2025 (5) TMI 403 - AT - Central Excise

Levy of 4% Special Additional Duty (SAD) under Notification No. 23/2003-CE and Section 3(5) of the Customs Tariff Act 1975 - clearances made by a 100% Export Oriented Unit (EOU) to its sister units located in the Domestic Tariff Area (DTA) - leviability of duty on destruction of expired tablets/ raw materials/remnant samples in the factory premises. Levy of 4% Special Additional Duty (SAD) under Notification No. 23/2003-CE and Section 3(5) of the Customs Tariff Act 1975 - clearances made by a 100% Export Oriented Unit (EOU) to its sister units located in the Domestic Tariff Area (DTA) - HELD THAT - In the case of Moser Baer India Ltd 2009 (6) TMI 48 - CESTAT NEW DELHI (LB) one of the issues inter alia was of imposition of SAD on clearances from 100% E.O.U. The value included goods cleared in DTA by E.O.U and exempted from sales tax/ VAT. Hon ble Larger Bench concluded vide para 1 7.1 7.3 7.4 7.6 and para 8 12-13 that if an article on which sales tax/VAT or other local taxes are leviable and same is notified by the Central Government by notification issued under Section 3(5) of the Customs Tariff Act 1975 as attracting SAD @ 4% ad valorem then SAD would be chargeable on import of the article even if some State Governments give exemption overall or for some area of a particular state and if that article has been fully exempted from payment of sales tax/VAT. Therefore we conclude that on merits if supplies are made by 100%EOU to specified exempt area even if such area is not leviable to VAT/sales tax it would still be chargeable to 4% SAD. Even the learned counsel had fairly conceded that the decision of the Larger Bench of the Tribunal in the case of Moser Baer India Ltd is against them. Leviability of duty on destruction of expired tablets/ raw materials/remnant samples in the factory premises - HELD THAT - In Sun pharmaceutical Ltd vs. Commissioner of Central Excise and Customs Daman 2008 (4) TMI 636 - CESTAT AHMEDABAD it has been held that for expired medicines if despite waiting for long for permission to destroy the goods no permission is received and the destruction is carried out by party on its own in their premises then the demand of duty cannot be sustained. It is not coming out from the records in this case as to whether permission was sought for by the appellant and still the party had destroyed the goods circumventing requirement of grant of some reasonable period to the department or not. If reasonable time was not allowed by the party the duty shall be demandable otherwise not. On the issue of destruction of goods further details are warranted. These aspects need to be looked into by the adjudicating authority with all the relevant details along with limitation issue. Invocation of extended period of limitation - HELD THAT - Regarding filing of regular returns it is observed that they have not disclosed availment of benefit at Sr. 1 of N/N. 23/2003 and have indicated only Sr. 2 of the above notification. Therefore the appellant s argument on invocation of extended period fails. Conclusion - i) If supplies are made by 100%EOU to specified exempt area even if such area is not leviable to VAT/sales tax it would still be chargeable to 4% SAD. ii) Regarding duty on destruction of expired tablets/ raw materials/remnant samples in the factory premises reasonable time was not allowed by the party the duty shall be demandable otherwise not. On the issue of destruction of goods further details are warranted. These aspects need to be looked into by the adjudicating authority with all the relevant details along with limitation issue. iii) The appellant s argument on invocation of extended period fails. Appeal partly allowed.

Summary

The core legal questions considered by the Tribunal in this matter are as follows:

1. Whether the clearances made by a 100% Export Oriented Unit (EOU) to its sister units located in the Domestic Tariff Area (DTA), characterized as stock transfers without payment of VAT/CST, attract the levy of 4% Special Additional Duty (SAD) under Notification No. 23/2003-CE and Section 3(5) of the Customs Tariff Act, 1975.

2. Whether duty is leviable on goods (expired tablets, capsules, raw materials, remnants) destroyed by the appellant without prior permission from Central Excise/Customs authorities, and the correctness of the demand of duty on such destroyed goods.

3. The applicability of extended period of limitation and imposition of penalty in view of the appellant's conduct and disclosures.

Issue 1: Levy of 4% SAD on Clearances from 100% EOU to DTA on Stock Transfer Basis Without VAT Payment

The relevant legal framework includes Notification No. 23/2003-CE granting exemption from payment of SAD if goods cleared to DTA are not exempted by the State Government from payment of Sales Tax or VAT. Section 3(5) of the Customs Tariff Act, 1975 imposes SAD at 4% on imported goods, with the rate prescribed by notification. The Department's position is that SAD is payable whenever sales tax is not paid, including on stock transfers to sister concerns without VAT/CST payment.

