TIOL-DDT 869
21.05.2008
Wednesday

A recap:

Dutiable and exempted goods- Can the amount of 10% paid on exempted goods be collected from the customers?

TIOL-DDT 124 on 30 05 2005 remarked,

As is well known, a manufacturer having taken Cenvat credit, has to pay an amount equal to 10% of the total price, while clearing exempted goods. Now the question is , can this 10% be collected from the customer and if collected what are the consequences?

First of all it is accepted that this 10% is not duty and so the principles applicable to duty are not applicable here. However no manufacturer would like to absorb this burden of ten percent. He would pass it on visibly or otherwise. What happens if he recovers this amount from his customers by showing it in the invoice?

There have been two types of Audit objections. In one case, the Audit contented that the rules do not permit the manufacturer to collect the ten percent from their customers and if they do, it has to be paid to the Government as required under Section 11D . In another objection, Audit believes that this ten percent has to be added to the price to arrive at the ten percent liability. And Board had, in a communication, felt that such elementary objections had to be pointed by the Central Excise field staff without waiting for wisdom from Audit!

Now take the first case :- Is Section 11D attracted? 11D speaks of any excess amount collected as representing Excise duty. This ten percent is not Excise duty and is not collected as representing Excise duty. Even if Section 11D is attracted, they have paid the ten percent to the Government, says the Tribunal in NU- WAVE SHOES v COMMISSIONER OF C. EX., NEW DELHI ( 2002-TIOL-192-CESTAT-DEL ). The Tribunal observed that ¶This makes it clear that the appellants have not retained the amount collected from the customers and that they have passed on the amount to the Government as provided under Section 11D of the Central Excise Act. Hence the charge of contravention of the provisions of Section 11D is not sustainable¶

So 11D is out. Then should this 10% collected from the customer be added to the price to arrive at the ten percent? This will lead to absurd situations. Suppose the price is Rs 100 and the manufacturer collects ten percent from the customer. Now Audit would want this ten percent to be added to Rs. 100 and the amount to be paid should be Rs. 11 (10% of 110). But then if the assessee passes on this additional one Rupee also? Then the price has to be taken as 111 and 10% has to be calculated. This will go on and on till --- till infinity! No! we must stop it somewhere. Why not at the beginning? The point is, he collected Rs 110 and 10% has to be paid on that. But 110 includes 10%. It is 100 + 10. Elementary arithmetic? Not to Audit and some Commissioners!

After Audit raised this objection and the department routinely, as it is the wont, confirmed the demands, the issue reached the Tribunal. As mentioned earlier, the Northern Bench of the Tribunal in the Nu-Wave case held that the 8% (then) collected is credited to the Government and so there is no violation. The Northern Bench in another decision in VIMAL MOULDERS (I) LTD ( 2003-TIOL-244-CESTAT-DEL ), differed from the Nu Wave Shoes case, with due respect of course! Similarly the Western Bench of the Tribunal in P.T. STEEL INDUSTRIES ( 2003-TIOL-243-CESTAT- MUM ) disagreed with the Nu wave Shoe case with due respect of course!

But in a recent case, the Bangalore Bench of the Tribunal had no such problem and it followed the NU- WAVE SHOES case. In Commissioner of Central Excise, Hyderabad -I v Pennar Industries Limited ( 2005-TIOL-441-CESTAT-BANG ) the Tribunal observed that,

¶The respondents had correctly debited 8% of the sale value of the exempted goods. This amount is not considered as duty. There is no law, which says that they should not collect this amount of 8% from the buyer of the goods. Section 11D of the CE Act, 1944 will be attracted only when duty is collected and not paid to the exchequer.¶

Absolutely fine and correct! There is no law against colleting this 10% from the customer. If it is not to be collected, why should any manufacturer avail the exemption at all? They can as well pay full duty and collect it from their customers! This can't be the purpose of the exemption notification. But then what happens to the Northern Bench decision in VIMAL MOULDERS and the Western Bench decision in P.T. STEEL INDUSTRIES?

Naturally the case had to reach a Larger Bench which it eventually did.  

