Strategic Tax Management

Final ICWAI - December 2003

[Portion relating to indirect taxes]

Answer Question No. 1 which is compulsory and any five from the rest.
Total six questions are to be answered.

Q 1 Answer any ten of the following, giving brief reasons not exceeding 3 to 4 sentences. [2 x 10 = 20 marks]

Q 1 (a) Assessee manufacturing cement had mines 20 kms away from factory. He was using explosives in mines. Use of explosives is necessary for manufacture of his final product i.e. cement. Can he avail Cenvat credit of duty paid on the explosives

Answer 1(a) – As per definition of input in Cenvat Credit Rules, Cenvat credit is available only if the inputs are used in the factory. In this case, since the inputs are not used in the factory, assessee is not entitled to Cenvat credit.

Q 1 (b) An exemption notification stated that the exemption is available only if manufacturer uses inputs on which appropriate duty has already been paid. The inputs were exempt from duty. Assessee claimed that Nil duty is also a duty and hence he is entitled to exemption, as he has paid required duty. Is he entitled to exemption ?

Answer 1(b) – In CCE v. Dhiren Chemical Industries 2002(139) ELT 3 (SC), it has been held that since the words used are ‘appropriate duty has already been paid’, some duty must have been actually paid on inputs. Since the inputs were exempt from duty, no duty has been actually paid and hence assessee is not entitled to exemption from duty.

Q 1 (c) An assessee was under impression that his product is exempt from excise duty and hence sold the goods @ Rs 100 per piece without charging excise duty. Later, it was found that actually, the product was dutiable @ 16%. Department claimed that since goods were removed without duty, assessable value should be Rs 100 and duty is payable accordingly. Assessee contended that price of Rs 100 should be taken as cum-duty price and actual duty payable should be calculated by back calculations. Determine the correct duty payable per piece.

Answer 1(c) – In CCE v. Maruti Udyog Ltd. (2002) 141 ELT 3 (SC) and Srichakra Tyres Ltd. v. CCE 1999(108)ELT 361 (CEGAT 5 member bench), it has been held that the price should be taken as cum-duty price and duty payable should be calculated by making back calculations. Hence, assessable value is Rs 86.21 and duty payable is Rs 13.79.

Q 1 (d) State correct or wrong – (i) Settlement Commission cannot entertain cases pending with the appellate Tribunal or any Court. (ii) Settlement Commission cannot entertain application involving classification of excisable goods (iii) No CST is payable if goods are supplied to an EOU unit (iv) Countervailing duty is payable on safeguard duty also.

Answer 1(d) – (a) Correct (b) Correct (c) Wrong (EOU unit can obtain refund of CST paid by suppliers) (d) Wrong.

Q 1 (e) A manufacturer purchased inputs from supplier ‘ABC Co’. The invoice was for Rs 11,000, comprising of price of goods as Rs 10,000 and Rs 1,000 as excise duty, which is available as Cenvat credit to the manufacturer. Pass journal entry for the purchase of goods.

Answer 1(e) – The journal entry will be as follows -

By Purchase Account	Dr	Rs 10,000
By Cenvat Credit Receivable (Input) Account	Dr	Rs 1,000
To Sundry Creditor – ABC Co.	Cr		Rs 11,000
By purchase of goods from ABC Co.

Q 1 (f) State whether following are includible in Value for purpose of levy of customs duty – (i) Technical know how related to imported machinery (ii) Erection charges for erecting machinery in India (iii) Special introductory high discount offered to new buyer in India by foreign supplier

Answer 1(f) – (a) Includible (b) Not includible (c) Not allowable as deduction, i.e. it is includible, as the sale is not in ordinary course of trade and discount is abnormal

Q 2 (a) Explain the meaning of ‘normal value’, ‘margin of dumping’ and ‘injury margin’. How would you determine ‘normal value’ in case of import from non-market economy countries? What are the restrictions on levy of dumping duty in respect of imports from WTO countries. (b) State the conditions for accepting ‘transaction value’ as ‘assessable value’ for purpose of Valuation under Central Excise [10+6 = 16 marks]

Answer 2(a) – Dumping normally means selling goods below the normal price. The purpose may be to clear excess stock or kill competition.

"Margin of dumping" means the difference between normal value and the price at which the goods are exported from the exporting country.

"Normal Value" means comparable price in ordinary course in trade, for consumption in the exporting country, after making allowances for differences in terms and conditions of sale, taxation etc.

