Under the Finance Bill 1997, the government plans to add on a subsection, Section 4A, for charging excise duty on specified commodities with reference to retail sale price. This will be applicable to such commodities as may be notified by the Centre and will not have a general application. Essentially, Section 4 determines the normal wholesale price at which goods are ordinarily sold by the manufacturer at the factory gate. Excise duty is to be paid on this price. Section 4A is meant to broaden the base of the existing laws.
The new provision has been criticised as a step towards disaster by Sukumar Mukhopadhyay (Business Standard: April 7). He has raised serious doubts about the legality and constitutional validity of the new Section 4A. In this article I propose to present a counter view for the interested reader.
To start with, let us have a close look at some of the fundamental concepts of excise law.
Consider Section 3 of the Excise Act. It provides for the levy and collection of excise duties on goods produced or made in India. In other words, it is the charging section for excise duties. The rates are specified in the schedule to the Central Excise Tariff Act,1995. For a tax to be in the nature of excise duty, the courts have held that the act of manufacture must be established. At the same time, however, the courts have held that the method of collection does not affect the essence of the duty.
In Governor-General in Council v Province of Madras (1945 F.C.R.179 = 1978 ELT 280), the Privy Council affirmed that when excise was levied on a manufacturer at the point of the first sale by him, that may be because the taxation 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 on the occasion of its sale. But the 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.
In RC Jall (1992 Supplement 3SCR 436) the Supreme Court rejected the contention that excise duty could not legally be levied on the consignee who has nothing to do with the manufacture or production of the goods. The court remarked: The argument confuses the incidence of taxation with the machinery provided for the collection thereof. It is pertinent to note that in this case the government was authorised to levy and collect a duty of excise on coal and coke when such coal and coke was dispatched by rail from the collieries of coke plants and the duty was to be collected by the railway administration by means of surcharge on freight either from the consignor or consignee. The law on this subject has been summarised by the Supreme Court in Bombay Tyre International (1983 ELT 1896 (SC)): While the levy in our country has the status of a constitutional concept, the point of collection is located where the statute declares it will be.
Second, and very importantly, there is a conceptual difference between the nature of tax and the measure of tax. The levy of tax is defined by its nature while the measure of the tax may be assessed by its own standard. The Supreme Court has held that it is true that the standard adopted as the measure of the levy may indicate the nature of the tax but does not necessarily determine it.
It is clear that considerable flexibility has been provided to the legislature in choosing the measure of excise duty. So long as the nature of tax remains an excise duty, the measure of tax need not necessarily be the wholesale price charged by the manufacturer or producer of excisable goods. On these grounds, the argument that excise duty can only be charged on the value of goods entering the market stream is wholly untenable and misleading. The argument stems from an obsessive belief that the wholesale price of the manufacturer can be the only legally valid measure for charging excise duty.
It is true that the Supreme Court has held certain deductions from the price to be includable and certain others to be non-includable in determining assessable value under Section 4 of the Central Excise Act. However, it is to be recognised that these judgements have been delivered on the interpretation of Section 4 ibid as it existed from time to time. What Section 4A seeks to provide for is an absolutely different kind of measure of tax.
It is, of course, correct that the law on valuation of excisable goods as contained in Section 4 has its own history, but can the legislature be held responsible for this?
For a considerably long time, enormous confusion prevailed in the country on the assumption that excise duty can be collected only on the manufacturing cost plus the manufacturing profit. Subsequent judgements have since cleared the air on this issue.
It was also vociferously argued on behalf of the processors of textile fabrics that the duty on textile fabrics processed on job basis could be charged only on the job charges and not on the full value of the processed fabrics. This contention was rejected by the Supreme Court in Empire Industries (1885(20)ELT179(SC) and Ujagar Prints (1988(38) ELT 535 (SC) (L.B). It is also noteworthy that the expression post-manufacturing expenses, which held the field for long, has been condemned by the Supreme Court in its recent judgement in the case of Government of India and others vs Madras Rubber Factory Ltd (1995 (77 ELT433 sc): Before we proceed further, it is appropriate to correct a certain phraseological inexactitude: the principles enunciated in Bombay Tyre International do establish that the expression post manufacturing expenses is not only legally inaccurate but is also likely to lead to some confusion. The said expression is associated with and is an extension of the concept of manufacturing cost and
manufacturing profit espoused by the learned counsel for the assessees in the said case but rejected by the Court. The expression post removal expenses may be more apt but is still not quite the correct expression.
Despite these disputes, there is one aspect on which the law seems to be fairly well settled. And this relates to the measure of tax. The argument that the litigious history of Section 4 may lead to serious disputes sounds more threatening than convincing. The Privy Council, the Federal Court and the Supreme Court have all held for considerable latitude and flexibility for the legislature in choosing the measure of tax so long as the nexus with the levy is maintained. In this context it is important to point out that maximum retail price (MRP) is determined by the manufacturer and is known at the time of removal of goods. It is not something extraneous to the production of goods.
There are certain other aspects that must be commented upon. It is not true that the abatement on account of taxes are the only abatements provided in Section 4A. What Section 4A actually mentions is that while allowing the abatements, if any, the government may take into account the amount of duty of excise, sales tax and other taxes, if any, payable on excisable goods. This is not in the nature of a limiting or restrictive provision. The government is at liberty to allow abatement on account of any other consideration.
The reference to the experience of levy of excise duty on cigarettes on the basis of printed retail price is also not relevant to examine the provisions of Section 4A. In the case of cigarettes, while the excise duty was to be computed at ad valorem rate on the assessable value determined under Section 4 of the Central Excise Act, the cigarettes were categorised on the basis of printed retail price. The duty was therefore not levied on printed retail price as such. The concept was used only to determine the rate of duty that was to be applied on cigarettes.
Flexibility has been provided to the legislature to choose the measure of excise duty. So long as a tax remains an excise duty, the measure of tax need not necessarily be the wholesale price charged by the manufacturer or producer of excisable goods.