The Larger Bench emphatically held that Section 11D has no application. Unison Metals vs Commissioner of Central Excise- 2006-TIOL-1337-CESTAT-DEL-LB

While this was going on, on May 9 th , the Chandigarh Commissioner booked a case and issued a press release as we reported in TIOL-DDT 359 - 10 05 2006 ,

Yesterday the Chandigarh Central Excise Commissioner issued a press note that manufacturers supplying pipes to water projects in Punjab and Himachal Pradesh have evaded excise duty to the tune of Rs. 4.5 Crores. They were availing the exemption and still collecting this 10% from the state governments and according to him failed to pay this 10% to the government. The Commissioner observed another modus operandi - the manufacturer, to keep the mischief under cover, inflated the prices of goods to the extent of 10 per cent, and showed the clearances at nil rate of duty. Any problem?

As per the Larger Bench decision, the assessee had not evaded duty at all and the procedure followed by him was correct and perfectly legal? That raises a pertinent question, ¶should the department rush to the Press tarnishing the image of the assessees when they book cases on such technical grounds?¶

CBEC has now reacted and clarifies that:-

“it is clarified that as long as the amount of 8% or 10% is paid to the Government in terms of erstwhile rule 57CC of the Central Excise Rules, 1944 or rule 6 of the CENVAT Credit Rules, the provisions of section 11D shall not apply even if the amount is recovered from the buyers. However, it may be noted that the CENVAT credit of the said amount of 8% or 10% cannot be taken by the buyer since such payment is not a payment of duty in terms of rule 3(1) of the CENVAT Credit Rules, 2004. Therefore, the said 10% amount should be shown in the invoice as “10% amount paid under Rule 6 of the CENVAT Credit Rules, 2004” .

BETTER LATE THAN NEVER!

CBEC Circular No. 870/08/2008- CX ., Dated: May 16, 2008

Income Tax - monetary limits for filing appeals by the Department – revised instructions.

Appeals will henceforth be filed only in cases where the tax effect exceeds monetary limits given here under:-

¶tax effect¶ means the difference between the tax on the total income assessed and the tax that would have been chargeable had such total income been reduced by the amount of income in respect of the issue against which appeal is intended to be filed (hereafter referred to as ¶disputed issues¶).

However, the tax will not include any interest thereon. Similarly, in loss cases notional tax effect should be taken into account. In the cases of penalty orders, the tax effect will mean quantum of penalty deleted or reduced in the order to be appealed against.

In a case where appeal before a Tribunal or a Court is not filed only on account of the tax effect being less than the monetary limit specified above, the Commissioner of Income-tax shall specifically record that ¶even though the decision is not acceptable, appeal is not being filed only on the consideration that the tax effect is less than the monetary limit specified in this instruction¶. Further, in such cases, there will be no presumption that the Income-Tax Department has acquiesced in the decision on the disputed issues. The Income-tax Department shall not be precluded from filing an appeal against the disputed issues in the case of the same assessee for any other assessment year, or in the case of any other assessee for the same or any other assessment year, if the tax effect exceeds the specified monetary limits.

In the past, a number of instances have come to the notice of the Board, whereby an assessee has claimed relief from the Tribunal or the Court only on the ground that the Department has implicitly accepted the decision of the Tribunal or Court in the case of the assessee for any other assessment year or in the case of any other assessee for the same or and other assessment year, by not filing an appeal on the same disputed issues. The Departmental representatives/counsel must make every effort to bring to the notice of the Tribunal or the Court that the appeal in such cases was not filed or not admitted only by reason of the tax effect being less than the specified monetary limit and therefore, no inference should be drawn that the decisions rendered therein were acceptable to the Department. Accordingly, they should impress upon the Tribunal or the Court that such cases do not have any precedent value.

Adverse judgments relating to the following should be contested irrespective of the tax effect.

(a) Where the Constitutional validity of the provisions of an Act or Rule are under challenge.

(b) Where Board's order, Notification, Instruction or Circular has been held to be illegal or ultra wires.

(c) Where Revenue Audit objection in the case has been accepted by the Department.

