JULY 09, 2013

By P G James

MANUFACTURING exports from India could increase from the meager USD 40 billion in 2002 to about USD 300 billion in 2015, according to a report titled 'Made in India-the Next Big Manufacturing Export Story', jointly prepared by CII and McKinsey. The report assesses that such an expansion would make India grab a share of approximately 3.5 per cent in the world manufacturing trade. Further, along with robust domestic demand growth, this is likely to create 25-30 million new jobs.

Another Report on the Working Group constituted by Ministry of Commerce & Industry on "Boosting India's Manufacturing Exports - Twelfth Five Year Plan (2012-17)" has projected growth of manufacturing exports from the current level of USD 151 billion to USD 534 billion by the final year of the 12th Plan. The total merchandise exports are likely to be near the USD 900 billion mark during 2016-17. The Report throws light on the present stumbling blocks of non-zero rating of exports and embedded taxes associated with the existing set up. How the noble objective of the astonishing billion mark for exports could be achieved if we are exporting taxes also to the world at large? Cascading effect of taxes on exports both at Central and State level would keep our export targets as targets only.

For penetration in the overseas market, nowadays, engagement of foreign Commission agents have become customary. Throughout the supply chain, right from the booking of orders, deliverables, collection of fund, post delivery follow up, customer care etc, the so-called agents play a pivotal role and for their services, commission is payable at the rate mutually agreed upon. Effective from 18th April, 2006, Service Tax has also to be paid on the payment of such commission under reverse charge mechanism. Departmental Officers at various places were not in favour of extending CENVAT credit on Service Tax paid under reverse charge on flimsy grounds even though Tribunals and Courts have not accepted the contention of the adjudicating authorities and have extended CENVAT benefits to the manufacturers.

In consonance with the avowed policy of the Government to promote export by relieving the burden of taxes on the product exported and also on the products consumed in the manufacture of the goods exported, CBEC had undertaken several measures like introduction of Service Tax refund scheme, Service Tax exemptions, Drawback, clarificatory Circulars etc. Various Tribunal judgements also are supportive to the above measures, few of which are given below:

Amalgamations Repco Ltd Vs.CCE, Chennai (2012-TIOL-369-CESTAT-MAD)

Parameswari Textiles Vs CCE, Trichy (2011-TIOL-1014-CESTAT-MAD)

Flat Products Equipments India Limited Vs CCE, Belapur (2011-TIOL-781-CESTAT-MUM)

Hydraulics India Services Pvt. Ltd. v. CCE, Bangalore (2011-TIOL-1752-CESTAT-BANG)

Super Spinning Mills Ltd. v. CCE, Coimbatore 2009-TIOL-2083-CESTAT-MAD

Semco Electrical Pvt. Ltd. v. CCE, Pune 2010-TIOL-162-CESTAT-MUM

Repro India Ltd. v. UOI 2007-TIOL-795-HC-MUM-CX

Texport Industries Pvt. Ltd. v. CCE 2012-TIOL-26-CESTAT-MUM

In a recent case of Dhariwal Industries Ltd (2013 (289) E.L.T. 227 (G.O.I.), it has been held by the Revisionary Authority that:

"It is Government policy that export should not suffer any duty. Once the substantial requirement of export out of country of the goods manufactured by the assessee is proved, the substantive benefit of rebate cannot be denied for alleged conflict between provisions"

Despite the law having been clarified in favour of manufacturer exporters, unwanted litigation and ‘let the Court decide' approach has become the order of the day. No quasi judicial authority is willing to get the reprimand and review by superiors as the harsh experience in Z.B.Nagarkar case (2002-TIOL-130-SC-CX) haunts them as the 'sword of Damocles'. In this case, the Commissioner passed an adjudication order for confiscation of the seized goods, illegally removed goods, imposed fines for redemption and demanded duty. He also confiscated the vehicle used in the carriage of the contraband goods but he did not impose any penalty under Rule 173Q of the Central Excise Act. Not contended with this, the Government charged him under the Conduct Rules. Appeals at Tribunal and High Court failed and finally he approached the Supreme Court for vacation of the charge-sheet. Hon Supreme Court held "If every error of law were to constitute a charge of misconduct, it would impinge upon the independent functioning of quasi-judicial officers"

None can deny the fact that unnecessary litigation harasses the assessees and also adds to cost of production by way of litigation costs, wastage of valuable time and block of money. Recent Biennial Report of Hon'ble Delhi High Court (2010-12) states that average Court expenditure incurred per minute per Court working is Rs 15678/-. If it is so, how much an assessee has to spend for bringing a case before High Court after passing through different adjudication channels?

Hon Gujarat High Court  in Commissioner of Central Excise v. M/s Cadila Healthcare Limited (2013-TIOL-12-HC-AHM-ST) ruled that the commission agent services cannot be stated to be a service used directly or indirectly in, or, in relation to manufacture or clearance of final product. Following the judicial discipline, CESTAT, Ahmadabad also allowed the Revenue Appeal so as to deny CENVAT credit in the following cases too.

- CCE, Daman Vs Paras Motors Mfg Co- (2013-TIOL-525-CESTAT-AHM)

- CCE, Surat-II Vs Astik Dyestuff P Ltd - (2013-TIOL-680-CESTAT-AHM)

It is a fact that Gujarat accounts for about a quarter of India's total exports. Based on the aforesaid decisions, Departmental Officers, especially in the State of Gujarat are thoroughly armored and empowered to disallow CENVAT credit on commission paid on one fourth of the entire country's export.

