M/S. SPORTS & LEISURE APPAREL LTD.versusCOMMISSIONER OF CENTRAL EXCISE, NOIDA

                         f2016] 4 S.C.R. 7



           MIS. SPO~TS & LEISURE APPAREL LTD.                           A
                                 v.
       COMMISSIONER OF CENTRAL EXCISE, NOIDA
                  (Civil Appeal No. 1288 of2005)
                       · MARCH 04, 2016                                 B

    [A.K. SIKRI AND ROIDNTON FALi NARIMAN, JJ.)
      Excise Laws - Excise duty - On knitted garments - Exempiion
from - Under Notification Nos. 1412002-CE and I 512002-CE da[ed
OJ. 03.2002 - Assessee-manufacturer of· knitted fabric -
Manufactured such fabric out of the duty paid yarn - It also did
                                                                        c
not take any MOD VAT credit of the duty paid on the yarn - Sought
exemption from duty under the Notifications dated 01.03.2002 -
Denied by the authorities c911cerned - Order upheld by the Tribunal
- On appeal, held: As per· the .scheme under the Notifications, the
manufacturers who did not want to avail MODVAT facility were            D
allowed to clear the goods without payment of excise duty -
Explanation 11 to the Notifications created legal fiction. that duty
shall be deemed to have been paid even without production of
documents evidencing payment of duty thereon - Jn the facts the
assessee was entitled to the benefit of exemption under the
                                                                        E
Notifications.
       Interpretation of Statutes - Legal fiction - A fiction created
by a provision of law is to be given its due play and must be taken
to its lo1;ical conclusion.
      Allowing the appeals filed by the assessees and dismissing        F
those filed by the Revenue,~the Court
     HELD: Jn the Union Budget 2002, a new excise duty
scheme for textile sector was introduced, as per which
manufacturers of the fabric or garments \Vere given choice to. opt
under one of two schemes. The two notifications (Notification           G
Nos. 14/2002-CE and 15/2002-CE dated 01.03.2002) 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. Normal
                                                                        H
                                  7
     8             SUPREME COURT REPORTS                       [2016) 4 S.C.R.


.<
     A   rate of duty is 12%. 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, whereby it is clear that those who did not want to
         avail MODVAT facility were allowed to clear the goods without
     B
         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
     c   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. Thus, Explanation II to the said exemption Notification
         Nos. 14/2002 and 15/2002 create legal fiction and that was the
     D   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. Therefore,
         benefit of exemption notification would be available to all the
         assessees. [Paras 14, 15 and 17) [13-B; 14-B-D, G)
     E         Union of India v. Jalyan Udyog (1994) 1 SCC 318 :
               2001 (5) Suppl. SCR 607 - relied on.
               CCE, Vadodara v. Dhiren Chemical Industries (2002) 2
               SCC 127 : 1993 (2) Suppl. SCR 293 - referred to.

     F                           Case Law Reference
               2001 (5) Suppl. SCR 607           relied on.       Para9
               1993 (2) Suppl. SCR 293           referred to      Para 15
              CIVIL APPELLATE JURISDICTION : Civil Appeal No. 1288
         of2006.
     G
                From the Judgment and Order dated 11.11.2004 of the Customs,
         Excise and Service Tax Appellate Tribunal, New Delhi in Appeal No. E/
         251 /04-NB-A
                                         WITH
     H   C. A. Nos. 1752, 1753, 1856, 2267, 2856, 44 79 of2006
 MIS. SPORTS & LEISURE APPAREL LTD. v. COMMNR. OF                               9
              CENTRAL EXCISE, NOIDA

      C. A. Nos. 6036-6038 of2008                                               A
      C. A. Nos. 4612, 4886, 6749-6769, 7247-7281, 8186, 8187-8189,
9145-9164 of2010
      C. A. No. 2260 of20l l
      C.A.Nos.5473,5474of2013.                                                  B
      K. Radhakrishna, Balbir Singh, V. Sridharan, Sr. Advs., Rupesh
Kumar, Ms. Nisha Bagchi, Ritin Rai, Jitin Singhal, Pratik Raoka, Ms.
Rukhmini Bobde, Ms. Pooja Sharma, B. Krishna Prasad, Rupender Singh
Mar, Rajesh Kumar, Ms. L. Charnya, Hemant Bajaj, Aditya Bhattacharya,
Anandh K., M. P. Devanath, Ajay Aggarwal, Rajan Narain, Gautam                  c
Ch ugh, Advs. for the Appel !ant.
       Mrs. Anil Katiyar, M. H. Patil, Sandeep Narain, T. Chandran Nair,
P. K. Shetty{For M/s. S. Narain & Co.), Jay Savla, Ms. Renuka Sahu,
Prabhati K. C., Abinav Sharma, Advs. for the Respondents.
      The Judgment of the Comi was delivered by                                 D
       A. K. SIKRI, J. 1. 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. l 4/02~CE and 15/
02-CE both dated 01.03.2002. These notifications give the benefit of            E
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 gannents 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
                                                                                F
taken, the duty is at concessional rate.
       2. The Revenue has taken the position thatthe 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       G
not be available. The stand tllken by the assessees, on the other hand, is
that Explanation II to the~exemption 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             H
10              SUPREME COURT REPORTS                        [2016) 4 S.C.R.



