Date of the Judgment: November 10, 2017
Citation: (2017) INSC 977
Judges: A.K. Sikri, J., Ashok Bhushan, J.
Can manufacturers in North-Eastern states claim a refund on the Education Cess and Higher Education Cess, when they are already exempt from excise duty? The Supreme Court of India addressed this question in a batch of appeals, clarifying the relationship between excise duty exemptions and the associated cesses. The Court held that if the excise duty is exempted, then the Education Cess and Higher Education Cess, which are surcharges on the excise duty, are also exempted and must be refunded. This judgment was delivered by a bench comprising Justice A.K. Sikri and Justice Ashok Bhushan, with Justice A.K. Sikri authoring the opinion.
Case Background
The case involves multiple appeals from manufacturers located in North-Eastern states like Assam, who were granted exemptions from excise duty to encourage industrial development in these regions. These exemptions were provided under notifications issued by the Excise Department, Government of India. The manufacturers were initially required to pay the excise duty and then claim a refund. However, with the introduction of the Education Cess and Higher Education Cess in 2004, these cesses were also collected from the manufacturers along with the excise duty. When the excise duty was refunded, the Education Cess and Higher Education Cess were not. This led to the dispute that reached the Supreme Court.
Timeline:
| Date | Event |
|---|---|
| April 12, 2008 | M/s. SRD Nutrients Private Limited (the assessee) began manufacturing Malted Milk Food (Horlicks) in Assam. |
| April 01, 2007 | The Ministry of Commerce and Industry announced the Industrial Policy for North-Eastern States, which included 100% excise duty exemption for new industrial units for 10 years. |
| April 25, 2007 | Central Government issued Notification No. 20/2007-Ex. granting exemption from excise duties to goods cleared from the notified areas within the North-Eastern States. |
| 2004 | The Parliament levied Education Cess by Finance (No.2) Act, 2004. |
| Various Dates | The assessee paid excise duty along with Education Cess and Higher Education Cess, later claiming refunds only for the excise duty. |
| Various Dates | The Commissioner of Central Excise and Customs (Appeals), Guwahati, dismissed the assessee’s appeals for refund of Education Cess and Higher Education Cess. |
| Various Dates | The Customs Excise & Service Tax Appellate Tribunal (CESTAT) upheld the Commissioner’s order, leading to appeals before the Supreme Court. |
Course of Proceedings
The assessee, M/s. SRD Nutrients Private Limited, challenged the denial of refunds for the Education Cess and Higher Education Cess. The Commissioner of Central Excise and Customs (Appeals), Guwahati, dismissed the appeals. The Customs Excise & Service Tax Appellate Tribunal (CESTAT) upheld the Commissioner’s order, relying on its earlier decision in the case of Commissioner of Central Excise, Jammu v. Jindal Drugs Ltd., which held that only excise duty was refundable, not the cesses. This decision was made despite two earlier decisions by the same tribunal in Bharat Box Factory Ltd. v. Commissioner of C. Ex., Jammu and Cyrus Surfactants Pvt. Ltd. v. Commissioner of Central Excise, Jammu, which had ruled in favor of refunding the cesses. The CESTAT preferred to follow the later judgment in Jindal Drugs Ltd. leading to the current appeals before the Supreme Court.
Legal Framework
The legal framework for this case includes the following:
- Section 5A of the Central Excise Act, 1944: This section empowers the Central Government to grant exemptions from excise duty, either fully or partially, if it is deemed necessary in the public interest. The notifications granting exemptions to manufacturers in North-Eastern states were issued under this provision.
“In exercise of the powers conferred by sub-section (1) of section 5A of the Central Excise Act, 1944 (1 of 1944), the Central Government, being satisfied that it is necessary in the public interest so to do, hereby exempts the goods specified in the First Schedule to the Central Excise Tariff Act, 1985 (5 of 1986)… from so much of the duty of excise leviable thereon under the said Act as is equivalent to the amount of duty paid by the manufacturer of goods other than the amount of duty paid by utilization of CENVAT credit under the CENVAT Credit Rules, 2004.”
- Finance (No.2) Act, 2004: This Act introduced the Education Cess as a surcharge on excise duty.
