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REPORTABLE IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 1288 OF 2005

M/S. SPORTS & LEISURE APPAREL LTD. .....APPELLANT(S)

VERSUS

COMMISSIONER OF CENTRAL EXCISE, NOIDA

.....RESPONDENT(S)

W I T H

CIVIL APPEAL NO. 1752 OF 2006

CIVIL APPEAL NO. 1753 OF 2006

CIVIL APPEAL NO. 1856 OF 2006

CIVIL APPEAL NO. 2267 OF 2006

CIVIL APPEAL NO. 2856 OF 2006

CIVIL APPEAL NOS. 6036-6038 OF 2008

CIVIL APPEAL NO. 4612 OF 2010

CIVIL APPEAL NO. 4886 OF 2010

CIVIL APPEAL NOS. 6749-6769 OF 2010

CIVIL APPEAL NOS. 7247-7281 OF 2010

CIVIL APPEAL NO. 8186 OF 2010

CIVIL APPEAL NOS. 8187-8189 OF 2010

CIVIL APPEAL NOS. 9145-9164 OF 2010

CIVIL APPEAL NO. 2260 OF 2011

CIVIL APPEAL NO. 5473 OF 2013

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CIVIL APPEAL NO. 5474 OF 2013

J U D G M E N T

A.K. SIKRI, J.

All these appeals are taken up together for hearing as the issue

involved in these appeals is identical, though divergent view is taken by

the different Benches of the Tribunal.  Issue pertains to grant of benefit

of exemption under Notification No. 14/02-CE and 15/02-CE both dated

01.03.2002.  These notifications give the benefit of concessional rate or

nil  rate  of  duty  to  the  knitted  garment  manufacturers  on  certain

conditions.  One of the conditions is for full  exemption is that knitted

garments are exempt if  manufactured out of  knitted fabrics on which

appropriate duty of excise has been paid and no cenvat credit of duty

paid  on inputs  or  capital  goods has been taken.   If  Cenvat  credit  is

taken, the duty is at concessional rate.   

2. The  Revenue  has  taken  the  position  that  the  benefit  of  these

notifications  is  available  only  when  the  garments  have  been

manufactured from the duty paid fabrics and in those cases where the

fabrics  has  not  suffered  excise  duty,  it  cannot  be  said  that  the

appropriate duty of excise has been paid thereon and consequently the

benefit of notifications would not be available. The stand taken by the

assessees, on the other hand, is that Explanation II to the exemption

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notifications creates a legal  fiction,  specifying that  for  the purpose of

conditions of this notification, textile yarn or fabrics shall be deemed to

have been duty paid even in the absence of production of documents

evidencing payment of duty.  They also relied upon condition No. 3 of

this notification.  Many Benches of the Custom Excise and Service Tax

Appellate Tribunal  (for  short  'CESTAT')  has accepted the plea of  the

assessees  holding  that  benefit  of  exemption  notification  would  be

admissible.  Many other Benches of the Tribunal have taken a contrary

view,  thereby  accepting  the  plea  of  the  Revenue  and  holding  that

Condition No. 4 is not satisfied. That is the precise reason for filing two

sets  of  appeals,  preferred  both  by  the  Revenue  as  well  as  those

assessees.

3. In order to state the precise question of law that falls for consideration

and the backdrop in which it arises for discussion, we would take note of

the facts appearing in Civil Appeal No. 1288 of 2005 which is preferred

by an assessee.   

4. Assessee  is  an  integrated  textile  apparel  manufacturer.  Assessee

purchases excise duty paid yarn from the market on payment of excise

duty.  Assessee does not take any MODVAT credit of the duty paid on

the yarn.  Assessee manufactures the knitted fabrics in its factory out of

the duty paid yarn.  The knitted fabric is entirely captively consumed in

the  manufacture  of  knitted  apparels.   The  apparels  are  thereafter

cleared outside the factory.

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5. Vide Union Budget 2002, a new excise duty scheme for textile sectors

was introduced.  Under this scheme, vide Notification Nos. 14/2002-CE

and 15/2002-CE dated 01.03.2002, fabric manufacturers and garment

manufacturers  were  given  an  option  to  operate  under  two  different

schemes.  Under one scheme, where the manufacturers of the fabric or

garment wants to avail the MODVAT credit of the duty paid on the inputs

or the capital goods, excise duty @ 75% of the normal rate of duty of

12% was levied.  Under another scheme, where the manufacturers do

not  want  to  avail  of  the  MODVAT facility,  complete  exemption  from

excise duty to the fabrics and garments was granted.  The various Sl.

Nos. of Notification Nos. 14/2002-CE and 15/2002-CE prescribed these

two alternative schemes.  

