9911796707
TMI Blog2025 (5) TMI 921X X X X Extracts X X X X X X X X Extracts X X X X ..... e prayed for quashing and setting aside the order-in-original for levy of goods and service tax in form of compensation Cess at the rate of 160% on branded tobacco products i.e. scented/flavoured chewing tobacco manufactured by the petitioners for export through merchant exporters which are subject to GST at 0.1% as per Notifications No. 40/2017 and 41/2017 dated 23/10/2017. 3. As the issue arising in these petitions are common, same were heard analogously and are being disposed off by this common judgment. 4. For the sake of convenience Special Civil Application No.6701 of 2023 is treated as a lead matter. 5. Factual matrix of Special Civil Application No. 6701 of 2023 can be summarised as under: FACTS 6. The petitioner is engaged in the business of manufacture of branded tobacco products falling under HSN 24039910 on which GST is payable at the rate of 28% and Compensation Cess is payable at the rate of 160%. 7. The goods manufactured by the petitioners are exported directly or through merchant exporters. 8. The procedure followed by the petitioners during different taxation regime is as under: A) As per pre-GST Regime 9. Prior to the introduction of GST, the main indire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1), the force of law." 12. According to the procedure prescribed under the aforesaid Notification, a merchant-exporter shall furnish a bond to the Assistant/Deputy Commissioner of Central Excise Duty. After furnishing the bond, a merchant-exporter shall obtain certificates in CT-1. 13. The petitioner removed the goods from its factory under the cover of Excise Invoice to be supplied to the merchant exporter for export. As per the Notification in case of self-sealing, the owner, working partner, Managing Director etc. of the assessee is required to certify the copies of ARE-1 that goods for export have been sealed in his presence and send the original and duplicate copies along with goods at the place of export and sent the triplicate and quadruplicate copies of the application to the Superintendent or Inspector of Central Excise having jurisdiction over the factory of the petitioner. 14. Thereafter Commissioner of Customs shall certify that the goods are exported and return the original copy of ARE-1 to the exporter and the duplicate copy to the officer specified in the application, with whom the exporter has furnished bond or a letter of undertaking. 15. The petitioner followe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion No. 41/2017 Integrated Tax (Rate) all dated 23.10.2017 were issued on the recommendation of the Council. 23. After issuance of Notification No. 40/2017-Central Tax (Rate) dated 23.10.2017, the tax payable on supplies to merchant exporter is exempted in excess of 0.1%. The said notification prescribes detailed conditions and procedures to be followed for making supplies to merchant exporter in order to claim exemption. The petitioners have complied with all the conditions which are summarised as under: a) The registered manufacturer supplier shall supply the goods to the merchant exporter on a tax invoice. b) The registered recipient shall export the said goods within a period of ninety days from the date of issue of a tax invoice by the registered manufacturer supplier. c) The merchant exporter shall indicate the GSTIN number and tax invoice number issued by the registered manufacturer supplier in the shipping bill. d) The merchant exporter shall be registered with an Export Promotion Council or a Commodity Board recognised by the Department of Commerce e) The merchant exporter shall place a purchase order on the registered manufacturer supplier for procuring the go ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of supply was not paid by the petitioners. Thereafter, summons were issued on the Director and other CFO of the petitioner company and during the course of recording of statements, it was submitted that the issue raised for non-payment of Compensation Cess on the taxable value of supplies was an industry wide issue and there is a bona fide belief in the industry that no Compensation Cess is leviable on supplies to a merchant exporter. 30. The respondent authorities thereafter issued intimation in Form DRC-01A dated 21.07.2022 under section 74(5) of the GST Act. 31. The petitioner submitted reply dated 29.07.2022 contending inter-alia that supplies made by the petitioner is for export and the entire exercise is revenue neutral and even if the petitioner would have paid the Compensation Cess, same would have been availed as credit by the Merchant Exporter and subsequently claimed as refund. 32. Thereafter show cause notice dated 11.08.2022 was issued wherein it is alleged as under: "i) Notification No. 40/2017 Central Tax (Rate) and 41/2017-IGST (Rate) both dated 23.10.2017 only exempts CGST and IGST. No exemption, or any concessional rate as such has been provided in respect of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cess has been provided. The supply at concessional rate under the said notifications are optional and not mandatory in nature. If the Petitioner has not opted for supply at concessional rate, it will be liable to pay GST and compensation cess on that supply. iii) The CBIC has clarified vide Circular No. 1/1/2017-Compensation Cess dated 26.07.2017 that Compensation cess is payable even on exported goods being inter-state supply. However, it will be refunded under Section 16 of the IGST Act. Further, if the exports are made under bond, no compensation cess will be charged. iv) The CBIC Board has clarified vide circular 37/11/2018-GST dated 15.03.2018, clarified that the benefit of