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The Doctrine of Revenue Neutrality

JULY 25, 2011

By B B Prasad IRS, Additional Director General, NACEN, Hyderabad

It is a settled principle that contravention of statutory provisions should be visited with consequences. An exception is advanced in taxation matters when the contravention has no revenue implications, i.e the contravention (of the statute) is of the form and not of the content. This is Revenue-neutrality. The article discusses the principle of revenue-neutrality in the light of decisions of judicial fora.

THE concept of revenue-neutrality (RN) does not form part of taxation statute. The principle has evolved in the course of judicial pronouncements over a period of time, so much so that, there is a propensity to apply it in unwarranted situations and bypass the legal provisions. Indirect tax like Central Excise is tailor-made for this. The article is a call to use restrain. In one of the early cases, namely, Formica India Division [2002-TIOL-620-SC-CX] we get a glimpse of the principle of revenue-neutrality.The tribunal`s larger bench had an occasion to extensively examine the applicability of RN in Jay Yushuncase : 2002-TIOL-126-CESTAT-DEL-LB and after referring to the this decision very succinctly prescribed the contours:

“(a) Revenue neutrality being a question of fact, the same is to be established in the facts of each case and not merely by showing the availability of an alternate scheme;

(b) Where the scheme opted for by the assessee is found to have been misused (in contradistinction to mere deviation or failure to observe all the conditions) the existence of an alternate scheme would not be an acceptable defence;

(c) With particular reference to Modvat scheme (which has occasioned this reference) it has to be shown that the Revenue neutral situation comes about in relation to the credit available to the assessee himself and not by way of availability of credit to the buyer of the assessee's manufactured goods;

(d) We express our opinion in favour of the view taken in the case of M/s. International Auto Products (P) Ltd. (supra) and endorse the proposition that once an assessee has chosen to pay duty, he has to take all the consequences of payment of duty.”

It can be seen that there is a caution in the above observations. The argument of RN is advanced in the following situations:

++ The assessee has not paid the duty on the intermediate products. RN is argued on the ground that if duty were paid , the same would have been available as credit to the same assessee.

++ Duty has not been paid on the goods cleared to a sister unit. The ground of RN is that if duty is paid, the same would be available as credit to the sister unit.

++ The situation is same as ii) above except that clearance is not to the sister unit but to a third party.

++ Duty has not been paid on the goods at the time of clearance. RM is argued on the ground that there was alternative option available under which there was no requirement to pay the duty or if paid, the same was available as refund.

++ Credit has been taken on inputs and duty has been paid on the final product which is exempted. The assessee is asked to reverse the credit. The ground for RN is that payment of duty on the final product should be taken as reversal of the credit.

++ Movement of the goods is from the principal manufacturer to the job-worker or vice-versa. The ground for RM revolves around availability of credit if duty is asked to be paid subsequently.

++ Excess duty has been paid from the credit account resulting in higher payment of rebate in cash. RN is argued on the ground of equal treatment of payment through credit and through PLA.

++ Export of goods are involved.

The law is settled that there is a valid case of RN, the important decision, other than Formica Indian Division case (supra) being:

DR. WRITER' S FOOD PRODUCTS PVT. Ltd - 2007-TIOL-197-CESTAT-MUM

Credit on education cess used for payment of duties of Central Excise other than education cess - However, mistake happened during initial days of introduction of education cess - Demand not sustainable, confirmation of duty and permitting taking of credit again being a Revenue neutral exercise - However, penalty imposable, infraction of law being clearly established.

II above is an extension of the i) and judicial decision is in favour of extending RN.

2009 (233) E.L.T. 499 (Tri. - Ahmd.) CRYSTAL QUINONE (P) LTD.

Revenue neutrality - Demand on Unit No. 1 alleging undervaluation for goods cleared to own Unit No. 2 - Duty paid by Unit No. 1 available as credit to Unit 2 for utilisation in payment of duty on their final product - Entire situation revenue neutral

In respect of III above the larger bench decision in Jay Yushin case did not accept the plea of RN. However, the apex court has taken a different view in Coco-Cola Ind Pvt ltd case [ 2007-TIOL-245-SC-CX ]:

Classification of goods - Revenue neutrality - Classification of non-alcoholic beverage bases/concentrates manufactured by assessee which are supplied to bottlers, who in turn use the same as raw material in manufacture of beverages - Excise duty payable on beverage bases/concentrates and Modvat credit availed under Notification No. 5/94-C.E. (N.T.) is identical hence, consequences of payment of excise duty after availing Modvat credit was revenue neutral .

