The Hindu Business Line : Telephone is no `capital good' if you manufacture H{-2}O{-2}

CASES, they say, are of two types: funny and not-so-funny. To explain the difference, here's the story of Ginni, a company that manufactures cotton filament and yarn.

I'm spinning no yarn, please note, because this is about a dispute that went to the Supreme Court and got resolved only a few weeks ago.

What was the problem? As a 100 per cent export oriented undertaking (EOU), Ginni was unhappy with the Central Excise Department for not giving it the benefit of a Central Excise sop. You know that export promotion is one of the avowed objectives of Government policy and that there are many tax sops for the purpose.

One such is Notification No. 123/81, which exempts excisable capital goods, components and raw materials, consumables, spares and packaging materials when brought in connection with the manufacture and packaging of articles into 100 per cent EOUs.

One fine morning, Ginni applied and sought excise exemption for "AC sheets, air-conditioners, flush doors, typewriters, store-wells, tables, chairs," and so on. And it was granted.

But later, the Department issued a show-cause notice calling upon Ginni for a duty of Rs 4.5 lakh for not using the above goods in the manufacture of cotton/filament yarn.

The company replied that the said goods were brought in connection with the manufacture of combed cotton yarn, and that the requisite conditions mentioned in Notification No. 123/81 stood satisfied. Ginni also said that direct utilisation of those goods in the manufacture of combed cotton yarn (which was an export product) was not necessary in view of the words "in connection with the manufacture" in the said notification.

After failing to convince the appellate authority, Ginni went to the tribunal, where the decision went in favour of Ginni.

It was held there that notification "should be given widest possible interpretation as its object was to increase the revenue and balance of payment position"; and the tribunal also placed reliance on the words `in connection with the manufacture'.

Justices S. N. Variava, A. R. Lakshmanan and S. H. Kapadia of the apex court studied the notification and observed that the preamble used the phrase `in connection with the manufacture of'; these words are wider, they said, when compared to the words in the conditions for exemption, namely, `used in the manufacture of'."

The judges faulted the Tribunal for emphasising `in connection with the manufacture', "while failing to notice the words `used in the manufacture of' in the conditions, which indicate use or participation of the said `goods' in the manufacture of products to be exported out of India."

The court laid down that this `test of participation' should be applied to the facts of each case.

"It is on fulfilment of both the above conditions, that the assessee becomes entitled to the benefit of the above notification," stated the court. "Each notification has to be read on its own terms and merely because the object of a notification is to increase resources of the State, conditions stipulated therein cannot be ignored," it cautioned. Also, when dealing with exemption notification, it is necessary to read the text strictly to determine eligibility.

On `capital asset' too the apex court gave its insightful comments. The phrase has wide meaning and "includes all types of properties including consumables, raw material, components and so on". Yet, "every capital asset is not capital goods". How? The judgment gives an example: "A telephone instrument may constitute `capital goods' where the assessee is in the business of telecommunication. However, if the assessee is in the business of manufacture of hydrogen peroxide, the same instrument cannot be construed as `capital goods' for the purposes of the above notification."

In short, one has to keep in mind "the peculiarities of the business" while interpreting the notification.

In Ginni's case, can we say that table, chairs, air-conditioners and so on are `goods' used in the manufacture of cotton or filament yarn?

"It was for the assessee to prove by evidence, and not by submitting a chart, the nexus between AC Sheets and the manufacture of filament/cotton yarn. It was for the assessee to prove by evidence the participation of AC sheets in the manufacture of filament/cotton yarn, which has not been done and, therefore, the tribunal had erred." Thus, the court untangled the yarny mess with commonsense logic. Shakespeare wrote in All's Well That Ends Well: "The web of our life is of a mingled yarn, good and ill together; our virtues would be proud if our faults whipped them not, and our crimes would despair if they were not cherished by our virtues."

One can say that of cases too that enter the portals of our courts, some funny and some not.

Tailpiece

"To avoid fringe benefit tax, I gave a wonderful suggestion to the boss!"

"Cut the benefit and hike salary?"

"No, I said we can book half of fringe benefits under canteen expenses and the other half under transport!"

Detaxification@TheHindu.co.in

D. Murali

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Easing ECBs

FTAs — adding to `spaghetti bowl of tariffs'

Guardians of our democracy

Progressing towards a flat tax?

What's lacking in the `black' fight

VAT of States

Telephone is no `capital good' if you manufacture H{-2}O{-2}

Wages of compliance is inequity

Behind the fig leaf of fringe benefit

New deal for rural India, powered by panchayats