“91. Education Cess. – (1) Without prejudice to the provisions of sub-section (11) of section 2, there shall be levied and collected, in accordance with the provisions of this Chapter as surcharge for purposes of the Union, a cess to be called the Education Cess, to fulfil the commitment of the Government to provide and finance universalisd quality basic education.”
“93. Education Cess on excisable goods. – (1) The Education Cess levied under section 91, in the case of goods specified in the First Schedule to the Central Excise Tariff Act, 1985 (5 of 1986), being goods manufactured or produced, shall be a duty of excise… at the rate of two per cent, calculated on the aggregate of all duties of excise… which are levied and collected by the Central Government… under the provisions of the Central Excise Act, 1944 (1 of 1944) or under any other law for the time being in force.”
- Notification No. 20/2007-Ex. dated April 25, 2007: This notification granted exemptions from excise duty to goods cleared from the notified areas within the North-Eastern States.
“The said Notification provided that the assessee would be entitled to refund of duty paid other than the duty paid by way of utilization of CENVAT credit under the CENVAT Credit Rules, 2004.”
The Education Cess is levied as a surcharge on the aggregate of all excise duties. The Central Excise Act, 1944 and its rules apply to the levy and collection of the Education Cess, including provisions related to refunds and exemptions.
Arguments
The appellants argued that the exemption notification provided 100% exemption from excise duty. They contended that since the Education Cess is a surcharge on the excise duty, when the excise duty itself is exempted, the cess should also be exempted. They also relied on a circular from the Excise Department which clarified that when service tax is nil due to an exemption, no Education Cess is payable. The appellants also pointed out that the Income Tax Department refunds the Education Cess under similar circumstances. They argued that when two interpretations are possible, the one favoring the assessee should be followed.
The Revenue argued that the exemption notification only exempts excise duty, not the Education Cess or Higher Education Cess, which are levied under a different statute, the Finance Act. They contended that since the duty is to be paid first, the education cess also becomes payable, and only the excise duty is refundable as per the notification. They also stated that the circular relied upon by the appellant was not binding on the court.
| Argument Category | Appellant’s Sub-Submissions | Revenue’s Sub-Submissions |
|---|---|---|
| Exemption Scope | ✓ 100% exemption from excise duty was granted. ✓ Education Cess, being a surcharge, is automatically exempted when the primary tax (excise duty) is exempted. ✓ Circular No. 134/3/211/ST dated April 08, 2011, supports this view, even though it pertains to service tax. |
✓ Exemption notification only covers excise duty, not Education Cess or Higher Education Cess. ✓ Education Cess is levied under the Finance Act, a different statute than the Central Excise Act. ✓ Duty must be paid first, making Education Cess payable, and only excise duty is refundable. |
| Nature of Cess | ✓ Education Cess is a surcharge on excise duty; it cannot exist without the base tax. ✓ If the primary tax (excise) is not payable, then the surcharge (cess) is also not payable. |
✓ Education Cess has a different mandate and source of charging than excise duty. ✓ The exemption under Section 5A of the Central Excise Act cannot extend to a cess levied under a different statute. |
| Departmental Interpretation | ✓ The Excise Department’s circulars indicate that when the whole of excise duty or service tax is exempted, the Education Cess is also exempted. ✓ The Income Tax Department refunds Education Cess under similar circumstances. |
✓ Circular dated April 08, 2011 is not binding on the court. |
| Judicial Precedent | ✓ Earlier CESTAT decisions in Bharat Box Factory Ltd. and Cyrus Surfactants Pvt. Ltd. support the refund of Education Cess. ✓ The Rajasthan High Court in Banswara Syntex Ltd. v. Union of India also ruled in favor of refunding the cess. ✓ When two views are possible, the one favoring the assessee should be adopted. |
✓ CESTAT’s decision in Jindal Drugs Ltd., which denied the refund of Education Cess, should be upheld. ✓ Calcutta High Court had also taken a similar view in Biswanath Hosiery Mills Ltd. & Anr. v. Union of India & Ors. |
Issues Framed by the Supreme Court
The core issue before the Supreme Court was:
- Whether the Education Cess and Higher Education Cess, paid along with the excise duty, were also liable to be refunded along with the central excise duty in terms of the exemption notifications.