One reason for the court to take the above view could be that the supplier and recipient in the case before the court had somewhat franchise relationship. However this aspect has not been brought to the fore, as a result, the tribunals havebeen relying on this decision and extending the benefit of RN rather indiscreetly: 2009-TIOL-530-CESTAT-MUMReliance Industries Ltd

Demand - Revenue neutrality with reference to Cenvat credit - Demand against additional consideration received for clearance to advance licence holders assailed submitting that credit of any differential duty if paid by assessee, available to buyer - Revenue neutral situation - Established legal position that where it is shown that any duty found payable by an assessee is available as credit to recipient, such duty cannot be demanded from former

In the above decisions, the underlying principle of cenvat credit scheme that the chain of duty payment should not break has been given a go-bye.

IV above is a debatable case. There are decisions; for and against:

2004-TIOL-110-SC-CX - NARAYAN POLYPLAST

Exemption vis-a-visCenvat/Modvat - Option - Whether assessee bound to avail exemption or can forgo the same in order to avail Modvat credit - Notification No. 53/88-C.E. - Issue being merely technical and no revenue implication involved, Tribunal's order not to be interfered

2004-TIOL-113-SC-CX-LB - NARMADA CHEMATUR PHARMACEUTICALS LTD

Exemption vis-a-visCenvat/Modvat - Optional exemption not availed in order to take Cenvat/Modvat credit - Such credit subsequently held to be wrongly availed - When amount of Cenvat/Modvat credit wrongly availed is exactly equivalent to the amount of excise duty paid by not availing the exemption, the consequence is revenue neutral, hence demand for such wrong availment of credit rightly quashed by Tribunal

2002(146)ELT345(tri-del)-Autolite (India) Ltd [ maintained in 2003(154)ELT A 169(SC) ]

Revenue neutrality - Moulds sent outside factory under invoice for captive consumption and not received back - Duty paid and credit taken by persons manufacturing goods by using moulds - Noticee cannot plead revenue neutrality as they were not entitled to credit and could not take benefit of Rules 57-S(8) to (10) of erstwhile Central Excise Rules, 1944 as they had intention to evade duty and did not fulfill of conditions for benefit of Rules ibid

It can be safely inferred from the Autolite case thatif the alternative option requires following of the elaborate procedure, which obviously have not been followed, the plea of RN is not tenable. It also follows that RN is not acceptable where the alternative option required payment of duty which could be claimed as refund from another organization: DGFT. This is so because, first of all, refund requires following an elaborate procedure, and secondly, the refund is to be claimed from another agency.

In the type V case the same assessee is involved, hence there is a case of RM as held in KEETEX case: 2007-TIOL-2342-CESTAT-MUM:

Revenue neutrality - Though assessee not entitled to Modvat credit as they have neither undertaken any manufacturing activity nor did have any manufacturing premises but facts remain that they have paid duty on final products in which inputs were used and quantum of duty paid on final products is not less than credit taken on inputs - Whole exercise is revenue neutral and no purpose will be served by demanding duty - Section 11A of Central Excise Act, 1944.

Some of the important decisions on the type VI above are as below.

2000 (126) E.L.T. 1216 (Tribunal) ALLIED INDUSTRIES

Short levy on account of non-inclusion of cost of free supply bushes supplied by customer in value of axle beam assemblies - Customer was entitled to full Modvat credit of whatever duty was paid by manufacturer on axle beam assemblies, resulting in a revenue neutral outcome - No intent to evade duty on manufacturer's part in the circumstances - Extended period not invokable - Demand restricted to six months' period.

In the above case revenue neutrality was treated as a proof in support of non absence of intention to evade duty. Duty demand was restricted to normal period.

2001 (137) E.L.T. 1098 (Tri. - Del.) JAY YUSHIN LTD.

