M/S Modipon
Fibre Company, Modinagar, U.P. Vs. Commissioner of Central Excise, Meerut [2007] Insc 1100 (25 October 2007)
S.
H. Kapadia & B. Sudershan Reddy
CIVIL
APPEAL NOS. 8529-8531 OF 2001 with Civil Appeal Nos. 2008-2010 of 2002 KAPADIA,
J.
Delay
condoned.
2.
These cross appeals are filed by M/s Modipon Fibre Company and the Department
under Section 35L of Central Excise Act, 1944 against order dated 3.7.2001
passed by the Customs Excise & Gold (Control) Appellate Tribunal
("CEGAT") holding that the assessee was entitled to deduction in
respect of turnover tax ("TOT") only at 0.5% and not at 2% as
claimed.
Civil
Appeal Nos. 8529-8531 of 2001
3. The
appellant-assessee is engaged in the manufacture of Nylon and Polyester Yarn
which is manufactured in its factory in U.P. and cleared to its various Depots
situated all over India including Surat from where the Yarn is sold to dealers.
The assessee used to pay duty during the relevant period, at the time of
removal of yarn, on the basis of the depot sale price, after claiming
permissible deductions under section 4 of the Central Excise Act, 1944
("1944 Act"). One such deduction was TOT in respect of yarn cleared
and despatched to Surat depot from the factory of the assessee
in U.P.. In respect of such despatch, the assessee claimed deduction at 2% on
account of TOT. This was on the footing that the Government of Gujarat vide
Notification dated 19.10.1993 had exempted sale of Yarn of all kinds by a
registered dealer to a special manufacturer of processed Yarn or to an eligible
unit to the extent to which the rate of TOT exceeded 0.5% of the total
turnover.
This
was provided the specified manufacturer furnished to the selling dealer a
certificate in Form 26 and if the processed Yarn stood sold within the State of
Gujarat.
4. On
19.3.1999, a show cause notice was issued by the Department to the assessee in
which it was alleged that the assessee had filed its price declaration under
Rule 173-C in regard to the goods transferred to its depot in Surat for sale therefrom;
that in the said price declaration, the assessee had indicated variety-wise
ex-depot sale price, amount of various deductions for sales tax, freight,
discount, TOT, excise duty etc.; that in the price declaration, the assessee
had also declared the assessable value arrived at by deducting the
abovementioned elements from ex-depot sale price; that, however, in the price
declaration, the assessee had suppressed from the Department the fact that
there were two types of sales, one in the backward area as notified by the
Gujarat Government and the other in areas other than the backward area; that
the assessee had failed to declare that the TOT was leviable on sale of goods
during the period March, 1994 to March, 1997 at the dual rate of 0.5% (for
sales in backward areas) and at 2% (for sales in areas other than backward
areas) respectively. According to the show cause notice, the assessee had
claimed deduction for TOT at 2% from ex- depot sale price in order to arrive at
the assessable value; that although sales stood effected from the depot at two
different rates, the assessee claimed deduction for TOT at the full rate of 2%
in respect of entire clearances of Nylon Yarn sent to its Surat depot without
mentioning that in the State of Gujarat on account of Notification dated
19.10.1993 two rates of TOT existed and, therefore, according to the show cause
notice, the assessee had claimed wrongfully the deduction at a higher rate of
2% as against the rate of 0.5%. According to the show cause notice, since the assessee
had deducted TOT at a higher rate to arrive at the assessable value, it had
lowered the assessable value to the extent of 1.5% and, as such, a demand for
difference was made on the assessee. According to the show cause notice, in the
peculiar facts of this case, there should have been different assessable values
in respect of Normal Areas Sales and Backward Areas Sales, particularly when
the rate of TOT was different for the two types of sales; that in the case of
Normal Areas Sales, the assessable value should have been arrived at allowing a
deduction of 2% on account of TOT and in the case of Backward Areas Sales, the
assessable value should have been arrived at by deduction of 0.5% on account of
TOT. However, according to the Department, in the price declaration filed by
the assessee, the assessee has claimed deduction at 2% on account of TOT in
respect of the entire clearance and thus, according to the Department, the assessee
had claimed wrongfully a larger deduction than what he was entitled to.
