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CASE NO.: Appeal (civil)  570 of 2002

PETITIONER: M/s Virlon Textile Mills Ltd

RESPONDENT: Commissioner of Central Excise, Mumbai

DATE OF JUDGMENT: 17/04/2007

BENCH: S. H. Kapadia & B. Sudershan Reddy

JUDGMENT: J U D G M E N T

with Civil Appeal No. 3237 of 2002

KAPADIA, J.

Civil Appeal No.570 of 2002:

       Appellant-M/s Virlon Textile Mills Ltd. is a 100% Export  Oriented Unit (EOU) engaged in the manufacture of Texturised  Polyester Yarn and Dyed Polyester Yarn. The said yarn is sold  against foreign exchange by the appellant in Domestic Tariff  Area (DTA) subject to permission given by the competent  authority under para 9.10(b) of Export and Import Policy  (Exim Policy) 1997-2002. In this civil appeal, the question for  consideration is the rate of duty applicable to sales falling  under para 9.10 (b).

       On 4.11.1999 a show cause notice was issued by the  Joint Commissioner of Central Excise, Mumbai to the  appellant stating that the appellant was not paying  appropriate duties on the goods cleared as per the permission  granted by the Development Commissioner. According to the  show cause notice, the appellant had paid Countervailing duty  (CVD) @ 30% on Texturised Polyester Yarn plus Rs. 9 per kg.  on Dyed Polyester Yarn cleared under para 9.10 (b) of Exim  Policy against foreign exchange. According to the show cause  notice, under the proviso to sub-section (1) of Section 3 of the  Central Excise Act, 1944, (the "1944 Act") duty of excise was  leviable on excisable goods produced by 100% EOU and  allowed to be sold in India, equal to the aggregate of the duties  of customs leviable under Section 12 of the Customs Act,  1962, on like goods produced or manufactured outside India if  imported into India, and where the said duty of customs is  chargeable by reference to value; the value of such goods shall  be determined in accordance with the provisions of the  Customs Act, 1962 and the Customs Tariff Act, 1975.  According to the said show cause notice, in the present  matter, on clearance of the said yarns into DTA under para  9.10(b), appellant, being a 100% EOU, was required to pay  duty of excise equal to the aggregate of duties of customs  leviable on such yarns falling under Chapter Sub-Heading  (CSH) 5402.33 of the Customs Tariff Act 1975 as follows:

"A.     Basic Customs duty - @ 35% ad valorem.

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B.      Additional Duty equal to excise duty  under Section 3 of the Customs Tariff  (also known as Countervailing Duty or  CVD) \026 24% + 6%.

C.      Special Additional Duty of Customs  under Sec. 3A of Customs Tariff Act,  1975 - @ 4%.

D.  Cess @ 0.05% under Textile Committee  Act,  1963."

According to the show cause notice, the appellant had failed to  pay the duty in respect of clearances of the above yarns under  para 9.10 (b), as indicated hereinabove, and accordingly, it  was asked to pay Rs. 33.58 lacs (rounded off figure) on their  clearances during the period 8.4.1999 to 20.10.1999 falling  during the Exim Policy period 1997-2002.

