Supreme Court Exempts Manufacturing Units from National Calamity Contingent Duty and Cesses: Bajaj Auto vs. Union of India (27 March 2019)

Introduction

Date of the Judgment: 27 March 2019

Citation: (2019) INSC 268

Judges: Justice L. Nageswara Rao and Justice Sanjay Kishan Kaul.

Can a manufacturing unit, exempt from paying Central Excise Duty, also be exempted from paying other duties and cesses, such as the National Calamity Contingent Duty (NCCD), Education Cess, and Secondary & Higher Education Cess? This was the core question before the Supreme Court of India in the case of Bajaj Auto Limited vs. Union of India. The Court examined whether these additional levies, imposed under different statutes, should also be waived for units enjoying an excise duty exemption. The bench comprised of Justice L. Nageswara Rao and Justice Sanjay Kishan Kaul, with the majority opinion authored by Justice Sanjay Kishan Kaul.

Case Background

In 2002, the Government of India announced a special package of incentives to encourage industrial development and employment in the states of Uttarakhand and Himachal Pradesh. This included a 100% excise duty exemption for new industrial units and existing units undergoing substantial expansion for a period of 10 years from the start of commercial production.

Bajaj Auto Limited established a two-wheeler manufacturing unit in 2007 in one of these states, availing the excise duty exemption. While Bajaj Auto was paying an automobile cess, they were not paying the National Calamity Contingent Duty (NCCD), Education Cess, and Secondary & Higher Education Cess. This led to an audit in February 2009, which raised objections to the non-payment of these three cesses. The dispute centered on whether the exemption from Central Excise Duty also extended to these additional levies.

Timeline:

Course of Proceedings

Following the audit objection, the Superintendent (Audit), Central Excise Meerut-II, issued a letter on 27 February 2009, to Bajaj Auto, querying the non-payment of the three cesses. Bajaj Auto responded to these queries, but the department issued a show cause notice on 26 August 2011, demanding payment of the cesses. The department argued that the exemption notification had to be strictly construed and that the cesses were not specifically exempted.

Bajaj Auto then filed a writ petition before the High Court of Uttarakhand on 13 October 2011, challenging the show cause notice. The High Court dismissed the writ petition on 9 October 2014. An appeal to the Division Bench of the High Court also failed, with the court upholding the single judge’s order on 16 March 2017. This led Bajaj Auto to appeal to the Supreme Court.

Legal Framework

The core legal issue revolves around the interpretation of the exemption notification issued under Section 5A of the Central Excise Act, 1944, and its applicability to the National Calamity Contingent Duty (NCCD), Education Cess, and Secondary & Higher Education Cess.

✓ Central Excise Act, 1944: Section 5A empowers the government to grant exemptions from excise duty. The notification issued under this section provided a 100% excise duty exemption for units in specified areas.

✓ Finance Act, 2001: Section 136 imposed the National Calamity Contingent Duty (NCCD) as a duty of excise on specified goods, in addition to other excise duties. According to Section 136(2), “The National Calamity duty chargeable on the goods specified in the Seventh Schedule shall be in addition to any other duties of excise chargeable on such goods under the Central Excise Act, 1944 or any other law for the time being in force.” Section 136(3) states, “The provisions of the Central Excise Act, 1944 and the rules made thereunder, including those relating to refunds and exemptions from duties and imposition of penalty, shall, as far as may be, apply in relation to the levy and collection of the National Calamity duty leviable under this section…”

✓ Finance Act, 2004: Sections 91 and 93 introduced the Education Cess, calculated as a percentage of the aggregate of all duties of excise.

✓ Finance Act, 2007: Sections 136 and 138 imposed the Secondary & Higher Education Cess, similar to the Education Cess.

Arguments

Appellant (Bajaj Auto Limited) Arguments:

• The appellant argued that the exemption from Central Excise Duty should also cover the NCCD, Education Cess, and Secondary & Higher Education Cess. They contended that these cesses are essentially surcharges on the basic excise duty and should not be levied when the primary duty is exempted.