"Export Price" means the price at which goods are exported.

If the export price is unreliable due to association or compensatory arrangement between exporter and importer or a third party, export price can be constructed (revised) on the basis of price at which the imported articles are first sold to independent buyer or according to rules made for determining margin of dumping.

Margin of dumping is determined on basis of weighted average of 'normal value' and the 'export price' of product under consideration.

"Injury margin" means difference between fair selling price of domestic industry and landed cost of imported product. The landed cost will include landing charges of 1% and basic customs duty.

The anti-dumping duty will be dumping margin or injury margin, whichever is lower. Thus, only anti-dumping duty enough to remove injury to domestic industry can be levied.

In case of non-market economy countries (mostly communist countries), 'normal value' can be determined on basis of price in a market economy third country, price paid in India for a like product or any other reasonable basis.

As per para 8 of Annexure I to Anti-Dumping Duty Rules, ‘non-market economy’ means any country which the designated authority determines as not operating on market principles of cost or pricing structure, so that the sales in such country do not reflect the fair value of merchandise. Designated Authority will consider various aspects to determine whether the country is a market economy.

In case of imports from WTO countries, dumping duty can be levied on import from such countries, only if Central Government declares that import of such articles in India causes material injury to industry established in India or materially retards establishment of industry in India. This is because WTO agreement permits levy of anti-dumping duty when it causes injury to domestic industry as a result of specific unfair trade practice by foreign producer, by selling below normal value.

Answer 2(b) - Section 4(1)(a) state that 'assessable value' when duty of excise is chargeable on excisable goods with reference to value will be 'transaction value' on each removal of goods, if following conditions are satisfied -

	The goods should be sold at the time and place of removal.
	Buyer and assessee should not be related
	Price should be the sole consideration for the sale.
	Each removal will be treated as a separate transaction and 'value' for each removal will be separately fixed.

Q 3(a) - An assessee availed Cenvat credit of duty paid on all the inputs. His clearances comprised of following – (i) Part of his final products was exported directly without payment of excise duty (ii) Part of his final products were sold to another manufacturer. The manufacturer used them in his manufacture and then exported his final product. The goods were cleared under bond without payment of duty. (iii) Some of the inputs were used in manufacture of final products which were exempt from duty. Assessee has not maintained separate account of inputs used in such exempted final products. (iv) Balance quantity of his final products was used for home consumption on payment of excise duty at normal rates. - - Discuss provisions in respect of Cenvat credit which he had availed on inputs used in final products which were exported [8 marks] (b) Question relates to Income Tax and hence not reproduced here

Answer 3(a) – Cenvat provisions are as follows -

(i) As an export incentive, no excise duty is payable on products exported. As per normal CENVAT rules, CENVAT is available only if duty is payable on final products. Hence, CENVAT credit on inputs used for manufacture of final products which are exported will lapse because final products are exempt from duty. However, as an incentive to export, it has been provided that CENVAT credit will be available on such inputs which can be used for clearance of any of the final products. – Rule 6(5) of Cenvat Credit Rules. However, the manufacturer will not be entitled to duty drawback or claim rebate of duty. If the credit cannot be used for clearance of any of the exported final goods, manufacturer can get cash refund of the same as per Rule 5 of Cenvat Credit Rules.

(ii) Excise rules permit removal of intermediate products under bond for export. These are used as inputs by another manufacturer. The final product is then exported. In such cases, it has been held that removal without payment of duty under a bond does not mean that the goods are wholly exempt from duty or chargeable to nil rate of duty. Hence, CENVAT on inputs on such intermediate product need not be reversed - Orissa Synthetics Ltd. v. CCE - 1994 (69) ELT 585 (CEGAT).

(iii) As per rule 6 of Cenvat Credit Rules, if assessee does not maintain separate accounts of inputs used in manufacture of exempted final products, he is required to pay an ‘amount’ equal to 8% of price of the exempted final product. If his input is specified in rule 6(3)(a), he does not have to pay 8% amount, but only has to reverse the Cenvat credit which he had availed on inputs.

(iv) Cenvat credit availed on inputs used in final product can be utilized for payment of duty on final product which is cleared without payment of duty. If the credit is insufficient, balance amount is payable through PLA.

