Introduction:

In a significant judgment, the Orissa High Court ruled that the Social Welfare Surcharge (SWS) on customs duty is inapplicable where the customs duty itself is exempted under the Merchandise Exports from India Scheme (MEIS). A division bench comprising Justices Arindam Sinha and MS Sahoo concluded that since SWS is calculated as a percentage of the customs duty collected, its imposition would be null where the customs duty collected is zero. This ruling came in response to a petition filed by M/s. Dalmia Cement (Bharat) Limited, challenging the levy of SWS on petroleum coke imported under MEIS, arguing that exempt customs duty entails zero SWS liability.

Arguments by the Petitioner:

The petitioner, an importer of petroleum coke, contended that under MEIS, they were exempted from paying customs duty. They argued that SWS, as per Section 110(3) of the Finance Act, 2018, is a percentage of the customs duty collected. With customs duty being zero under the exemption, SWS must also be zero. Relying on Union of India v. Modi Rubber Ltd. (1986), the petitioner emphasized the principle that exemption from duty negates liability for additional duties calculated as a percentage of the exempt duty.

Additionally, the petitioner invoked Section 25 of the Customs Act, which provides for either levy and collection of duty or exemption but not both. They argued that liability to pay SWS is contingent on customs duty being collected, and without such collection, no basis exists for SWS calculation.

Arguments by the Revenue:

The Revenue countered that SWS is a distinct levy under the Finance Act, 2018, separate from customs duty under the Customs Act, 1962. They maintained that the exemption under MEIS applies only to customs duty and does not extend to levies imposed under different statutes. Citing M/s. Unicorn Industries v. Union of India (2019), the Revenue argued that an exemption under one legislation cannot extend to a levy under another.

Further, they claimed that SWS serves a social welfare purpose distinct from the revenue-generation aim of customs duties. Thus, they asserted that MEIS exemptions, granted via notifications under the Customs Act, do not apply to SWS levied under the Finance Act.

High Court’s Observations and Judgment:

The Orissa High Court analyzed the statutory provisions and precedents to conclude that SWS is intrinsically linked to customs duty collection. The Court reasoned that:

Section 110(3) of the Finance Act mandates that SWS be calculated as a percentage of customs duty collected. When customs duty is exempted and no collection occurs, the SWS calculation is also rendered nil.

The charging mechanism for SWS requires actual collection of customs duty. Exemption under MEIS precludes any collection, negating SWS liability.

The Court rejected the Revenue’s argument that SWS is an independent levy unrelated to customs duty collection. It emphasized that the language of Section 110(3) unequivocally ties SWS to customs duty collection.

In diverging from the Madras High Court’s ruling in M/s. Gemini Edibles and Fats India Pvt. Ltd. v. Union of India (2024), which upheld SWS liability despite MEIS exemption, the Orissa High Court held that treating duty credit scrips under MEIS as “money value” for customs duty would be legally untenable.

The bench also clarified that while SWS serves a social welfare purpose, its imposition is contingent on customs duty being levied and collected, a condition absent in the present case. The petition was allowed, and the petitioner was exempted from paying SWS.

Key Takeaways:

The judgment underscores the principle that statutory levies dependent on another tax or duty cannot operate independently. It reiterates the significance of statutory language in determining the scope of exemptions and levies.

Conclusion:

The Orissa High Court’s ruling in this case reaffirms that Social Welfare Surcharge is inherently tied to the collection of customs duty. By interpreting Section 110 of the Finance Act, 2018, the Court rightly held that where customs duty is exempted under schemes like MEIS, SWS cannot be levied. This decision provides clarity for traders availing MEIS benefits, ensuring that exemptions are implemented in letter and spirit. The judgment also highlights the necessity for a coherent legislative framework that harmonizes exemptions across statutes to avoid undue litigation.