Sukumar Mukhopadhyay: More light on exemption and excisability

The issue of manufacture and taxable event is not new. But the fact that a particular high court gave a decision which was promptly set aside by the Supreme Court very recently makes it incumbent on analysts to clarify to the readers why such misunderstanding arises again and again over a period of time.

First let me indicate here what the correct position is, which we learnt from the junior most officers when we joined service. It is simply, that when the goods are manufactured they may be fully exempted but when they are cleared from the factory for consumption , if there is a duty, that rate of duty has to be charged. This position went on until 1975, when a judgment came from the MP High Court in the case of UOI vs Kirloskar Brothers reported in 1978 (2) E.L.T. (J 690) (M.P.). This judgment was the beginning of the misunderstanding. The judgment ruled that if there was a full exemption at a certain time, and the exemption is withdrawn later and if the goods are cleared later, then the goods do not have to pay excise duty since the goods were non-excisable earlier when the taxable event (that is, manufacture ) took place. The mistake in this judgment was that it took full exemption as non-excisable. Actually they are quite different. Even when the goods are fully exempt, they continue to be excisable. This wrong judgment created a lot of misunderstanding as the other High Courts differed and finally the Supreme Court gave a judgment clarifying the whole issue in the judgment on 28.9.1989 in the case of Wallace Flour Mills vs CCE reported in 1989 (44) ELT 598 (SC). In this judgment the Supreme Court held that “ It is well settled by the scheme of the Act as clarified by several decisions that even though the taxable event is the manufacture or production of an excisable article, the duty can be levied and collected at a later stage for administrative convenience. The scheme of the said Act read with the relevant rules framed under the Act particularly Rule 9A of the said rules, reveals that the taxable event is the fact of manufacture of production of an excisable article, the payment of duty is related to the date of removal of such article from the factory.” This judgment has been quoted with approval by several Supreme Court judgements notably CCE vs Polyset Corporation , 2000 (115) E.L.T. 41 (S.C.).Inthis judgment the Supreme Court has said that the date of manufacture of goods is relevant for determining whether the goods were excisable and as to the rate of duty that the said goods must bear, what is relevant is the date of their clearance.

Even after the matter has been well settled why is it that the issue arose again? It arose because once again the High Court thought that full exemption is the same as non-excisable. It arose in a Delhi High Court case of HMM vs UOI, dated 16.9.2002 reported in 2005 (192) E.L.T. 63 (Del.) where the Delhi High Court held that the duty being on manufacture and the goods having been exempted at the time of manufacture, the goods must be taken as exempted at the time of clearance even though the exemption had been withdrawn by then.

The UOI had not been represented by anybody. So, nobody pointed to the High Court that the issue has already seized to be res integra. That is to say, it had been a settled issue by the judgements in the cases of Wallace Flour Mills and Polyset discussed above.

The conclusion is that the matter is settled once again that full exemption is not the same as non-excisability.

If the goods were non-excisable when they were manufactured (that is, when the taxable event took place), then they will continue to be non-dutiable at the time of clearance though there may be a duty at that time. But if the goods were just fully exempted, then they will have to pay duty prevailing at the time of clearance.

 

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