Central Govt increases duty on mobile handsets including Cellular Phones

  By Vimal Pruthi, ACA, LL.B.

INDIA is one of the economies of the world which is having high potential for sale of mobile phones. The Govtt saw the said potential from the stand point of collecting tax revenue. Hence in the Finance Budget of 2011-12 the Central Government has enhanced levy of excise duty on mobile phones including cellular phones.

++ Prior to announcement of Finance Bill 2011-12 (Budget 2011), NCCD @ 1% was levied on manufacture/import of mobile phones under the Seventh Schedule of the Central Excise Tariff Act.

++ The Central Government has now, vide Sl. No. 100 of the Notification No. 1/2011-CE dated 01/03/2011 has provided for levy of 1% excise duty on "Mobile handsets including Cellular Phones and Radio trunking terminals" subject to fulfillment of condition specified in the said notification. This notification does not apply to the goods in respect of which credit of duty on inputs or input services has been taken under the provisions of Cenvat Credit Rules, 2004.

++ Further to this, the Central Government has also issued Notification No. 2/2011-CE dated 01/03/2011 which vide Sl. No. 60 provides for levy of 5% excise duty on "Mobile handsets including Cellular Phones and Radio trunking terminals" . Further, under this notification there is no condition attached and thus the manufacturer is eligible to claim Cenvat credit.

++ A conjoint reading of both the notifications provides following clarification for levy of excise duty on mobile phones manufactured in India:

In case Cenvat credit is availed:

++ In terms of Notification No. 02/2011 – CE dated 01/03/2001, mobile handsets including cellular phones and radio trunking terminals shall be liable to excise duty @ 5%.

Incase Cenvat credit is NOT availed:

++ In terms of notification No. 01/2011-CE dated 01/03/2011 if no credit of input goods or input services is availed then excise duty @1% would apply.

Further, NCCD at the rate of 1% shall also be leviable over and above the excise duty in both of the above cases .

++ However, a moot question which arises here is whether imported "Mobile handsets including Cellular Phones and Radio Trunking terminals" would be taxable at 1% countervailing duty leviable under Section 3(1) of the Customs Tariff Act commonly known as CVD or 5% CVD?

++ One way to interpret the said notification is that the imported mobile phones are not capable of fulfilling the conditions of Notification No. 1/2011-CE dated 01/03/2011. To avail this exemption importer is under an obligation to show that for manufacture of such goods no credit of inputs or input services has been availed. In the case of imported mobile handsets the goods are manufactured abroad and hence it cannot be shown that no Cenvat credit has been taken for manufacture of such imported mobiles as the Central Excise Act of India and Cenvat Credit Rules, 2004 do not apply to goods manufacture abroad. Therefore, the condition of Notification No. 01/2001-CE dated 01/03/2011is not fulfilled and hence leviable to CVD @ 5%.

++ Reference is made to the judgment of Larger Bench in Priyuesh Chemicals & Metals 2000 (120) ELT 259). In this case Zink Ash manufactured in India was eligible for exemption if no credit of input used for manufacture of Zink Ash was taken. The issue before the Larger Bench of Tribunal was whether this exemption will be applicable on the imported Zink Ash because imported goods are manufactured outside India and no Cenvat credit was availed on such goods. The Tribunal held that imported goods cannot be treated as goods manufactured in India by the inputs on which no Cenvat credit has been taken and hence benefit of the exemption notification shall not be available. The relevant Para of the judgment is produce below for your reference:

