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Invocation of Sec 3A of CEA: The new avataar of production norm

JULY 09, 2008

By Somesh Arora, IRS (Retd)

THE fascination of the Revenue Department to acquire and use power of fixing production norm in what it  perceives as evasion prone commodities or units is as old as R.173-E of the erstwhile Central Excise Rules, 1944. The sequel has been addition /deletion and then addition of Section3-A again in the Act. In none of its incarnations, the provision has existed without its fair share of litigation. In fact, fixing a norm on account of any one factor of production in the complex world of business can never be an easy task. Even a very basic machine like a charkha can be run manually by two different persons at different pace. A household machine like an airconditioner can have different levels of electricity consumption for the same tonnage. Therefore, to single out a factor and to apply it as a norm can be an onerous task fraught with the peril of dissatisfaction of effected parties. How, varied can be such estimates can be seen from the fact that just eight months back, Revenue had thought that a duty of Rs. 12 lacs should suffice for a packing machine making pouches up to value of Rs 1.50, but has revised the estimates to Rs.19 lacs as a benchmark for the same.

The department had armed itself with the power to fix production norm in evasion prone units in the budget of current year. Invocation of the same for gutkha industry it appears was always on the anvil. However, while a detailed exercise appears to have been done in making elaborate provisions, certain goof ups  have been made, which will have to engage the attention of authorities sooner or later. While in the past, mostly compounded levy was fixed on the basis of norm of per machine, this time Department has chosen to adopt the twin criteria of price range of product sold as well as number of machines in a factory. This is where some serious complications have arisen. As pointed out by a prominent analysts of TIOL. The Government in its notification has specified the duty applicable which is as follows:

S. No.

Retail sale price (per pouch)

Rate of duty per packing machine per month
(Rs. in lakh )



Pan masala

Pan masala containing tobacco










Up to Rs. 1.00




From Rs. 1.01 to Rs. 1.50




From Rs. 1.51 to Rs. 2.00




From Rs. 2.01 to Rs. 3.00




From Rs. 3.01 to Rs. 4.00




From Rs. 4.01 to Rs. 5.00




From Rs. 5.01 to Rs. 6.00




Above Rs.6.00

50        +     8.36    *   (P - 6),
where P represents retail sale price of the pouch

69   + 11.45 * (P - 6), where P represents retail sale price of the pouch

Illustration. -  The rate of duty per packing machine per month for a gutkha pouch having retail sale price of Rs. 8.00 (i.e. 'P') shall be
= Rs. 69 + 11.45*(8-6) lakhs
= Rs. 91.90 lakhs

TIOL illustration

If your Gutkha pouch has MRP of Rs 6.00, as per the above table, you have to pay Rs. 70 lakhs a month. You can save Rs 89,000/- duty per month per machine by just increasing the MRP to Rs 6.01/ - This is how it works. Since the MRP is more than Rs 6/-, you are under Serial No 8. Now, as per the formula, your duty will be Rs 69 + 11.45 multiplied by (6.01-6.00). This makes the total duty as Rs 69.11 lakhs (Rs 69 lakhs plus 0.11 lakhs)

So now, Gutkha with MRP of Rs 5.50/- attracts more duty than gutkha with MRP of Rs 6.01/-.

What is indeed intriguing is the fact, that down the line for each slab the person having MRP close to the opening level of  the slab e.g. 1.01, 1.51,2.01 etc. ends up paying more taxes than the person having MRP close to the ending level of the slab i.e. 1.50, 2.00, 3.00 etc. Now this is against the established cannons of the taxation, as person with lower turnover has to pay higher excise duty and the person with higher turnover has to pay less.  Whether charging lower price provides an intelligible differentia to discriminate on the quantum of tax may become a debatable issue.

Further, Sec 3A has been propounded with the specific purpose of safeguarding the interest of revenue primarily considering the extent of evasion of duty in respect of notified goods. Does it give power to levy and raise taxes even beyond what is prescribed under Central Excise Tariff is a question, which will have to be addressed.

Consider this illustration:

The existing rate of basic excise duty on Pan Masala of Tariff heading 24039990 is 50%, let us assume that a manufacturer is making pouches with a price tag of Rs.1.01, so presently he was required to pay a duty on 37,44,000 pouches of norm of production /per machine/per month of Rs.9,45,360 after allowing 50% rebate on MRP as per law. Under, the new dispensation, he is required to pay Rs.19lacs, out of which by virtue of table-2 to notification 42/2008-ce- dt 1.7.2008 , a factor of 0.7355 will be allocated to central excise duty and remaining to factors like additional duty of excise, cess etc.  Therefore, the central excise duty now payable will be Rs. 13,97,450.  The legal question which is likely to arise then is whether Section 3-A of the Central Excise Act can be invoked so as to hike duty in a number of instances even beyond the existing Tariff rate of duty even without taking resort to Sec.3 of The Central Excise Tariff Act,1985 ?

Further, the production norm and constitution of slabs on criteria of every 50 paisa to one rupee appears to have been done on purely arbitrary basis than on any empirical study. For instance, A machine can produce 37, 44,000 pouches of one Rupee in a month, even if the pouch goes up in value up to  Rs.1.50, the production does not dip.

But, same dips to 35,56,800 in the price range from Rs.1.51 to Rs. 3.00 and so on. It appears that revenue is assuming that expensive pouches will necessarily have more quantity and not better quality and hence the slow down leading to dips.  Secondly, it appears that there is a presumption that quantity in each pouch can increase only at the cut off levels thought about by the department and never before or after.  Is there anything in law which prevents a manufacturer to make say pouches of 5 Gms. at a price of say Rs.1.45 instead of 3 gms for Rupee one or Rs1.50.  If no, then his machine will produce number of pouches in the dipped range of 35,56,800, but the Rules made under the notification do not allow any leverage to accommodate such realistic situations and make the exercise of fixing norm somewhat arbitrary.

Since, it is for the first time Revenue has sought to experiment with Sec.3-A, therefore anomalies seem to have crept, which will need to be rectified or will have to be addressed by the courts, before the Provisions evolve into a workable legislation.

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