       This demand had been confirmed by all the authorities  and the Tribunal (CEGAT) vide impugned judgment dated  19.10.2001. In the impugned judgment, the Tribunal took the  view that the entire supplies of yarns to DTA against foreign  exchange earned by the appellant was liable to duty payment  on clearance in accordance with the proviso under sub-section  (1) to Section 3 of the 1944 Act equal to the customs duty  leviable under Section 12 of the Customs Act, 1962 on like  goods produced by a manufacturer outside India. In other  words, the Tribunal has upheld the order of the Commissioner  (A). The Tribunal has also rejected the contention raised on  behalf of the appellant saying that even if the supplies of the  yarn under para 9.10(b) was comparable to the DTA sales in  para 9.9 of the said Exim Policy, still the appellant was  entitled to the benefit of exemption under notification No.  2/95-CE dated 4.1.1995. The Tribunal also rejected the  contention of the appellant that, in any event, it was entitled  to exemption under notification No. 53/97-Cus. Dated  3.6.1997. According to the Tribunal, the said notification No.  53/97 exempted specified goods from customs duty which  were imported into India for manufacture of articles for export  out of India or for being used to produce final products for  export in cases where the final products/ articles stood  produced or manufactured by 100% EOU approved by the  Commissioner. According to the Tribunal, para 7 of  notification No. 53/97 was not applicable to the present case  since para 7 applied only to goods (raw materials) which were  imported for the manufacture of articles allowed to be sold in  India on payment of duty under Section 3(1) of the said 1944  Act. According to the Tribunal, para 7 applied only to DTA  sales falling under para 9.9 and it did not apply to DTA sales  (supplies) falling under para 9.10 (b) and if they are equated  still the appellant was not entitled to the benefit, in full, of the  exemption notification no. 2/95-CE. According to the  Tribunal, the appellant was also not entitled to the benefit of  exemption under notification No. 2/95-CE because that  notification was applicable to goods allowed to be sold in India  in accordance with the provisions of para 9.9 of Exim Policy  1997-2002. According to the Tribunal, notification bearing no.  2/95-CE had the effect of fixing a value or the amount of  which 50% of the duty leviable under Section 12 of the  Customs Act, 1962 stood payable. But Section 12 of the  Customs Act, 1962 only applied to goods sold to domestic  tariff at the rate of duty leviable on like goods when imported  into India. According to the Tribunal, in terms of notification

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No. 2/95-CE the rate of duty applicable was 50% of the  amount of duty. According to the Tribunal, the appellant  herein was not entitled to the benefit of exemption under  notification No. 2/95-CE since the goods have not been sold in  DTA in terms of para 9.9. The Tribunal came to the conclusion  that, there was no merit in the contention of the appellant that  even supplies made to DTA against payment in foreign  exchange should be counted towards fulfilment of export  obligations and, therefore, all sales made to DTA whether  against payment in foreign exchange or payment in rupees  should be treated as DTA sales and, in that event, the  assessee-appellant would also be entitled to the benefit of  exemption notification No. 2/95-CE.  

In this matter, appellant seeks equation of para 9.10 (b)  sales with para 9.9 sales for the purposes of claiming benefit  of exemption under notification No. 2/95-CE which has been  denied by the Tribunal. Hence this civil appeal.

       We quote hereinbelow Section 3(1) of the Central Excise  Act, 1944:

"SECTION 3. Duties specified in the  Schedule  to   the  Central  Excise  Tariff   Act, 1985 to  be  levied.  \027 (1) There shall be  levied and collected in such manner  as  may   be  prescribed duties of excise on all excisable  goods which are produced or manufactured in  India as, and at the rates, set forth in the   Schedule to the Central Excise Tariff Act,  1985:

       Provided that the duties of excise which  shall be levied and collected on any excisable  goods which are produced or manufactured,-

(i)     in a free trade zone and brought to any  other place in India; or

(ii)    by a hundred per cent export-oriented          undertaking and allowed to be sold in  India.

shall be an amount equal to the aggregate of  the duties of customs which would be leviable  under section 12 of the Customs Act, 1962 (52  of 1962), on like goods produced or  manufactured outside India if imported into  India, and where the said duties of customs  are chargeable by reference to their value; the  value of such excisable goods shall,  notwithstanding anything contained in any  other provisions of this Act, be determined in  accordance with the provisions of the Customs  Act, 1962 (52 of 1962) and the Customs Tariff  Act, 1975 (51 of 1975).   Explanation 1. \027 Where in respect of any  such like goods, any duty of customs leviable  under the said section 12 is leviable at  different rates, then, such duty shall, for the  purposes of this proviso, be deemed to be  leviable under the said section 12 at the  highest of those rates.

