2012 (7) TMI 679 - HC - Customs

Recovery of Education Cess - petitioners have been availing of the DEPB scheme - Held that - As goods imported under the DEPB scheme by assessee by virtue of exemption notification No.45/2002, carry nil rate of customs duty and additional duty they are also not liable to pay education cess at the prescribed rate - from the nature of DEPB scheme and the exemption granted to imports made under such scheme, it can be seen that the very purpose is to neutralise the import duty component on the imported goods used for production of export items. Such object is achieved through the DEPB scheme under which the exporter is given the facility of utilising the credits in the DEPB scrips for the purpose of adjustment against the customs duty liability on the goods imported for the ultimate purpose of export on value addition. Merely because the conditions provided for adjustment of credit in the DEPB scrips, it cannot be stated that either there was no exemption from payment of customs duty or that the Central Government was levying and collecting customs duty from the importers in form of adjustment of credit in the DEPB scrips.Thus through such adjustments on the DEPB scrips at the time of further imports, customs duty component is sought to be neutralised. Circular dated 8-7-2004, the Ministry of Finance, in a question whether goods that are fully exempt from excise/customs duty or are cleared without payment of such duty would be subject to education cess, clarified that the education cess is leviable at the rate of 2% of the aggregate of the duties of excise/customs levied and collected. If goods are fully exempted from excise duty or customs duty or are chargeable to nil rate of duty or are cleared without payment of duty under specified procedure such as clearance bond, there is no collection of duty and, therefore, no education cess would be leviable on such clearances- . Duty demands, were even otherwise made without issuing any show-cause notice or adjudication. Even on such grounds, the notices are liable to be quashed - in favour of assessee.

Summary

Issues Involved:
1. Legality and validity of Circular No.5/2005-Cus. dated 31-1-2005.
2. Demand notices dated 24-3-2005 and 28-3-2005 for recovery of Education Cess.
3. Permanent prohibition against charging Education Cess on imports under the DEPB scheme.

Detailed Analysis:

1. Legality and Validity of Circular No.5/2005-Cus. dated 31-1-2005:
The petitioners challenged the legality and validity of Circular No.5/2005-Cus., which mandated the debit of Education Cess at the rate of 2% from the DEPB scrip for imports made under the DEPB scheme. The petitioners argued that since no customs duty is payable under the DEPB scheme, the question of charging Education Cess does not arise. They contended that the DEPB scheme is similar to other export incentive schemes where no Education Cess is demanded when no customs duty is paid. The respondents, however, argued that the DEPB scheme is different as it involves adjustment of credits in the DEPB scrips rather than full exemption from customs duty. The court, after examining the nature of the DEPB scheme and relevant provisions, concluded that the impugned circular was invalid and contrary to sections 81 and 84 of the Finance Act, 2004. The court held that the circular was quashed and set aside.

2. Demand Notices Dated 24-3-2005 and 28-3-2005 for Recovery of Education Cess:
The petitioners also challenged the demand notices issued by the Assistant Commissioner of Customs, Kandla, demanding Education Cess. They argued that these notices were issued without any previous adjudication, show-cause notice, or hearing. The court agreed with the petitioners, noting that the duty demands were made without issuing any show-cause notice or adjudication. Consequently, the court quashed these notices.

3. Permanent Prohibition Against Charging Education Cess on Imports Under the DEPB Scheme:
The petitioners sought a permanent prohibition against the respondents from charging any amount of Education Cess on imports made under the DEPB scheme. The court examined the relevant provisions and the nature of the DEPB scheme, concluding that for imports made under the DEPB scheme, there is total or partial exemption from payment of customs duty. The court noted that the adjustment of credit in the DEPB scrips is procedural and does not negate the exemption from customs duty. Therefore, the court held that no Education Cess can be levied on such imports, except where partial exemption applies, as admitted by the petitioners.

Conclusion:
The court allowed the petition in part, quashing the impugned circular and demand notices. It clarified that Education Cess is not leviable on imports under the DEPB scheme where there is total exemption from customs duty. However, for items with partial exemption, Education Cess is applicable on the non-exempt portion of customs duty. The court also allowed the respondents to proceed with the adjudication of notices, bearing in mind the conclusions arrived at in this judgment.