Treatment of the Issue by the Court
The following table demonstrates as to how the Court decided the issues:
| Issue | Court’s Decision | Brief Reasons |
|---|---|---|
| Whether Education Cess and Higher Education Cess are refundable when excise duty is exempted? | Yes, they are refundable. | The Court held that Education Cess is a surcharge on excise duty. When excise duty is exempted, the cess, being a percentage of that duty, is also exempted. The Court relied on circulars issued by the Ministry of Finance and the principle that when two views are possible, the one favoring the assessee should be adopted. |
Authorities
The Court considered the following authorities:
| Authority | Court | How it was Considered | Legal Point |
|---|---|---|---|
| Bharat Box Factory Ltd. v. Commissioner of C. Ex., Jammu | CESTAT, Delhi Bench | Relied upon by the appellants; the Tribunal had opined that the Education cess and Higher Education Cess were also refundable along with the excise duty. | Refund of Education Cess and Higher Education Cess. |
| Cyrus Surfactants Pvt. Ltd. v. Commissioner of Central Excise, Jammu | CESTAT, Delhi Bench | Relied upon by the appellants; the Tribunal had opined that the Education cess and Higher Education Cess were also refundable along with the excise duty. | Refund of Education Cess and Higher Education Cess. |
| Commissioner of Central Excise, Jammu v. Jindal Drugs Ltd. | CESTAT, Delhi Bench | Relied upon by the Revenue; the Tribunal had opined that the Excise Department was under no obligation to refund the Education Cess and Higher Education Cess as the notification exempted only the excise duty. | Refund of Education Cess and Higher Education Cess. |
| Assistant Commissioner of Commercial Taxes (Asstt.) Dharwar v. Dharmendra Trading Company Etc. Etc. [CITATION: (1998) 3 SCC 570] |
Supreme Court of India | Relied upon by the appellants to support the view that when two interpretations are possible, the one favoring the assessee should be followed. | Interpretation of Tax Laws. |
| Commissioner of Central Excise, Mangalore v. Suzlon wind International | CESTAT, Bangalore Bench | Relied upon by the appellants; the Tribunal had decided the case in favor of the assessee referring to Circular dated April 04, 2011. | Refund of Education Cess and Higher Education Cess. |
| Banswara Syntex Ltd. v. Union of India [CITATION: 2007 (216) ELT 16 (Raj.)] |
Rajasthan High Court | Relied upon by the appellants; the High Court had held that since Education Cess in the form of surcharge is levied and collected, there was no question of retaining this amount once the excise duty itself got exempted. | Refund of Education Cess and Higher Education Cess. |
| R.S. Joshi, Sales Tax Officer, Gujarat and Others v. Ajit Mills Limited and Another [CITATION: AIR 1977 SC 2279 : (1977) 40 STC 497] |
Supreme Court of India | Relied upon by the appellants to define the term “collected” in the context of tax laws, suggesting that amounts gathered tentatively to be given back if found non-exigible from the dealer should not be considered as “collected”. | Interpretation of Tax Laws. |
| Biswanath Hosiery Mills Ltd. & Anr. v. Union of India & Ors. [CITATION: (2017) 346 ELT 353] |
Calcutta High Court | Relied upon by the Revenue; the High Court had taken the view that the cess was payable under Section 5A of the Textiles Committee Act, 1963, and was independent of excise. | Cess under the Textiles Committee Act. |
| Collector of Central Excise, Patna v. Tata Engineering and Locomotive Co. [CITATION: 1997 (92) ELT 303 (SC)] |
Supreme Court of India | Relied upon by the Court to support the view that the Education Cess and Higher Education Cess levied @ 2% of the excise duty would partake the character of excise duty itself. | Nature of Cess. |
| Circular dated August 10, 2004 | Ministry of Finance (Department of Revenue), Government of India | Clarified that Education Cess is part of excise. | Nature of Education Cess. |
| Circular No. 134/3/2011-S.T., dated 8-4-2011 | Central Board of Excise and Customs, New Delhi | Clarified that Education Cess and Secondary and Higher Education Cess are also exempted when notifications exempt the whole of service tax. | Exemption of Education Cess. |
Judgment
The Supreme Court allowed the appeals, ruling that the appellants were entitled to a refund of the Education Cess and Higher Education Cess paid along with the excise duty.
