APRIL 14, 2014

By Pritam Mahure, CA

TO attract investors/ industries, State Governments provide for various incentives. The methodology to grant the incentives typically can be by way of:

a. Sales Tax Retention Scheme – Herein, the assessee can retain prescribed percentage of sales tax collected from customers

b. Sales Tax Exemption - Sales Tax exemption is available to the assessee for a specified period

c. Sales Tax Deferral Scheme – Assessee can collect sales tax but defers payment of sales tax for a specified period and at the end of specified period, deposits the sales tax collected. In certain cases, premature repayment of the sales tax liability is allowed (calculated at Net Present Value of the future sales tax liability )

d. Other methods such as subsidy, input credit refund etc

Issue

The facts before the Apex Court [2014-TIOL-19-SC-CX] were that the assessee (Super Synotex ) collected sales tax from its customers, however, it paid 25% of the Sales Tax collected to the State Government and retained the balance 75% as incentives in accordance with the State Incentive scheme.

In this context the issue was ' whether 75% the Sales Tax retained by the assessee should formpart of 'transaction value' and thus be subjected to Excise Duty ?

Legal Provisions

Pre-1 July 2000: The erstwhile definition of the term 'value' was as under:

(d) in relation to any excisable goods …

(ii) does not include the amount of the duty of excise, sales tax and other taxes, if any, payable on such goods

Post 1 July 2000: Post 1 July 2000 the definition of 'transaction value' is as under:

(d) "transaction value" means the price actually paid or payable for the goods, when sold, and includes in addition to the amount charged as price, any amount that the buyer is liable to pay to, or on behalf of, the assessee, … ;but does not include the amount ofduty of excise, sales tax and other taxes, if any, actually paid or actually payable on such goods .

Contentions of the Revenue

The amount retained as 'incentives' is an additional consideration and thus will form part of value for the levy of excise duty.

Contentions of the Assessee

The amount received was an incentive and, therefore, was not includiblein the assessable value for the purpose of excise. Such retention of sales tax is a deemed payment of sales tax to the State exchequer. The assessee also placed reliance on the CBEC Circular No. 378/11-98-CX dated 12.3.1998.

Apex Court Judgment

a. For the period pre1 July 2000

Referring to the terminology used in the definition of 'value' for the period upto 1 July 2000, the Apex Court held that as the terminology used in the statute was sales tax "payable", the amount of 'sales tax' which was otherwise payable, but retained in accordance with Sate legislation, was not includible for excise valuation purposes.

b. For the period post 1 July 2000

In this context the Apex Court observed that "… the amount paid to the State Government is only excludible from the transaction value. What is not payable or to be paid as sales tax/VAT, should not be charged from the third customer/party but if it charged and is not payable or paid , it is a part and should not be excluded from the transaction value ".

The Apex Court further stated - 'Be that as it may, the clear legislative intent, as it seems to us, is on "actually paid". The question of "actually payable" does not arise in this case…In view of the aforesaid legal position, unless the sales tax is actually paid to the Sales Tax Department of the State Government, no benefit towards excise duty can be given under the concept of "transaction value".'

The Apex Court also held that the term "value" under Section 4(4)(d) was differently worded (as compared to the terminology used post 1.7.2000) and hence the CBEC Circular dated 12.03.1998 was not applicable. The Apex Court also adverted to the Constitution Bench decision in Ratan Melting & Wire Industries - 2008-TIOL-194-SC-CX-CB where it is held - So far as the clarifications/circulars issued by the Central Government and of the State Government are concerned they represent merely their understanding of the statutory provisions. They are not binding upon the court.

Remarks

With due respect to the Apex Court judgment, I have the following to submit –

++ It is pertinent to note that use of term "actually payable" in the definition of the 'transaction value' is also significant. However, there is no discussion on the same in the judgment. The word 'payable' could be interpreted to mean the liability to pay should be there, whether the amount has been paid or not.

++ The use of the adverb 'payable' as alternative to 'paid' may mean that the sales tax should be actually 'payable' to the State and as per the applicable State laws it is 'payable' (though it is retained if assessee fulfils the prescribed condition).

++ Further, although sales tax is retained by the assessee still the fact remains that the sales tax collected by the assessee was actually 'payable' to the State and if the assessee does not fulfil the prescribed conditions, the sales tax so retained would become payable to the State.

++ Further, if the terminology 'actually payable' is interpreted to mean 'actually paid' then there was no need for the legislature to use the additional words 'actually 'payable' alongwith 'actually paid'. Incidentally, this argument was neither pressed nor considered.

++ The Show Cause Notice was based on the allegation of the Revenue that sales taxretained by the assessee was 'additional consideration'. It is pertinent to note that the term "consideration for sale" is what passes from buyer to the seller and not the other way round as held by Tribunal and affirmed by Supreme Court in the case of Sony India Ltd. 2004-TIOL-43-SC-CX. As such, consideration should typically flow from the buyer whereas in the instant case the consideration is flowing from State Government (as the State Government is granting incentive). Also, the incentives received are in the nature of capital subsidy and are towards the investment made by the assessee in the particular area.

Dark road ahead

This decision in Super Synotex (India) Ltd. 2014-TIOL-19-SC-CX is the latest in a series of judgments which have gone against the assessee. Bad times commenced with the FIAT India P. Ltd. 2012-TIOL-58-SC-CX and were soon followed by Larsen & Toubro Limited 2013-TIOL-46-SC-CT-LB.

In the present case, assessees are left twiddling their thumbs and contemplating whether seeking any State incentives was worth the trouble, after all.

Hope happy days would back soon!