Supplies at concessional rate is optional and are subject to certain conditions prescribed therein. v) The Petitioner has supplied goods to the merchant exporter who has exported then out of India. Thus, the Petitioner is not exporter of goods. vi) On the ground of revenue neutrality, the impugned order relies on Star Industries Ltd. v. Commissioner of Customs (Import), Raigad, 2015 (324) E.L.T. 656 (S.C.). Further, reliance is placed on the decisions holding that exemption notifications have to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t provides that the provisions of the GST Act and IGST Act and the rules made thereunder would apply mutatis mutandis in relation to levy and collection of the Cess leviable under section 8 of the Compensation Cess Act. It was therefore, submitted that as per the provisions of section 2 (5) of the IGST Act which defines export of goods as taking goods out of India to a place outside India, would also be applicable for the purpose of levy of Compensation Cess. Therefore, sale made by the merchant exporter to overseas customer is export of goods and therefore, is zero rated supply under section 16 of the IGST Act, not liable to GST and Compensation Cess when supplied against LUT. 42. It was submitted that however, it is not necessary that in a particular chain of transactions only one supply can be an export of goods as in the facts of the case, even supply by the petitioner to merchant exporter would also quality as export of goods as the goods manufactured by the petitioners are removed from factory of the petitioners against the purchase order of the merchant exporter for procuring goods at concessional rate for the purpose of export. 43. It was submitted that the goods are seal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ort and therefore, petitioners would also be entitled to the same benefit as merchant exporter would be entitled to under the provisions of GST Act, IGST Act or Compensation Cess Act. 46. It was submitted that as per Rule 19 of the Central Excise Rules, 2002 along with the provisions of Central Excise Act, 1944 also recognizes supplies to merchant exporter as export supplies. 47. Reference was made to Notification No. 42/2001-CE(NT) dated 26.06.2001 which provides for the conditions, safeguards and procedure for the purpose of export. It was submitted that the petitioners have followed the prescribed procedure and removed the goods for export under the cover of Form ARE-1. 48. It was further submitted that Foreign Trade Policy also recognizes the supplies made to merchant exporters as an export supply by EOU as per para 6.10 of the Foreign Trade Policy 2015-2020 subject to conditions mentioned in para 6.19 of the Handbook of Procedure. 49. Learned Senior Advocate Mr. Sridharan therefore, submitted that considering such supply of goods by the petitioners to merchant exporters for actual export recommended that tax on supplies to merchant exporters in excess of 0.1% will be exemp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of GST Council cannot be applied to compensation Cess would frustrate the entire purpose of the recommendation and therefore, strict interpretation of exemption notification issued by the Government in relation to CGST and SGST would equally apply to the Compensation Cess and the respondents were not justified in levy of Compensation Cess at the rate of 160% which ultimately is required to be refunded to the merchant exporter as the goods supplied by the petitioners to merchant exporter is zero rated supply. It was therefore, submitted that Notification No. 40/2017 and Notification No. 41/2017 dated 23.10.2017 will also include exemption from Compensation Cess in excess of 0.1%. 54. It was submitted that without prejudice to the above contentions, not granting exemption from Compensation Cess on supplies made to merchant exporter will be violative of Article 14 of the Constitution of India as the GST Council in its 22nd Meeting held on 06.10.2017 made recommendation to resolve the issue of payment of GST and Compensation Cess at the time of procurement to the effect that supplies of goods to merchant exporters registered with Export Promotion Council/Commodity Board shall be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n is between supplies meant for exports including to merchant exporters and other domestic supplies. It was therefore, submitted that for levy of Compensation Cess on such supplies made to merchant exporters is arbitrary, discriminatory and violative of Article 14 of the Constitution of India. 59. It was further submitted that entire exercise of payment of Compensation Cess at the rate of 160% on the supplies made to merchant exporter is revenue neutral as even nominal tax which is 0.1% to be paid by the petitioners is also refunded to merchant exporter, therefore, even Compensation Cess levied at 160% by the respondent authorities on the supplies of merchant exporter is also to be refunded resulting into revenue neutral exercise. 60. Reliance was placed on Circular No. 37/11/2018-GST dated 15.03.2018 in which it is clarified that the benefit of supplies at concessional rate is subject to certain conditions and the said benefit is optional and the supplier who supplies goods at concessional rate is also eligible for refund on account of inverted tax structure as per the provisions of sub-section(3) of section 54 of the CGST Act. It was therefore, submitted that if Compensation Ce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ircular No. 199/11/2023-GST dated 17.07.2023 in which proviso to Rule 28 is clarified. It was therefore, submitted that no Compensation Cess will be payable by the petitioners and therefore, the impugned order is required to be quashed and set aside. 