Valuation (Central Excise) - Value of components supplied free of cost includible in assessable value of final product for payment of duty.--------- Allegation of “suppression” of facts established as assessee, even while knowing components for manufacture of final products had been received free of cost from supplier, made a declaration in price list that no extra consideration had been received from suppliers of components - Extended period of demand sustainable in consequence - Section 11A of Central Ex-ise Act, 1944

The above decision has since been reversed by the apex court in International Auto case: 2005-TIOL-81-SC-CX-LB. The SC has observed:

Inputs supplied by final product manufacturer to intermediate product producer who using his own inputs as well - Transaction between intermediate product producer (appellant) and final product manufacturer covered by Rule 57F(2)(b) of erstwhile Central Excise Rules, 1944 - Manufacturer of final product entitled not only to adjust credit on inputs supplied by it to appellant but also to credit for duty paid by appellant on its products - Appellant not liable to pay duty on inputs supplied by final product manufacturer since it had not taken credit for Modvat in respect of inputs

2004 (174) E.L.T. 454 (Tri. - Del.) ILPEA PARAMOUNT PVT. LTD.

Valuation (Central Excise) - Bush being integral part of product “pulsator” manufactured by assessee and a complete product in itself, its value includible in value of pulsator - Section 4 of Central Excise Act, 1944.

Demand - Limitation - Suppression - Revenue neutrality - Availability of Modvat credit - Item bush received under Rule 57F(4) of erstwhile Central Excise Rules, 1944 challans free of cost. Fact that the party, to whom the assessee supplied pulsator with bush fitted therein, could take credit, could not be construed as a case of revenue neutrality and a circumstance reflecting bona fide of assesssee - Fact that assessee not adding value of bush in value of their product ‘pulsator' for having received Rule 57F(4) ibid challans, not disclosed to Department at any stage - Extended period of limitation applicable - Section 11A of Central Excise Act, 1944.

It can be seen that above decision is not in conformity with International Auto case ratio .

A decision on the type VII : 2007-TIOL-983-CESTAT-AHM - AMBICASYNTEXPVT. LTD.

Deemed credit - Recovery of - Export of man-made fabrics by taking credit applying higher rate of duty - Not a case of Revenue neutrality - Such deemed credit taken in excess is recoverable

In the case of exports, RN has been accepted:

2007 (212) E.L.T. 85 (Tri. - Mumbai) INDUSTHECOPVT. LTD. Capital goods on which credit was taken, exported as such subsequently - Reversal of credit - Appellant's submission that they were not required to pay back the credit in the light of C.B.E. & C. Circular dated 31-12-1996 having force - Entire exercise Revenue neutral also inasmuch as even if appellant had exported goods on payment of amount equal to credit, same would have been available to them by way of rebate

In some cases, while accepting the argument of RN, penalty has been upheld for violation of the procedures:

2005-TIOL-66-SC-CX-LB - PUNJAB TRACTORS LTD .

Revenue neutrality - Duty paid on exempted inputs and Modvat credit availed and reversed at the time of clearance of final products - Violation of Rules 57C and 57F of erstwhile Central Excise Rules, 1944 - Process followed by assessee if allowed would be revenue neutral - Assessee liable to penalty - Tribunal's order insofar as it imposes demand of duty set aside.

The tribunals and courts have not extended the benefit of RN when there are gross violations of the procedures or where there is evasion:

2004(177)ELT 1032: Crompton Greaves Ltd

Suppression of facts - Revenue neutrality - Once issue of suppression is separately dealt with in facts and circumstances of a case and decision arrived at, Modvat credit availed of by sister unit on inputs received from assessee is of no help to them - When prima facie, suppression on part of an assessee is established, plea of revenue neutrality would not come to rescue him of charges of suppression - Even in cases where modvatable goods are involved and consumed by sister unit in manufacturing final product, suppression of facts cannot be wiped off

2005-TIOL-75-SC-CX-LB - DHARAMPALSATYAPAL

Suppression - Clandestine manufacture of compound (kimam) without payment of duty - Assessee in business of manufacturing TulsiZafraniZarda for couple of years - Similar kimam brought from various traders who operated from licensed units - Units where compound (kimam) was manufactured not registered or licensed - No Central Excise records maintained - Plea of bona fide belief not acceptable - Demand not barred by time

Conclusion: The plea of Revenue-neutrality should not be applied as a matter of practice; it should be an exception, because it has the potential of breaking the cenvat-chain. The larger bench of the tribunal in the Jay Yushin case had set the guidelines. The apex court in the Coca-cola beverages case has diluted the criteria set in the Jay Yushin case. The decisions are unanimous that the RN is not to be accepted in the cases of abuse of procedures or mala fide .

(The views are personal of the author )


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