6. Notification No. 15/2002-CE vide Sl. No. 14 prescribed Nil rate of excise

duty for “Articles of apparel, knitted or crocheted” falling under Heading

61.01, subject to the following condition:

“If  made  from  knitted  or  crocheted  textile  fabrics, whether or not processed on which appropriate duty of excise  leviable  under  the  First  Schedule  to  the  said Central  Excise Tariff  Act,  and the Additional  Duties  of Excise (Goods of Special Importance) Act read with any notification for the time being in force or the Additional duty  of  Customs  leviable  under  Section  3  of  the Customs Tariff Act, 1975, as the case may be, has been paid and no credit of the duty paid on inputs or capital goods has been taken under Rule 3 or Rule 11 of the CENVAT Credit Rules, 2002.”

Explanation to Notification No. 15/2002-CE provided as under:

“For the purposes of conditions specified below, textile yarns or fabrics shall be deemed to have been duty paid

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even  without  production  of  documents  evidencing payment of duty thereon”

7. Notification  No. 15/2002-CE, as is  evident  from the preamble thereto,

grants  exemption  from  whole  of  duty  of  excise  leviable  on  knitted

garments  falling  under  heading  61.01  subject  to  the  satisfaction  of

Condition  No.  4  of  this  notification.   As  per  Condition  No.  4  of  the

notification, knitted garments are exempt provided these garments are

manufactured out of knitted fabrics on which appropriate excise duty has

been paid and no cenvat  credit  of  duty paid on the inputs or  capital

goods has been taken.

8. Show cause notice dated 27.03.2003 was issued by the Commissioner

of  Central  Excise,  proposing  to  deny  the  benefit  of  Notification

No.15/2002-CE to the apparels and demanding excise duty in respect of

the  clearances  made between 01.03.2002  to  November,  2002.   The

assessee submitted its reply.  After  considering the reply filed by the

assessee,  Commissioner  of  Central  Excise,  Noida  passed

order-in-original dated 31.07.2003 confirming the duty demand imposing

equivalent  amount of  penalty.  On 20.01.2004, assessee filed appeal

No.  E/251/03-A  before  the  Tribunal  against  the  above  order  of  the

Commissioner.  In that appeal, the Tribunal passed the impugned final

Order  Nos.  1239-1240/04-NB(A)  upholding  the  order  of  the

Commissioner on the aspect of denial of Notification No. 15/2002-CE to

the apparels.  However, the Tribunal has set aside the penalty imposed

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on the assessee.   

9. A perusal of the order of the Tribunal would reveal that for coming to this

conclusion, the Tribunal has referred to and relied upon the judgment of

this Court in  CCE, Vadodara v. Dhiren Chemical Industries1.  In that

case, exemption notification came up for consideration and interpreting

the  phrase  “on  which  the  appropriate  amount  of  duty  of  excise  has

already been paid”, the Court held that in order to avail the benefit of the

notification, it was incumbent upon the manufacturer to actually pay the

duty, in the following words:

“An  exemption  notification  that  uses  the  said  phrase applies to goods which have been made from duty paid material.  In the same phrase, due emphasis must be given to the words “has already been paid”.   For the purposes of getting the benefit of the exemption under the  notification,  the  goods  must  be  made  from  raw material on which excise duty has, as a matter of fact, been paid,  and has been paid at  the “appropriate” or correct  rate.   Unless  the  manufacturer  has  paid,  the correct amount of excise duty he is not entitled to the benefit of the exemption notification.”

10. The  Tribunal  has  also  rejected  the  contention  of  the  assessee

predicated on Explanation II to the notification by observing that the said

explanation  only  dispenses  production  of  documents  evidencing

payment of duty and does not waive the condition of payment thereof.

11. Challenging the aforesaid rationale adopted by the Tribunal in arriving at

the impugned decision, the learned counsel for the Revenue made his

submission on two fronts.  In the first instance, it was argued that the

1 (2002) 2 SCC 127

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Tribunal  erred  in  relying  upon  the  judgment  of  this  Court  in  Dhiren

Chemical  Industries  case,  which  is  a  judgment  of  December, 2001

wherein earlier notification was interpreted by the Court.  He submitted

that the position changed dramatically thereafter inasmuch as in order to

overcome  the  condition  of  actual  excise  duty,  Explanation  II  was

specifically inserted in Notification No. 15/02 thereby creating a fiction of

deemed  duty  paid  insofar  as  manufacturers  of  knitted  textile  are

concerned.   For  this  purpose,  he  has  taken  us  through  the  Budget

Speech/Explanatory  Notes  concerning  the  Notification  Nos.  14  and

15/2002.   He,  thus,  argued  that  judgment  in  Dhiren  Chemical

Industries  case  was  not  applicable  having  regard  to  the  aforesaid

provision specifically incorporated in the new notifications.  In this very

hue,  his  second  attempt  was  to  argue  that  Explanation  II  of  the

notification  was  not  correctly  interpreted  by  the  Tribunal,  thereby

defeating the very purpose for which this notification was issued.   