Contrary to the above, in the case of CCE, Ludhiana Vs. Ambika Overseas 2011-TIOL-951-HC-P&H-ST, Hon'ble Punjab & Haryana High Court upheld that Department was unable to show any perversity or illegality in the Tribunal's decision to the effect that the assessee was entitled to avail CENVAT credit on the services provided by the overseas commission agents as input services within the meaning of the definition of "input service" given under Rule 2(l) of the CENVAT Credit Rules 2004.

It is now a well settled principle of law that when two views are possible, one which favours the assessee should be adopted. (Sneh Enterprises Vs CCE, New Delhi 2006-TIOL-114-SC-AD)

While introducing CENVAT Credit Rules, 2004, Ministry of Finance issued a Press Note on 12th Aug, 2004 regarding CENVAT credit facility of taxable services. The relevant portion of the Press Note reads as under:

"In principle, credit of tax on those taxable services could be allowed that go to form a part of the assessable value of which excise duty is charged"

Hence it is obvious that since the service on which CENVAT credit is availed forms a part of the assessable value of final product, Service Tax paid on such services will be eligible for CENVAT credit as "input service". Wherever Sales commission paid to the commission agents forms part of the assessable value on which excise duty is payable, there is no rationale behind denial of such credit. It is settled law laid down by the Hon'ble Supreme Court in the case of Coromandel Fertilisers Ltd vs Union of India & Ors 2002-TIOL-343-SC-CX that commission paid to a commission agent is not available as deduction from the assessable value, which would inevitably mean that Excise duty is payable on the total value including the so called commission.

In the CBEC Circular No 943/04/2011-CX, dated April 29, 2011, it has been clarified as follows:

Further, CBEC has issued Notification No 17/08-ST dated 1st Apr, 2008 wherein the exemption by way of refund is provided for the service tax paid on the "Services provided by a commission agent, located outside India, and engaged under a contract or agreement or any other document by the exporter in India, to act on behalf of the exporter, to cause sale of goods exported by him"

Vide Not No 18/09-ST dated 7th July, 2009, the exemption from payment of Service Tax on the services provided by overseas commission agents has been provided subject to the filing of EXP-1 and half yearly Return in EXP-2. In view of the above, it is evident that the ultimate intention of Government is to exempt Service Tax on commission either by way of exemption, CENVAT credit or refund.

In the CBEC Circular No 120/01/2010-ST. dated: January 19, 2010, it has been clarified that:

"There cannot be different yardsticks for establishing the nexus for taking of credit and for refund of credit. Even if different phrases are used under different rules of CENVAT Credit Rules, they have to be construed in a harmonious manner"

It has been held in CCE, Jalandhar Vs Ambika Forgings 2010 (259) E.L.T. 593 (Tri. - Del.) that once the legislative mandate is apparent, no technical meaning need to be assigned to deny relief.

Further, Appeal filed by Revenue has been rejected by the Principal Bench of Hon CESTAT-Delhi in the case of CST Vs Convergys India Pvt. Ltd. (2009-TIOL-888-CESTAT-DEL) upholding the above principle that "there cannot be two different yardsticks, one for permitting credit and the other for eligibility for granting rebate. Whatever credit has been permitted to be taken, the same are permitted to be utilized and when the same is not possible there is provision for grant of refund or as rebate"

Hon Apex Court in the case of Ramala Sahkari Chini Mills Ltd. Vs CCE, Meerut 2010-TIOL-102-SC-CX held that "Generally word ‘include' should be given wide interpretation - By employing such word, legislature intends to bring in, by legal fiction, something within accepted connotation of substantive part - Regard must be had to context in which the word ‘includes' appears to determine whether such word has enlarging effect".

Rule 2 (l) of CENVAT Credit Rules includes myriad of services including sales promotion and also covers excluded services of various types. When excluded services are specifically mentioned in the Rules, there is no reasoning to stretch it further to other services. In this regard, Hon CEGAT, Calcutta in Collector of C. Ex. Vs Heavy Engineering Corporation Ltd. 1990 (49) E.L.T. 531 (Tribunal) held that:

"What are excluded from the scope of an expression in a legal provision by such an exclusion clause are only those items mentioned specifically in the exclusion clause. This cannot be stretched by analogy to other items not so specifically mentioned, unlike an inclusion clause where the items covered by the expression would not be confined to those so included. The items included are illustrative and not exhaustive. Contrarily, the items excluded are exhaustive and not illustrative"

Certainty in taxation is a fundamental canon of taxation, and if that is not followed, there will be confusion/chaos in tax administration as held by Hon Tribunal in Kinetic Engineering Vs CCE, Pune – 2012-TIOL-508-CESTAT-MUM.

The maxim "Nec quicquam acrius quam pecuniæ damnum stimulat" reminds us that" Nothing stings more deeply than the loss of money". Nobody would like to part with the hard earned money due to anomalies in taxation but how many can afford to litigate and escalate the same to the highest forum?

On the one side, Government mandates payment of Service Tax on reverse charge method for the services received from overseas commission agents and it is being exempted, refunded or made CENVA Table through various Notifications and clarificatory Circulars with the ultimate motive of avoiding cascading effect of taxes and also to zero rate exports. But it is a paradox that this is being disallowed at the other side by field formations. It is high time for the Government to intervene and streamline the process of CENVAT flow to the manufacturing community and to instruct field formations to refrain from accusations and objections on technical grounds.

Concluded with few lines from the poem of William Blake:

"The accuser of sins by my side doth stand,
And he holds my money bag in his hand;
For my worldly things God  makes him pay;
And he'd pay for more, if to him I would pray"

(The views expressed are strictly personal)