Aadrikaa Legal Services (ALS) – IDT Tax I Arbitration I Litigation
Date: 04.05.2026
Gujarat High Court- No Education Cess on Duty-Free Imports Under DEPB and Exemption Schemes
This Short Article has been prepared & written by Advocate Ravi Shekhar Jha-Delhi High Court, New Delhi. The views expressed are based on his interpretation of the law. He can be reached at his email id intelconsul@gmail.com .
This article provides a detailed analysis of a significant legal judgment from the Gujarat High Court regarding the applicability of education cess on imports made under exemption notifications and the Duty Entitlement Passbook (DEPB) scheme. The judgment addresses whether importers who are exempt from paying customs duty and additional duty under specific government notifications are still liable to pay education cess on such imports.
Background of the Case
The respondent, M/S Pasupati Acrylon Ltd., engaged in export business, imported goods in early 2006 and claimed exemption from customs duty under Notification No.32/2005-Cus. The Assessing Officer accepted the exemption for customs and additional duty but demanded education cess on the customs duty and CVD (countervailing duty). The company appealed, and the Commissioner (Appeals) set aside the demand for education cess. The revenue challenged this decision, leading to a series of appeals culminating in the Gujarat High Court judgment.
Key Legal Questions
The appeals raised three main questions:
- Is education cess leviable on goods exempted from customs duty and additional duty under Notification No.32/2005-Cus?
- Did the Tribunal err in relying on the Reliance Industries Ltd. case to reject the revenue’s appeal?
- Is education cess applicable to imports made under the DEPB scheme as per the Finance Act, 2004 and CBEC circular No.5/05?
The DEPB Scheme and Exemption Notifications
The DEPB scheme is designed to neutralize the customs duty component on imported goods used for export production. Exporters receive duty credits in DEPB scrips, which can be used to offset customs duty liability on future imports. Notification No.32/2005-Cus and similar notifications grant total or partial exemption from customs duty for imports under the DEPB scheme, subject to certain conditions.
Court’s Analysis and Reasoning
1. Nature of Exemption
The court emphasized that the purpose of the DEPB scheme and exemption notifications is to neutralize customs duty on the import component of export products. The adjustment of credits in DEPB scrips is procedural and does not constitute actual payment of customs duty.
2. Education Cess Applicability
The Ministry of Finance clarified in a circular dated 8-7-2004 that education cess is levied at 2% of the aggregate duties of excise/customs “levied and collected.” If goods are fully exempted from duty or cleared without payment, no education cess is applicable because no duty is collected.
3. Comparison with Other Schemes
The court noted that imports under Advance Licence Schemes, which are also exempt from customs duty, do not attract education cess. Drawing a distinction for DEPB scheme imports based on procedural credit adjustment was deemed invalid.
4. Legal Precedents
The court relied on previous judgments, including the Reliance Industries Ltd. case, which held that the CBEC circular demanding education cess on DEPB scheme imports was not legally sustainable. The court also disagreed with the Madras High Court’s view in Tanfac Industries Ltd., clarifying that the question of education cess was not involved in that case.
Final Judgment and Implications
The Gujarat High Court held that:
- Imports made under the DEPB scheme, which are fully exempt from customs duty, are not liable for education cess.
- The CBEC circular demanding education cess on such imports was quashed as invalid.
- The procedural adjustment of credits in DEPB scrips does not change the nature of the exemption.
All tax appeals by the revenue were dismissed, affirming the Tribunal’s decision.
Practical Example
Scenario: An exporter imports raw materials under the DEPB scheme and claims exemption from customs duty. The customs officer demands education cess on the exempted duty.
Outcome: Based on this judgment, the exporter is not liable to pay education cess since no customs duty is actually levied or collected.
Conclusion
This judgment clarifies that education cess is not applicable on imports made under exemption notifications and the DEPB scheme, provided the imports are fully exempt from customs duty. The procedural adjustment of credits does not constitute duty payment, and no education cess can be levied. This provides significant relief and clarity for exporters utilizing these schemes.
Source: Gujarat High Court
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