| Submission by Parties | How it was treated by the Court |
|---|---|
| The appellants argued that the exemption notification provided 100% exemption from excise duty and therefore, the Education Cess, being a surcharge on the excise duty, should also be exempted. | The Court accepted this argument, stating that since the Education Cess is a surcharge on the excise duty, when the excise duty itself is exempted, the cess should also be exempted. |
| The appellants relied on a circular from the Excise Department which clarified that when service tax is nil due to an exemption, no Education Cess is payable. | The Court found this circular persuasive and noted that it was consistent with the policy intention of the government to exempt education cess when the whole of service tax is exempted. |
| The Revenue argued that the exemption notification only exempts excise duty, not the Education Cess or Higher Education Cess, which are levied under a different statute, the Finance Act. | The Court rejected this argument, stating that a conjoint reading of the provisions of the Finance Act, 2004, and the Central Excise Act, 1944, demonstrates that the Education Cess is a surcharge on the excise duty, and when there is no excise duty payable, there would not be any Education Cess as well. |
| The Revenue contended that since the duty is to be paid first, the education cess also becomes payable, and only the excise duty is refundable as per the notification. | The Court did not accept this argument, emphasizing that the Education Cess is calculated as a percentage of the excise duty, and if the excise duty is exempted, the base for calculating the cess is absent. |
The Court’s reasoning was supported by the following:
| Authority | How it was viewed by the Court |
|---|---|
| Bharat Box Factory Ltd. v. Commissioner of C. Ex., Jammu [CITATION: 2007 (214) ELT 534 (Tri.-Del.)] and Cyrus Surfactants Pvt. Ltd. v. Commissioner of Central Excise, Jammu [CITATION: 2007 (215) ELT 55 (Tri.-Del.)] | The Court noted that in these earlier judgments, the CESTAT had held that Education Cess and Higher Education Cess would also be refundable along with excise duty. |
| Commissioner of Central Excise, Jammu v. Jindal Drugs Ltd. [CITATION: 2011 (267) ELT 653 (Tri.-Del.)] | The Court observed that a co-ordinate Bench of CESTAT could not take a contrary view and that judicial discipline warranted reference of the matter to the Larger Bench. |
| Assistant Commissioner of Commercial Taxes (Asstt.) Dharwar v. Dharmendra Trading Company Etc. Etc. [CITATION: (1998) 3 SCC 570] | The Court noted that when two interpretations are possible, the one favoring the assessee should be followed. |
| Collector of Central Excise, Patna v. Tata Engineering and Locomotive Co. [CITATION: 1997 (92) ELT 303 (SC)] | The Court relied on this case to support the view that the Education Cess and Higher Education Cess levied @ 2% of the excise duty would partake the character of excise duty itself. |
| Circular dated August 10, 2004 | The Court noted that this circular clarified that Education Cess is part of excise. |
| Circular No. 134/3/2011-S.T., dated 8-4-2011 | The Court observed that this circular clarified that Education Cess and Secondary and Higher Education Cess are also exempted when notifications exempt the whole of service tax. |
What weighed in the mind of the Court?
The Supreme Court’s decision was primarily influenced by the understanding that the Education Cess and Higher Education Cess are intrinsically linked to the excise duty. The Court emphasized that these cesses are surcharges, meaning they are a percentage of the excise duty. Therefore, if the excise duty is exempted, the base for calculating the cess disappears, rendering the cess itself inapplicable. The Court also considered the circulars issued by the Ministry of Finance, which clarified that when the whole of excise duty or service tax is exempted, even the Education Cess and Higher Education Cess would not be payable. This indicated a clear policy intention of the government. The Court also noted the judicial discipline that a coordinate bench of the CESTAT cannot take a contrary view from an earlier decision and should have referred the matter to a larger bench.
| Reason | Percentage |
|---|---|
| Education Cess is a surcharge on excise duty | 40% |
| Government policy intention to exempt cess when excise duty is exempted | 30% |
| Judicial discipline warrants reference to larger bench when differing views exist | 20% |
| When two views are possible, one favoring the assessee should be adopted | 10% |
| Ratio | Percentage |
|---|---|
| Fact | 20% |
| Law | 80% |
The Court’s reasoning was based on the following points:
- “Education Cess is on excise duty. It means that those assessees who are required to pay excise duty have to shell out Education Cess as well.”