Q 4 (a) State the doctrine of unjust enrichment in case of refunds under Central Excise and Customs. Discuss applicability of this doctrine in case of (i) Goods captively consumed by importer and not sold (ii) Goods cleared under Provisional Assessment. [8 marks] (b) Question relates to Income Tax and hence not reproduced here

Answer 4(a) – Indirect taxes are allowed to be recovered from buyer. Thus, the manufacturer/importer recovers the taxes from buyer. If the manufacturer had charged excise or customs duty to his buyer, it is clear that he has passed on the burden to the buyer and has already recovered duty from his customer. In such cases, refund of excess duty paid to the manufacturer will amount to excess and un-deserved profit to him. It will not be equitable to refund the duty to him, as he will get double benefit - first from the customer and again from the Government. This is called ‘unjust enrichment’. Refund, if any, should be paid to customer who has borne the burden of duty. However, in majority of the cases, it is not practicable to identify individual consumer and pay refund to him. At the same time, the duty is illegally collected and hence cannot be retained by Government. In UOI v. Roplas Ltd. 1988(38) ELT 27 (Bom HC), it was suggested that in such cases, the refund due should be transferred to a Consumer Welfare Fund instead of paying it to the manufacturer. Central Excise Act and Customs Act were amended in 1991 and the provisions in respect of 'unjust enrichment' were incorporated. As per these provisions, refund will be paid to manufacturer only if he proves that he has borne the burden of duty. Otherwise, the amount will be paid to Consumer Welfare Fund.

Provision applicable to captive consumption – If goods are captively consumed, these are not sold directly. However, in UOI v. Solar Pesticides P Ltd. 2000(1) SCALE 423 = 2000(2) SCC 705 = 2000 AIR SCW 444 = AIR 2000 SC 862 = JT 2000(1) SC 577 = 116 ELT 401 = 26 SCL 115 (SC 3 member bench), it has been held that provisions in respect of unjust enrichment are applicable in respect of raw material captively consumed also. In case of captive consumption, even if it is difficult to prove that incidence of duty has not been passed to purchase of final product, refund will not be granted if manufacturer is not able to show and prove that incidence has not been passed on to some body else.

In the buyer uses the goods himself (e.g. machinery for own use or raw material for further manufacture) and does not sell to another person, how he can prove that he has not passed on the incidence to another person? In Jaipur Syntex Ltd. v. CCE 2002(143) ELT 605 (CEGAT), assessee had paid higher duty and the differential amount was treated in accounts as ‘claims receivable’. This was treated as part of Balance Sheet and not charged to P&L account. It was held that it is evident that incidence of duty has not been passed on to customers. Thus, the assessee can show that he has not recovered the duty by not taking it in his P&L account.

Provision applicable to Goods cleared under provisional assessment - Rule 7(6) of Central Excise Rules makes it clear that even in case of provisional assessment, refund is subject to doctrine of unjust enrichment. Hence, in case of provisional assessment, assessee should recover only lower duty from the buyer in the invoice. Otherwise, he cannot obtain refund.

However, in case of customs duty, there is no parallel provision and provision of unjust enrichment should not apply if customs duty is paid on provisional basis. - - In respect of refund under Customs Act, it has been held that doctrine of unjust enrichment are not applicable if duty is paid on provisional basis - Escorts Yamaha Motors v. CC 2000(122) ELT 883 (CEGAT) * Hero Honda Motors Ltd. v. CC 2000(126) ELT 1014 = 40 RLT 597 (CEGAT). However, as per CBEC circular No. 40/2002-Cus dated 17-7-2002, unjust enrichment provisions will apply to provisional assessment also.

Strategic Tax Management

Final ICWAI - June 2003

[Portion relating to indirect taxes]

Q 1 Reproduce the correct answer in the following cases. Give reasons for your answer in 3-4 sentences.

Q 1(i) Sales tax payable on product ‘A’ if sold within State of Punjab is 2%. If the product is sold in inter-State sale, what will be the Central Sales Tax payable if (a) Buyer furnishes C form (b) Buyer does not furnish any form (c) Buyer furnishes H form (d) Buyer furnishes D form.

Answer 1(i) – (a) 2% (b) 10% (c) Nil (d) 2%

Q 1(j) An exemption notification under Customs Act was issued on 2nd January, 2003, published in Official Gazette on 3rd January and was made available for sale on 4th January. State the date when the notification will be effective.

Answer 1(j) – As per section 102(4) of Customs Act and section 5A(5) of Central Excise Act, a notification becomes effective on the date it is issued. Hence, the notification is effective from 2nd January, 2003.

