Tax Exemption for Export-Oriented Units: Supreme Court Clarifies Job Work and Duty Benefits

The case of Commissioner of Central Excise, Nagpur v. M/s Universal Ferro & Allied Chemicals Ltd. revolves around the taxation policies applicable to 100% Export Oriented Units (EOUs) engaged in job work and domestic tariff area (DTA) sales. The Supreme Court ruled on whether an EOU could undertake job work for domestic companies and still avail of duty exemptions. The judgment clarifies the applicability of the Excise Act, EXIM Policy, and exemptions under specific government notifications.

The case arose when the revenue department challenged the decision of the Customs, Excise & Service Tax Appellate Tribunal (CESTAT), which had ruled in favor of the company, Universal Ferro & Allied Chemicals Ltd. (UFAC). The dispute primarily concerned whether UFAC had violated EXIM Policy by engaging in job work for Tata Iron & Steel Company (TISCO) and whether the company was entitled to duty exemptions.

Background of the Case

UFAC was a 100% Export-Oriented Unit (EOU) approved by the Secretariat for Industrial Approvals, operating under the Ministry of Industry. The company was engaged in manufacturing Ferro Manganese and Silicon Manganese. While EOUs are primarily meant to export goods, they are allowed to sell a certain percentage in the Domestic Tariff Area (DTA) under specific conditions.

UFAC had entered into an agreement with TISCO for the conversion of raw materials into Silicon Manganese. Under this arrangement, TISCO supplied raw materials like Manganese Ore and Coke, while UFAC added other materials and processed them into Silicon Manganese. The finished goods were returned to TISCO after job work. The revenue department alleged that this transaction violated EXIM Policy since EOUs were permitted to perform job work only if the final product was exported, which was not the case here.

Key Legal Issues

• Whether UFAC’s job work for TISCO was permissible under EXIM Policy.
• Whether UFAC was entitled to duty exemptions under the Excise Act.
• Whether the revenue department was justified in demanding duty payments on goods processed under the job work agreement.

Arguments by the Revenue Department

The revenue department contended:

• UFAC’s job work did not qualify for exemption as per EXIM Policy. According to the department, an EOU could only perform job work if the finished product was directly exported.
• The company’s activities were covered under Paragraph 9.17(b) of EXIM Policy, which permits job work only when goods are meant for export, and in this case, the processed goods were sold in India.
• The proviso to Section 3(1) of the Central Excise Act states that EOUs selling goods in DTA must pay duties equivalent to customs duties applicable on imported goods.
• The proviso to Section 5A of the Central Excise Act prevents the government from granting exemptions to EOUs bringing goods into DTA unless specifically mentioned in a notification.
• Since UFAC did not technically “sell” the goods but returned them to TISCO after processing, it could not claim exemption under Notification No. 8/97-C.E.

Arguments by UFAC

UFAC argued:

• The transactions were covered under Paragraph 9.9(b) of EXIM Policy, which allows EOUs to sell up to 50% of their export value in the DTA.
• The company obtained all necessary permissions from the Development Commissioner and complied with all regulations.
• The policy was amended in 2000, extending job work permissions to all sectors, including manufacturing of metals.
• The revenue department ignored a key circular dated 22.05.2000, which extended job work permissions to EOUs across all sectors.
• The duty exemption granted under Notification No. 8/97-C.E. was applicable since the goods were cleared in compliance with EXIM Policy.

Supreme Court’s Observations

The Supreme Court ruled in favor of UFAC and upheld the CESTAT’s decision. The Court made the following key observations:

“The combined reading of paragraph 9.9(b) of the EXIM Policy, the Circulars issued by the Board, particularly, the Circular dated 22.5.2000 and reply to the query of the Customs Authorities by the Development Commissioner, SEEPZ, would clearly show, that the UFAC was entitled to carry out the job work on behalf of TISCO on payment of duty as provided under Exemption Notification of 1997.”

The Court rejected the revenue department’s argument that UFAC had violated EXIM Policy, stating that:

“The Development Commissioner had already clarified that UFAC’s transactions were permissible, and clearance of goods was allowed under EXIM Policy.”

Final Judgment

The Supreme Court dismissed the revenue department’s appeal and upheld the CESTAT ruling. The key aspects of the judgment were:

• UFAC’s activities were in compliance with EXIM Policy, and the company had obtained valid permissions from the Development Commissioner.
• The revenue department failed to consider the amendments to the EXIM Policy, which had expanded job work permissions for EOUs.
• The duty exemption granted under Notification No. 8/97-C.E. remained valid and applicable.
• The Court reiterated that an exemption notification is valid unless specifically repealed, and in this case, the notification explicitly allowed exemptions for job work transactions.

Conclusion

This judgment clarifies the taxation framework for EOUs and affirms that:

• EOUs can engage in job work for DTA units if permitted under EXIM Policy.
• Tax exemptions remain valid unless explicitly repealed by a new policy or legislative amendment.
• Revenue authorities must consider the latest policy changes before demanding duties.

The ruling reinforces the principle that government policies and tax exemptions should be interpreted in a manner that encourages business growth and fair trade practices. EOUs engaging in job work under proper authorization remain entitled to benefits under applicable laws.

Petitioner Name: Commissioner of Central Excise, Nagpur.
Respondent Name: M/s Universal Ferro & Allied Chemicals Ltd..
Judgment By: Justice S.A. Bobde, Justice B.R. Gavai, Justice Surya Kant.
Place Of Incident: Nagpur, Maharashtra.
Judgment Date: 06-03-2020.

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