TIOL-DDT 2904
05 08 2016
Friday

As we are about to embark on a mission of GST, where the tax on manufacture - excise duty and the tax on sales, - sales tax/VAT are to be subsumed in the new GST, it would be apt to recall an interesting case that was decided by the Federal Court of India 74 years ago - The Province of Madras vs Boddu Paidanna & Sons - 2002-TIOL-269-SC-CX decided on 8th May 1942.

Boddu Paidanna & Sons carried on the business at Vizianagaram in the Province of Madras. Their business consisted of the purchase of groundnut for the purpose of extracting oil from the kernels of the nuts and the making of groundnut cake out of the residue. They sold this oil and cake and since they were themselves the manufacturers, it followed that each sale which they affected was the first sale of the commodity after its manufacture or production.

The Madras General Sales Tax Act, 1939 provided that, subject to the provisions of the Act, every dealer, that is to say, every person who carries on the business of buying and selling goods, is to pay in each year a tax on his turnover.

The expression "goods" was defined as meaning all kinds of movable property, other than actionable claims, stocks and shares and securities and included all materials, commodities and articles.

The tax was to be assessed, levied and collected in such manner and in such instalment as may be prescribed by rules made for the purpose by the Provincial Government.

The assessing authority under the Madras Sales Tax Act assessed Boddu Paidanna to tax. Accordingly, the sum of Rs. 160-11-0 was demanded from them by way of tax and paid by them under protest. They then took proceedings in the Court of the District Munsif at Vizianagram for a declaration that the Madras Act and certain rules made thereunder were ultra vires the Madras Legislature and for an order directing a refund of the sum of Rs. 160-11-0 together with Rs. 3 interest thereon.

The learned Munsif gave judgment in favour of Boddu Paidanna holding that a tax on the first sale of goods manufactured in the Province was a duty of excise which the Madras Government were not competent to impose.

There was an appeal to the District Court at Vizagapatam, but on the application of the Advocate-General of Madras, the appeal was transferred to the High Court of Madras. The Madras High Court upheld the judgment of the lower Court.

The Madras High Court noted the difference between excise and sales tax as:

The essence of a tax on goods manufactured or produced is that the right to levy it accrues by virtue of their manufacture or production. It is immaterial whether the goods are actually sold or consumed by the owner or even destroyed before they can be used. If a duty is imposed on the goods manufactured or produced when they issue from the manufactory, then the duty becomes leviable independently of the purpose for which they leave it and irrespective of what happens to them later.

On the other hand, a duty on the sale of goods cannot be levied merely because goods have been manufactured or produced. Nor can it be levied merely because the goods have been consumed or used or even destroyed. The right to levy the duty would not at all come into existence before the time of the sale. It cannot at all be levied unless the goods are actually sold, and may not be leviable if they are transferred in some other form. Thus a duty on goods manufactured or produced is distinct and separate from and independent of a duty on their sale and, (except probably at the stage of the first sale) there seems to be no good reason why the two may not co-exist without overlapping.

The High Court held,

"The tax operates on the goods themselves and it is imposed before they leave the hands of the manufacturer or producer. In the normal course he is certainly not going to part with his goods until a contract of sale has been entered into. This being the case it seems to us that the tax is intimately connected with the manufacture or production of the goods. We hold that a Provincial Legislature in India has no power to tax a sale by the manufacturer or producer as this would mean the imposition of an excise duty and the assumption of power vested only in the Centre. Where an entry in the Provincial List overlaps an entry in the Federal List, the Federal List must prevail. Where the interests can be reconciled this must be done, because obviously Parliament could never have intended that there should be a conflict."

Moreover, it is to be remembered that a Legislature cannot do indirectly that which it has no power to do directly.

Notwithstanding that the tax imposed by the Madras General Sales Tax Act is based on turnover, we hold that it is in fact a tax on sales and that in so far as it imposes a tax on the first sales of goods manufactured or produced within the Province, it is ultra vires the Provincial Legislature. This means that we consider that in calculating a dealer's turnover for the purposes of the Act the sale by him of goods which he has manufactured or produced must be excluded.

This judgment was delivered on 5th September 1941.

The Province of Madras took the matter in appeal to the Federal Court of India (the then equivalent of today's Supreme Court)

The Federal Court observed,

Under the Constitution Act, the Federal Legislature has an exclusive power to impose duties of excise (List I, Entry No. 45) and the Provincial Legislature an exclusive power to impose taxes on the sale of goods (List 2, Entry No. 48).

The duties of excise which the Constitution Act assigns exclusively to the Central Legislature are duties levied upon the manufacturer or producer in respect of the manufacturer or production of the commodity taxed. The tax on the sale of goods which the Act assigns exclusively to the Provincial Legislatures, is a tax levied on the occasion of the sale of the goods. Plainly a tax levied on the first sale must in the nature of things be a tax on the sale by the manufacturer or producer; but it is levied upon him qua seller and not qua manufacturer or producer. It may well be that a manufacturer or producer is sometimes doubly hit, but so is the taxpayer in Canada who has to pay income-tax levied by the Province for Provincial purposes and also income-tax levied by the Dominion for Dominion purposes.