67. Learned Senior Advocate Mr. Sridharan also referred to sections 8 and 10 (1) of the Compensation Cess Act to submit that the Compensation Cess, if any, collected from the petitioners will be available as credit to the merchant exporters and will be refunded to them as the goods are exported and such Compensation Cess would not be credited to the Goods and Services Tax Compensation Fund to be distributed to the States as compensation for loss of revenue. It was therefore, submitted that the amount which cannot be distributed to the States in accordance with the purpose of the Act, the same cannot be levied itself at the threshold stage under section 8(1) of the Compensation Cess Act. 68. It was therefore, submitted that inter-state and intra-state supplies referred to in section 8 of the Compensation Cess Act refers only to the supplies within India and an export supply is not within the contemplation of charging section. 69. Lea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upon the Revenue to prove such suppression to invoke extended period of limitation. 74. It was therefore, submitted that in facts of the case no penalty is leviable under section 74 and section 122 (2) (b) of the CGST Act. It was further submitted that no interest is also recoverable from the petitioners under section 50 of the CGST Act as the demand is not sustainable. 75. Learned advocate Mr. Paresh M. Dave appearing for the petitioner in Special Civil Application No. 15708 of 2024 adopted the submissions and contentions made by learned Senior Advocate Mr. Sridharan and further emphasised upon the contention that supply made by the petitioner of branded tobacco product to merchant exporter would be equivalent to export of goods as per the provisions of section 2 (5) of the IGST Act and therefore, same would be zero rated supply. Reliance was placed on decision in case of Lord Krishna Sugar Mills v. Commissioner of Sales Tax, UP Lucknow reported in (1966) 18 STC 498 (SC) wherein relying upon decision in case of Amritsar Sugar Mills Co. Ltd.(supra), it was held that the appellant before the Court was entitled to rebate under section 5 of the Uttar Pradesh Sales Tax Act, 1948 in r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te Mr. C.B. Gupta and learned advocate Mr. Utkarsh Sharma appearing for the respondents submitted that there is no exemption notification issued by the Central Government to for exemption from levy of Compensation Cess on the inter-state supply and the same rate would be applicable to the goods which are sold by the petitioners to the merchant exporter for exports. 80. It was submitted that the petitioners have an alternative remedy to challenge the order-in-original passed by the respondent authorities by filing an appeal before the appellate authority as per the provisions of section 107 of the GST Act and as such, the petitions should not be entertained while exercising the jurisdiction under Article 227 of the Constitution of India. 81. It was submitted that issuance of notification of exemption from levy of GST is a policy decision and the notification issued for the purpose of exemption of the goods to be exported by restricting the levy to 0.1% on CGST, SGST and IGST cannot be applied to Compensation Cess to be levied under the Compensation Cess Act. 82. In support of the submissions, reliance was placed on the following averments made in the affidavit in reply: "13. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... formation of a policy decision. I submit that in matters of formation of policies and more particularly fiscal policy, this Hon'ble Court would ordinarily refrain from exercising extraordinary writ jurisdiction and intervening. Hence, on this ground alone, the said prayer is liable to be rejected. 17. I submit that it is amply clear that compensation cess is completely and independent and distinct from GST, it has been introduced for a limited period for a specific purpose and the supply effected by the Petitioner to merchant exporter attracts levy of compensation cess. I state that the products of the Petitioner are covered under the notification being Notification No. 1/2017-Compensation Cess (Rate) dated 28.06.2017 and hence compensation cess along with applicable GST on intra and inter state supply of goods is required to be paid by the assessee along with interest and penalty in terms of the impugned order." 83. It was submitted that as per Notification No. 1/2017 dated 28.06.2017, the rate of Compensation Cess for chewing tobacco without lime tube under Chapter Heading 2403 99 10 is 160% being sin goods and as such, Compensation Cess is to be levied at the same rate a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fficers of the DGGI. It was therefore, submitted that the petitioners have been rightly saddled with interest and penalty in the impugned order-in-original. 90. It was further submitted that as per Notifications No. 40/2017 and Notification No. 41/2017, no exemption for Compensation Cess has been provided and supply at the nominal rate under the said notifications is not mandatory and it is optional and the assesse will be liable to pay GST and Compensation Cess on supply at normal rate if such option of supply at exemption/nominal rate is not exercised. 91. It was therefore, submitted that since exemption/nominal rate of GST and IGST has been provided by the said notifications and no exemption has been provided thereof on Compensation Cess, the petitioners are liable to pay Compensation Cess along with exemption/nominal rate of CGST and IGST. 92. It was therefore, submitted that no interference may be made in the impugned orders and the petitioners may be relegated to avail the alternative efficacious remedy by preferring an appeal to challenge the impugned order-in-original. 