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Taxman was in a huff till the fag end, but his dreams went in a puff

D. Murali

THE cigarette company case, ITC Ltd vs Commissioner of Central Excise, recently created a flutter at the apex court. The dispute before Justices Ruma Pal and P. Venkatarama Reddi of the Supreme Court was about what happened about two decades ago: Excise officials had found that retailers were selling cigarettes at a price higher than the maximum retail price (MRP) printed on the package; and so the Department demanded from ITC duty on the higher value. Though the taxman huffed and puffed till the fag end, it was ITC that had the last laugh. The judgment that runs into some 70,000 characters in almost a thousand lines has some interesting snatches for tax practitioners, as also for lay readers and language-watchers.

Definitions of contention

At the outset, the court stated that the outcome of the appeal depended `primarily on the interpretation of a 1983 Notification' of the Department that contained a few definitions, such as sale price, cigarettes packed in packages, and adjusted sale price. Thus, sale price of cigarette packages meant "the maximum price (exclusive of local taxes only) at which such package may be sold in accordance with the declaration made on such package."

Cigarettes packed in packages meant "cigarettes which are packed for retail sale, in packages which bear a declaration specifying the maximum sale price thereof as the amount specified in the declaration, plus local taxes only." And adjusted sale price, in relation to each cigarette contained in a package of cigarettes, was "the unit price arrived at by dividing the sale price of such package by the number of cigarettes in such package."

There was more: "Where such cigarettes are packed in packages containing the same number of cigarettes but the sale prices of such packages are different, the adjusted sale price in relation to each such cigarette shall be the unit price arrived at by dividing the highest of such sale prices by the number of cigarettes in such package, and where such cigarettes are packed containing different number of cigarettes, the unit price for each such package shall be determined by dividing the sale price of each such package by the number of cigarettes therein and the highest of such unit prices shall be the adjusted sale price in relation to each such cigarette."

With the company and the Department interpreting differently the notification's definitions, claiming that the other party had erred, the court had to clear the cloud. For this, it took the help of earlier decisions, such as: The J.K. Steel Ltd case of 1969 where the apex court had said, "No rule or principle of construction requires that close reasoning should not be employed to arrive at the true meaning of a badly drafted entry in an Excise Act"; and in the Innamuri Gopalan case it was held that if the taxpayer is within the plain terms of the exemption "he cannot be denied its benefit by calling in aid any supposed intention of the exempting authority."

How to use the three phrases

In the ITC case on hand, the court pointed out "the three phrases" that required interpretation: `may be sold', `in accordance with' and `declaration made'. Are these expressions ambiguous, asked the court, and proceeded to clarify: "There is no dispute that `made' means `printed' and that `in accordance with' means `in a manner conforming with'. The dispute, as we see it, turns on the phrase `may be sold'."

The Revenue's contention was to interpret the phrase `may be sold' as `capable of being sold'. Thus, "the cigarette manufacturer was bound to print an MRP at which the retailer could and was likely to sell the cigarettes keeping a reasonable margin of profit," argued the Revenue.

Justice Pal explained: "While the word `may' can indicate `possibility' as held by the Division Bench, or `capability' as submitted by the Revenue, it is also used as denoting `permission'." Thus, a person may do something if he is permitted to, said the judge, adding that the notification used `may' in the third sense, "because it has been qualified with the phrase `in accordance with'." A mini course in language usage, that is.

Further, if you read `may be sold' and `in accordance with' together, "the definition of `sale price' in relation to a package of cigarettes would mean the MRP (exclusive of local taxes) at which such package is permitted to be sold in conformity with the printed price," stated the judge. What about the other two meanings? "If the word `may' is construed to mean `likely' or `can' then the phrase `in accordance with' would be rendered meaningless as it would be open to the retailer to sell it at such price as he may think fit notwithstanding the printed MRP." The phrase `in accordance with' cannot be taken to mean `irrespective of', said Justice Pal, because that would mean, "doing violence to the language of the Notification".

Consumer protection

We are aware that the Standards of Weights and Measures Act and the Packaged Commodity Rules mandate that sale is only in accordance with the printed MRP. "The purpose of printing the MRP on cigarette packages is to achieve a standardisation of prices throughout the country and to inform consumers of the appropriate price of the product," said the court. "If the consumer fails to demand the MRP or the State authorities do not enforce the statutory requirements, the system under the notification breaks down, but that does not legally justify an interpretation of the notification by presuming an illegality on the part of the retailer."

Three types of declaration

The judgment discusses three different types of declarations: One, an assurance of an existing state of affairs; two, an assurance of a future course of conduct by the declarant himself; and three, a statement of required conduct by a third party.

"In the first two kinds of declarations the onus is on the declarant to make good the declaration," said Justice Pal. "But when all that is stated in the declaration is a requirement to be fulfilled by another, what is to be enquired into is the compliance with the requirement and not the correctness of the declaration itself."

