DEPB: Tribunal sets aside board's circular

Updated: Oct 30 2005, 05:30am hrs
In his budget speech of 8 July 2004, the finance minister proposed levy of education cess through a simple statement: "I propose to levy a cess of 2% on income tax, corporation tax, excise duties, customs duties and service tax." On the face of it no dispute or doubt should arise about the intention of the new levy. But thanks to the subtlety of our written tax laws, howsoever meticulously drafted they are often prone to doubts and dispute.

Take the case of education cess. When doubts were raised whether education cess is payable in the case of goods that are fully exempted from excise duty/customs duty (such as clearance under bond or fulfillment of certain conditions), the CBEC clarified: "The education cess is leviable at the rate of 2% of the aggregate of all duties of excise/customs (excluding certain duties like anti-dumping duty, safeguard duty, etc.) levied and collected.

If goods are fully exempted from excise duty or customs duty, or chargeable to nil rate of duty or are cleared without payment of duty under specified procedure such as clearance under bond, there is no collection duty. Thus, no education cess would be chargeable on such clearances." This is perhaps saying the obvious in as much as elementary school arithmetic teaches us that zero multiplied by any number is zero! Take a slightly different situation of imports under the Duty Entitlement Pass Book (DEPB) Scheme which permits exemption from duty by debiting the scrip issued. Is education cess still applicable

This question was considered by the CBEC and the filed formations informed that even though an importer does not pay customs duty under the DEPB Scheme, he is liable to pay 2% education cess. And this is how the board explained the logic in Circular No. 5/2005-Cus, dated January 31, 2005: "in the case of imports under DEPB scheme the position is slightly different.

As per the notifications governing imports under DEPB scheme, the basic duty and additional duty are exempt subject to the condition that the duties leviable on the goods are debited from DEPB. In other words, in the case of DEPB scheme, though the imports are governed by an exemption notification, the fact remains that in case of such imports the duty is debited from the DEPB scrip. Therefore, it has been decided that in the case of imports under DEPB scheme, the education cess at 2% would also be debited from the DEPB scrip."

In the case reported as commissioner of customs, Mumbai v Reliance Industries Ltd [2005 (188) ELT 449], the tribunal found no merit in the department's argument. Rejecting the appeal, the tribunal observed, "We find that the DEPB scheme operates under an exemption notification no. 45/2002-Customs, dated April 4, 2002.

The said notification specifically exempts goods imported under DEPB scheme from basic, additional and special additional duty of customs. However, in terms of the conditions specified in the said notification, the exemption operates by allowing duty credit in the Duty Entitlement Pass Book on exports at the rates specified and subsequently by debiting an amount equal to duty payable, against such credit in the pass book, on imports. As such, crediting and debiting of duty amounts is a matter of procedure and convenience, but the notification basically provides full exemption from customs duty."

The tribunal also reminded the appellant commissioner that it is already settled that DEPB scheme is in the nature of exemption from duty. On an earlier occasion when a question arose in the case of Essar Steels Ltd v CCE Vishakhapatnam [2004 (173) ELT 239] whether Cenvat credit could be taken in respect of the CVD portion of duty debited under the DEPB scheme, a larger bench of the tribunal answered it in the negative.

Thus, the tribunal has annulled the board's ruling. The tribunal noted: "We find that the provisions in the (said) Finance Act (No. 2 of 2004) specify the education cess as 2% of the customs duty levied and collected. In the case of imports under the DEPB scheme, which are fully exempt, the customs duty is nil. Hence the education cess being 2% of the customs duty is also nil. If it were the intention of he Parliament to debit and credit education cess for imports under the DEPB Scheme, then the quantum of cess would have been specified in absolute terms with a notification similar to notification no. 45/2002 with similar conditions. That is, however, is not the case.

On the other hand, the cess has been specified at the rate of 2% of the customs duty in relative terms. In which case, it becomes nil for exempted DEPB imports. "In fact, the tribunal went a step further. It suggested for suitable amendment in the policy by the concerned authorities" to ensure that no DEPB credits are allowed at the time of exports giving rise to undue benefit."

The author is ex-chief commissioner, Customs & Central Excise