93. Learned Senior Advocate Mr. Sridharan in rejoinder submitted that alternative efficacious remedy i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pply" means any of the following supplies of goods or services or both namely:- (a) export of goods or services or both; or (b) supply of goods or services or both [for authorised operations] to a Special Economic Zone developer or a Special Economic Zone unit. xxx (3) A registered person making zero-rated supply shall be eligible to claim refund under either of the following options, namely:- (a) he may supply goods or services or both under bond or Letter of Undertaking, subject to such conditions, safeguards and procedure as may be prescribed, without payment of integrated tax and claim refund of unutilised input tax credit; or (b) he may supply goods or services or both, subject to such conditions, safeguards and procedure as may be prescribed, on payment of integrated tax and claim refund of such tax paid on goods or services or both supplied, in accordance with the provisions of section 54 of the Central Goods and Services Tax Act or the rules made thereunder." Goods and Service Tax (Compensation to States) Act, 2017. 2. Definitions (1) In this Act, unless the context otherwise requires,- xxx (c) "cess" means the goods and services tax compensation c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , short-levy, interest, appeals, offences and penalties, shall, as far as may be, mutatis mutandis, apply, in relation to the levy and collection of the cess leviable under section 8 on the intra-State supply of goods and services, as they apply in relation to the levy and collection of central tax on such intra-State supplies under the said Act or the rules made thereunder. (2) The provisions of the Integrated Goods and Services Tax Act, and the rules made thereunder, including those relating to assessment, input tax credit, non-levy, short-levy, interest, appeals, offences and penalties, shall, mutatis mutandis, apply in relation to the levy and collection of the cess leviable under section 8 on the inter-State supply of goods and services, as they apply in relation to the levy and collection of integrated tax on such inter-State supplies under the said Act or the rules made thereunder: PROVIDED that the input tax credit in respect of cess on supply of goods and services leviable under section 8, shall be utilised only towards payment of said cess on supply of goods and services leviable under the said section. GST ACT 54 (3) - Subject to the provisions of sub-section (1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to the BOs for which full input tax credit is available to the concerned BOs. However, HO may not be issuing tax invoice to the concerned BOs with respect to such services, or the HO may not be including the cost of a particular component such as salary cost of employees involved in providing said services while issuing tax invoice to BOs for the services provided by HO to BOs. Whether the HO is mandatorily required to issue invoice to BOs under section 31 of CGST Act for such internally generated services, and/ or whether the cost of all components including salary cost of HO employees involved in providing the said services has to be included in the computation of value of services provided by HO to BOs when full input tax credit is available to the concerned BOs. The value of supply of services made by a registered person to a distinct person needs to be determined as per rule 28 of CGST Rules, read with sub-section (4) of section 15 of CGST Act. As per clause (a) of rule 28, the value of supply of goods or services or both between distinct persons shall be the open market value of such supply. The second proviso to rule 28 of CGST Rules provides that where the recipient is e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Circular No. 1/1/2017-Compensation Cess dated 26.7.2018 8. In view of the above, it is hereby clarified that provisions of section 16 of the IGST Act, 2017, relating to zero rated supply will apply mutatis mutandis for the purpose of Compensation Cess (wherever applicable), that is to say that: a) Exporter will be eligible for refund of Compensation Cess paid on goods exported by him [on similar lines as refund of IGST under section 16 (3) (b) of the IGST, 2017]; or b) No Compensation Cess will be charged on goods exported by an exporter under bond and he will be eligible for refund of input tax credit of Compensation Cess relating to goods exported [on similar lines as refund of input taxes under section 16 (3) (a) of the IGST, 2017]." 97. There is no dispute between the parties regarding the supply of goods by the petitioners to merchant exporters to be considered as "export of goods" in the hands of the petitioners and therefore, provision of section 16 of the IGST Act would also apply to the supplies made by the petitioners to merchant exporters as zero rated supply. 