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 Explanation 2. \027 In this proviso, -

(i) "free trade zone" means the Kandla Free  Trade Zone and the Santa Cruz  Electronics Export Processing Zone and  includes any other free trade zone which  the Central Government may, by  notification in the Official Gazette, specify  in this behalf;

(ii) "hundred per cent export-oriented  undertaking" means an undertaking  which has been approved as a hundred  per cent export-oriented undertaking by  the Board appointed in this behalf by the  Central Government in exercise of the  powers conferred by section 14 of the  Industries (Development and Regulation)  Act, 1951 (65 of 1951), and the rules  made under that Act.

       We also quote hereinbelow the exemption notification No.  2/95-CE: "GENERAL EXEMPTION NO. 55

Exemption to all excisable goods produced  in 100% EOU, FTZ, EHTP or STP units when  sold in India- In exercise of the powers  conferred by sub-section (1) of section 5A of  the Central Excise and Salt Act, 1944 (1 of  1944), the Central Government, being satisfied  that it is necessary in the public interest so to  do, hereby exempts all excisable goods  (hereinafter referred to as the said goods)  specified in the Schedule to the Central Excise  Tariff Act, 1985 (5 of 1986) and produced or  manufactured in a hundred percent export  oriented undertaking or a free trade zone or an  Electronic Hardware Technology Park (EHTP)  unit or a Software Technology Parks (STP) unit  and allowed to be sold in India under and in  accordance with the provisions of sub- paragraphs (a), (b), (c) and (d) of paragraph 9.9  or of paragraph 9.20 of the Export and Import  Policy, 1 April 1997 - 31 March 2002, from so  much of the duty of excise leviable thereon  under section 3 of the said Central Excise Act  as is in excess of the amount calculated at the  rate of fifty per cent of each of the duties of  customs, which would be leviable under  section 12 of the Customs Act, 1962 (52 of  1962) read with any other notification for the  time being in force issued under sub-section  (1) of section 25 of the said Customs Act on  the like goods produced or manufactured  outside India if imported into India:

Provided that the amount of duty payable  in accordance with this notification in respect  of the said goods shall not be less than the

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duty of excise leviable on the like goods  produced or manufactured outside the  hundred per cent export-oriented undertaking  or free trade zone or Electronic Hardware  Technology Park (EHTP) unit or Software  Technology Parks (STP) unit which is specified  in the said Schedule read with any other  relevant notification issued under sub-rule(1)  of rule 8 of the Central Excise Rules, 1944 or  sub-section (1) of section 5A of the said  Central Excise Act, as the case may be:

Provided further that nothing contained  in the above proviso shall apply to the goods  which are chargeable to nil rate of duty  leviable under section 12 of the Customs Act  read with any other notification for the time  being in force issued under sub-section (1) of  section 25 of the said Customs Act.

Provided also that the exemption under  this notification shall not be availed until the  Assistant Commissioner is satisfied that,-

(i)     in the case of the said goods other  than software, rejects, scrap, waste or  remnants:-

(a)     such goods being cleared for home  consumption are similar to the goods which  are exported or expected to be exported from  the unit during the specified period of such  clearances in terms of the Export-Import  Policy, 1st April, 1997 \026 31st March, 2002;

(b)     the value of such goods being  cleared for home consumption from the unit  specified in column (2) of the Table hereto  annexed, does not exceed the percentage limit  of the entitlement as specified in the  corresponding entry in column (3) of the said  Table for such clearance, calculated with  reference to the total value of production of  goods which are identical in all respects to  those under clearance;

(c)     The balance of the production of the  goods which is identical to such goods under  clearance of home consumption, is exported  out of India or disposed of in terms of  paragraph 9.10 of the said Export and Import  Policy,

(ii)    In the case of the said goods being  software cleared for home consumption:-

(a)     the value of such software cleared  during the period specified does not exceed  twenty-five per cent of the total value of  production of the software in the unit;

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(b)     the balance of the production  excluding the value cleared as referred to in  sub-clause (a) is exported out of India or  disposed of in terms of para 9.10 of the said  Export and Import Policy,

(iii)   in the case of the said goods in the  nature of rejects, scrap, waste or remnant  being cleared for home consumption, the value  of such goods is within the percentage limits  fixed for the unit in terms of the Export and  Import Policy 1.4.1997 \026 31.3.2002.

