment of Central Excise Duty on goods procured from DTA units.
  • They can avail of the entitlements of DTA supplier as specified in Chapter 8 of FTP on condition that it will not pass on that benefit back to DTA supplier later on.
• For DTA Suppliers:
  • DTA suppliers are entitled to a refund of Terminal Excise Duty (TED) on goods supplied to EOUs, as these supplies are considered “deemed exports.”
  • The refund claims of DTA suppliers should be processed by the authority responsible for implementing the Foreign Trade Policy (FTP).
• For the Government:
  • The DGFT circular was held to be not merely clarificatory and should be given prospective effect.
  • The government needs to ensure that the refund claims are processed in a timely and efficient manner.

Conclusion

The Supreme Court’s judgment in the case of Sandoz Private Limited vs. Union of India has provided much-needed clarity on the issue of Terminal Excise Duty (TED) refunds for supplies to Export Oriented Units (EOUs). The Court has clarified that DTA suppliers are entitled to a refund of TED on goods supplied to EOUs, and that the DGFT circular was not merely clarificatory and should be given prospective effect. This ruling will help to promote exports and ensure that both EOUs and DTA suppliers are treated fairly under the Foreign Trade Policy.