A    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
B
     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 of2005
c    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
D    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.
            5. Vi de Union Budget 2002, a new excise duty scheme for textile
     sectors was introduced. Under this scheme, vide Notification Nos. 14/
E    2002-CE ~nd 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 MOD VAT credit of the duty paid on
     the inputs or the capital goods, excise duty@ 75% of the normal rate of
F    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 SI. Nos. ofNotification Nos. 14/2002-CE and 15/2002-CE
     prescribed these two alternative schemes.

G           6. Notification No. 15/2002-CE vide SI. No. 14 prescribed Nil
     rate of excise duty for "Articles of apparel, knitted or crocheted" falling
     under Heading 61.0 I, 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
H
 MIS. SPORTS & LEISURE APPAREL LTD. v. COMMNR. OF                            11
        CENTRAL EXCISE, NOIDA [A. K. SIKRI, J.]

       Additional Duties of Excise (Goods of Special Importance) Act         A
       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."
                                                                             B
  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 even without
       production of documents evidencing payment of duty thereon"
       7. Notification No. 15/2002-CE, as is evident from the preamble       c
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     D
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,            E
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
                                                                             F
Commissioner. Jn 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 ofNotification No. 15/2002-CE to
the apparels. However, the Tribunal has set aside the penalty imposed
on the assessee.
                                                                             G
      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. Dhire11 Chemical
Industries'. In that case, exemption notification came up for
consideration and interpreting the phrase "on which the appropriate
1 (2002) 2   sec 121                                                         H
12              SUPREME COURT REPORTS                        [2016] 4 S.C.R.



A    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
B          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
c          is not entitled to the benefit of the exemption notification."
            I 0. 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.
D
           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 instai1ce, it was argued
    that the Tribunal erred in relying upon the judgn1ent of this Court in
  . Dltiren Cltemical Industries case, which is a judgment of December,
E 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
F
    Speech/Explanatory Notes concerning the Notification Nos. 14 and 15/
    2002. He, thus, argued that judgment in Dltiren Chemical Industries
    case was not applicable J;iaving regard to the aforesaid provision
    specifically incorporated in the new notifications. In this very hue, his
    second attempt was to argue that Explanation 11 of the notification was
G 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
H    the view that the stand taken by the assessees warrants to succeed. ·
 MIS. SPORTS & LEISURE APPAREL LTD. v. COMMNR. OF                              13
        CENTRAL EXCISE, NOIDA [A. K. SIKRI, J.]

       14. We have already reproduced the relevant portion ofNotification      A
No. 15/2002, in particular Condition No. 4 contained therein as well as
Explanation 11 thereof. As pointed out above, in the Union Budget 2002,
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
                                                                               B
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, ful 1exemption from payment of duty was granted to those who
did not wish to avail the MODVAT credit facility. These two schemes            c
were explained in the Budget Explanatory Notes issued by the Central
Government, relevant p011ion 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, ifthe manufacturer             D
      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)]. lfhe 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       E
      as Jipplicable 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         F
      appropriate excise duty or CVD has been paid. It may, however,
      be noted that Explanation JI 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
                                                                               G
      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.
       It is thus made clear that the benefit of the rate of duty should be
       allowed without insisting upon any documentary proof for payment
                                                                               H
14              SUPREME COURT REPORTS                         [2016] 4 S.C.R.


A          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 n\ Ies ."                        ·
             15. A reading of the aforesaid Explanatory Note makes it clear
B    that those who did not want to avail MOQVAT facility were allowed to
     clear tlte goods without payment of any excise duty. It is in this context
     that the authorities were asked not to insist upon a1iy 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
c    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
D    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. Ja/yan Udyog 2 ).
            I 6. It would be pertinent to mention here that Condition- No. 3
E    which uses the words "read with any notification for the time being in
     force" was put 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
F    views of the Tribunal, the matter was referred to a larger Bench of the
     rribunal 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.
G
           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.
     Kalpana K. Tripathy                                      Appeals disposed of.
H    '(1994)1SCC318