Q 6 (a) - A small scale industry is not eligible for exemption from duty if it manufactures goods bearing brand name of other person. Discuss the provisions in respect to (i) Original Equipment (OE) parts manufactured by SSI with ‘BHEL’ mark for use by BHEL (Bharat Heavy Electricals) in their equipment (ii) Soap manufactured bearing brand name of ‘Hotel Tajmahal’ to be kept in hotel rooms for use by occupants (iii) Foreign Brand name (iv) Goods manufactured in rural area (b) What are the offenses in Central Excise for which penalty can be imposed under rule 25(1) of Central Excise Rules. What is the maximum penalty that can be imposed under this rule [10+6 = 16 marks]

Answer 6(a) – Provisions in respect of each are as follows –

OE parts manufactured for BHEL – Provisions in respect of brand name apply only when brand name is used to indicate a connection in the course between such goods and some person using such name or mark. Thus, the provisions apply only when such goods are traded. In BHEL Ancillary Association v. CCE - 1990 (49) ELT 33 (Mad HC DB), it was held that mere using symbol or monogram without establishing its connection in the course of trade between such specified goods and owner of symbol or brand is of no consequence. Central Board of Excise & Customs (CBE&C), vide its Circular No. 345/35/87-TRU dated 29-10-87, has confirmed the view that provisions in respect of brand name apply only in respect of final products which are traded in market and not the parts. - - Thus, the SSI unit will be entitled to avail SSI exemption. He should file a declaration with excise authorities. If the turnover exceeds Rs 100 lakhs, he is required to follow procedure prescribed in Central Excise (Removal of Goods at concessional rate of duty for manufacture of excisable goods), Rules 2001.

Soap manufactured with name ‘Tajmahal’ – The buyer i.e. Hotel Tajmahal is not trading in those goods. The soap bears the brand name of hotel, but the hotel is not trading in the soap. In such case, provisions of branded goods is not applicable, i.e. the SSI unit will be eligible for SSI concession. - Model Soap Company v. CCE - 1998 (98) ELT 622 = 24 RLT 628 (CEGAT).

Goods bearing foreign brand name – Even if goods are manufactured with foreign brand name, the fact remains that the brand does not belong to SSI. Hence, he is not eligible for SSI concession. - Namtech Systems Ltd. v. CCE 2000(115) ELT 238 = 36 RLT 35 (CEGAT 5 member bench). However, if the brand name is assigned to the SSI manufacturer, it becomes his brand name and then he is entitled to SSI exemption. - CCE v. West Coast Diesels Ltd. 2000(122) ELT 103 (CEGAT).

Goods manufactured in rural area –Excise duty on goods manufactured under others brand name will be exempt if these are manufactured in rural area. 'Rural area' means the area comprised in a village as defined in the land revenue records, excluding (i) Area under any municipal committee, municipal corporation, town area committee, cantonment board or notified area committee or (ii) Any area that may be notified as an urban area by State Government or Central Government. However, this exemption is only upto Rs 100 lakhs and not unlimited. Moreover, if his turnover during previous year was more than Rs 300 lakhs, he is not entitled to any excise exemption at all.

Answer 6(b) - Under rule 25(1) of Central Excise Rules, [earlier rule 173Q or 209], following are offences :

	Removing excisable goods in contravention of Excise Rules or notifications issued under the rules.
	Not accounting for excisable goods manufactured, produced or stored
	Engaging in manufacture, production or storage of excisable goods without applying for registration certificate u/s 6 of CE Act
	Contravening any provision of Central Excise Rules or notifications issued under these rules with intent to evade payment of duty.

The offending goods are liable to confiscation. In addition, penalty upto duty payable on goods in respect of which contravention is committed, or Rs 10,000 whichever is higher, can be imposed.

Q 7(a) What are the essential requirements of ‘penultimate sale for export’ under Central Sales Tax Law ? Can packing material be purchased without payment of CST for packing goods to be exported ? [10 marks]

Answer 7(a) - Export is often effected through specialised agencies like Export Houses etc., termed as ‘Merchant Exporters’ under EXIM policy. Such indirect exports also need exemption from taxes to make the products competitive. Hence, such penultimate sale, i.e. sale preceding the sale occasioning export is also deemed to be in the course of export under section 5(3) of CST Act and is exempt from CST.