7. We have perused the records and have considered the submission made by both the sides. There is no dispute that exemption notification under Central Excise Act and Rules applied to imported goods for the purpose of levy of additional duty of Customs. There is also no dispute that the imported goods/importers should satisfy the conditions of exemption Notifications if they claim the benefit of exemption. This is the law laid down by the Supreme Court in the Thermax case (supra) and the Bombay High Court in the Ashok Traders case (Supra). We are in complete agreement with the Revenue on this issue. In the present case, the appellants are contending that they satisfied the condition stipulated in the Proviso to Notification No. 19/88 by stating that they had not availed themselves of Modvat credit on the inputs used in the manufacture of the imported consignment of Zinc Ash. This is not the correct understanding of the requirement of this notification. The exemption notification stipulates that “no credit of duty paid on the inputs used in the manufacture of said goods have been taken under Rule 56A or Rule 57A of Central Excise Rules 1944”. In order to satisfy this condition it has to be shown that the Zinc Ash in question had been manufactured from inputs on which no credit of duty has been taken. The goods were manufactured abroad. It is common knowledge that the Central Excise Act of India and Central Excise Rules of India do not apply to manufacture abroad. Therefore, the appellant's claim that the imported consignments fulfil the requirement of the Notification has no substance or basis in facts. In other words, it is clear from the exemption notification that it exempts only Zinc Ash which is produced from duty paid inputs. In order to satisfy this condition, it is necessary that a manufacturer seeking exemption should show that the Zinc Ash was produced from duty paid inputs. Imported goods are incapable of fulfilling this condition and therefore, could not claim the exemption under notification 19/88

++ Reference is also made to the judgment of ITC Vs Commissioner of Customs (2009) 237 ELT 173. In this case the specified textile goods were exempted from levy of Excise duty if Cenvat credit of inputs and capital goods used for manufacture of such goods was not availed. The issue before Tribunal was whether this exemption would be available to imported textile products or not. The Tribunal held that the goods were not manufactured in India and the importer was not in a position to produce the evidence that on such goods no Cenvat credit had been taken. Hence the benefit of the exemption notification would not be available. Relevant part of the judgment is reproduced below for the ease of reference:

5 We find that the appellant claimed the benefit of Notification No. 30/ 2004-CE. The condition of the notification is that the benefit is not available to the goods in respect of which credit of duty on inputs or capital goods has been taken. The appellant heavily relied upon the decision of Hon'ble Supreme Court in the case of Lohia Sheet Products (supra) where the Hon'ble Supreme Court allowed the benefit of Notification No. 8/96 -CE. In Lohia Sheet Products case the notification provided Nil rate of duty in respect of the copper waste and scrap used within the factory of production for the manufacture of unrefined or unwrought copper, copper sheets or circles and handicrafts. The copper waste and scrap were imported into India and the benefit of notification was denied, by the Revenue, on the ground that the same was not generated within the factory of production. In this situation, the Hon'ble Supreme Court held that the imported scrap is entitled to exemption under Notification No. 8/96 -CE as the imported scrap was used within the factory of production and there is no condition under the notification that same should be generated in the factory of production. In the present case, we find that the condition of the notification is different. The condition is that benefit of notification is not available to the goods in respect of which credit of duty on inputs or capital goods has been taken, therefore, the ratio of the decision of Hon'ble Supreme Court relied upon by the appellant is not applicable on the facts of the present case. We find that Hon'ble Supreme Court iii the case of Motiram Tolaram (supra) relied upon by the Revenue denied the benefit of notification where the concessional rate of duty is provided in respect of polyvinyl alcohol, if the same was manufactured from excise/ CV duty paid on vinyl acetate monomer. The Hon'ble Supreme Court held that as the said condition was not satisfied; therefore, the benefit of notification is not available. The same view has been taken by the decision of Hon'ble Bombay High Court in the case of Ashok Traders (supra) and Gujarat Plastic Industries (supra). The Hon'ble High Court held that in case the conditions of notification are not fulfilled, the benefit of notification is not available. The Larger Bench of the Tribunal in the case of Priyesh Chemicals & Metals (supra) also taken the same view. In the present case, as the appellant claimed the benefit of notification, therefore, they have to show that conditions imposed in the notification are fulfilled. The appellant had not produced any evidence or to show that conditions of the notification are fulfilled, therefore, we find no infirmity in the impugned order. The appeal is dismissed.

