TIOL-DDT 1860
18.05.2012
Friday

THE CAG in its latest report on Customs points out,

According to the proviso to serial No.2 of the Notification No. 23/2003-CE dated 31 March 2003 as amended, it is stipulated that while calculating the aggregate of the customs duties, additional duty of customs leviable under sub section 5 of section (3) of the Customs Tariff Act shall be included, if the goods cleared into Domestic Tariff Area (DTA) are exempt from payment of Sales Tax (ST) or Value Added Tax (VAT). Further, in terms of Notification No. 19/2006-cus dated 1 March 2006, an additional duty of customs shall be levied at the rate of four per cent ad valorem on all the imported goods. Thus, in the case of finished goods cleared in DTA, which are exempt from payment of ST or VAT, the special additional duty of customs at the rate of four per cent becomes leviable.

A 100% EOU under Central Excise Commissionerate, Vapi, engaged in manufacture and export of goods falling under chapters 28, 32, 34 and 38 of the Customs Tariff had made DTA clearances between 1 March 2006 and 31 March 2009 to its sister units. The DTA clearances made to sister units were treated as ‘stock transfer' and cleared under notification No. 23/2003-CE without payment of excise duty equivalent to the four per cent additional duty of customs on the plea that goods cleared in DTA are not exempt from payment of ST/VAT. This resulted in non levy of additional duty of customs amounting to Rs. 19.90 crore.

When Audit pointed this out in January 2010, the department did not accept the Audit observation and stated that sales tax was not paid for clearances to its sister units, as it was stock transfer/branch transfer. The department further stated that the goods transferred to sister units were used for their own production and final products are cleared on payment of appropriate taxes.

The reply of the department is not acceptable to Audit as:

1. The notification no. 23/2003-CE does not provide any specific exemption to ‘stock transfer'. It provides exemption only to ‘DTA clearances', that too where the goods suffered ST/VAT.

2. Board circular No. 38/2003-cus dated 6 May 2003 had clarified that stock transferred' by an EOU to DTA are covered under DTA sale.

3. ‘Stock transfer' is covered under the meaning of ‘sale' as defined in section 2 (h) of the Central Excise Act, 1944.

However, the department subsequently adjudicated the demand for Rs. 33.14 crore for period upto 30 June 2010.

CAG Recommends

Department may introduce suitable mechanism in the notification itself to levy special additional duty on firm on clearances of goods on stock transfer basis to their related firms if sales tax/VAT is not paid at the time of clearance of goods from customs bonded warehouse .

But there is no sale and so no sales tax/VAT when an EOU transfers certain goods to itself. The AG created litigation has already reached higher echelons of appellate machinery and will continue merrily for some years.

The CAG should conduct an Audit on the litigation it has generated and the final results with the amount of money the nation lost in audits and appeals.

Rule 16 of CER, 2002 and SSI exemption - any solution?

A Netizen sent us this mail-

“I am registered with the Central Excise department. As a SSI unit, I am entitled to small scale exemption of Rs. 1.5 Crores in terms of Notification No. 8/2003-CE. This February, as I had crossed the SSI exemption limit, I cleared a consignment to a customer on payment of Excise duty after availing CENVAT. The customer found certain defects in the goods and returned the same to me in the month of March. Since he had taken CENVAT credit, he debited the same while returning the goods. Upon receipt of the goods, I took CENVAT credit of the duty in terms of rule 16 of the CER, 2002 and found that the goods required a minor repair job. Needless to mention, since the finished goods were returned, their value was not taken into account while computing the aggregate value of clearances of four crores under the SSI notification.

When I opted for the SSI exemption this financial year, I had to observe the provisions of rule 11(2) of the CENVAT Credit Rules, 2004 which required me to do as below -

"A manufacturer who opts for exemption from the whole of the duty of excise leviable on goods manufactured by him under a notification based on the value or quantity of clearances in a financial year, and who has been taking CENVAT credit on inputs or input services before such option is exercised, shall be required to pay an amount equivalent to the CENVAT credit, if any, allowed to him in respect of inputs lying in stock or in process or contained in final products lying in stock on the date when such option is exercised and after deducting the said amount from the balance, if any, lying in his credit, the balance, if any, still remaining shall lapse and shall not be allowed to be utilized for payment of duty on any excisable goods, whether cleared for home consumption or for export."

Accordingly, my CENVAT credit account which also contained the credit taken under rule 16(1) was reduced to nil balance.

Incidentally, the goods received back have now been repaired and I intend to clear the same to the original consignee.

I faced the following two problems -

+ While clearing the repaired goods, in terms of rule 16(2) of the CER, 2002, I am required to pay an amount equal to the CENVAT credit taken earlier in terms of rule 16(1) of the CER, 2002. As can be seen, the CENVAT credit has already been reversed in terms of rule 11(2) of the CCR, 2004 and, therefore, I do not have any balance in my CENVAT credit account.

+ I am presently operating under SSI exemption and am required to clear the goods at Nil rate of duty ONLY.

Without seeking any advise, I cleared "these repaired goods" at nil rate of duty.

There is no loss of Revenue to the exchequer but I fear that I may receive a demand from the department by invoking the provisions of rule 16(2) of the CER, 2002 read with rule 14 of the CCR, 2004 as rule 16(1) deems the “returned goods” as ‘Inputs” under the CENVAT Credit Rules.

