Mrp A Step Towards Disaster
For the first time, the valuation law is being amended to bring in the concept of imposing tax on the basis of retail sale price. Section 4 of the Central Excise Act 1944, has been amended and a new Section 4A has been introduced. Sub-section (1) introduces valuation of some excisable goods with reference to retail sale price. These are goods in relation to which it is required under the provisions of the Standard of Weights and Measures Act 1976, to declare the retail sale price of goods on the package. Cosmetics, soaps, medicines etc. fall under this category. Sub-section (2) of the proposed Section 4A lays down that where the goods are chargeable to excise duty with reference to value, such value will be deemed to be the sale price declared on such goods.
Sub-section (3) provides that the government may, for the purpose of abatement, take into account the amount of duty of excise, sales tax and other taxes. Explanation I lays down that retail sale price means the maximum price on which the excisable goods in packaged form may be sold to the ultimate consumer and includes all taxes, local or otherwise, freight, transport charges, commission payable to dealers, and all charges towards advertisement, delivery, packing, forwarding and the like, as the case may be.
The Section makes it clear that the abatement can only be in respect of taxes and not in respect of dealers' commission, advertisement charges, packing charges etc. Excise duty, therefore, will be chargeable on all these elements. The question, therefore, arises whether this amendment is legal, keeping the constitutional provision in view. Entry No 84 of List I of Schedule VII of the Constitution lays down that the excise duty is chargeable on tobacco and other goods manufactured or produced in India except alcoholic liquors, opium etc. The SC has laid down that the taxable event is the act of manufacture for excise (full Bench Judgement of the Supreme Court on a reference made by President of India, Special Reference No.1 of 1962 reported in 1963 AIR SC 1760). This concept has been repeatedly asserted in the cases of Shinde Brothers vs Deputy Commissioner (AIR 1967 SC 1512), Wallace Flour Mills vs Collector of Central Excise - 1989(44) ELT 598 (SC) and Ujjagar Prints vs UOI - 1988 (38) ELT 535(SC). If any
law imposes excise duty which is beyond manufacture then it will be treated as ultra vires to the Constitution. Valuation in excise law is regarded in the legal circle as the most litigated subject. The two landmark judgements on the subject are in the case of Bombay Tyre International (1983 (14) ELT 1896 (SC) and MRF (1995 (77) ELT 433(SC). In the MRF judgement, which is the latest on the subject, the SC decided in respect of primary and secondary packing that the cost of packing in which goods are ordinarily sold in the course of wholesale trade to the wholesale buyer alone is includible in the assessable value. The cost of durable packing and of special packing are not includible in the assessable value and so are not chargeable to excise duty. Trade discount known and understood at the time of removal of goods is deductible from assessable value which means, it is not chargeable to duty. But warranty discount is not deductible because it is not in the nature of trade discount. Interest on finished goods
from the date of clearance of goods from factory gate till the date of sale to the depot is includible in the value, i.e. chargeable to excise duty. Expense incurred by the assessee upto the date of delivery on account of storage charges or expenditure incurred on sales organisation is also includible in the value, i.e. it is chargeable to excise duty. Interest on receivable incurred after sale or removal of goods from a factory is not includible into the assessable value.
It was found from this judgement that the SC has allowed certain items to be included in the value and certain others are not to be included. Those which are not includible in the value are trade discount of wholesalers and retailers, cost of special packing and durable packing and interest on receivables. But the present law now includes all these since they are part of retail price. So it negates this part of the SC judgement. Parliament cannot make a law which is fundamentally against the structure of the Constitution. If an affected manufacturer goes to the high court or the SC, it is likely that this amendment will be set aside.
Excise duty can only be charged on the value when the goods first enter into the market stream. Subsequent value addition is not chargeable. Only a VAT system can mop up the revenue which, however, will go to the states.
Regarding the administrative practicability of this new system of MRP, one is reminded of the ITC case. Between 1983 and 1987 the duty on cigarette was nearly 500 per cent, and by a notification it was fixed with reference to the MR. (Since MRP was introduced in an exemption, it was not constitutionally wrong). The cigarettes were stamped with a certain amount of MRP, say, Rs 2 per packet, but the price finally charged was, say, Rs 2.50 paise. The view taken by the ITC was that it had no control over the sale price since there were millions of wholesalers and retailers. The view of Revenue was that the ITC fixed a price which was impracticable because the margin given by it was too small for so many wholesalers and retailers. It has already taken 10 years to decide only the adjudication. We do not know how many more years will be taken. Therefore, it needs to be considered if this it worthwhile having a valuation law that will entangle the future generation into infinite litigation.