The Hindu Business Line : Mosquito repellent that didn't help a tractor company

TRACTORS help in ploughing. But a tax tribunal had to plough through tractors recently, when deciding the Escorts case. The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), New Delhi, studied what goes into a tractor, because the question before it was whether transmission assembly (TA) used in tractors would come under the excise duty net.

At Escorts, tractors roll out of assembly lines. "By progressive assembly, various components and sub-assemblies go on getting meshed up. For instance, gear box assembly gets meshed up with differential assembly and these assemblies get meshed up with hydraulic assembly and so on till identifiable and marketable tractor emerges," notes the CESTAT order, describing the process of tractor manufacture.

The Department observed that the company was using TA of the tractor division in the manufacture of material handling machines at a different company, Escorts Construction Equipment Ltd (ECEL). So, the taxman said that TA was a marketable product emerging during the manufacture of tractor and so leviable to excise duty. A duty demand was made on Escorts, stating that goods manufactured as intermediate products for captive use are excisable.

Mr V. Lakshmikumaran, arguing for the company, said that TA was not goods. "It is not marketable and is not marketed." It didn't have "an identifiable and independent existence commercially known in the market", he said. TA was only "a cluster of meshed up assembly". To strengthen his stand, the advocate cited an apex court decision in the Sonic Electrochem case where the plastic body of electro mosquito repellent (EMR) was found not to be a marketable product. Reason given was that each competing EMR uses its own design of plastic body, so if you go to the market to buy a replacement plastic body for your EMR, you may not get one, "because at present it is not a commercially known product." By analogy, therefore, tractor is like the mosquito repellent, and TA, the plastic body.

Mr V. Valte, Senior Departmental Representative countered the company's arguments. He said that the company was paying duty only for TAs sent to ECEL, and not for those used in the manufacture of tractors. Every tractor required one TA, and the company had also imported TA, he said. To support his view that TA was an identifiable product, there was a letter from TAFE Ltd, another tractor-maker, that they manufacture TA and occasionally remove the same to their Parts Department "for free replacement against warrant claims."

Another defence of the company's advocate was to say that Escorts has been manufacturing tractors since 1965, and "they bona fide believed that TA is not goods"; and that the tractor industry as a whole was not discharging duty on use of TA in the exempt tractors. It was only in 1995 that the Department sought to demand duty on the IC engine that went into these tractors. Mr Lakshmikumaran cited the Shambhu Nath & Sons Ltd case where the Tribunal had observed: "When a fact that is well known to industry remains unknown for 10 years to Central Excise... we are compelled to reflect upon the application of the officers. But the officers were ignorant of what was well-known to the industry; they have only themselves to blame." Mr Valte, however, countered, saying that Central Excise officers were not required to know the detailed manufacturing process of each and every product.

Mr V. K. Agrawal, Member of CESTAT, referred to the 1977 Delhi Cloth and General Mills case of the apex court to determine whether there was manufacture. Again, there was a two-fold test laid down in 1998 by the Supreme Court in the J. G. Glass case: "First, whether by the said process a different commercial commodity comes into existence or whether the identity of the original commodity ceases to exist; second, whether the commodity which was already in existence will serve no purpose but for the said purpose." TA satisfied both these tests, said Mr Agrawal. "After assembly of various parts and components a new and different article known as TA emerges having a distinctive name, character and use," he ruled, and added that it was excisable. The matter was remanded to the Department.

An intermission in the transmission story?

Comma in pan masala

Scented supari and betel nuts with menthol came up to the portals of Madras High Court in the A.R.R. Enterprises case. Earlier, at the tribunal level, the company had been unsuccessful in defending itself against the Excise Department which viewed the product as pan masala. "No, ours is sugandha (scented) supari, and betel nut is nut," argued the company, trying to classify its product as "preparations of vegetables, fruit, nuts or other parts of plants, including jams, fruit jellies, marmalades, fruit or nut puree and fruit or nut pastes, fruit juices and vegetable juices, whether or not containing added sugar or other sweetening matter."

Excise officials read out Note 3 in Entry 2106.90 of the Tariff which defined pan masala as "any preparation containing betel nuts and any one or more of other ingredients such as lime, katha (catechu), cardamom, copra, menthol and tobacco."

The court observed that when betel nut was mixed with any one or more of the other ingredients, it became pan masala. Justice Mr V. S. Sirpurkar said, "The last words in the first sentence of Note 3 namely `and tobacco' are not to be read with all the other ingredients." He explained why: "The plain and simple meaning of this clause is that the betel nut alone should be a common factor along with any one or more of the six other factors like lime, katha (catechu), cardamom, copra, menthol and tobacco." The judge drew attention to the fact that there is no comma after the word menthol. "Had a comma been there, perhaps the words menthol and tobacco would be required to be read along with the other factors besides the betel nut."

A decision to chew over.

Tailpiece

"It takes a long time to understand tax."

"They only want you to pay tax, not understand it!"

Detaxification@TheHindu.co.in

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