Come 22nd September, Compensation Cess will cease to be levied on Passenger Vehicles, Coal and few more goods. There is a debate raging as to the requirement of reversal of Compensation Cess ITC. I have published a view that as per Section 18(4) of the CGST Act read with section 11 and 2(2) of the Goods And Services Tax (Compensation To States) Act, 2017 wherein I have said that Cess ITC availed on stock in hand could be questioned and that this issue needs to be legally rectified in favour of taxpayers to stop mass financial disruption.

In this article I have tried to analyze the issue from viewpoint of whether the Cess has been practically subsumed and also from judicial standpoint whereby I have analysed few landmark judgements of Supreme Court and High Court where the issue of ITC was at the core.

I. Cess is being subsumed in the new rates and is not being abolished

The argument that Cess levy is being made nil may be correct in theory, but not so legally, in my view in most cases Cess tax is being replaced with regular GST. In other words, commensurate reduction in cess is not being passed on in the new rates, let’s see the current total tax and new tax rates on goods on which cess is applicable:

From the above table, it is clear that cess is now being invisibly subsumed in the new rates either fully or partly. As would be clear from below discussed judicial precedents, a scheme which was promised needs to run its course, it is on the basis of the earlier Scheme necessarily that the taxes have to be adjusted and payment made complete. Any manner or mode of application of the said change would result in affecting the rights of the assesses.

II. Judicial Precedents and their relevance in the Cess saga

1. EICHER MOTORS LTD. Versus UNION OF India 1999 (106) E.L.T. 3 (S.C.)

Facts before the court:

Excise duty on Inputs used in making tractors was 15% to 25% whereas excise duty on final products (Tractors) was 10% to 15%. Value addition from raw material to finished tractors was also not of such a magnitude that the excise duty required to be paid on final products could have exceeded the total input credit allowed. Since the excess credit could not have been utilized for payment of the excise duty on any other product, the unutilized credit was getting accumulated. In other words, government was not getting anything in cash from tractor manufacturers.

To overcome this issue, Rule 57-F (4-A) was introduced in Central excise Rules 1994 and ITC lying in balance with the manufacturers on 16.03.1995 was sought to be lapsed.

Apex Court ruling:

Few manufacturers of tractors challenged this rule, Supreme Court, quashed the rule and allowed the ITC, but more importantly it gave a very important maxim which is relevant even today, Credit once legitimately availed becomes a vested right and cannot be taken away. Following para from this judgement is relevant for our discussion on the issue of Cess ITC:

“As pointed out by us that when on the strength of the Rules available, certain acts have been done by the parties concerned, incidents following thereto must take place in accordance with the Scheme under which the duty had been paid on the manufactured products and if such a situation is sought to be altered, necessarily it follows that the right, which had accrued to a party such as the availability of a scheme, is affected and, in particular, it loses sight of the fact that the provision for facility of credit is as good as tax paid till tax is adjusted on future goods on the basis of the several commitments which would have been made by the assesses concerned. Therefore, the Scheme sought to be introduced cannot be made applicable to the goods which had already come into existence in respect of which the earlier Scheme was applied under which the assessees had availed of the credit facility for payment of taxes. It is on the basis of the earlier Scheme necessarily that the taxes have to be adjusted and payment made complete. Any manner or mode of application of the said Rule would result in affecting the rights of the assesses”

In simple words, Supreme Court said that if a tax is paid under a scheme with a promise that the same would be allowed to be utilised towards a final product, said tax so paid cannot be lapsed for goods which have already come into existence. Compensation Cess was introduced due to compromise between the centre and states. It was to be used to compensate the states to cover their losses, taxpayers were promised that they could pass on the burden to the end consumer. Cess is not to be levied from 22nd Sept on Passenger vehicles, coal and beverages. Same situation will arise in near future for tobacco industry as and when the finance minister decides to discontinue levy of cess of them. Cess was collected from Traders for compensating states, but the next leg of the promise whereby the same could be passed on the end consumers won’t be possible post 22nd Sept. Traders can’t be left in a lurch as they can no more shift this burden to the end consumer.

2. DAI ICHI KARKARIA LTD. 1999 (112) E.L.T. 353 (S.C.)

This one is another landmark judgment on Input tax credit. The facts of this case were a bit different though, it was a case of valuation of intermediate goods.

Facts before the court:

The manufacturer purchased raw material, same were used in the manufacture of an intermediate product. He then used the intermediate product in the manufacture of a final product. The raw material and the intermediate product were then liable to excise duty and they were specified goods for the purposes of the Modvat scheme. The assessable value of the intermediate product for the purposes of excise duty was to be determined on the basis of its cost. In determining the assessable value of the intermediate product the cost of the raw material was to be considered.