There are illustrations too: "Declarations to be furnished in Form `C' by registered purchasing dealers under Section 8(1) of the Central Sales Tax Act, 1956 which certify that the purchasing dealer is a registered dealer in respect of commodities mentioned in the declaration, are illustrative of the first kind of declaration... Similarly, declarations of value for the purposes of import or export duty under the Customs Act fall within the first category."

Three cases for the third type

For the third kind of declaration, examples are "usually to be found where assessment under Statute A is dependent upon a basis provided by Statute B. In such case, the assessing officers under Statute A cannot question the basis. That is within the province of the authorities under Statute B."

If that seems to go above your head, help comes in the form of a 1969 decision of the apex court in Union of India vs Rai Bahadur Shreeram Durga Prasad (P) Ltd, where the furnishing of a declaration under Section 12(1) of the Foreign Exchange Regulation Act, 1947 was a pre-condition to the export of goods under the Customs Act, 1962. There, it was held: "Correctness of the declaration could not be questioned by the Custom authorities on the ground that the declaration under Section 12(1) of FERA was incorrect."

Similarly, in a 1987 case (M. Narasimhaiah vs Deputy Commissioner for Transport) before the Supreme Court, the dispute was this: "The Karnataka Motor Vehicles Taxation Act provided for taxation with reference to a number of passengers which the vehicle was permitted to carry. The assessee had a permit issued under the Motor Vehicles Act, 1939 which permitted him to carry a number of passengers. On the basis that the assessee had carried passengers above the permitted limits; tax was sought to be levied under the Taxation Act in respect of the assessee's vehicle."

The decision was: "When the statute itself provided for the highest levy of tax on the basis of the number of passengers permitted to be carried in the vehicle, one cannot ignore the phrase `which the vehicle is permitted to carry' and levy tax on the basis of the actual number of passengers carried." A four-wheeler case that is on all fours with the present case!

Closer in time is the Apollo Tyres case of 2002 about Section 115J of the Income-Tax Act, to illustrate the third kind of declaration. The Supreme Court had stated: "The Section provided for the payment of minimum tax by every company on the basis of its profit and loss account prepared in accordance with the specified provisions of the Companies Act... The assessing officer under the Income-Tax Act had no power to re-scrutinise the account by embarking upon a fresh inquiry in regard to the entries made in the books of account of the company."

Impossibly chaotic situation

In sum, the Revenue had failed to keep in mind the distinction between different kinds of declarations, said Justice Pal. "The notification does not envisage an inquiry into the correctness of the MRP printed on the packages by the Excise Officer. As far as he is concerned, he is limited to satisfying himself that there is a declaration in the prescribed form." Period. "To hold otherwise would not only defeat the object with which the notification was introduced but lead to a reversion to the earlier mode of assessing the value of the manufactured commodity, the uncertainty associated therewith and an impossibly chaotic situation."

The rationale of the Notification was to get over "hassles arising on the question of determination of assessable value," observed the judge. If one were to go according the decision of the Tribunal, the Department would go behind the printed prices and find out the `effective prices' at which the retailers may sell the packages to consumers and treat such prices as the printed prices for the purpose of determining the rate of duty applicable. "The consequences of this interpretation by the Tribunal would be startling," she said, piercing the Department's zeal to pierce the price veil.

Neither lawful nor logical

The High Court's view that the printed MRP should reflect the actual price at which the particular kind of cigarette is sold throughout the country was a `patent impossibility' because, as the Tribunal had noted, the actual price at which the cigarettes were sold could not `lawfully or logically' be the printed MRP because `the manufacturer has limited or little control over the actions of the retailers' who are, `about a million in number'.

This led the Tribunal to aim at an MRP that should be the `reasonable price' at which the cigarettes could be sold. There was "an elaborate exercise to determine what should be that single reasonable price for the entire country which should have been declared and printed by the appellant on the packages."

Complicated costing confusion

Justice Pal pointed out that the outcome of such an elaborate mission would be equally illogical. How? Because "it envisages an excise officer in one part of the country determining what would be the reasonable market price through out the country for that particular brand." This would require "the examination of the cost data and market considerations" — a `very complicated and time consuming impractical exercise'. Yet, this was what a flawed interpretation of the notification would have achieved, says the judgment.

Even if such a mammoth task had been taken up, "the question whether the price so fixed by the Excise authority is `reasonable' or not would itself be justiciable with the consequent blockage of revenue in the quagmire of litigation." That is precisely what the Notification had sought to avoid, concluded the judge.

What ultimately went up in vanishing smoke rings was the Department's dream of raking in revenue of about Rs 800 crore.


"I think he is weak in logic?"


"He spells the word, lojig!"

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