Exemption to penultimate sale is subject to the condition that the penultimate sale (i.e. last but one sale) is (a) for purpose of complying with agreement or order in relation to export and (b) such sale is made after the agreement or order in relation to export and (c) same goods which are sold in penultimate sale should be exported. In other words, the final exporter should be in possession of export order from foreign buyer and should take delivery of goods from the supplier making penultimate sale solely for execution of such export order and export the same goods.

In Consolidated Coffee Ltd. v. Coffee Board - AIR 1980 SC 1468 = (1980) 3 SCR 625 = (1980) 46 STC 164 (SC 3 member bench) - (called second Coffee Board case) , it was held that all the aforesaid conditions must be satisfied for availing exemption under section 5 (3) of CST Act. It was also held that ‘agreement or order in relation to export’ means or refers to the agreement with a foreign buyer and not an agreement or order with a local party containing the covenant to export.

Only penultimate sale is exempt but purchases earlier to penultimate sale are not exempt and purchase tax is payable if prescribed.

There must be a pre-existing agreement or order to sell the specified goods to a foreign buyer, last purchase must be after the agreement with foreign buyer and the last purchase must be made for complying with the pre-existing order. Only then the transaction is covered under section 5 (3) i.e. it is treated as a ‘penultimate sale’. The same goods which are purchased must be sold. Thus, when fresh frog legs were purchased and these were exported after removing skin, cleaning and freezing, it was held that ‘same goods’ were sold and purchases of frog was eligible under section 5(3).

Purchase of packing material for export permissible - If gunny bags purchased are used as containers for export of certain goods to a foreign country, it is deemed as ‘export sale’ as per section 5 (3). The last purchase preceding the sale occasioning export should be for complying with an export order. - State of AP v. Standard Packings - (1995) 96 STC 151 (AP HC DB). In State of Tamilnadu v. Catherine Traders - (1991) 81 STC 228 (Mad HC DB), polythene bags were sold to exporters for packing ‘banians’ (vests) for export. The ‘banians’ were exported packed in the polythene bags. It was held that sale of polythene bags is ‘penultimate sale’ eligible under section 5 (3).

Q 8(a) - A consignment is imported by air. CIF price is 2,000 Euro. Air freight is 550 Euro and Insurance cost is Euro 50. Exchange rate announced by CBE&C as per customs notification is 1 Euro = Rs 47.10. Basic Customs duty payable is 30%. Excise duty on similar goods produced in India is 16%. Special Additional Duty (SAD) is payable at normal rates. Find Value for customs purposes and total customs duty payable. (b) State briefly provisions of EPCG scheme. [10+6 = 16 marks]

Answer 8(a) : FOB Price of consignment is 1,400 Euro [2,000-550-50]. Air freight is to be restricted to 20% of FOB Value for purpose of customs valuation. Hence, freight will be considered as 20% of 1,400 i.e. 280 Euro for purpose of customs valuation. Thus, CIF Value for customs purposes is 1,730 Euro (1,400 + 280 + 50). This is equal to Rs. 81,483 @ Rs. 47.10 per Euro. Add 1% of CIF i.e. Rs. 814.83 as landing charges. Thus, Value for Customs purposes will be 82,297.83 rounded to Rs 82,298/-.

Basic customs duty @ 30% is Rs 24,689.40. - - Additional customs duty (CVD) is payable on value plus customs duty, i.e. on Rs 1,06,987.40 [82,298+24,689.40]. Thus, CVD payable is Rs 17,117.98 (16% of Rs 1,06,987.40).

Special Additional Duty (SAD) @ 4% is payable on AV + Basic customs duty + CVD. Thus, SAD is 4,964.22 [4% of Rs 1,24,105.38].

Hence, total duty payable is Rs 46,771.60 [Basic - Rs 24,689.40 plus additional (CVD) Rs 17,117.98 plus special additional duty Rs 4,964.22].

Answer 8(b) Under Export Promotion Capital Goods (EPCG) scheme, a licence holder can import capital goods (i.e. plant, machinery, equipment, components and spare parts of the machinery) at concessional rate of customs duty of 5% and without CVD and special duty. Computer software systems are also eligible. Import of spares upto 20% of value of capital goods is permitted. Jigs, fixtures, dies, moulds will be allowed to the extent of 100% of CIF value of licence. Importer has to fulfil export obligation equal to five times the CIF value of goods imported to be fulfilled over a period of 8 years. In respect of EPCG licenses for Rs 100 crore or more, the export obligation shall be required to be fulfilled over a period of 12 years. Similarly, sick companies under BIFR and units in Agri Export Zones can fulfil export obligation in 12 years. Export obligation for every block of two/four years has been specified. has been specified. In first two years, there is no export obligation. Extension for fulfilling export obligation upto two years can be obtained.