• Relying on the principle of liberal interpretation of exemption notifications, the appellant argued that the benefit of the exemption should be extended to all duties and cesses linked to excise duty. They cited the judgment in SRD Nutrients Pvt. Ltd. v. Commissioner of Central Excise, Guwahati [(2018) 1 SCC 105], which held that Education Cess and Secondary & Higher Education Cess are not payable when the excise duty itself is exempted.

• The appellant submitted that the NCCD, though levied on the product, is still in the nature of an excise duty and should be treated the same way as the other two cesses.

Respondent (Union of India) Arguments:

• The respondent argued that exemption notifications must be construed strictly. They contended that the exemption notification specifically mentioned only the Central Excise Duty and did not include the NCCD, Education Cess, and Secondary & Higher Education Cess.

• The respondent argued that the NCCD is different from the other two cesses because it is levied on the product itself, not on the excise duty payable. Therefore, it should not be covered by the excise duty exemption.

• The department contended that since the cesses were not specifically exempted, they were payable, and there was a willful suppression of facts by the appellant.

The innovativeness of the appellant’s argument lies in extending the principle established in SRD Nutrients Pvt. Ltd. to the NCCD, despite its different nature of incidence.

Submissions of Parties

Issues Framed by the Supreme Court

The Supreme Court framed the following issue for consideration:

1. Whether a manufacturing establishment, which is exempted from payment of Central Excise Duty under the Central Excise Act, 1944, is also liable to pay the National Calamity Contingent Duty (NCCD), Education Cess, and Secondary & Higher Education Cess.

Treatment of the Issue by the Court

Authorities

Cases Relied Upon by the Court:

Legal Provisions Considered by the Court:

• Section 5A of the Central Excise Act, 1944: This section empowers the government to grant exemptions from excise duty.
• Section 136 of the Finance Act, 2001: This section imposed the National Calamity Contingent Duty (NCCD) as a duty of excise.
• Sections 91 & 93 of the Finance Act, 2004: These sections introduced the Education Cess.
• Sections 136 & 138 of the Finance Act, 2007: These sections imposed the Secondary & Higher Education Cess.

Judgment

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

How each authority was viewed by the Court?

✓ SRD Nutrients Pvt. Ltd. v. Commissioner of Central Excise, Guwahati [(2018) 1 SCC 105]: The Court followed this judgment, holding that Education Cess and Secondary & Higher Education Cess are not payable when the excise duty itself is exempted.

✓ Banswara Syntex Ltd. v. Union of India [2007 SCC OnLine Raj 365]: The Supreme Court approved the view of the Rajasthan High Court that a surcharge takes the character of the parent levy and is subject to the same provisions.

✓ Novopan India Ltd., Hyderabad v. CCE and Customs, Hyderabad [1994 Supp (3) SCC 606]: The Court reiterated the principle that exemption notifications should be interpreted liberally, provided that no violence is done to the language employed.

✓ Union of India v. Wood Papers Ltd. [(1990) 4 SCC 256]: The Court affirmed that a liberal approach should be adopted when construing the language of exemption notifications to allow the benefit to be reaped by the beneficiary.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the principle of liberal interpretation of exemption notifications and the understanding that cesses linked to excise duty should also be exempted when the primary duty is exempted. The Court emphasized the nature of NCCD as a duty of excise, despite being levied on the product, and extended the reasoning of SRD Nutrients Pvt. Ltd. to cover NCCD as well.

Fact:Law Ratio

The Court’s reasoning was heavily based on legal principles and precedents, with a focus on the interpretation of tax laws and exemption notifications.

Logical Reasoning

Judgment

The Supreme Court held that Bajaj Auto Limited was not liable to pay the National Calamity Contingent Duty (NCCD), Education Cess, and Secondary & Higher Education Cess. The Court reasoned that:

• The exemption notification should be interpreted liberally, provided that no violence is done to the language employed.
• The Education Cess and Secondary & Higher Education Cess are surcharges on the excise duty and, therefore, not payable when the excise duty is exempted. The Court relied on the judgment in SRD Nutrients Pvt. Ltd. for this conclusion.
• The NCCD, though levied on the product, is still in the nature of an excise duty and should be treated the same way as the other two cesses. The Court noted that “NCCD will not cease to be an excise duty, but is the same as an excise duty, even if it is levied on the product.”
• The Court also emphasized that “once the excise duty is exempted, NCCD, levied as an excise duty cannot partake a different character and, thus, would be entitled to the benefit of the exemption notification.”
• The Court noted that the exemption notification itself states that the exemption is from the “whole of the duty of excise or additional duty of excise”.

