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The introduction of Cenvat Credit Rules 2004 which facilitated cross utilization of credits in terms of Service Tax on input services and Central Excise duty on inputs and capital goods was expected to ease the process of credit availment and utilization for both manufacturers as well as service providers thereby enabling them to avoid cascading effect of taxes. In reality though, assessees in recent years have been facing numerous issues in terms of eligibility to credits. The questions often raised by the Department range from eligibility to credits considering the definition of inputs and input services to need for segregation of usage of such inputs and input services based on the turnover composition which at times impacts credit availment and utilization.

One of the issues which are being raised by the Department (Central Excise) Audit Teams in recent times is the one pertaining to payment of education cess and utilization of credits for the purpose of the same. The questions raised are specifically in the context of utilization of credit of basic duty of excise for education cess payment. The questions are raised on the ground that education cess cannot be equated with duty of excise.

There have been quite a few instances where objections have erroneously been raised by making a reference to Section 91 of Finance (No. 2) Act 2004 holding education cess to be in the nature of a surcharge ignoring for a moment the context in which both Sections 91 and 93 have been phrased in the said Act. The reference to education cess u/s 91 of the Act is in the context of Income Tax Rates while Section 93 would be relevant in the context of education cess on duty of excise.

A reading of the said Section 93 reproduced below would indicate the nature of education cess going by the principle of literal construction of Statutes which would signify legislative intent. Section 93 of the Act confirms the nature of education cess to be one of duty of excise. The same can be seen from the Section reproduced below –

“(1) The Education Cess levied under section 91, in the case of goods specified in the First Schedule to the Central Excise Tariff Act, 1985 (5 of 1986), being goods manufactured or produced, shall be a duty of excise (in this section referred to as the Education Cess on excisable goods), at the rate of two per cent., calculated on the aggregate of all duties of excise (including special duty of excise or any other duty of excise but excluding Education Cess on excisable goods) which are levied and collected by the Central Government in the Ministry of Finance (Department of Revenue), under the provisions of the Central Excise Act, 1944 (1 of 1944) or under any other law for the time being in force.

(2) The Education Cess on excisable goods shall be in addition to any other duties of excise chargeable on such goods, under the Central Excise Act, 1944 (1 of 1944) or any other law for the time being in force.”

Moreover, the aforesaid Section has to be seen in the context of Section 92 of the Act which seeks to assign meanings to terms used in the following Sections i.e. following Section 92. The same is reproduced below –

“The words and expressions used in this Chapter and defined in the Central Excise Act, 1944 (1 of 1944), the Customs Act, 1962 (52 of 1962) or Chapter V of the Finance Act, 1994 (32 of 1994), shall have the meanings respectively assigned to them in those Acts or Chapter, as the case may be.”

A combined reading of Sections 92 and 93 would reveal that the word “shall” has been used in order to assign meanings to words sought to be defined and/or clarified. Once the word “shall” is used in a statute, its use is imperative i.e. mandatory as confirmed in Pratap Singh Kaison Vs Gurmej Singh (AIR 1958 Punjab 409, 411). Therefore, the term “duty of excise” referred to in the aforesaid Chapter would have the meaning assigned to it under the Central Excise Act by virtue of Section 92. This would mean while it is referred to as duty of excise in Section 93, the term happens to be carrying the meaning assigned to it under Central Excise Act 1944.

Consequently, education cess in the context of excisable goods would have to be regarded as a duty of excise itself and nothing else. Once it is regarded as a duty of excise, all the provisions pertaining to levy and collection as well as associated benefits if any would have to be provided for as if it is a duty of excise. This is reinforced by the fact that Section 93(3) of the Act which is reproduced below, specifically talks about refunds and exemptions provisions under Central Excise Act 1944 and the Rules made there under applying to education cess in the same manner as they would apply to duties of excise on goods.

“(3) The provisions of the Central Excise Act, 1944 (1 of 1944) and the rules made there under, including those relating to refunds and exemptions from duties and imposition of penalty shall, as far as may be, apply in relation to the levy and collection of the Education Cess on excisable goods as they apply in relation to the levy and collection of the duties of excise on such goods under the Central Excise Act, 1944 or the rules, as the case may be.