The export obligation shall be fulfilled by export of goods capable of being manufactured or produced by the capital goods imported under the scheme.

The license holder can also procure such machinery from India. The Indian manufacturer will be able to import components for the machinery at concessional rate of 5%. However, the export obligation will be that of licence holder and not of Indian machinery manufacturer.

Strategic Tax Management

Final ICWAI - December - 2002

[Portion relating to indirect taxes]

Answer Question No. 1 which is compulsory and any five from the rest.
Total six questions are to be answered.

Q 1 Reproduce the correct answer in the following cases. Give reasons for your answer in 3-4 sentences.

1(j) Maximum Retail Price of a product (being personal deodorant) under Customs Tariff Heading No. 3307.20 is Rs 1,500 and its assessable value is Rs 1,000. As per Notification 13/2002-CE(NT), personal deodorant is assessable under Central Excise on the basis of Maximum Retail Price after allowing an abatement of 40%. Basic Excise Duty rate is 16%. The countervailing duty (CVD) payable under Customs Tariff Act on personal deodorant is (i) Rs 96 (ii) Rs 240 (iii) Rs 144 (iv) Rs 160

Answer 1(j) – Since the product is covered under MRP provisions, CVD is payable on basis of MRP. The MRP is Rs 1,500. Abatement is 40%. Hence, Assessable Value is Rs 900 (60% of Rs 1,500). CVD will be 16% of Rs 900 i.e. Rs 144.

Q 2(b) What are the essential requirements of ‘penultimate sale for export’ under Central Sales Tax Law ? [4 marks]

Answer 2(b) - Export is often effected through specialised agencies like Export Houses etc., termed as ‘Merchant Exporters’ under EXIM policy. Such indirect exports also need exemption from taxes to make the products competitive. Hence, such penultimate sale, i.e. sale preceding the sale occasioning export is also deemed to be in the course of export under section 5(3) of CST Act and is exempt from CST.

Only penultimate sale is exempt but purchases earlier to penultimate sale are not exempt and purchase tax is payable if prescribed.

Q 4 “The tax payer is entitled to so arrange his affairs that the tax payable under the appropriate Act is less than what otherwise it could be”. - - “The Courts are now concerning themselves not merely with the genuineness of a transaction, but with the intended effect of it on fiscal purposes. No one can now get away with a tax avoidance project with the mere statement that there is nothing illegal about it”. – Discuss.

Answer 4 – The words tax planning and tax evasion are used quite often. Tax evasion means avoiding tax by illegal means e.g. by suppressing facts, by not maintaining correct records, by falsifying records, by giving false statements etc. These methods are clearly illegal and would be punished in normal course. Tax avoidance means art of dodging the tax without breaking the law. It means taking undue advantage of loopholes in the taxation provisions or by twisting the words and thus avoiding correct payment of tax. In other words, tax avoidance means following the provisions of Tax Law in letter but killing the spirit of the law. Tax planning means (a) taking advantage of the legitimate concessions and exemptions provided in the tax law and thus reducing the tax liability (b) arranging business operations such that tax liability is reduced i.e. when two methods are possible to achieve an objective, select one which results in lower tax liability.

Till the judgment of Supreme Court in famous McDowell’s case, distinction between tax avoidance and tax planning was not very marked. However, in this historic decision, Supreme Court has clearly stated that use of colourable devices for avoiding legally payable taxes will not enable any person to avoid taxes which are legally payable.

McDowell’s case is a very important case to understand the change in judicial thinking and approach in the matter of tax laws. One of the earlier cases decided on this issue was that of IRC v. Duke of Westminster (1936) AC 1 (HL), decided by House of Lords in U.K. in 1935. In this case it was held that the taxing statute must be construed strictly. Every man is entitled to arrange his affairs, so that his tax liability is reduced. Each transaction can be viewed separately and if that transaction is within the four corners of law, the Courts will not interfere even if such transaction reduces tax liability. A person has right to dispose of his capital and income to attract upon himself the least amount of tax. In India also, this principle was adopted in cases like CIT v. A Raman – AIR 1968 SC 49 = (1968) 67 ITR 11 (SC).

