SECTION 2(f)(iii) of the Central Excise Act, 1944 was amended in the year 2003 to provide that, in relation to goods specified in the Third Schedule thereof, packing or repacking in a unit container or labelling or re-labelling of containers including the declaration or alteration of retail sale price on it or adoption of any other treatment on the goods to render the product marketable to the consumer would amount to ‘manufacture'.

While inserting this Third Schedule, the Central Government instead of identifying the goods which are required to be inserted in this schedule, took the easier way out by copying the contents of notifications issued under Section 4A of the Act verbatim (except the abatement values) to begin with and later effected a couple of minor amendments to either incorporate or delete certain categories of goods from the Third Schedule in tandem with amendments to notifications issued under Section 4A.

This gave an impression that all the goods notified for assessment under Section 4A are invariably covered under the definition of ‘manufacture' in terms of Section 2(f)(iii) read with the Third Schedule. This is not true. In fact, as we understand, there is absolutely no relationship between Section 2(f)(iii) of the Act and the Third Schedule there under and Section 4A of the Act  and notifications issued there under. It could be a matter of pure coincidence and/or convenience that the Central Government chose this simpler route.

But this probably has made life difficult for the trade and industry, if we go by a mail we received from one of the leading manufacturers of forklifts and related equipment:

“We have noticed that notification no. 19/2010 dtd. 29 th  April, 2010 has amended notification no. 49/2008 to insert Sr. No. 109 with the intention of taxing “Parts, Components and Assemblies of goods falling under tariff item 8426 41 00, headings 8427, 8429 and sub heading 8430 10” on the MRP declared less abatement of 30% as prescribed therein. The said amendment affects us as we are manufacturers of Forklift Trucks-Chapter Heading 8427.

However, we notice that simultaneously similar entry has not been inserted in the “Third Schedule” to the Central Excise Act, 1944. Or have we missed seeing it? In the absence of a similar entry in the Third Schedule it would be difficult to implement the above.

Just to give you a brief background. We manufacture Forklift Trucks. We also manufacture parts and components and assemblies of such forklift trucks. For our own manufactured components there is no problem, as we are aware of the MRP / RSP at which we will be selling the said item and hence we will be paying the duty by affixing / declaring the RSP on the package at the time of clearance from the factory, hereafter.

However, for general items (batteries, bearings, hoses, gears, switches, tyres, etc…the list is endless) bought from other manufacturers it would be difficult. Even if we were to declare our MRP to them, will they be in a position to keep stocks separately for each such manufacturer to whom they sell their items and declare the MRP of each such manufacturer on their products.

If a similar entry is inserted in the Third Schedule then it would be possible to bring all such items to the manufacturing Plant and then avail Cenvat credit of the duty paid by the manufacturer and thereafter declare our MRP on the package and pay duty as per our MRP less the abatement. This would be permissible as the activity of altering the MRP would amount to manufacture in terms of the definition under Section 2(f) (iii), of the Act.

Can you please enlighten us?

While the grievance of this manufacturer for not bringing parity for goods notified under Section 4A and goods incorporated under Third Schedule of the Act is understandable, the apprehension that manufacturers of general items (batteries, bearings, hoses, gears, switches, tyres, etc) would have to keep stocks separately for OEMs and declare the MRP of OEMs on such products before clearing it to OEMs may be unwarranted for two reasons.

Firstly, merely because certain goods notified under Section 4A of the Act are procured in bulk by OEMs, the manufacturers of such goods need not follow the assessment under Section 4A, instead they can adopt the valuation under Section 4 of the Act because in terms of the amended provisions of Rule 2A read with Rule 6 of the Standards of Weights and Measures (Packaged Commodity) Rules, 1977, clearances to industrial consumers and institutional consumers are exempt from affixing retail sale price, which is a pre-requisite for bringing those goods under the purview of Section 4A. This was also the law laid down by the Apex Court in Jayanti Food Processing Pvt Ltd vs. CCE - 2007-TIOL-150-SC-CX.