12. Learned counsel for the assessees, on the other hand, argued on the

same lines on which the Tribunal has rested its decision.   

13. We have considered the respective submissions and are of the view that

the stand taken by the assessees warrants to succeed.   

14. We have  already  reproduced  the  relevant  portion  of  Notification  No.

15/2002,  in  particular  Condition  No.  4  contained  therein  as  well  as

Explanation II thereof.  As pointed out above, in the Union Budget 2002,

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a  new excise  duty  scheme for  textile  sector  was  introduced,  as  per

which manufacturers of the fabric or garments were given choice to opt

under  one  of  two  schemes.   Normal  rate  of  duty  is  12%.   The  two

notifications  provided  exemption  and  concessional  rates  respectively.

Those who wanted to avail the MODVAT credit of the duty paid on the

inputs  or  the  capital  goods,  were  supposed  to  pay  excise  duty  at

concessional rate i.e. 75% of the normal rate of duty.  Under the other

scheme, full exemption from payment of duty was granted to those who

did not wish to avail the MODVAT credit facility.  These two schemes

were explained in the Budget Explanatory Notes issued by the Central

Government, relevant portion whereof is extracted below:

“In the case of processed knitted fabrics of cotton, which were hitherto exempt from duty, an optional levy of 12% [8% Cenvat + 4% AED(ST)] has been prescribed.  That is, if the manufacturer wants to avail cenvat credit of the duty paid on inputs (either on deemed basis or actual basis)  and capital  goods (on actual  basis),  he will  be required  to  pay  duty  at  12%  adv.  [8%  cenvat  +  4% AED(ST)].   If  he does not want to avail  any credit  on inputs and capital goods, he is not required to pay any duty.  The rates of deemed credit for processed knitted fabrics of cotton are the same as applicable to woven fabrics.   

Notification  Nos.  14/2002-CE  and  15/2002-CE,  both dated 01.03.2002 prescribes effective rates of  duty of 'nil' or 12% adv. in the case of textile fabrics subject to the condition that  the goods should  have been made from textile  yarns or  fabrics  on which the appropriate excise duty or CVD has been paid.  It may, however, be noted  that  Explanation  II  to  the  notification  makes  it abundantly clear that all fibres and yarns are deemed to have  been  duty  paid  even  without  production  of documents evidencing payment of duty.  Therefore, the manufacturer is eligible for the rates prescribed in the notification.  The only condition that has to be satisfied is with  regard  to  availment  or  non-availment  of  cenvat credit, as the case may be.  

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It is thus made clear that the benefit of the rate of duty should  be  allowed  without  insisting  upon  any documentary proof for payment of duty. However, if the manufacturer wants to avail cenvat credit of duty paid on inputs  or  capital  goods  on  actual  basis,  he  will  be required  to  produce  duty  paying  documents  as prescribed under the Cenvat credit rules.”

15. A reading of the aforesaid Explanatory Note makes it clear that those

who did not  want to avail  MODVAT facility  were allowed to clear the

goods without payment of any excise duty.  It is in this context that the

authorities  were  asked not  to  insist  upon any documentary  proof  for

payment of  duty and this was transported into the notification,  in the

form  of  Explanation  II.   It,  therefore,  becomes  clear  that  when

Explanation II states that the duty shall be deemed to have been paid

even  without  production  of  documents  evidencing  payment  of  duty

thereon, it was clearly meant that no duty was required to be paid by the

manufacturers of knitted garments.  Such an intention is clearly reflected

in the Government's own Budgetary Notes extracted above.  We, thus,

hold that Explanation II to the said exemption Notification Nos. 14/2002

and 15/2002 create legal fiction and that was the precise purpose for

which this explanation was added.  It is trite law that a fiction created by

a provision of law is to be given its due play and it must be taken to its

logical conclusion (Union of India v. Jalyan Udyog2).  

16. It would be pertinent to mention here that Condition No. 3 which uses

the words “read with any notification for the time being in force” was put

2 (1994) 1 SCC 318

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in place to overcome the interpretation that was given by this Court in

Dhiren Chemical Industries case.

17. Learned counsel for the assessees has brought to our notice another

pertinent development.  He submitted that because of conflicting views

of the Tribunal, the matter was referred to a larger Bench of the Tribunal

which has answered the reference by detailed judgment rendered on

29.10.2014, accepting the plea of the assessees and rejecting the stand

of  the Revenue.   In  any case,  we have independently  examined the

issue  and  for  the  reasons  stated  above,  we  are  of  the  opinion  that

benefit  of  exemption  notification  would  be  available  to  all  these

assessees.  

18. As  a  result,  appeals  filed  by  the  assessees  are  allowed  and  those

appeals preferred by the Revenue are dismissed.  There shall  be no

order as to costs.   

.............................................J. (A.K. SIKRI)

.............................................J. (ROHINTON FALI NARIMAN)

NEW DELHI; MARCH 04, 2016.