Explanation. \026 For the purpose of this  notification, the expression, -

(1) "Export and import Policy, 1 April, 1997 \026  31st March, 2002" means the Export and  Import Policy, 1 April, 1997 \026 31 March, 2002  published by the Government of India under  the Ministry of Commerce notification No.  1/1997-2002, dated 31st March, 1997.

(2)  "Electronic Hardware Technology Park  (EHTP) unit" means a unit established under  and in accordance with Electronic Hardware  Technology Park (EHTP) Scheme notified by  the notification of the Government of India in  the Ministry of Commerce No. 5 (RE-95) 92-97,  dated 30th April, 1995 and approved by an  Inter-Ministerial Standing Committee  appointed by the notification of the  Government of India in the Ministry of  Industry (Department of Industrial  Development) No. S.O. 117(E), dated the 22nd  February, 1993;

(3)     "Software Technology Parks (STP) unit"  means a unit established under and in  accordance with Software Technology Parks  (STP) Scheme notified by the notification of the  Government of India in the Ministry of  Commerce No. 4/(RE-95)/92-95, dated 30th  April, 1995 and approved by an Inter- Ministerial Standing Committee appointed by  the notification of the Government of India in  the Ministry of Industry (Department of  Industrial Development) No. S.O.117(E), dated  the 22nd February, 1993.

S. No. Unit Percentage limit of  entitlement for

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clearances for home  consumption (1) (2) (3) 1.

2.

3. Units in the agriculture,  aquaculture, animal  husbandry, floriculture,  horticulture, pisciculture,  poultry and sericulture  sectors

Units engaged in the  manufacture of electronic  hardware products which  achieves,-

(a) net foreign exchange  earnings as a percentage  of exports less than ten  per cent

(b) net foreign exchange  earnings as a percentage  of exports of ten per cent

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or more but not exceeding  twenty five per cent

(c) net foreign exchange  earnings as a percentage  of exports exceeding  twenty five per cent   

Other Units 50 per cent

NIL

Upto thirty per cent of  the production in value  terms of the electronic  items, including  components  manufactured in the  unit.

Upto forty per cent of  the production in  value terms of  electronic items,  including components  manufactured in the  unit.

25 per cent"      (emphasis supplied)

For the following reasons, we find merit in this civil  appeal. Firstly, on examination of the Exim Policy we find that  the said Policy as a rule stated that every 100% EOU was  obliged to manufacture or produce from duty free imported  raw materials capital goods etc., finished products/ articles  and as a rule every 100% EOU was obliged to export its entire  production and earn foreign exchange. This was what was  called as Physical Exports. However, this rule had certain  exceptions. In this civil appeal, we are concerned with DTA