If the taxpayer who pays a sale tax is also a manufacturer or producer of commodities subject to a central duty of excise, there may no doubt be an overlapping in one sense, but there is no overlapping in law. The two taxes which he is called on to pay are economically two separate and distinct imposts. There is in theory nothing to prevent the Central Legislature from imposing a duty of excise on a commodity as soon as it comes into existence, no matter what happens to it afterwards, whether it be sold, consumed, destroyed or given away. A taxing authority will not ordinarily impose such a duty because it is much more convenient administratively to collect the duty (as in the case of most of the Excise Acts) when the commodity leaves the factory for the first time and also because the duty is intended to be an indirect duty which the manufacturer or producer is to pass on to the ultimate consumer, which he could not do if the commodity had for example been destroyed in the factory itself. It is the fact of manufacture which attracts the duty, even though it may be collected later; and we may draw attention to the Sugar Excise Act in which it is specially provided that the duty is payable not only in respect of sugar which is issued from the factory but also in respect of sugar which is consumed within the factory.

In the case of a sales tax, the liability to tax arises on the occasion of a sale and a sale has no necessary connection with manufacture or production. The manufacturer or producer cannot of course sell his commodity unless he has first manufactured or produced it, but he is liable, if at all, to a sales tax because he sells and not because he manufactures or produces, and he would be free from liability if he chose to give away everything which came from his factory. In our opinion, the power of the Provincial Legislatures to levy a tax on the sale of goods extends to sales of every kind, whether first sales or not, and we regret that we are unable to agree with the contrary opinion which has been expressed by the High Court.

The question according to the Federal Court was this:

Assuming the right of the Central Legislature to tax the production of a commodity and the right of the Provincial Legislature to tax its sales, can a good reason be shown for excluding a particular category of sales on the ground only that they are sales by the producer?

According to the High Court, a tax on the first sale of goods is so connected with their production that it is an excise duty.

But with great respect to the High Court, the Federal Court differed and observed. "Every tax on the sale of goods produced in India is in a sense an excise duty, whether the sale is the first, second or third, though an excise duty is not necessarily a tax on sales; and the High Court should have formulated their proposition thus: a tax on the first sale of goods is so connected with their production that it cannot properly be described as, and is not in fact, a tax on sale."

The Federal Court recalled that in 1935 when the Constitution Act was passed, the distinction between a producer's or manufacturer's sales tax and sales taxes (including retail sales taxes) of other kinds was familiar to economists and those concerned with public finance and it is therefore not without significance that Parliament did not think fit to confine the Provincial taxing power in terms to sales taxes other than taxes on first sales.

The Federal Court also observed, "It is also material, even if not necessarily conclusive, to point out that the judgment of the High Court would deprive the Provincial Legislature of the whole yield of taxes on first sales, and not merely of the tax on the first sale of commodities which are also subject to a duty of excise; and it would do so without in practice conferring any corresponding benefit on the Central fisc, since for plain reasons of convenience the number of commodities on the production which it is administratively worthwhile to impose an excise duty will always be very limited."

Chief Justice Gwyer who delivered the Judgment of the Federal Court blamed himself for the confusion in an earlier judgment, when he stated, "I may perhaps be myself responsible for some of the confusion which seems to have arisen, by reason of the suggestion which I made (in 1939 F.C.R. 18) that the Central Legislature should be regarded as having power "to impose duties on excisable articles before they become part of the general stock of the province, that is to say, at the stage of manufacture or production, and the Provincial Legislature an exclusive power to impose a tax on sales thereafter". In using these words, I intended to do no more than suggest a convenient dividing line between the two spheres of jurisdiction; but I certainly did not mean to elevate the dividing line into a legal principle. I should much regret if any contribution of mine to the elucidation of the problems which come before this Court were thought to have included the introduction of some kind of "original package doctrine and all the refinements and complications which that doctrine has brought in its train in the Courts of America."

So, finally Boddu Paidanna lost the 163 Rupees refund claim and both excise duty and Sales Tax came to be legally levied on the first sale of manufactured goods. This principle took several twists and turns and finally we are at threshold of GST where excise and sales tax will merge into a single tax.

IN the Privy Council

Though not in the same case, the governor General in Council took the issue in appeal to the Privy Council on an identical case.

The Privy Council went on to analyse the Madras General Sales Tax Act.

The Madras Act which received the assent of the Governor of Madras on June 4, 1939, is entitled "An Act to provide for the levy of a general tax on the sale of goods in the Province of Madras." Its preamble recites that it is expedient to provide for the levy of a general tax on the sale of goods in the Province of Madras.