++ The Second way to interpret the above notification can be that on the imported goods no Cenvat credit has been availed and hence the conditions of the notification No. 01/2011-CE dated 01/03/2011 are fulfilled. In this view reference can be made to the judgment of Supreme Court in the case of Lohia Steel Products Vs Commissioner of Customs 2008(224) ELT 349. In this case under the erstwhile notification No. 08/96-CE dated 23/07/96 which provided for exemption on copper/brass waste used within the factory of production for manufacture of unrefined copper and handicrafts. The issue before the Supreme Court was whether such an exemption would be available to imported copper/brass waste. The Supreme Court held that the condition of the notification should be strictly construed and even imported goods fulfill the requirement of the exemption notification because the imported goods would be used in the factory for manufacture of the unrefined copper or handicrafts. Further, there is no requirement that the copper/brass waste should be manufactured in India or imported. Hence benefit of the exemption notification would be available. Relevant paras of the judgment are reproduced below for ease of reference:

15. Entry 74.04 can be divided into three parts, viz., (i) copper waste and scrap; (ii) used within the factory of production; and (iii) for the manufacture of unrefined or unwrought copper, copper sheets or circles and handicrafts. The sum and substance of the entry, in our opinion, is that if a manufacturer uses copper waste and scrap within the factory of production for the manufacture of unrefined or unwrought copper, copper sheets or circles and handicrafts, then it would be entitled to the exemption under the impugned notification. In the present case, the appellants satisfy all the three conditions as they had used the copper/brass waste and /or scrap within the factory of production, and for the manufacture of handicrafts. The entry nowhere uses the word 'generated' or 'imported'. The condition that only that scrap would be entitled to exemption which has been generated in the factory of production is, therefore, unwarranted and unsustainable. The word, 'within' occurs after the word, 'used'. The assessing authority as well as the Tribunal have arrived at the finding that only that scrap/waste of copper would be entitled to the exemption which had been generated in the same factory because of the word, 'within' used in the heading 74.04. According to them, the word, 'within' pre-supposes that the copper waste and scrap was generated in the same factory. We are unable to read the entry in the manner as suggested by the Revenue.

16. The test laid down by the Tribunal that the benefit of the notification/tariff heading would be admissible to only that copper waste and scrap which is generated in the factory of production and not the imported waste and scrap, is not supported either by the text of the exemption notification, heading 74.04 or any other authority.

++ Hence on the basis of judgment of Supreme Court in the case of Lohia Steel Products Vs Commissioner of Customs 2008(224) ELT 349 it can be argued that on the imported goods no Cenvat credit has been taken hence conditions of the exemption notification has been fulfilled and hence on the imported mobile phones 1% CVD is leviable. It is pertinent to note that similar argument was rejected by the Tribunal in the case of ITC Vs Commissioner of Customs (2009) 237 ELT 173 following the judgment of Larger Bench in Priyuesh Chemicals & Metals ( 2000 (120) ELT 259). Hence if the importers of the mobile phones take this view than they may need to litigate the matter because the revenue authorities will argue that the imported goods does not fulfill the conditions of the Notification No. 01/2011-CE dated 01/03/2011.

++ If we see the intention of the legislature in this case than the intention is that if a manufacturer does not avails the Cenvat credit of inputs and input services then it can opt for a concessional rate of 1% excise duty. Alternatively if the manufacturer avails the Cenvat credit then it is under an obligation to pay 5% excise duty. In nutshell on manufacture of mobile phones revenue will either get 5% Excise duty OR 1% excise duty and credit forgone on inputs and input services used for manufacture of mobile phones. The aim of levy of CVD is to countervail the excise duty leviable on manufacture of such goods in India and to bring the imported goods in parity with the goods manufactured in India. Hence if on imported mobile phones 1% CVD is levied treating that these goods fulfil the condition of the notification and if the same is compared with the manufactures of mobile phones in India those either pay 5% excise duty or 1% excise duty and forgo Cenvat credit on inputs and inputs services, the importers will be better off as compared to the manufacturer in India and it will not be in line with the aim of levy of CVD. We understand such an interpretation should not be given which defeats the basic aim of levy of CVD.

++ The issue is contentious and in the coming days the issue is going to be question of concern between the revenue authorities and importers of mobile phones.

(The author works with one of the Big Fours)