The Karnataka High Court has rejected the Revenue’s appeal against a CESTAT order granting relief to a manufacturer over supplies made to Special Economic Zone (SEZ) developers, leaving undisturbed the setting aside of a ₹4.90 crore demand, along with interest and penalty.
The Bench of Justice S.G. Pandit and Justice Dr. Chillakur Sumalatha relied on the Court’s earlier decision in Commissioner of Central Excise & Service Tax, Bangalore v. Fosroc Chemicals (India) Pvt. Ltd. The Bench declined to interfere with the Tribunal’s decision despite the Revenue’s contention that the amendment extending the relevant CENVAT benefit to SEZ developers operated only prospectively.
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The respondent/assessee manufactured TMT bars, MS rolls and end cuttings falling under Chapter 72 of the Central Excise Tariff Act, 1985.
The company cleared goods to SEZ developers and availed CENVAT credit on inputs relating to those goods. The Revenue took the position that the manufacturer was not eligible for the benefit of the exception under Rule 6(6) of the CENVAT Credit Rules, 2004, in respect of the disputed supplies.
Consequently, the department issued a show-cause notice dated February 13, 2009, proposing recovery of ₹4,90,22,299, representing 10% of the price or value of the goods cleared to SEZ developers.
The department invoked Rule 14 of the CENVAT Credit Rules read with Section 11A of the Central Excise Act, 1944, including the extended limitation proviso. Interest and penalty were also proposed.
After considering the company’s reply, the adjudicating authority passed an order-in-original dated September 29, 2009, confirming the demand together with interest and penalty.
The manufacturer challenged that order before the Customs, Excise and Service Tax Appellate Tribunal, South Zonal Bench, Bengaluru.
CESTAT relied on the Karnataka High Court’s ruling in Fosroc Chemicals, reported at 2015 (318) E.L.T. 240 (Kar.), and allowed the manufacturer’s appeal. The Tribunal set aside the adjudication order and held that the company was entitled to all consequential relief.
Aggrieved by that decision, the Revenue approached the High Court under Section 35G of the Central Excise Act.
The Revenue’s proposed substantial questions of law centred on Notification No. 50/08 and the effect of the amendment dated December 31, 2008.
The department questioned whether CESTAT’s order was sustainable in view of the notification’s claimed prospective operation. It also raised questions concerning the treatment of supplies to SEZ developers before December 31, 2008, under Rule 6(3)(b) of the CENVAT Credit Rules and their treatment as exports under Section 2(18) of the Customs Act.
The Revenue further contended that the Tribunal had ignored the statutory mandate that the amendment was prospective.
Appearing for the department, advocate Jeevan J. Neeralgi submitted that CESTAT had failed to appreciate the grounds urged and had erroneously allowed the manufacturer’s appeal. The respondent company remained unrepresented, although service had been held sufficient.
The High Court noted that the manufacturer’s supplies to SEZ developers were undisputed.
The Bench observed that the relevant benefit was already available in respect of units situated within SEZs and that the amendment dated December 31, 2008, extended the benefit to SEZ developers as well.
Significantly, the Court recorded that the amendment was made “by way of substitution.”
The Bench found that CESTAT had correctly followed the coordinate Bench’s decision in Fosroc Chemicals. The Tribunal had extracted and discussed the relevant portion of that precedent while granting relief to the manufacturer.
In view of the extension of the benefit to SEZ developers and the earlier High Court ruling, the Bench found no ground to interfere with the Tribunal’s order.
Rejecting the Revenue’s appeal, the High Court left intact CESTAT’s order setting aside the demand of ₹4,90,22,299, along with the associated interest and penalty. The Tribunal’s direction granting consequential relief also remained undisturbed.
The ruling affirms the application of the Fosroc Chemicals precedent to the dispute over supplies to SEZ developers before the December 31, 2008 amendment. The Revenue’s contention that the amendment operated only prospectively did not persuade the Court to disturb the relief.
The judgment rests on the amendment by substitution and the earlier coordinate Bench decision. It does not separately determine the extended limitation issue or provide an independent, detailed ruling on the Customs Act export-definition question raised by the Revenue.
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