The Hyderabad Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has set aside an excise demand raised on the inclusion of the value of railway rails supplied free of cost by Indian Railways and remanded the matter for fresh adjudication in light of a retrospective exemption introduced through the Finance Act, 2015.

The bench of Angad Prasad (Judicial Member) and A.K. Jyotishi (Technical Member) has observed that the Finance Act, 2015 retrospectively inserted Entry No. 205A into Notification No. 12/2012-C.E., granting exemption for the value of free-supplied rails and specifically covering the disputed period. Once a retrospective exemption is enacted, it must be treated as if it existed during the relevant period itself, and all pending proceedings must be decided in accordance with the amended law.

The appellant is engaged in the manufacture of glued joints classifiable under Chapter Heading 8530 of the Central Excise Tariff Act, 1985. Indian Railways had awarded contracts to the company for manufacturing and supplying glued joints used in railway infrastructure. For executing these contracts, Indian Railways supplied rails free of cost, which were then used by the appellant in the manufacturing process.

The department initiated proceedings alleging that the value of such free-supplied rails should form part of the assessable value of the finished glued joints. Based on this view, duty demand along with interest and penalties was proposed and subsequently confirmed by the adjudicating authority.

Before the Tribunal, the appellant argued that the very foundation of the demand had ceased to exist because Parliament subsequently introduced a retrospective exemption through the Finance Act, 2015. The amendment inserted Entry No. 205A into Notification No. 12/2012-C.E., granting exemption in respect of the value of rails supplied free of cost by Indian Railways for the manufacture of glued joints. Importantly, the exemption was made effective retrospectively for the period from March 17, 2012 to February 3, 2014—the exact period covered by the dispute.

The assessee contended that once the legislature retrospectively exempted such value from duty, the basis on which the demand was confirmed disappeared, rendering the impugned order unsustainable.

The Tribunal noted that there was no dispute regarding the fact that the glued joints were manufactured using rails supplied free of cost by Indian Railways. It also observed that the adjudicating authority had confirmed the demand solely on the premise that no exemption existed during the relevant period.

The Bench observed that the adjudicating authority never had an opportunity to examine the assessee’s eligibility under the retrospective exemption because the amendment was introduced after the original order was passed. Therefore, reconsideration by the original authority became necessary.

Holding that the legal basis of the demand had materially changed due to the retrospective legislative amendment, the Tribunal set aside the impugned order and remanded the matter to the adjudicating authority for fresh adjudication. It directed the authority to examine the case in light of the retrospective exemption and left all issues open, including valuation, eligibility to exemption, quantification of demand, limitation, interest, penalty and other factual and legal contentions.

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