Therefore,
according to the show cause notice, the difference between the amount of TOT
actually paid should have formed part of the assessable value and accordingly,
the Department called upon the assessee to pay excise duty on the differential
value. According to the Department, the assessee had wrongfully claimed
deduction on account of TOT; that the assessee had claimed wrongfully deduction
on the entire clearances at 2%; that the assessee had claimed in the price
declaration deduction on account of TOT at 2% when it had actually paid TOT @
0.5% in respect of backward area sales and, to that extent, the assessee had
evaded excise duty by wrongfully claiming excess amount of deduction on the
amount of deduction on account of TOT as compared to what was actually paid by
it. The demand has been confirmed by all the authorities.
Hence,
these civil appeals.
5. Mr.
S.K. Bagaria, learned senior counsel, appearing on behalf of the assessee,
submitted that the word "payable" in section 4(4)(d)(ii) is a
function of charging duty. If there is a charge, payability exists. If there is
a charge, liability exists. That, levy of duty is the legislative function. The
first step is liability, whereas the second step is when the tax becomes due.
On completion of assessment, the tax becomes due. Till such assessment,
liability may exist but tax does not become due till quantification takes
place. According to the learned counsel, the expression "payable" in
section 4(4)(d)(ii) is "time related concept" as the assessable value
has got to be determined at the time of clearance/removal. Learned counsel
submitted that, therefore, the word "payable" in section 4(4)(d)(ii)
should not be given a notional meaning.
According
to the learned counsel, assessable value is a matter relatable to
chargeability. That, liability to be assessed is not the same as payability as
under the 1944 Act, "payability" has to be decided at the time of
clearance of goods and, therefore, from the ex-depot price, assessee was
required to deduct under section 4(2) the cost of transportation as well as
elements enumerated in section 4(4)(d)(ii). According to the learned counsel,
on the date of the clearance of the goods, it was not possible for the assessee
to visualize as to how many sales would be Normal Area Sales and how many sales
would be Backward Area Sales as it depended on eligibility of special
manufacturers.
According
to the learned counsel, on the date of clearance, the assessee was only aware
of the fact that the turnover tax was 2%. Therefore, there was no mis-declaration
as alleged by the Department. According to the learned counsel, the assessee
used to manufacture variety of yarns.
The
factory of the assessee was in U.P. These different varieties of yarns were despatched
from the factory in U.P. to various sales depot of the assessee all over India. One such sales depot of the assessee
was in Surat. Learned counsel pointed out that
under the exemption Notification sales in backward areas were subject to
certain eligibility criteria and compliance of the procedure mentioned in the
exemption Notification issued by the Gujarat Government in 1993. According to
the learned counsel, it was impossible for the assessee to have visualized as
to how many dealers in Surat in future would be entitled to the benefit of
exemption Notification, particularly at the time when the yarn was cleared at
the factory gate of the assessee in U.P. and, therefore, according to the assessee,
eligibility of the dealers in Surat, who were liable to pay TOT constituted
post-clearance event. According to the learned counsel, such post-clearance
events are assumptions; that chargeability of excise duty cannot depend on such
assumptions; that liability did not depend on assessment as it is fixed
ex-hypothesis and, consequently, according to the learned counsel, the assessee
was right in claiming deduction on account of TOT at 2% as that was the only
rate which existed on the date when the goods were cleared at the factory gate.
According to the learned counsel, at the time of filing the price declaration
under Rule 173-C, the assessee had no means of knowing whether ultimately the
TOT would be payable at 2% or at 0.5% and, therefore, the assessee was
justified in claiming deduction of TOT at 2% being the prescribed tariff rate.