Secondly, manufacturers of such goods i.e. goods notified under Section 4A can affix different MRPs on retail packages when such retail packages are sold in different areas in terms of Explanation 2(c) to Section 4A(4) of the Act. However, this aspect may not be applicable in the instant case because the OEMs may be situated in the same area and for such OEMs different retail sale prices cannot be affixed by the manufacturer. In any case, as stated above, clearances of goods to OEMs need not be subject to assessment under Section 4A so long as such industrial consumers buy the packaged commodities for using them in their industry for production. At this juncture it may be noted that OEMs primarily procure such goods only for further consumption in the manufacture of final products. However, if they procure it purely for the purpose of further retail sale, though they may not necessarily know when such goods will be released into the production line or when they will be sold as such as spares, then it may come under the purview of Section 4A (some OEMs have their own exclusive spare parts divisions which are primarily engaged in procuring spares in bulk and repacking and reselling them to their customers in the secondary market).

If the OEMs are engaged in the latter activity as mentioned above, then it would be prudent on the part of the Government to incorporate such goods in the third schedule as well. Otherwise, the activity of procuring the spares in bulk by the spare parts division of OEMs and repacking/relabeling them etc would not amount to manufacture and they may not be liable to pay excise duty at all in such instances. This may also be true in cases where OEMs do not have a separate spare parts division but still procure spare parts in bulk and repack/relabel etc and sell them to their customers in the secondary market.

The above issue is not confined to Notification No. 19/2010-CE alone. In fact, Notification No. 9/2010-CE (NT) dated February 27, 2010 amended Notification No. 49/2008-CE (NT) dated December 24, 2008 by substituting the contents of S. No. 108 thereof which expanded the scope of MRP based assessment to more automobile spares, components and accessories. However, S. No. 100 of the Third Schedule still retains the old description as it existed prior to issuing Notification No. 9/2010-CE (NT).

With the result if the processes specified in Section 2(f)(iii) of the Act are carried out on all those goods which were brought into the fold of MRP based assessment with effect from February 27, 2010 by virtue of amended S. No. 108 of Notification No. 49/2008-CE (NT), they will not amount to manufacture because these goods are not covered in S. No. 100 of the Third Schedule.

So in the interest of its own coffers, it will be a wise thing for the Central Government to amend the Third Schedule to bring it on par with the contents of notifications issued under Section 4A. This is because even if the primary manufacturers of spares/components/accessories of automobiles clear the notified goods in bulk and pay duty in terms of Section 4, those industrial/institutional consumers which procure them for repacking and reselling them in retail will necessarily pay duty by assessing those goods under Section 4A. Further the entire chain of transactions will come under the CENVAT chain which will benefit the OEMs.

For more on the Third Schedule please see TIOL-DDT 790 25.01.2008

Lucknow Chief Commissioner's rejoinder on our story – mixed reactions

THE Lucknow Chief Commissioner has sent shock waves across the country with his rather irreverent comments about the High Court judgement, which we had carried on Friday. Apart from the few comments we carried in the Message Board, we received several calls and messages – rather strong ones both for and against the Chief Commissioner.

Anu Nair angrily told us, “Carrying of inflammatory and derogatory articles/reports/views is never expected from a Taxation website. I request you to delete the entire matter immediately. Or at least make my views appear in your next DDT !”

Some of her views:

++ Incidentally, the rejoinder gives the readers the impression that the C.C has a definite grudge against the Hon'ble Judge Shri Rajes Kumar and he (CC) has also cast aspersions on the integrity of the Hon'ble Judge who is seen to hold office in the same Court for more than 5 years!

++ The CBEC (if it has read this rejoinder) should immediately remove the Chief Commissioner from his present posting and make him sit idle.  Sorry, since an idle mind is a devil's workshop, the CC should be made in-charge of some welfare department or land and housing.

++ The CC seems to have spent many sleepless nights when the news item was reported and should have finally found peace since the “rejoinder” has been published today by Taxindia.

++ The quality of drafting leaves much to be desired – right from the innumerable grammatical and typo mistakes and insertion of inconsequential paragraphs in the “rejoinder” like the ones concerning section 35A(3) amendment, reference to the Dunlop India decision of SC, reference to unseating of the PM of the country in 1977 etc., the Chief Commissioner has exposed himself and some of his Assistant Commissioners whose case he seems to advocate through the rejoinder.

++ Admittedly, the CC fails to tell us as to why his department had not moved the Apex Court against the Allahabad HC decision dated 20.09.2005 of one and a half page reducing the pre-deposit amount of Rs.1 Crore ordered by the CESTAT to Rs.20 lakhs if he thinks that the department's case was so strong.

++ The CC can also very well expect a defamation suit filed by the assessee for the following sentence – “But with his deep-pocket, Galaxy was in a position to shop for (appropriate?) jurisdiction.”