The proposal for filing Special Leave Petition under Article 136 of the Constitution before the Supreme Court should, in all cases be sent to the Directorate of Income-tax (Legal & Research) New Delhi and the decision to file Special Leave Petition shall be in consultation with the Ministry of Law and Justice.

The monetary limits will not apply to writ matters.

This instruction will apply to appeals filed on or after 15th of May 2008.

CBDT Instruction No. 5/2008, Dated: May 15, 2008

Today's case

Branch of non-resident educational institution - exemption u/s 10(23) - CBDT cannot reject application if it exists for education & also cannot enforce monitoring conditions at threshold level but is at liberty to prescribe any conditions: Supreme Court

THE issue before the Apex Court was related to the grant of exemption u/s 10( 23C )( vi) to the branch of a non-resident educational institution. And the prescribed authority (PA) in this case was the Central Board of Direct Taxes itself which had rejected the application on the ground that the applicant had remitted certain amount to its Head Office (HO) in America and it did not exist solely for the purposes of education. What also prompted the Board to do so was its understanding that the suplus generated by any educational body should be spent 'in India ' for educational purpose. However, the Apex Court has now held that the monitoring conditions attached to the relevant Section cannot be enforced right at the stage of grant of exemption. If an institution exists solely for education and meets the primary condition of Sec 10(23), the PA is at liberty to lay down any conditions, including application of certain percentage of accounting money in India, but cannot insist on compliance with the conditions which would arise only in future after the stage of grant of exemption.

We bring you this judgement today.

Jurisprudentiol – Tomorrow's cases

Income Tax

Sale of house property - capital gains tax - Deduction u/s 48 to be allowed first before allowing deductions under Ss 53 & 54: Delhi HC

IN an important decision the Delhi High Court has held that while computing capital gains tax the Revenue must allow deduction u/s 48(2) of the Act on the amount computed u/s 48(1)(a) and before allowing deduction under Sections 53 and 54 as per the scheme of the Act. Thus the final verdict which had gone in favour of the Revenue at the Tribunal stage was turned in favour of the assessee .

UP Sales Tax

Classification - only because charcoal contains the word `coal', the same would not mean to be a species of coal. - If an entry had been interpreted consistently in a particular manner for several assessment years, ordinarily it would not be permissible for the Revenue to depart therefrom , unless there is any material change

If there is no meaning attributed to the expressions used in the particular enacted statute then the items in the customs entries should be judged and analysed on the basis of how these expressions are used in the trade or industry or in the market or, in other words, how these are dealt with by the people who deal in them, provided that there is a market for these types of goods. This principle is well known as classification on the basis of trade parlance. This is an accepted form of construction. It is a well known principle that if the definition of a particular expression is not given, it must be understood in its popular or common sense viz. in the sense how that expression is used everyday by those who use or deal with those goods.

The meaning of drug is very wide and same has been held to be so in a large number of cases. So the appeals are allowed with costs. Counsel's fee assessed at Rs.50 ,000 /-.

Central Excise

Manufacture of micronutrient compounds – classification - It is the ¶method of manufacture¶ which has a strong bearing on the question whether the product(s) needs to be classified under CSH 3808.20 or under CSH 3105.00.   Matter remanded. It is well-settled that mere non-declaration is not sufficient to invoke the larger period but some positive act of suppression is required- Supreme Court

Manufacture of micronutrient compounds – classification - It is the ¶method of manufacture¶ which has a strong bearing on the question whether the product(s) needs to be classified under CSH 3808.20 or under CSH 3105.00.  – Matter remanded.

Limitation: three Circulars have been issued by the Department. Till today, the controversy regarding the classification of ¶micronutrient fertilizers¶ was not settled. There is even a conflict of views between Ministry of Finance and Ministry of Agriculture. In the circumstances, question of invoking extended period of limitation does not arise. It is well-settled that mere non-declaration is not sufficient to invoke the larger period but some positive act of suppression is required for invoking larger period of limitation under Section 11A of the Central Excise Act, 1944

See our columns tomorrow for the judgements

Until Tomorrow with more DDT

Have a nice Day.

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