According to the learned counsel, 0.5% was the concessional rate which depended
upon fulfilment of conditions and eligibility criteria and, therefore, it was
not possible for the assessee to visualize whether ultimately TOT would be
payable at 2% or at 0.5%. According to the learned counsel, section 4 of the
1944 Act provides for deduction of tax "payable" and since TOT was
normally payable at the prescribed rate of 2%, the assessee was justified in
deducting TOT at 2% from the normal price in order to arrive at the assessable
value at the factory gate (place of removal). According to the learned counsel
for the assessee, in terms of section 4(4)(d)(ii) and the Explanation thereto,
the concept of "effective duty of excise" payable on the goods was
restricted only to excise duty. It was not extended to sales tax/TOT payable
and, therefore, the assessee was justified in deducting the TOT payable in the
State of Gujarat at the normal prescribed tariff rate of 2% from the normal
price of the yarn to arrive at the assessable value instead of deducting the concessional
rate of TOT at 0.5% prescribed by Notification dated 19.10.1993, which exempted
the processors in backward areas in the State of Gujarat from paying TOT at 2%
and instead provided for payment of TOT at 0.5%. According to the learned
counsel, under the above circumstances, at the time of sale, the assessee was
not aware whether ultimately the TOT would be payable at 2% or at 0.5%,
therefore, the learned counsel urged that the assessee was justified in claiming
deduction for TOT at 2% from the normal price. In this connection, learned
counsel placed reliance on the judgments of this Court in the cases of IDL
Chemicals Ltd. v. Collector of Central Excise reported in (1997) 5 SCC 311; MRF
Ltd. v. Collector of Central Excise, Madras reported in (1997) 5 SCC 104; J.K.
Synthetics Ltd. v. Commercial Taxes Officer reported in (1994) 4 SCC 276; Harshad
Shantilal Mehta v. Custodian and ors. reported in (1998) 5 SCC 1 and Associated
Cement Companies Ltd. v. State of Bihar and ors. reported in (2004) 7 SCC 642.
6. Dr.
R.G. Padia, learned senior counsel appearing on behalf of the Department,
submitted that on the date when the assessee had filed price declaration under
Rule 173-C, the assessee was aware of Notification dated 19.10.1993 issued by
the Gujarat Government; that the assessee was also aware that there existed
backward area sales and normal area sales on the date when it filed the price
declaration; that the assessee had never informed the Department that there
were two separate rates prevalent under the above Notification dated
19.10.1993; that if the amount of TOT paid by the assessee was less than the
amount claimed as TOT deduction at the time of ex-factory clearances, the assessee
should have paid the differential excise duty but the assessee never disclosed
to the Department that there were two types of sales, namely, backward area
sales and normal area sales and nor did the assessee inform the Department
about the TOT actually paid by it and, therefore, Department was right in
confirming the show cause notice dated 19.3.1999 for the period March, 1994 to
March, 1997.
7. The
question to be answered is the meaning of the word "payable" in
section 4(4)(d)(ii). The said word is descriptive. One has to see the context
in which the said word finds place in the aforestated section 4(4)(d)(ii). We
quote hereinbelow section 4(4)(d)(ii), which reads as under:
"4.
Valuation of excisable goods for purposes of charging of duty of excise.- (1)
to (3) xxx xxx xxx (4) For the purposes of this section, - (a) to (c) xxx xxx xxx
(d) "value", in relation to any excisable goods,- (i) xxx xxx xxx
(ii) does not include the amount of the duty of excise, sales tax and other
taxes, if any, payable on such goods and, subject to such rules as may be made,
the trade discount (such discount not being refundable on any account
whatsoever) allowed in accordance with the normal practice of the wholesale
trade at the time of removal in respect of such goods sold or contracted for
sale.