The Court stated that “the rationale is that while there may be surcharges under different financial enactments to provide the Government with revenue for specified purposes, the same have been notified as leviable in the nature of a particular kind of duty.”

The Court set aside the impugned orders and quashed the show cause notice dated 26.8.2011.

Key Takeaways

• Manufacturing units located in states like Uttarakhand and Himachal Pradesh, which are exempt from Central Excise Duty, are also exempt from paying the National Calamity Contingent Duty (NCCD), Education Cess, and Secondary & Higher Education Cess.
• Exemption notifications should be interpreted liberally to benefit the assessee, provided that no violence is done to the language employed.
• Surcharges linked to excise duty, even if levied under different statutes, are not payable when the primary excise duty is exempted.
• The judgment provides clarity on the scope of excise duty exemptions and their applicability to additional levies.
• This ruling will have a significant impact on businesses operating in areas with excise duty exemptions, reducing their overall tax burden.

Directions

The Supreme Court set aside the impugned orders of the High Court and quashed the show cause notice dated 26.8.2011, holding that the appellant is not liable to pay NCCD, Education Cess, and Secondary & Higher Education Cess.

Development of Law

The ratio decidendi of this case is that an exemption from Central Excise Duty also extends to the National Calamity Contingent Duty (NCCD), Education Cess, and Secondary & Higher Education Cess for manufacturing units in specified areas. This judgment clarifies that surcharges linked to excise duty are also exempted when the primary duty is exempted. The Supreme Court has extended the principle of SRD Nutrients Pvt. Ltd. to NCCD, despite its different nature of incidence. This decision reinforces the principle of liberal interpretation of exemption notifications and provides clarity on the scope of excise duty exemptions.

Conclusion

The Supreme Court’s judgment in Bajaj Auto Limited vs. Union of India provides significant relief to manufacturing units enjoying excise duty exemptions. By holding that the exemption from Central Excise Duty also covers the National Calamity Contingent Duty (NCCD), Education Cess, and Secondary & Higher Education Cess, the Court has clarified the scope of such exemptions and reduced the tax burden on these units. The decision underscores the importance of liberal interpretation of exemption notifications and ensures that the benefits intended by the government are fully realized by the beneficiaries.

Category

Parent Category: Central Excise Act, 1944

Child Categories:

• Section 5A, Central Excise Act, 1944
• Exemption Notifications
• National Calamity Contingent Duty
• Education Cess
• Secondary & Higher Education Cess
• Tax Law

FAQ

Q: What was the main issue in the Bajaj Auto vs. Union of India case?

A: The main issue was whether manufacturing units exempt from Central Excise Duty were also exempt from National Calamity Contingent Duty (NCCD), Education Cess, and Secondary & Higher Education Cess.

Q: What did the Supreme Court decide?

A: The Supreme Court ruled that manufacturing units exempt from Central Excise Duty are also exempt from NCCD, Education Cess, and Secondary & Higher Education Cess.

Q: What is the significance of this judgment?

A: This judgment clarifies that surcharges linked to excise duty are also exempted when the primary duty is exempted, providing relief to manufacturing units enjoying excise duty exemptions.

Q: What is the National Calamity Contingent Duty (NCCD)?

A: NCCD is a duty of excise imposed on specified goods under the Finance Act, 2001, in addition to other excise duties.

Q: What are Education Cess and Secondary & Higher Education Cess?

A: These are cesses imposed as a percentage of the aggregate of all duties of excise, introduced by the Finance Acts of 2004 and 2007, respectively.

Q: What does the term ‘liberal interpretation of exemption notifications’ mean?

A: It means that courts should interpret exemption notifications in a way that benefits the assessee, provided that the language of the notification allows for such an interpretation.