This decision was often used for reduction in tax liability through various ingenious methods. Thus, many transactions were arranged with sole purpose of reducing tax liability. Many such examples can be cited. Courts in England as well as in India realised that the tax payers are taking undue advantage of loopholes/drafting lacunae in laws. It was realised that legislature cannot take care of every device and scheme to avoid taxation. It is necessary for Courts to view the series of transaction as a whole and see if their sole purpose is to reduce tax liability.

Judicial thinking in England on these lines was reflected in decision of WT Ramsay Ltd. v. IRC (1982) AC 300 = (1981) 1 All ER 530 (HL). In this case, it was held that pre-ordained series of transactions are to be ascertained by considering the result of the series as a whole, and not by dissecting the scheme and considering each individual transaction separately. In this case, it was found that the purpose of the scheme was tax avoidance and the transactions were entirely artificial.

Courts in India also changed their attitude to various schemes of tax planning and the case of McDowell’s is a turning point in judicial thinking in India. In this case, it was observed that tax planning may be legitimate if it is within the frame work of law, but colourable devices cannot be part of tax planning. It is wrong to say that it is honourable to avoid payment of tax by dubious methods. It is obligation of every citizen to pay tax honestly without resorting to subterfuges. The series of transactions has to be viewed as a whole and then the Court should see the real purpose of the transaction. - . - . - It is neither fair nor desirable to expect the Legislature to intervene and take care of every device and scheme to avoid taxation. It is upto the Court to take stock and determine the nature of the new and sophisticated legal devices to avoid tax and expose the devices for what they really are and refuse to give judicial benefication - McDowell and Co. Ltd. v. CTO (1985) 59 STC 277 (SC) = 1985 ECR 259 = 1985 UTPC 747 = (1985) 154 ITR 148 (SC) = AIR 1986 SC 649 = (1985) 2 Comp LJ 137 = (1985) 3 SCR 791 = (1985) 3 SCC 230 = (1985) 22 Taxman 11 [SC 5 member bench].

Thus, legitimate planning to take advantage of various provisions acceptable. For example, investing in public provident fund to reduce tax liability or exporting to get Excise and Income tax benefits is completely legitimate tax planning device, but devising dubious methods to reduce tax liability will not be favoured by Courts.

In Workmen v. Associated Rubber (1985) 5 SCC 114, it was observed, ‘It is the duty of the court, in every case where ingenuity is expended to avoid taxing and welfare legislations, to get behind the smoke screen and discover the true state of affairs’.

Q 5 (i) You are Manager (Taxation) of Company X which is the manufacturer as well as exporter. Company X is getting merged with Company Y. Discuss provisions applicable and actions you will take from angles of Income Tax, Central Excise, Customs and Central Sales Tax.

Answer 5 (i) - General points applicable to all taxes – (1) Inform all tax authorities as soon as scheme is approved by members. This is only advance information and only a precautionary step. (2) Inform tax authorities with copy of High Order approving amalgamation. (3) Wherever show cause notices, adjudication, assessments or appeals are pending with Adjudicating authority or appellate Authority, submit application for change of name of assessee/appellant/respondent as the case may be. (4) Wherever registration has been obtained (e.g. under Central Excise, Sales Tax, Service Tax etc.), apply for amendment to registration certificates. Submit fresh list of directors. Inform new authorised signatories, if there is any change. (5) Detailed stock taking should be done on ‘transfer date’ as specified in scheme of amalgamation. Preferably, this date should be close of accounting year. This will be useful for assessments, preparing final accounts etc.

Income Tax – (1) Though there is no provision for cancellation of Permanent Account Number (PAN), Income tax Officer (ITO) should be informed that identity of old company is extinguished and old PAN is no more valid. (2) Income Tax Officer should also be informed that from the ‘appointed date’, the amalgamating company ceases to exist and no income tax return will be filed for subsequent period . (3) The amalgamating company, i.e. ‘X’ company will henceforth use the PAN of amalgamated company i.e. of ‘Y’.