Explanation.- For purposes of this sub- clause,
the amount of the duty of excise payable on any excisable goods shall be the
sum total of
(a) the
effective duty of excise payable on such goods under this Act; and
(b)
the aggregate of the effective duties of excise payable under other Central
Acts, if any, providing for the levy of duties of excise on such goods, and the
effective duty of excise on such goods under each Act referred to in clause (a)
or clause (b) shall be, -
(i) in
a case where a notification or order providing for any exemption (not being an
exemption for giving credit with respect to, or reduction of duty of excise
under such Act on such goods equal to, any duty of excise under such Act, or
the additional duty under Section 3 of the Customs Tariff Act, 1975 (51 of
1975), already paid on the raw material or component parts used in the
production of manufacture of such goods) from the duty of excise under such Act
is for the time being in force, the duty of excise computed with reference to the
rate specified in such Act, in respect of such goods as reduced so as to give
full and complete effect to such exemption; and
(ii) in
any other case, the duty of excise computed with reference to the rate
specified in such Act in respect of such goods." (emphasis supplied)
As can
be seen from the above quoted section, excise duty can be deducted if it had
not been included in the invoice price. According to the Explanation, what is
deductible is the effective rate of duty. Where any exemption has been granted,
that exemption has to be deducted from the ad valorem duty. In other words, it
is only the net duty liability of the assessee that can be deducted in
computing the assessable value. The said principle stands incorporated in the
Explanation. For example, if the assessee recovers duty at the tariff rate but
pays duty at confessional rate, then excise duty has to be a part of the
assessable value. Similarly, refund of excise duty cannot be treated as net
profit and added on to the value of clearances. There is no provision in
section 4 of the 1944 Act to treat refund as part of assessable value. If
excise duty paid to the Government is collected at actuals from the customers
and if, subsequently, exemption becomes available, such excise duty which is not
passed on to the assessee, would become part of assessable value under section
4(4)(d)(ii).
8. In
the case of TOMCO v. Union of India reported in 1980 ELT 768 (Bom.) the assessees
were manufacturers of vegetable product known as 'Pakav'. The prices were fixed
by the Controller, who fixed the prices statutorily under the Vegetable Control
Order, 1947. These prices were fixed by the Controller, net of any tax during
the period March, 1969 to December, 1969. The prices so fixed by the Controller
included the element of excise duty payable thereon. TOMCO contended that it
was entitled to claim rebate of duty by virtue of Notification No. 6/62-CE
dated 10.2.1962. TOMCO further contended that, it was declaring the assessable
value after deducting the element of duty at 5% from the price fixed by the
Controller and, therefore, entitled to deduct from the selling price the duty
payable at 5% ad valorem. At this stage, it may be noted that TOMCO showed the
deduction at 5% from the price fixed by the Controller on the duty payable
under the above Notification whereas, according to the Department, the correct
method to arrive at the assessable value ("a.v.") was to deduct from
the selling price not the duty payable under the Notification but the duty
actually payable after the rebate, which the assessee was entitled to on
account of cotton seed oil content. In other words, according to the
Department, the duty element of the rebate was also admissible for deduction
from the selling price in order to arrive at the correct a.v.. This was the
controversy before the Bombay High Court. Therefore, the main issue, which
arose before the High Court was whether TOMCO was entitled to deduction of 5%
ad valorem or whether it was entitled to the deduction of 5% ad valorem minus
the rebate which it was entitled to receive under exemption Notification No.
6/62-CE dated 10.2.1962. According to TOMCO, the rebate of 6 paise was
admissible to the manufacturers who used indigenous cotton seed oil in the
manufacture of vegetable product, namely, Pakav (ghee) and, therefore,
according to TOMCO, what was given by rabate/exemption under the above
Notification was not deductible from the excise duty. In short, as in the
present case, TOMCO claimed higher deduction of 5% whereas Department contended
that the assessee was entitled to deduction of 5% minus 6 paise (rebate). On
behalf of TOMCO, as in the present case, it was argued that exemption was given
under the Notification by way of an encouragement to a manufacturer to make use
of cotton seeds in the manufacture of Pakav. The rebate in duty was not a
general rebate. It was a rebate admissible only to the manufacturer satisfying
certain conditions.
Therefore,
the position, in the present case, and the position prevalent in TOMCO's case
were identical. In the present case also the TOT deduction was available only
on fulfilment of certain conditions. Rejecting the arguments of TOMCO, the
Bombay High Court held that the rebate of 6 paise had to be deducted from 5% ad
valorem duty as the exemption under the Notification was not by way of a
windfall for the manufacturer but it was admissible only on account of the use
of cotton seed oil in the manufacture of Pakav.