In Loyal Textile Mills Ltd Vs JT. Secretary, MF (DR) (2012 (280) E.L.T 8 (Mad)), the High Court held that when at the time of collection, surcharge has taken the character of parent levy, whatever may be the object behind it, it becomes subject to the provision relating to the Excise Duty applicable to it in the manner of collecting the same obligation of the tax payer in respect of its discharge as well as exemption concession by way of rebate attached with such levies. This aspect has been made clear by combined reading of sub-sections (1), (2) & (3) of Section 93.

A reference to Section 2A of the Central Excise Act 1944 would reveal that references to the expressions "duty", "duties", "duty of excise" and "duties of excise" shall be construed to include a reference to "Central Value Added Tax (CENVAT)".  If a reference is made to Section 3 of the Act, the duty of excise on excisable goods is in itself referred to as CENVAT. The said Section 3(1) is reproduced below –

“(1) There shall be levied and collected in such manner as may be prescribed,—

(a) a duty of excise to be called the Central Value Added Tax (CENVAT), on all excisable goods (excluded goods produced or manufactured in special economic zones)  which are produced or manufactured in India as, and at the rates, set forth in the First Schedule to the Central Excise Tariff Act, 1985 (5 of 1986);”

A conjoint reading of Section 2A and Section 3 of the Act would reveal that the term “duty of excise” and “CENVAT” in the context of excisable goods would be synonymous. This coupled with the wordings of Section 92 and 93 of the Finance (No. 2) Act 2004, would mean that the term “education cess” would also be synonymous with the term “CENVAT” in so far as excisable goods is concerned.

Cenvat Credit Rules 2004

A reference to Rule 2(t) of Cenvat Credit Rules 2004 reveals that words and expressions used in these rules and not defined but defined in the Excise Act or the Finance Act shall have the meanings respectively assigned to them in those Acts. Consequently, the term “duty of excise” shall have the meaning assigned to it in Section 2A read with Section 3 of Central Excise Act 1944. This would also cover education cess following what was discussed in earlier paragraphs.

Once education cess is covered or regarded as duty of excise, it would fall within the purview of Rule 3(4)(a) of Cenvat Credit Rules 2004 and credit of basic excise duty could be utilized for payment of the said education cess regarded as duty of excise as the said Rule allows utilization of Cenvat credit for payment of any duty of excise on any final product in the absence of any specific restriction pertaining to utilization of such credits with regard thereto. 

In other words, duty of excise would not be construed differently when it comes to levy of duty from a scenario when it comes to availing and utilizing credits. Once there is unified definition for the term as discussed, and it is specifically found to cover education cess within its ambit, the assessee would be within his right to seek set off of Cenvat credits of basic duty of excise for paying of education cess liability regarded as duty of excise in respect of excisable goods manufactured.

Judicial Pronouncements

The issue as to the nature of education cess was addressed by the Government of India In Re: TVS Motors Co. Ltd (2013 (298) E.L.T 305 (G.O.I)) on a Revision application filed before it in respect of rejection of Rebate claims. A reference to Paragraphs 14 and 15 of the citation would reveal the fact that education cess is indeed duty of excise in respect of excisable goods as the Government of India confirmed its view thus and allowed rebate of education cess as duty of excise –

“…levy of surcharge under Sections 93, 94 and 95 on respective taxes was the levy for the purpose of Union and was to be utilised by the Union to fulfil the commitment of the Central Government to provide and finance universalised quality of basic education, as has been given out under Section 91 of the Act.

15. The very fact that the surcharge is collected as part of levy under three different enactments goes to show that scheme of levy of Education Cess was by way of collecting special funds for the purpose of Government project towards providing and financing universalised quality of basic education by enhancing the burden of Central Excise Duty, Customs Duty, and Service Tax by way of charging surcharge to be collected for the purpose of Union. But, it was made clear that in respect of all the three taxes, the surcharge collected along with the tax will bear the same character of respective taxes to which surcharge was appended and was to be governed by the respective enactments under which Education Cess in the form of surcharge is levied & collected.”

Assessees may also note that the Karnataka High Court prior to the decision of the Government of India had already allowed rebate of education cess as duty of excise in TVS Motor Co. Ltd Vs CCE Mysore III (2013 (295) E.L.T 42 (Kar.)) relying on an earlier decision of the Rajasthan High Court in Banswara Syntex Ltd. v. UOI - 2007 (216) E.L.T. 16 (Raj.) which had been affirmed by the Honorable Supreme Court by order dated 30-4-2009 in SLP (Civil) No. 19864/2008.