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sales. As an exception, there existed two types of DTA sales  under the said Policy, namely, DTA sales against rupee and  DTA sales against foreign exchange which was similar to  physical exports. This latter category was known as "Other  Supplies in DTA". Therefore, to put it in brief, "Other Supplies  in DTA" was equated with physical exports which, as stated  above, was the general rule for 100% EOU. In other words, the  general rule was physical exports and other supplies in DTA  was equated to physical exports. This equation was necessary  because other supplies in DTA gave certain benefits to the  economy like preservation of foreign exchange, import  substitution, savings of transportation costs and to provide  competitiveness and level-playing field for Indian exporters.  According to the Revenue, the expression occurring in the  second proviso to Section 3(1), namely, "allowed to be sold in  India" was applicable only to DTA sales against rupee and not  DTA sale against foreign exchange. In this civil appeal, we are  concerned with the law as it stood prior to 11.5.2001. In our  view, DTA sale against foreign exchange was covered by the  expression "allowed to be sold in India" and, therefore, such  sale fell under the proviso to Section 3(1) of the 1944 Act. In  the circumstances, the duty liability of the assessee (appellant  herein) was required to be determined after allowing to it the  benefit of notification No. 2/95-CE. That notification granted  partial exemption to the assessee from duties in respect of  goods manufactured in 100% EOU and allowed to be sold in  India under para 9.9 (a), (b), (c) and (d). Once DTA sales  against foreign exchange are held to be covered by the proviso  to Section 3(1) of the 1944 Act then the whole difference  between DTA sales against rupee and DTA sales against  foreign exchange, for the purposes of notification No. 2/95-CE  would stand eliminated.  This would be, however, subject to  the compliance of other conditions of notification No. 2/95-CE.  Therefore, in our view, the Tribunal had erred in relying on  para 9.9(b) for limiting the benefits of exemption under  notification No. 2/95-CE by imposing a new condition to the  effect that the benefits would be admissible only in respect of  50% of such DTA sales against foreign exchange. Secondly,  once the permission was granted by the competent authority  under the Exim Policy to make DTA sales against foreign  exchange, the assessee (appellant herein) was entitled to the  benefit of concessional rate of duty under notification no.  2/95-CE. If DTA sales against rupee were allowed the benefit  of notification No. 2/95-CE, then DTA supplies against foreign  exchange, which were at par with physical exports, cannot be  denied the same benefits and they cannot be subjected to a  higher duty. Thirdly, once DTA sales against foreign exchange  are covered by the above expression "allowed to be sold in  India", all issues relating to calculation of the duty payable in  terms of notification No. 2/95-CE will have to be decided  afresh by the adjudicating authority and accordingly, we  hereby remand the matter back to the Commissioner for  calculating the duties payable by the assessee in terms of  notification No. 2/95. The Commissioner will calculate the  duties accordingly as hereinabove mentioned. Lastly, we are of  the view that there is no fundamental difference, as far as the  exemption notification No. 2/95-CE is concerned, between  DTA sales against foreign exchange and DTA sales against  rupee. Once DTA sales against foreign exchange fall within the  expression "allowed to be sold in India", the Department  cannot deny to such sales the exemption under notification  no. 2/95-CE, since DTA sales against foreign exchange will  come under para 9.9. According to the Tribunal, the entire  supply to DTA against foreign exchange was not entitled to the  benefit of notification No. 2/95-CE but only 50% of the supply

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was eligible for the said relief. We do not see any basis for  introduction of this condition in notification No. 2/95-CE. It  appears that this condition is brought in on the ground that  para 9.9 (b) refers to DTA sales up to 50% of the FOB value of  exports. In our view, the Tribunal had erred in relying on the  said para 9.9 (b) for limiting the benefits of exemption under  notification No. 2/95-CE in respect of 50% of DTA sales  (supplies) against foreign exchange. One cannot ignore the fact  that DTA sales in foreign exchange provides for better money  value as compared to DTA sales in rupee. Therefore, if DTA  sales against rupee are allowed the benefits of notification No.  2/95-CE, DTA supplies, which are at par with physical  exports, cannot be denied the same benefits.

For the above reasons, we do not wish to examine the  larger issue canvassed before us on behalf of the assessee  (appellant herein). We are confining this judgment to the  arguments which were advanced by the appellant herein  before the Tribunal.

Accordingly, the civil appeal filed by the appellant herein  stands allowed. The impugned judgment of the Tribunal is set  aside and the matter is remitted to the Commissioner for  calculation of duties payable in terms of notification              no. 2/95-CE, as interpreted hereinabove.  

The appeal stands allowed with no order as to costs. Civil Appeal No. 3237 of 2002 [Commissioner of Central Excise  v.  M/s Virlon Textile Mills]

       In view of our judgment in Civil Appeal No.570 of 2002  (supra), this civil appeal filed by the Department stands  dismissed with no order as to costs.