9. At
this stage, we may note that there was a conflict of views at the relevant time
when TOMCO case was decided by Bombay High Court on 24.7.1980. It is precisely
in order to avoid the conflict that the Legislature inserted the above
Explanation in section 4(4)(d)(ii) of the 1944 Act by using the words "the
effective duty of excise payable on goods under this Act."
10. In
the case of B.K. Paper Mills Pvt. Ltd. v. Union of India and ors. Reported in
1984 (18) ELT 701 (Bom.) the assessee was the manufacturer of various types of
papers at their factory in Bombay. The papers
manufactured by the assessee was liable to excise duty under Tariff Item 17 of
the First Schedule to the 1944 Act (as it then stood) at the rate specified
therein. Under Notification No. 45/73 dated 1.3.1973 an exemption from excise
duty to the extent mentioned in the Notification was given in respect of
certain types of papers cleared by the assessee (manufacturer). In preparing
the invoices, the assessees did not give the benefit of exemption Notification
to their customers. The assessees contended that the exempted duty of excise
was, in fact, a subsidy and, therefore, they were not required to pass on the
benefit of exemption to their customers. The assessees filed their price lists
for the period July, 1976 to July, 1979 under Rule 173-C. The Department issued
a show cause notice stating that the assessees were paying duty at a concessional
rate while, in fact, they were charging full tariff rate of duty to their
buyers and, therefore, they were liable to pay the differential duty calculated
on the revised a.v. by applying section 4 of the 1944 Act. The Department
directed the a.v. to be determined by deducting from the normal price the
actual value of the duty payable. This determination was challenged by the assessee.
The Bombay High Court, speaking through Sujata V. Manohar, J., as she then was,
held vide para 25 that looking to the provisions of section 4(4)(d)(ii) of the
1944 Act and the language used therein, it was clear that only the reduced rate
of duty was excludible from the value of the goods. That, the Explanation did
not add something extra to section 4(4)(d)(ii) as it merely explained what was
implicit in that Section.
11. In
our view, the above two judgments of the Bombay High Court lay down the correct
principle underlying the Explanation to section 4(4)(d)(ii). As held in TOMCO's
case (supra), the exemption was not by way of a windfall for the manufacturer-assessee
but on account of cotton seed oil used by TOMCO in the manufacture of Pakav.
Similarly, in the case of B. K. Paper Mills (supra), the Bombay High Court has
correctly analysed section 4(4)(d)(ii) with the Explanation to say that only
the reduced rate of duty can be excluded from the value of the goods and that
Explanation explains what was implicit in that Section.
That,
the said section 4(4)(d)(ii) did not refer to duty leviable under the relevant
tariff entry without reference to exemption Notification that may be in
existence at the time of clearance/removal. That, section 47 of the Finance
Act, 1982 which inserted the Explanation expressly sets out what is meant by
the expression "the amount of duty of excise payable on any excisable
goods." By the amount of duty of excise what is meant is the effective
duty of excise payable on such goods under the Act and, therefore, effective duty
of excise is the duty calculated on the basis of the prescribed rate as reduced
by the exemption notification. This alone is excluded from the normal price
under section 4(4)(d)(ii).
12. It
is true that the Explanation to section 4(4)(d)(ii) only refers to the amount
of duty of excise payable on excisable goods, however, as held by the Bombay
High Court in the case of B.K. Paper Mills (supra), the Explanation expressly
sets out what is implicit in section 4(4)(d)(ii) which states that
"value" in relation to excisable goods does not include the amount of
duty of excise, sales tax and other taxes if payable on such goods. Therefore,
the test to be applied is that of the "actual value of the duty
payable" and, therefore, there is no merit in the argument advanced on behalf
of the assessee that the Explanation is restricted to the duty of excise. This
principle can therefore apply also to actual value of any other tax including
TOT payable. Even without the Explanation, the scheme of section 4(4)(d)(ii)
shows that in computing the assessable value, one has to go by the actual value
of the duty payable and, therefore, only the reduced duty was deductible from
the value of the goods.
