Levy of SWS When Imports Made Availing “Scrip” Exemptions – Unending Controversy

In the article published with SCC Times on 13-02-2024¹, the authors discussed the conflicting judgments on the aspect of exemption from cess in cases where the principal duties are exempt and particularly, where the cess/surcharge were levied on the aggregate of excise/customs duty. The authors were of the belief that the controversy is somewhat settled. However, with recent conflicting decisions, the issue remains largely unsettled.

In the present article, the authors highlight the recent judicial developments and point out the conflicts still existing from a latest decision(s).

For those unfamiliar with the controversy, a brief recap: social welfare surcharge (“SWS”) is a levy calculated as a percentage of customs duties levied on imported goods. The issue is whether SWS is leviable, since the basic customs duty is “exempt” when the goods are imported against a duty credit scrip like Merchandise Exports from India Scheme (“MEIS”). The goods imported against duty-free scrips are governed by exemption notification issued under Section 25 of the Customs Act, 1962, and are subject to scrips debit from the duty payable on the imported goods.

In Central Excise, the situation is different regarding the levy of Education Cess (“EC”) , or Secondary Higher Education Cess (“SHEC”) under Finance Act, where the excise duty is nil by virtue of exemption notification. The issue has been referred to Chief Justice of India for constituting a larger Bench of the Supreme Court to resolve the conflict arising between SRD Nutrients (P) Ltd. v. CCE ² and Unicorn Industries v. Union of India³.

Levy of SWS and judicial pronouncements

With respect to SWS, levied on the aggregate of duties of customs under Finance Act, 2018, the Bombay High Court very recently dismissed the review application filed by Revenue against the judgment passed in Emami Agrotech Ltd. v. Union of India⁴. In this case, relying upon the decision of LA TIM Sourcing (India) Pvt. Ltd. v. Union of India⁵, it was held that the assessees ought not debit the MEIS scrips for any amount towards SWS and if any amount has been deducted, the same would be refunded to the assessees with interest. While observing so, the Court placed reliance upon Circular No. 03/2022-Customs dated 01-02-2022 which clarified that amount of SWS payable would be “nil” in cases where the aggregate of customs duties is zero, even though SWS has not been exempted.

The Bombay High Court had proceeded on a premise that the payment of basic customs duty (“BCD”) through MEIS scrips is nothing but a complete exemption from payment of customs duty, and consequently, SWS which is calculated at 10% of aggregate of duties of customs would also be nil. Hence, payment of customs duty by way of debiting scrips is a conditional exemption i.e. subject to exports made of notified goods or products in terms of the foreign trade policy (FTP).

The above rationale is also in line with the reasoning adopted by the Gujarat High Court in Gujarat Ambuja Exports Ltd. v. Govt.of India⁶ in the context of scrips debited under the duty entitlement pass book (“DEPB”) scheme, observing that merely because adjustment is done through scrips, it cannot be said that there was no exemption from payment of customs duty, as the adjustment wass only procedural in nature. This view was also taken by the Andhra Pradesh High Court in CCE v. Kedia Overseas Ltd.⁷ Pertinently, Revenue’s special leave petition (SLP) before the Supreme Court challenging the judgment of Kedia Overseas case⁸ also stands dismissed.

Further, the Bombay High Court in Commr. of Customs(Export) v. Reliance Industries Ltd.⁹, had already taken this very view, in context of DEPB scheme, holding that if customs duty is exempted, then EC on the customs duty is not to be levied and collected.

Contrary view of the Madras High Court in Gemini Edibles and Tanfac Industries

In Tanfa Industries Ltd. v. Commr. of Customs¹⁰, the Madras High Court dealt with the question that “whether, for securing exemption, the adjustment of credit on the export of goods under the DEPB scheme towards the customs duty payable, is equivalent to the payment of duty in cash”

It was held that a notification requiring debiting of scrips cannot be treated as an exemption, instead, it only provides for an option for payment/discharging of duty by debiting the scrips. Pertinently, assessees’ SLP before the Supreme Court challenging the Tanfac Industries (P) Ltd. case¹¹ judgment also stands dismissed.

Following the above ratio, a Single-Judge Bench of the Madras High Court in Gemini Edibles and Fats India (P) Ltd. v. Union of India¹² held that SWS cannot be discharged by debiting from the MEIS/service exports from India scheme (“SEIS”) scrips and is required to be paid in cash or any other mode.

In an intra-court appeal, the Division Bench of the Madras High Court¹³, while upholding the judgment of the single-Judge Bench, endorsed the view taken in Tanfac Industries (P) Ltd. case¹⁴ that debit of scrips under MEIS is merely a neutralisation mechanism or mode of payment of duty and cannot be treated as exemption. It further held that merely because a notification is issued under Section 25 of the Customs Act, 1962, it cannot be considered as a granting of exemption. Thus, SWS needs to be paid in cash and cannot be debited through scrips, as MEIS Notification does not contain reference to the same.

Analysis

Contrary to the view adopted by the High Courts of Bombay, Gujarat and Andhra Pradesh, the Madras High Court has held that debiting of scrips cannot be said to be “exempted” as the duty is paid through scrips.

It is apposite to mention here that in a taxing statute, the term “collection” would signify the physical realisation of tax, which is levied, as held by the Supreme Court in Somaiya Organics (India) Ltd. v. State of U.P.¹⁵ In cases of exemption through schemes such as MEIS/DEPB, an argument can be made that there is no physical realisation of tax to the Government, as the duty is foregone by the Government; more so, when the language of MEIS Notification specifically mentions exemption to goods imported into India against a duty credit scrip.

Considering the above, with due respect, the Madras High Court in Gemini Edibles case¹⁶ has lost sight of the Supreme Court’s decision.

Conclusion

Until the issue as to whether the payment of duty through scrips would be considered as exemption or a mere neutralisation mechanism issue is addressed by the Supreme Court or by way of a suitable amendment (preferably a retrospective one), the assessees would be in a predicament. From the perspective of importers, uniformity and finality is the need of the hour.

Till then, the predicament is that which judgment should be applied or followed by the departmental authorities. We can take a clue from the decision of the larger Bench of the Customs, Excise and Service Tax Appellate Tribunal (“CESTAT”) in Collector of Central Excise v. Kashmir Conductors¹⁷, wherein the position in case of conflicting decisions of various High Courts is summarised, observing that the decision of a particular High Court should certainly be followed by all the authorities within the territorial jurisdiction of that High Court.

In cases where the jurisdictional High Court has not expressed any view on the subject- matter and there are contrary views of other High Courts, the Tribunal is at liberty to formulate its own view. However, if there is a decision of only one High Court in regard to the disputed interpretation or proposal of law, the Tribunal is bound to follow the same, since it is not at liberty to disregard the solitary High Court decision.