Presuming I had paid the ‘amount' through the Personal Ledger Account, I might have landed in another trouble - and that is that the SSI notification makes a mention that if I forego the exemption, I am required to pay the ‘normal' rate of duty for the entire financial year - albeit the fact remains that this was not my first clearance!

I request DDT to carry this apprehension of mine so as to elicit response from Netizens?”

Stamp Duty on Power of Attorney - Upheld by Supreme Court

BY the Indian Stamp (Madhya Pradesh Amendment) Act, 2002, a stamp duty of 2 percent was imposed on the market value of the property which is subject matter of power of attorney when power of attorney is given without consideration to a person other than father, mother, wife or husband, son or daughter, brother or sister in relation to the executant and authorizing such person to sell immovable property situated in Madhya Pradesh. On a writ petition, the Madhya Pradesh High Court declared the provision as violative of Article 14 of the Constitution .

The State appealed to the Supreme Court. The Supreme Court in a recent order set aside the High Court order and upheld the State Law. The Supreme Court observed,

The statute enacted by Parliament or a State Legislature cannot be declared unconstitutional lightly. The court must be able to hold beyond any iota of doubt that the violation of the constitutional provisions was so glaring that the legislative provision under challenge cannot stand. Sans flagrant violation of the constitutional provisions, the law made by Parliament or a State Legislature is not declared bad.

By creating two categories, namely, an agent who is a blood relation, i.e. father, mother, wife or husband, son or daughter, brother or sister and an agent other than the kith and kin, without consideration, the Legislature has sought to curb inappropriate mode of transfer of immovable properties. Ordinarily, where executant himself is unable, for any reason, to execute the document, he would appoint his kith and kin as his power of attorney to complete the transaction on his behalf. If one does not have any kith or kin who he can appoint as power of attorney, he may execute the conveyance himself. The legislative idea behind Clause (d), Article 45 of Schedule 1-A is to curb tendency of transferring immovable properties through power of attorney and inappropriate documentation. By making a provision like this, the State Government has sought to collect stamp duty on such indirect and inappropriate mode of transfer by providing that power of attorney given to a person other than kith or kin, without consideration, authorizing such person to sell immovable property situated in Madhya Pradesh will attract stamp duty at two per cent on the market value of the property which is subject matter of power of attorney. In effect, by bringing in this law, the Madhya Pradesh State Legislature has sought to levy stamp duty on such ostensible document, the real intention of which is the transfer of immovable property. The classification, thus, cannot be said to be without any rationale. It has a direct nexus to the object of the 1899 Act. The conclusion of the High Court, therefore, that the impugned provision is arbitrary, unreasonable and irrational is unsustainable.

See the Supreme Court order here.

Jurisprudentiol - Monday's cases

Central Excise

Valuation - Physician Sample - Transaction Value for samples manufactured on job work; Pro rata value for free samples - CESTAT

WHEN physician samples manufactured and cleared to brand owners/ buyers on principal-to-principal basis for a consideration, which are further distributed by the buyer free of cost to physicians/doctors, the same is required to be assessed to duty on the transaction values.

As regards the physician samples manufactured by the appellants on their own behalf and distributed free of cost, the issue is no more open for arguments inasmuch as the Larger Bench of the Tribunal in the case of Cadila Pharmaceuticals Ltd. Vs CCE Ahmedabad - 2008-TIOL-1668-CESTAT-AHM-LB has held that valuation of such physician samples is required to be made on the basis of pro rata

Income Tax

Income tax - Whether when assessee is given licence to manufacture denatured spirit but also manufactures arrack under compulsion for supplies to Govt, assessee in such a case loses entitlement to investment allowance u/s 32A - NO, rules HC

THE assessee filed the return of income for 1986-1987 claiming net loss of Rs. 16,54,000/-. By a subsequent return, the loss was revised downward to Rs. 16,09,450/-. The assessee claimed investment allowance, which was allowed by the ITO. The CIT on scrutiny found that investment allowance cannot be allowed as the petitioner manufactured rectified spirit and denatured spirit and also sold arrack after diluting the rectified spirit. Therefore, in exercise of powers u/s 263 of the Act, the CIT revised the order on 26.02.1990, aggrieved by which, the assessee filed an appeal. The ITAT allowed the appeal holding that item 1 of Eleventh Schedule disqualifies manufacture of only potable liquor from claiming investment allowance and that the rectified spirit and denatured spirit do not come within the purview of item 1. Aggrieved by the order of the ITAT the Revenue sought a reference to the High Court.

Service Tax

Service Tax on reimbursement of salaries - prima facie activity undertaken by applicant is covered under Manpower Supply Services. Pre-deposit ordered: CESTAT

THE applicant was engaged in the business of manufacture of Steel Ingots but due to heavy losses in steel industry, they could not run the factory. Due to this reason, the company was unable to clear the dues to its creditors. Therefore, the creditors approached the Bombay High Court for liquidation of the Company for recovery of their dues. Before the High Court, an arrangement was made and as per the arrangement the plant was leased out to M/s. Ferro Alloys Corporation Ltd., on Leave and License agreement. This agreement is being renewed from time to time. Arrangements were made like, all the employees of the applicant were engaged by M/s. Ferro Alloys Corporation Ltd. (FACOR in short) and their salaries, service charges and other office expenses should be paid by M/s. FACOR and the applicant will disburse to the respective employees.

See our columns Monday for the judgements

Until Monday with more DDT

Have a Nice Weekend