Another decision relied on by the Honorable High Court has been that of the Supreme Court in Barnagore Jute Factory Co. Vs Inspector of Central Excise (1992 (57) E.L.T 3 (SC)) where the Court had referred to Section 9 of Industries (Development & Regulation) Act 1951 to hold cess levied there under as duty of excise based on specific wordings in Section 9(1) reproduced below –

“(1) There may be levied and collected as a cess for the purposes of this Act on all goods manufactured or produced in any such scheduled industry as may be specified in this behalf by the Central Government by notified order a duty of excise at such rate as may be specified in the notified order, and different rates may be specified for different classes of goods..”

In delivering its verdict the Court also relied on Rule 3 of The Jute Manufacturers’ Cess Rules 1976 which applied the provisions of Central Excise Act and Rules made there under applicable in matters of levy and collection of cess.

The Jammu & Kashmir High Court had earlier in Bharat Box Factory Ltd Vs Commissioner of Customs & Central Excise, Jammu (2008 (231) E.L.T 416 (J&K)) sought to regard question of refund of education cess levied u/s 91 of Finance (No. 2) Act 2004 under Notification 56/2002 CE as being related to rate of duty of excise and rejected the petition by the Department as the same was held to be required to be made to Honorable Supreme Court u/s 35L of the Act as it related to rate of duty of excise.

Objections to credit utilization are usually based on the decision of the Honorable Supreme Court in Modi Rubber Limited & Others Vs UOI & Others (1986 (25) E.L.T 849 (SC)). The context in which the said decision was given would be worth reviewing. The said decision was given with regard to the interpretation of exemption clause in exemption Notifications issued u/r 8 of the erstwhile Central Excise Rules 1944 while the term “duty” for the purpose of said Rules had been defined under Rule 2(v) of the said Rules.

While the definition was restricted to duty leviable under Section 3 of the Act, the same was applicable only in the context of the Rules and the said Notifications under discussion had been issued under Rule 8(1) of the said Rules. Paragraph 11 of the said citation is reproduced below -

“11. We have already pointed out, and this is one of the principal arguments against the contention of the respondents, that by reason of the definition of "duty" in clause (v) of Rule 2 which must be read in Rule 8(1), the expression `duty of excise' in the notifications dated 1st August, 1974 and 1st March, 1981 must be construed as duty of excise payable under the Central Excises and Salt Act, 1944.”

The aforesaid scenario is totally different from the one concerning treatment of education cess for credits utilization where the nature of education cess is sought to be clarified in Finance (No. 2) Act 2004 itself rather than in a subordinate legislation.

The issue of utilization of basic duty credit for education cess payment specifically came up before the Gujarat High Court in M/s Madura Industries Textiles Vs Commissioner Central Excise, Customs & Service Tax (2013 (1) TMI 352 Gujarat HC) wherein the Court ruled in favour of the assesse. The issue of nature of cess was also clarified by the Karnataka High Court in M/s Shree Renuka Sugars Ltd Vs CCE (2014 (1) TMI 1469 – Karnataka HC) wherein sugar cess was held to be a duty of excise based on the need for appropriation of the same by the Parliament for the purpose of utilization by Government of India. This would have to be seen in the context of need for appropriation of education cess as laid down u/s 91(2) of Chapter VI of Finance (No. 2) Act 2004.

It is worthwhile noting that there are internal circulars issued in the Office of the Controller General of Accounts, Department of Expenditure, Ministry of Finance, which clearly confirm education cess to be a tax revenue and indicate only a transfer of funds on account of education cess to the non lapsable fund Prarambhik Shiksha Kosh under Public Accounts of India after securing Parliament Sanction/approval for demand for grants rather than directly crediting proceeds of the cess to the said fund.  Readers may note that amounts received into Public Accounts of India directly do not need Parliament approval for disbursement while those related to taxes go into the Consolidated Fund of India which can be disbursed only with Parliament sanction. This sanction is a must for transfer of funds on education cess to Prarambhik Shiksha Kosh which only confirms the nature of such cess to be one of duty or tax as discussed so far.

By CA Srikantha Rao T


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