The Tribunal referred extensively to the Larger Bench decision in the Moser Baer India Ltd case, which held that the exemption granted by some States from sales tax does not affect the central rate of SAD prescribed under Section 3(5). The Court emphasized that if an article attracts sales tax/VAT generally and is notified under Section 3(5) as subject to SAD @ 4%, then SAD is chargeable even if certain States or areas exempt it from sales tax/VAT. The Tribunal reproduced the relevant paras (7.4 and 12) to underline that SAD is independent of the actual payment of sales tax but depends on whether sales tax is leviable on the goods.

The appellant argued that stock transfers are not sales and hence SAD should not apply, relying on their own earlier favorable order and the fact that VAT paid was reimbursed under a packaged investment scheme, rendering the transaction revenue neutral. They also contended that exemption under Notification No. 23/2003-CE applies when goods are exempt from VAT/CST, which in their case was true.

The Tribunal rejected these contentions, holding that the Larger Bench ruling in Moser Baer India Ltd is binding and against the appellant. It clarified that even if the area where the sister units are located is exempt from VAT/sales tax, SAD @ 4% is still leviable on clearances from 100% EOU to DTA. The Tribunal also noted that the appellant did not disclose the availment of benefit under Serial No. 1 of Notification No. 23/2003-CE in their returns, only Serial No. 2, which undermined their claim on limitation and extended period. The appellant's reliance on other case law regarding limitation was found inapplicable as those decisions predated the disputed period and facts.

Issue 2: Duty on Destruction of Expired Goods and Raw Materials Without Proper Permission

The appellant destroyed expired tablets, capsules, remnants, and raw materials. They had permission from the Food and Drugs Administration (FDA), Silvasa, only for destruction of finished goods but not for raw materials, and no permission was obtained from Central Excise or Customs authorities. The Department contended that duty was payable on such destroyed goods and that the appellant failed to reverse the full Cenvat credit on such destruction. The Department relied on Para 6.8 (e) and (f) of the Foreign Trade Policy (2009-14), which allow sale or destruction of waste/scrap/remnants only with proper permissions and payment of applicable duties or concessional duties.

The Tribunal noted that destruction without following proper procedures and without permission from the relevant authorities attracts duty demand and reversal of credit. The appellant also failed to prepare proper documents reflecting duty payable, resulting in a demand of Rs. 88,66,739/-.

However, the Tribunal referred to a prior decision in Sun Pharmaceutical Ltd, where it was held that if permission for destruction is not granted despite waiting, destruction carried out by the party on its own premises does not attract duty demand. The Tribunal found that the record did not clearly show whether the appellant sought permission and whether the department was given reasonable time to respond. Hence, the matter was remanded to the original authority for detailed consideration of whether permission was sought, the period allowed to the department, and the duty demand accordingly. The Tribunal also directed examination of limitation issues related to this demand.

Issue 3: Limitation and Penalty

The appellant argued that extended period of limitation should not apply due to regular audits and no suppression, and that no penalty should be imposed. The Tribunal rejected the limitation plea because the appellant failed to disclose the benefit under the relevant notification serial number properly in their returns. The Tribunal also noted that the appellant's reliance on case law regarding bona fide doubt and no willful suppression was not applicable to the facts here, as the disputed period postdated those decisions and the appellant's conduct did not meet the threshold for protection.

Regarding penalty, the appellant requested no penalty be imposed, but the Tribunal did not explicitly rule on penalty in this order, focusing instead on remanding the destruction-related issues for further consideration.

Significant Holdings and Principles Established

The Tribunal upheld the principle that the levy of SAD under Section 3(5) of the Customs Tariff Act is independent of actual payment or exemption of sales tax/VAT by the State Government. It stated verbatim from the Larger Bench ruling in Moser Baer India Ltd:

"The exemption granted by some of the states cannot affect the rate prescribed under Section 3(5) notification and similarly the exemption granted by a state government in respect of assessee in some specified areas can have no bearing on the rate of SAD, fixed by the Central Government by a notification issued under Section 3(5) of the Customs Tariff Act, 1975."

Further, the Tribunal concluded:

"Therefore, we conclude that on merits if supplies are made by 100%EOU to specified exempt area, even if such area is not leviable to VAT/sales tax, it would still be chargeable to 4% SAD."

On destruction of goods, the Tribunal emphasized procedural compliance and permissions as critical to duty liability. It remanded the matter for detailed fact-finding on whether permission was sought and the department's opportunity to act.

On limitation, the Tribunal held that failure to disclose the correct notification serial number in returns negates the appellant's plea against invocation of extended period, and that reliance on earlier case law on bona fide doubt was misplaced given the timeline and facts.

In sum, the Tribunal partly allowed the appeal by remanding the destruction-related duty demand for fresh adjudication but upheld the department's claim for SAD on clearances to sister units in DTA without VAT payment, confirming the applicability of 4% SAD under Section 3(5) irrespective of State-level sales tax exemptions.