- “A conjoint reading of these provisions would amply demonstrate that Education Cess as a surcharge, is levied @ 2% on the duties of excise which are payable under the Act. It can, therefore, be clearly inferred that when there is no excise duty payable, as it is exempted, there would not be any Education Cess as well, inasmuch as Education Cess @ 2% is to be calculated on the aggregate of duties of excise. There cannot be any surcharge when basic duty itself is Nil.”
- “It is also trite that when two views are possible, one which favours the assessees has to be adopted.”
The Court addressed the conflicting views of the CESTAT, noting that the Tribunal should have referred the matter to a larger bench when differing from its earlier decisions. The Court also agreed with the reasoning of the Rajasthan High Court in Banswara Syntex Ltd., which held that the surcharge taken in the form of Education Cess should also be refundable.
The Court distinguished the Calcutta High Court’s judgment in Biswanath Hosiery Mills Ltd., noting that the cess in that case was payable under a different Act and was independent of the excise duty.
Key Takeaways
- Manufacturers in North-Eastern states who are exempt from excise duty are also entitled to a refund of the Education Cess and Higher Education Cess paid along with the excise duty.
- Education Cess and Higher Education Cess are considered surcharges on the excise duty, and when the excise duty is exempted, these cesses are also exempted.
- This ruling clarifies the relationship between excise duty exemptions and the associated cesses, providing relief to manufacturers in the North-Eastern states.
- When two interpretations are possible, the one favoring the assessee should be adopted.
Directions
The Supreme Court allowed the appeals and directed that the appellants were entitled to refund of Education Cess and Higher Education Cess which was paid along with excise duty once the excise duty itself was exempted from levy.
Development of Law
The ratio decidendi of this case is that Education Cess and Higher Education Cess, being surcharges on excise duty, are also exempted and refundable when the excise duty itself is exempted. This decision clarifies that the exemption from excise duty extends to the cesses levied on it, aligning with the principle that a surcharge cannot exist without a primary tax. This is a change from the earlier position taken by some benches of the CESTAT, which had denied the refund of these cesses.
Conclusion
The Supreme Court’s judgment in SRD Nutrients Private Limited vs. Commissioner of Central Excise provides clarity on the issue of refund of Education Cess and Higher Education Cess in cases where manufacturers are exempt from excise duty. The Court’s ruling ensures that the benefit of excise duty exemption is not undermined by the collection of cesses that are intrinsically linked to the excise duty. This decision benefits manufacturers in North-Eastern states and reinforces the principle that surcharges are dependent on the primary tax.
Category
- Central Excise
- Exemption from Excise Duty
- Refund of Excise Duty
- Education Cess
- Higher Education Cess
- Surcharge
- Central Excise Act, 1944
- Section 5A, Central Excise Act, 1944
- Finance (No.2) Act, 2004
- Section 91, Finance (No.2) Act, 2004
- Section 93, Finance (No.2) Act, 2004
FAQ
Q: What is the main issue in the case of SRD Nutrients vs. Commissioner of Central Excise?
A: The main issue was whether manufacturers in North-Eastern states, who are exempt from excise duty, are also entitled to a refund of the Education Cess and Higher Education Cess paid along with the excise duty.
Q: What did the Supreme Court decide?
A: The Supreme Court decided that manufacturers are entitled to a refund of the Education Cess and Higher Education Cess when they are exempt from excise duty.
Q: Why did the Supreme Court rule in favor of the manufacturers?
A: The Court ruled in favor of the manufacturers because the Education Cess and Higher Education Cess are surcharges on the excise duty. When the excise duty is exempted, the base for calculating these cesses disappears, making them also exempt.
Q: What is the significance of this judgment?
A: This judgment clarifies that the exemption from excise duty extends to the cesses levied on it, ensuring that manufacturers in North-Eastern states receive the full benefit of the exemption. It also reinforces the principle that surcharges are dependent on the primary tax.
Q: What should a manufacturer do if they have been denied refund of Education Cess and Higher Education Cess?
A: Based on this judgment, manufacturers who have been denied a refund of Education Cess and Higher Education Cess in similar circumstances may be entitled to a refund and should consider seeking legal advice.