Full Judgment Text
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CASE NO.:
Appeal (civil) 8529-8531 of 2001
PETITIONER:
M/s Modipon Fibre Company,Modinagar, U.P.
RESPONDENT:
Commissioner of Central Excise,Meerut
DATE OF JUDGMENT: 25/10/2007
BENCH:
S. H. Kapadia & B. Sudershan Reddy
JUDGMENT:
J U D G M E N T
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
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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,
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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
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"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,-
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(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 \026
(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
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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.
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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
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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
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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.