Central Excise - The following actions will be required – (1) When approval of High Court is obtained, application should be made to Assistant/Deputy Commissioner of Central Excise in charge of the division, for amending the Registration certificate. Fresh details should be given in prescribed form A-1. (2) If the bonds are executed, these should be got amended with new name or new bonds should be executed and old bonds should be got cancelled. (3) If LUT (Letter of Undertaking) was submitted for clearance of goods without payment of duty, fresh LUT for export may be submitted. (4) As per Rule 8 of Cenvat Credit Rules, if a factory is transferred on account of amalgamation, the manufacturer can transfer unutilised Cenvat credit to the amalgamated factory. The transfer of credit is subject to following conditions - * There should be specific provision for transfer of liabilities of such factory * The transfer is allowed only if stock of inputs as such or in process, or the capital goods are also transferred along with the factory to the new ownership and the inputs or capital goods on which credit has been availed of are duly accounted for to the satisfaction of Commissioner. Thus, transfer is possible only with permission of Commissioner of CE. In most of the cases, permission of High Court is obtained much later than the ‘effective date’ as specified in the scheme. However, till the permission of High Court is obtained, the two units work independently. Hence, approval of Commissioner can be obtained only as on date of application to him and not ‘effective date’ as mentioned in the scheme. Application giving all details of stock, Cenvat credit etc. should be submitted to Assistant /Deputy Commissioner.

In Kwality Zipper v. CCE 2002(145) ELT 296 (CEGAT), it was held that even if amalgamation is sanctioned by High Court from a later date, the clubbing provisions to decide SSI exemption limit will be effective from the transfer date as specified in the scheme. In this case, transfer date was 1-4-1999 while order of Court sanctioning amalgamation was made on 14-12-1999. However, it was held that clubbing provisions will apply w.e.f. 1-4-1999. It was also held that assessee should inform department as soon as Board resolution is passed.

Customs – (1) The company may be holding DEPB Pass Book, Advance License, EPCG licenses etc. These should be got amended by changing name of the company. (2) Pending applications for duty drawback should be amended to incorporate new name. (3) Outstanding export obligations under earlier licenses should be got transferred in name of new amalgamated company. (4) Wherever bonds were executed with customs authorities, these should be got amended with new name or new bonds should be executed and old bonds should be got cancelled.

Central Sales Tax – (1) CST Registration certificate shall be got amended to incorporate new name. (2) Security given while obtaining CST registration should be amended/modified/replaced.

Q 6 (a) An assessee availed Cenvat credit of duty paid on all the inputs. His clearances comprised of following – (i) Part of his final products was exported directly without payment of excise duty (ii) Part of his final products were sold to another manufacturer. The manufacturer used them in his manufacture and then exported his final product. The goods were cleared under bond without payment of duty. (iii) Balance quantity of his final products for home consumption on payment of excise duty at normal rates. - - Discuss provisions in respect of Cenvat credit which he had availed on inputs used in final products which were exported. (b) State the doctrine of unjust enrichment in case of refunds under Central Excise and Customs. Discuss applicability of this doctrine in case of (i) Goods captively consumed by importer and not sold (ii) Goods cleared under Provisional Assessment. [8+8 = 16 marks]

Answer 6(a) – Cenvat provisions are as follows -

(iii) Cenvat credit availed on inputs used in final product can be utilized for payment of duty on final product which is cleared without payment of duty. If the credit is insufficient, balance amount is payable through PLA.

Answer 6(b) – Indirect taxes are allowed to be recovered from buyer. Thus, the manufacturer/importer recovers the taxes from buyer. If the manufacturer had charged excise or customs duty to his buyer, it is clear that he has passed on the burden to the buyer and has already recovered duty from his customer. In such cases, refund of excess duty paid to the manufacturer will amount to excess and un-deserved profit to him. It will not be equitable to refund the duty to him, as he will get double benefit - first from the customer and again from the Government. This is called ‘unjust enrichment’. Refund, if any, should be paid to customer who has borne the burden of duty. However, in majority of the cases, it is not practicable to identify individual consumer and pay refund to him. At the same time, the duty is illegally collected and hence cannot be retained by Government. In UOI v. Roplas Ltd. 1988(38) ELT 27 (Bom HC), it was suggested that in such cases, the refund due should be transferred to a Consumer Welfare Fund instead of paying it to the manufacturer. Central Excise Act and Customs Act were amended in 1991 and the provisions in respect of 'unjust enrichment' were incorporated. As per these provisions, refund will be paid to manufacturer only if he proves that he has borne the burden of duty. Otherwise, the amount will be paid to Consumer Welfare Fund.