Manufacturing: Burden of proof with govt

EXPERT EYE

The Supreme Court has settled the issue that the burden to prove that manufacture has taken place is to be discharged by the revenue department if it claims so.

If the assessee claims that the goods are not manufactured, which means they are not exigible, then the revenue department will be required to prove that manufacture has actually taken place.

In the Metlex Ltd vs Commissioner of Central Excise case, 2004 (165) ELT 129 (SC), duty-paid plastic films were purchased and thereafter metallised and laminated.

The revenue department argued that since metallised and laminated films were separate entries in the tariff, they were two distinct manufactured items.

The Supreme Court said the two separate entries did not prove that metallised film was manufactured in view of several tribunal and high courts' judgments that they were not manufactured.

The department had taken it for granted that they were manufactured, when in fact the burden of proof was on them, which they had not discharged.

Though it is a fairly well settled issue, the matter went to the apex court several times in matters related to sales tax, income-tax and excise.

As early as in 1967, in a case related to sales tax (the State of Gujarat vs Raipur Manufacturing Co case, 1967 (19) STC 1 (SC)), the Supreme Court held that the burden of proving that the company was carrying on the business of selling coal was on the sales tax authorities.

In an income-tax case (the KG Thomas vs Commissioner of Income Tax case, 1985 (156) ITR 412 (SC)), the apex court said the burden was on the revenue department to prove that an assessee was receiving casual or regular income so that it could be proved to be eligible to tax.

In a central excise case (the Commissioner of Central Excise vs Ambalal Sarabhai case, 1989(43) ELT 214 (SC)), the Supreme Court said whether starch hydrosulphate was marketable and exigible was for the the revenue department to prove.

In the Union of India vs Garware Nylons case, 1996 (87) ELT 12 (SC), the apex court again said the burden of proof that it was taxable in a manner which the department wanted was on them.

In the Commissioner of Central Excise vs Steel Strips Ltd, 2003 (154) ELT 336 (SC), the Supreme Court held that it was for the authorities to prove that rolling of hot rolled steel to cold rolled steel amounted to manufacture.

In case of Customs, the issue is different from the central excise since whatever is imported is dutiable. Even dead body or parts of human body such as blood is dutiable as they are imported. As soon as they cross the territorial waters of India they are dutiable. So the question of the burden of proof does not arise.

But it arises in the case of sales tax, income tax, and excise. In the case of value-added tax and service tax, which are rather recent taxes in India, the same position is correct though no case has so far gone to the court.

Over a long period of time the revenue department has been holding goods as dutiable and income as exigible without discharging the burden of proof, which is on them.

The Supreme Court has in all cases, wherever it gave judgment on the issue, confirmed that it was for the revenue department to prove the exigibility of income or goods.

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