++ Vituperative language was not called for – the CC seems to have become too emotional – the heart should not have ruled his mind!

++ Terming the order of the Hon'ble HC as judicial terrorism is the last nail in the coffin.

++ Although the Chief Commissioner has undertaken full responsibility for this outburst, my humble suggestion is that the Chief Commissioner should immediately find an escape route lest he wants to lose his job – say he was out of his mind and needs to attend a Vipassana course!

++ I would be thrilled to know the outcome of this “rejoinder”.

 An assessee wrote in

++ It should not be forgotten that any officer acting as judiciary authority should maintain dignity and decorum of his post.  He should not overstep his jurisdiction by offering unwanted, uncalled for and unreasonable observations.  Statutory provisions do not give carte blanche to A.C. to act in haphazard way.

The former Governor of Himachal and Karnataka, Rama Devi in an interview with me for TIOL six years ago, said, “Supreme Court is right not necessarily because it is right but because it is the final authority and once that final authority decides something we are expected to follow that.”

We have made it very clear that we don't subscribe to or support the Chief Commissioner's views. We strongly believe in judicial discipline and we would expect even a Commissioner's (Appeals) decision to be scrupulously followed by the lower officers and the Department should not be seen flouting the decisions of higher appellate authorities like Tribunals and High Courts. Be you ever so high, yet the law is above you.

But interestingly the Chief Commissioner's views have many takers.

Incidentally I may be allowed the indulgence of relating a personal experience. Eight years ago I wrote an article for TIOL - "Is there any nexus between Central Excise and Sex Education?".

The Chief Commissioner who was then a Commissioner wrote to me, “I have an occasion to go through the text produced by you “Is there any nexus between Central Excise and Sex Education” which came to me through Internet on the wave length of Taxindiaonline.com, dated 9 th September, 2002. 

Of course, a brilliant, encouraging and amusing revelations on your part. Some of us are very proud of such officers like you who call a spade a spade for informing and educating the big brother officers in the Department .” He also marked a copy of his letter to me to his officers with a remark, “Copy to the Additional Commissioner, Central Excise [Prev./Tech/Audit]/Joint Commissioner of Customs with a copy of “Internet mail” for reading and for doing all things which may dispel the doubts hovering in the minds of junior officers as if the senior officers do not know their subject and are too ignorant to be tolerated.”

Jurisprudentiol – Tuesday's cases

Service Tax

When the original authority and appellate authorities come up with a categorical finding that there is no suppression of facts, Revenue appeal does not merit any examination under Section 35G: High Court

THE assessee, a cable operator, was issued a show cause notice for demanding service tax of Rs. 25.79 lakhs for providing internet services and advertisement services and proposed to levy penalties under Sections 76 and 78 of Finance Act, 1994. The lower authority confirmed Rs. 3.51 lakhs with imposition of penalties under Sections 76 and 78 of the Act. The Appellate Commissioner set aside the penalties and this order was upheld by the CESTAT. Hence, this appeal by the Revenue before the High Court.

Income Tax

Real estate developer - sale of land held as stock-in-trade to be treated as business income and not capital gains: ITAT

THE device of constituting partnership firm with the assessee as one of its partners and then his retirement after 11 days on the basis of retirement deed, the stamp papers for which were purchased simultaneously with the formation of the partnership firm, do go to show that the assessee was not genuinely inducted in and then removed from the firm as partner in the said firm. On the other hand the reality of the transaction which can be viewed by the naked eyes is that the assessee agreed to sell development right in Ghatkopar plot to the four persons.

Customs

Software recorded in CDs is prima facie classifiable under heading CTH 85.24 and chargeable to ‘nil' rate of duty – goods not available for confiscation – redemption fine prima facie not imposable - Waiver granted from making pre-deposit of customs duty, penalty and fine: CESTAT

THE dispute is regards the item ‘ Software recorded in CDs ' which the Commissioner as the adjudicating authority classified under Heading 84.71 and accordingly demanded duty @5% + 16% on the entire value of Rs.3,94,00,694/-, which comes to over Rs.85 lakhs. He also imposed a redemption fine of Rs.1 Crore while imposing a penalty equivalent to the duty demand. The appellant is before the CESTAT with a prayer for waiver of pre-deposit and stay of recovery of the amounts demanded.

See our columns Tomorrow for the judgements

Until Tomorrow with more DDT

Have a nice day.

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