13. To
the same effect is the judgment of the Division Bench of the Bombay High Court
in the case of Central India Spinning, Weaving and Manufacturing Co. Ltd. and
ors. v. Union of India and ors. reported in 1987 (30) ELT 217 (Bom.). We quote hereinbelow
para 7 of the said judgment, which reads as follows:
"It
is true that according to Section 4(4)(d)(ii) of the Central Excises Act, the
value does not include the amount of duty of excise, if any payable on such
goods, but in view of Explanation to Section 4(4)(d)(ii), the 'duty of excise'
means the duty payable in terms of the Central Excise Tariff read with
Exemption Notification issued under Rule 8 of the Central Excise Rules. In this
view of the matter, the only deduction that is permissible is of the actual
duty paid or payable while fixing the assessable value.
Thus
where the company/ manufacturer whose goods were liable to excise duty at a
reduced rate in consequence of an exemption notification, while paying duty at
reduced rate collected duty at a higher rate i.e. tariff rate from its
customers the authorities were justified in holding that what was being
collected by the company as excise duty was not excise duty but the value in
substance of the goods and therefore, the excess value collected by the
petitioner from the customers was recoverable under Section 11A of the Central
Excises and Salt Act, 1944."
14.
Applying the above tests to the facts of the present case, it is clear that on
the date when the assessee filed its price declaration under Rule 173-C the assessee
was aware that there was an exemption Notification dated 19.10.1993 in the
State of Gujarat; that there were depot sales in Surat; that there were two
types of sales, namely, backward area sales and normal area sales and that the
rate of TOT in respect of backward area sales was 0.5% whereas the rate of TOT
for normal area sales was at 2% and yet the assessee after suppressing the aforestated
data claimed the TOT deductions at the rate of 2% across the board for all
clearances and, therefore, the Department was justified in calling upon the assessee
to pay differential excise duty.
We
accordingly confirm the demand.
15.
Before concluding, we may add that every efficient manufacturer has to plan his
operations sufficiently carefully to know what raw materials he will use and in
what proportion he will use the raw materials in the manufacture of his final
product. Generally, such manufacturers maintain what is called as Order Book. A
manufacturer who is prudent would ordinarily worked out on estimation, the
extent of exemption which he is likely to get, in which event, the uncertainty
to which the learned counsel has made reference would in fact hardly arise. In
the present case, we are concerned with the amount of deduction. That deduction
has been claimed by the assessee- manufacturer (appellant). The burden is on
such manufacturer to maintain proper records, as the burden is on it to file a
proper price declaration under Rule 173-C.
The
burden to claim deduction is on the manufacturer. In the present case, the assessee
has filed a declaration under the said Rule 173-C without disclosing to the
Department any of the aforestated details. We are, therefore, of the view that
the Department was right not only in raising the demand for differential duty
but also for invoking the extended period of limitation.
16.
For the aforestated reasons, we find no merit in these civil appeals and the
same are accordingly dismissed with no order as to costs.
Civil
Appeal Nos. 2008-2010 of 2002
17.
This batch of civil appeals have been filed by the Department against order
dated 3.7.2001 passed by the CEGAT ("the Tribunal") which order
stands confirmed by our above judgment in civil appeal Nos. 8529-8531 of 2001
in favour of the Department.
18. By
the impugned order, the Tribunal has confirmed the demand made on the assessee
vide show cause notice dated 19.3.1999 for the period March, 1994 to March,
1997.
However,
the Tribunal found that the demand made by the Department was beyond limitation
after the assessee had categorically informed the Department vide letter dated
14.1.1997 that there were two types of sales, namely, backward area sales and
normal area sales. According to the Tribunal, therefore, there was no
suppression after the Department had acquired the knowledge for the first time
vide the assessee's letter dated 14.1.1997 and, therefore, it was not open to
the Department to claim suppression after 14.1.1997.
19. We
see no reason to interfere with the findings recorded by the Tribunal on the
question of suppression.
20.
Accordingly, civil appeal Nos. 8529-8531 of 2001 filed by the assessee and the
cross civil appeal Nos. 2008-2010 of 2002 filed by the Department stand
dismissed with no order as to costs.
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