98. Prior to GST regime under the provisions of the Central Excise Act and Rules as well as Sales Ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elivery. If it means constructive delivery then there is no doubt that on the facts as stated by the Judge (Revisions) the contract provided for constructive delivery inside Uttar Pradesh and the assessee-mills would not be entitled to rebate under section 5. The Madras High Court had occasion to consider a similar question in India Coffee and Tea Distributing Co. Ltd. v. The State of Madras [1959] 10 S.T.C. 359. It held that the word "delivery" in section 5 of the Madras General Sales Tax Act, 1939, which exempts from taxation sales of tea "if the sale is for delivery outside the State and delivery actually was made" did not include anything which the law deemed "delivery" but was restricted to physical delivery of the thing sold. In coming to this conclusion, Subrahmanyam, J., observed: "In deciding whether the word 'delivery' in section 5(v) includes delivery in law, we have to have regard to the objects of the Legislature in enacting section 5 (v). The object obviously was the promotion of the export of tea. The Legislature intended that where tea was exported from the State for being delivered outside the State, the sale which resulted in such export should be exem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rters should not be subject to a tax of 1%. The Hon'ble Minister from Karnataka raised a question whether the proposed exemption scheme would also apply to export of services. DGFT clarified that the present scheme of advance authorisation, EPCG, etc. applied only to goods. The Secretary suggested that no new dispensation should be created under the GST. The Council agreed to this suggestion. The Secretary suggested that supplies to merchant exporters could be exempt if the goods were moved immediately to the port of shipment or to an export warehouse. The Senior Joint Commissioner (Commercial Taxes), West Bengal stated that in the earlier scheme of Form H under VAT, no tax was paid when goods were sold to merchant exporter but full tax became payable if goods were not eventually exported. He stated that a similar procedure should be continued and there should be no mandatory requirement of directly sending the goods to warehouses for export. The Secretary stated that input tax credit would not be available if full exemption was given for supply to merchant exporter. He suggested that a tax of 0.1% could be levied on supplies to merchant exporters. The Hon'ble Deputy Chief ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is saddled with levy of Compensation Cess at the rate of 160% considering the same as inter-State supply under the IGST Act though supplies made by the petitioners to merchant exporters is "export of goods" as per section 2 (5) of the IGST Act read with clarification issued by Notification No. 13/2018. Therefore, supplies made by the petitioners to merchant exporter is zero rated supply. 2) If the petitioners are made liable to pay Compensation Cess at the normal rate of 160%, the same analogy should apply with regard to working capital blockage in the hands of the manufactures who are supplying goods for export to merchant exporters for which GST Council has recommended for exemption from levy of GST and IGST and reduced the rate upto 0.1% only for the purpose of notifying the transaction so as to bring the transaction within the purview of provisions of the GST Act. Accordingly, the Government has issued notification as stated here-in-above. As the Compensation Cess Act is a satellite Act adopting the provisions of GST and IGST Act, Government ought to have issued notification under the Compensation Cess Act also at par with Notification No. 40/2017 and Notification No. 41/201 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2017. 111. It is not in dispute that the goods manufactured by the petitioners are removed from the factory of the petitioners against the purchase orders of the merchant exporters for procuring the goods at concessional rate for the purpose of export. Goods are sealed and are cleared directly to the port for export without being stored at any intermediate place of merchant exporter in accordance with the procedure prescribed under Rule 19 of the Central Excise Rules, 2002 as well as Notification No. 40/2017 and Notification No. 41/2017. The merchant exporters thereafter consolidate the cargo and ships the same for export. Therefore, the movement of goods from the factory of the petitioners to the port for export and from the port to outside India are integrally connected and therefore they are part and parcel of the same transaction. The GSTIN of the assessee and the tax invoice number is also mentioned in the shipping bill by the merchant exporter. In such circumstances, as per provisions of section 2 (5) of the IGST Act, supply of goods by the petitioners to merchant exporters is to be considered as export of goods and therefore, the same would be zero rated supply as per secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mula is not ambiguous in nature or unworkable, nor is it opposed to the intent of the legislature in granting limited refund on accumulation of unutilised ITC. It is merely the case that the practical effect of the formula might result in certain inequities. The reading down of the formula as proposed by Mr Natarjan and Mr. Sridharan by prescribing an order of utilisation would take this Court down the path of recrafting the formula and walk into the shoes of the executive or the legislature, which is impermissible. Accordingly, we shall refrain from replacing the wisdom of the legislature or its delegate with our own in such a case. However, given the anomalies pointed out by the assessees, we strongly urge the GST Council to reconsider the formula and take a policy decision regarding the same." 115. In view of above, when there is no recommendation by GST Council to grant exemption from payment of Compensation Cess at par with GST and IGST on supply of goods for export or supply to merchant exporter, we also strongly urge the GST Council to consider the issue of granting exemption from levy of Compensation Cess at par with GST and IGST as recommended by it in 22nd Meeting so as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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