Bajaj Auto Ltd. vs. Union of India: Supreme Court Quashes Tax Demand on Exempted Units

The case of Bajaj Auto Limited vs. Union of India & Ors. raised significant legal questions regarding tax exemptions for manufacturing units operating under government-incentivized schemes. The Supreme Court of India, in its judgment delivered on March 27, 2019, examined whether a manufacturing establishment that was exempted from paying Central Excise Duty (CENVAT) was still liable for National Calamity Contingent Duty (NCCD), Education Cess, and Secondary & Higher Education Cess.

The judgment revolved around a policy initiative taken by the Government of India in 2003 to promote industrialization in the states of Uttarakhand and Himachal Pradesh. Under this scheme, new industrial units and existing units undergoing substantial expansion were granted 100% excise duty exemption for ten years. However, the question before the Court was whether other cesses and duties, such as NCCD and Education Cess, were also exempted under the notification.

Background of the Case

Bajaj Auto Limited, a major automobile manufacturer, established a two-wheeler manufacturing unit in Uttarakhand in 2007. The unit was granted excise duty exemption under Notification No. 50/2003-Central Excise, issued by the Central Board of Excise and Customs (CBEC) under Section 5A of the Central Excise Act, 1944. This notification provided for a complete waiver of excise duties for specified goods manufactured in the designated regions.

During an audit conducted in 2009, it was observed that Bajaj Auto had not been paying NCCD, Education Cess, and Secondary & Higher Education Cess. The tax authorities issued a show cause notice on August 26, 2011, demanding payment of these duties. Bajaj Auto contested this demand and filed a writ petition in the High Court of Uttarakhand, which dismissed the petition. The matter then went to the Supreme Court.

Legal Issues Raised

• Whether the exemption granted under Notification No. 50/2003 covered NCCD, Education Cess, and Secondary & Higher Education Cess.
• Whether these levies were independent of excise duty or mere surcharges on it.
• Whether an exemption notification should be interpreted strictly or liberally in favor of the assessee.

Petitioner’s (Bajaj Auto’s) Arguments

Bajaj Auto Limited, represented by senior counsels Mr. Mukul Rohatgi and Mr. Arvind Datar, contended that:

• The three contested duties were all surcharges on excise duty, meaning that if excise duty itself was exempted, then these cesses could not be levied.
• The Supreme Court had already ruled in SRD Nutrients Pvt. Ltd. vs. Commissioner of Central Excise, Guwahati that Education Cess and Secondary & Higher Education Cess were not payable when excise duty was exempted.
• Since the government’s policy explicitly intended to promote industrialization through tax exemptions, it would be against the spirit of the notification to demand these duties.
• The principle of liberal interpretation of exemption notifications should apply to extend the benefit to the assessee.

Respondent’s (Union of India’s) Arguments

The government, represented by counsel Ms. Nisha Bagchi, argued:

• While Education Cess and Secondary & Higher Education Cess were levied on the total excise duty amount and could be exempted if excise duty was waived, NCCD was a duty on the product itself, making it independent of the excise exemption.
• Exemption notifications should be interpreted strictly, and since NCCD was not explicitly mentioned in the exemption notification, Bajaj Auto was liable to pay it.
• The exemption notification covered “excise duty” but did not mention “other duties” like NCCD, which had a different statutory origin.

Supreme Court’s Judgment

The Supreme Court ruled in favor of Bajaj Auto, quashing the tax demand and setting aside the High Court’s order. The key findings were:

• Education Cess and Secondary & Higher Education Cess were not payable since they were levied as a percentage of excise duty, and when excise duty was exempt, these cesses had no basis for calculation.
• NCCD, though a separate duty, was also in the nature of an excise duty. Since the exemption notification stated that the unit was exempt from the “whole of the duty of excise,” this included NCCD.
• Following the precedent set in SRD Nutrients Pvt. Ltd., the Court held that surcharges levied in the nature of excise duty could not be separately demanded when the base excise duty itself was exempted.
• The government’s own circulars had previously clarified that no cess could be levied on exempted excise duty.
• The Court reaffirmed that exemption notifications should be interpreted liberally to fulfill their intended economic objectives.

Key Takeaways from the Judgment

• Manufacturing units availing excise duty exemptions under government policies cannot be asked to pay surcharges that are computed based on excise duty.
• NCCD, though levied on the product itself, remains an excise duty and falls within the scope of exemption notifications.
• The Supreme Court has consistently followed the principle that tax exemptions should be interpreted to maximize benefits for the assessee.
• Government notifications granting tax reliefs must be applied in a manner that aligns with their policy intent, avoiding conflicting tax interpretations.

Conclusion

The Supreme Court’s decision in this case provided significant relief to industries operating in tax-incentivized zones. It reaffirmed the principle that once an industry is granted a full exemption from excise duty, the same benefit extends to all surcharges and levies linked to excise duty.

By quashing the government’s tax demand, the ruling clarified that NCCD, Education Cess, and Secondary & Higher Education Cess could not be imposed separately on an excise-exempt unit. The decision upholds the core principle that tax exemptions must be interpreted in a way that favors the taxpayer and fulfills the government’s economic policy objectives.

Petitioner Name: Bajaj Auto Limited.
Respondent Name: Union of India & Ors..
Judgment By: Justice L. Nageswara Rao, Justice Sanjay Kishan Kaul.
Place Of Incident: Uttarakhand.
Judgment Date: 27-03-2019.

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