Their Lordships of the privy Council emphasized the essential character of the Madras Act as, "Its real nature, its "pith and substance," is that it imposes a tax on the sale of goods. No other succinct description could be given of it except that it is a "tax on the sale of goods." It is in fact a tax which according to the ordinary canons of interpretation appears to fall precisely within Entry No. 48 of the Provincial Legislative List."

The privy Council observed,

Here there is no question of direct and indirect taxation nor of the definition of specific and residuary powers. The Indian Constitution contains what purports to be an exhaustive enumeration and division of legislative powers between the Federal and Provincial Legislatures. Where there is such an enumeration, the language of the one list may be coloured or qualified by that of the other. The problem is different when on the one hand there are specific, and on the other residuary, powers.

The term "duty of excise" is a somewhat flexible one: it may, no doubt, cover a tax on first and perhaps on other sales: it may in a proper context have an even wider meaning.

A duty of excise is primarily a duty levied upon a manufacturer or producer in respect of the commodity manufactured or produced. It is a tax upon goods, not upon sales or the proceeds of sale of goods.

The two taxes, the one levied upon a manufacturer in respect of his goods, the other upon a vendor in respect of his sales, may in one sense overlap. But in law there is no overlapping. The taxes are separate and distinct imposts. If in fact they overlap, that may be because the taxing authority, imposing a duty of excise, finds it convenient to impose that duty at the moment when the excisable article leaves the factory or workshop for the first time upon the occasion of its sale. But that method of collecting the tax is an accident of administration; it is not of the essence of the duty of excise which is attracted by the manufacture itself. That this is so is clearly exemplified in those excepted cases in which the Provincial, not the Federal, Legislature has power to impose a duty of excise. In such cases there appears to be no reason why the Provincial Legislature should not impose a duty of excise in respect of the commodity manufactured and then a tax on first or other sales of the same commodity. Whether or not such a course is followed appears to be merely a matter of administrative convenience. So by parity of reasoning may the Federal Legislature impose a duty of excise upon the manufacture of excisable goods and the Provincial Legislature impose a tax upon the sale of the same goods when manufactured.

The Privy Council held:

The tax imposed by the Madras Act is not a duty of excise in the cloak of a tax on sales. Lacking the characteristic features of a duty of excise such as uniformity of incidence and discrimination in subject-matter, it is in its general scope and in its detailed provisions a "tax on sales".

The appeal by the Governor General was dismissed.

FTP - VKGUY benefits on export of grapes including packing material

GRAPGE exporters are importing durable containers under the re-export notification 104/94-Cus. The re-export of such containers happen as it is used as packing materials for export of grapes. The value of these re-exported containers gets included in the FOB value of grapes and is taken into account for VKGUY benefits.

Revenue view is that the value of packing material which was imported should be deducted from FOB value of grapes for the purpose of granting VKGUY benefits under FTP 2009-14 and the grape exporters should pay back a part of the export benefits availed by them under Duty Drawback and VKGUY schemes as imported material used for packing grapes and shown as re-exported is not eligible for the incentives in terms of Para 3.17.2(ii) of FTP 2009-14.

DGFT clarifies that grapes packed in imported packing material do not fall under ineligible category mentioned under para 3.17.2(ii) of FTP and, therefore, exporter is entitled for VKGUY benefit on FOB value i.e. without deducting the cost of imported packing material.

DGFT Trade Notice No. 13/2016, Dated: August 04, 2016

FTP - Minimum Import Price on Iron and Steel

THE Minimum Import Price fixed for imports of iron and steel products, by Notification No. 38/2015-2020 dated 5th February, 2016 was to be valid till 4th August 2016.

Government has decided to continue the MIP for two months till 4th October 2016.

Notification No.20/2015-20, Dated: August 04, 2016

FTP - Import/export policy for Human Biological Samples

GOVERNMENT has notified the import/export policy condition for human biological samples:

"The import of human biological samples by the Indian diagnostic laboratories/Indian Clinical Research Centres for lab analysis/R & D testing or export of these materials to foreign laboratories should be permitted by Customs authorities at the port of entry/exit without prior approvals (import licence/export permit) from any other Government agency, provided the concerned Indian company/agency submits an undertaking that they are following and will follow all the applicable rules, regulations & procedures for safe transfer and disposal of the biological samples being imported/exported as per the related norms/regulations set by WHO*/DGFT** [SCOMET items in Export Policy of ITC (HS), 2012, Schedule - 2 (Export Policy)]/Ministry of Environment, Forests and Climate Change***, Government of India, to the Customs authorities at the port of entry/exit along with the details of such samples".

Notification No.19/2015-20, Dated: August 04, 2016

Customs - New Exchange Rates From Today

CBEC  has notified new exchange rates for Imported Goods and for Export Goods with effect from 05th August 2016. The USD is 67.75 for imports and 66.05 Rupees for exports.

Notification No. 106/2016-Cus (NT)., Dated: August 04, 2016

Until Monday with more DDT

Have a nice weekend.

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