Department took the view that the cost of the raw material must be the price paid by the manufacturer to its seller inclusive of excise duty so paid. Manufacturer took a stand that the basic price of the raw material should be taken without the excise duty thereon, as he is entitled to credit. Hence it was a question of valuation to start with but the subject matter of difference between the department and the taxpayer was the eligibility of Modvat credit.

After considering, Eicher Motors judgement, Supreme Court ruled that excise duty paid on raw materials used in making of intermediate goods cannot be included in the cost of intermediate goods because that credit will be used to pay excise duty on the final products being manufactured using the intermediate goods.

3. CCE, PANCHKULA Versus HMT (TD) LTD. 2015 (322) E.L.T. 342 (P & H)

Facts before the court:

HMT was engaged in manufacturing of tractors. It procured spares and other goods which were used for manufacturing of these tractors. It paid excise duty on procurement of such raw materials and took Input credit of the same. Effective from 9.07.2004, Tractors and parts used within the factory production for manufacturing of final goods were exempted from levy of excise duty, therefore the dept demanded reversal of ITC availed on raw materials.

Judgement by the Larger Bench of CESTAT – 2008 (232) E.L.T. 217 (Tri. – LB)

Larger Bench allowed the matter in favour of the taxpayer and ruled as under:”

21. We find that the different benches of the Tribunal have taken the similar view in the cases of C.N.C. Commercial Ltd. (supra) upheld by the High Court, Saboo Alloys Pvt. Ltd. (supra), Swastik Textile Engineers Ltd. (supra) and P.S.L. Ltd. (supra). We agree with the views expressed in the said decisions.

22. In view of the above discussions, we hold that when the input-credit legally taken and utilised on the dutiable final products, need not be reversed on the final product becoming exempt subsequently w.e.f. 9-7-2004. The decision of the Bangalore Bench in the case of TAFE Ltd. (Tractor Division) v. CCE, Bangalore – 2007 (210) E.L.T. 571 (Tri.) = 2007 (79) RLT 706 (Tribunal-Bangalore) enunciated the correct position of the law. The issue is thus, answered in favour of the assessee and against the Revenue.

Ruling by Punjab & Haryana High Court:

Matter was appealed by the department in High Court where in following ruling was given

20. In the instant case, it is not a matter of dispute that the assessee has paid the duty on inputs used in the indicated manufacturing of final goods, the assessee has maintained separate accounts/record, duly entered credit of duty-paid on the inputs in manufacture of final goods and validly availed the Cenvat credit. Therefore, the same cannot be reversed on the ground that the final product (i.e. agricultural Tractors) were subsequently exempted from tax. Thus, the contrary arguments of the learned counsel for the Revenue ‘stricto sensu’ deserve to be and are hereby repelled under the present set of circumstances. No contrary judgment has been cited on behalf of the Revenue. Therefore, the aforesaid judgments are the complete answer to the problem in hand.

21. In the light of aforesaid reasons, the assessee is held entitled to the benefit of Cenvat credit in the obtaining circumstances of the case. Hence, question No. 1 is answered against the Revenue and in favour of the assessee.

Department Appeal against the above judgement is pending in the Supreme Court – 2015 (323) E.L.T. A79 (S.C.) [10-01-2011]

III. Conclusion:

It would not be out of place to say that introduction of GST in its present form is because of a compromise between centre and state governments, that compromise came in the form levy of Compensation Cess. States feared that GST will decrease their revenue, Central Government promised them with 14% compounded growth of revenue for 5 years. To fund this promise, Compensation Cess was levied on many luxury and sin goods. This promise has now run its course, 56th Council meeting decided to remove this levy from all goods except tobacco related products, Finance Minister has been given the mandate to remove cess on tobacco related products once the loan and interest taken during covid is paid. In a nutshell, Compensation cess was a bridge to achieve GST reforms. GST is a refined form of Value added tax whereby the suppliers are allowed to pass on the burden to the end consumer, removing cess is a good step nonetheless, but burdening the traders who were just a pass through agents would be a huge breach of trust, trust which the taxpayers reposed in the governments.

Finance Minister once said that governments must collect taxes like bees collect nectar, flowers remain to blossom so should the taxpayers. This issue of reversal of cess needs to be resolved in this spirit, else the courts of this country will be inundated with litigation for years.

About Author
Nitesh Jain

A pioneer in his field, Nitesh Jain is the primary driving force behind the firm. Nurturing a result- oriented mind and a go-getter attitude, he specializes in presenting pragmatic solutions for key business challenges. He has consulted renowned corporates and PSUs like Sardar Sarovar Narmada Nigam Limited and Ahmedabad Metro Rail. He is an active member of Indirect Tax Committee of GCCI.

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