The Hindu Business Line : CA's certificate is not a gospel truth to be accepted uncritically

WRITING is manual labour of the mind, said John Gregory Dunne, comparing it to any other job, "like laying pipe". This week, therefore, we shall apply our mind to a case about pipes, Pragathi Concrete Products P Ltd vs Commissioner of Central Excise.

The company manufactured PSC (pre-stressed concrete) pipes and supplied the same to Karnataka Urban Water Supply and Drainage Board. According to the contract with the Board, Pragathi was also responsible for "laying, joining, commissioning, testing and maintenance of pipeline for 12 months". The `composite contract' mentioned the contracted amount without any bifurcation as to cost of pipes and other activities. For paying excise duty, the company took the value as per cost of PSC pipes certified by a chartered accountant.

The taxman was not happy with the tax base Pragathi had worked on. Excise officials noticed that the CA's certificate had indicated the exclusion of the cost of certain elements such as nuts, hard crates, MS rods, overheads like interest, depreciation, and maintenance of machinery, while arriving at the cost of PSC pipes. The Department also obtained cost data rates from the Board, and the cost of similar products manufactured by Indian Hume Pipes.

Tax officials discovered that the composite contract had an escalation clause according to which the Board had awarded Rs 106 lakh to Pragathi, and no duty had been paid on the same. Therefore, show-cause notices were issued to the company, fixing through best judgment method the manufacturing cost of pipes at 73 per cent of the composite contract, and also demanding duty on the escalation charges considering the same as additional consideration.

Protest of the pipe company

The text of the Bangalore tribunal where the case ended up lists almost a dozen grounds on which Pragathi argued against the Department's order. These included the arguments that the demand was barred by limitation; that the Board's document is a confidential one not made available to any of the bidder for tender, and so the Department should not base its calculation on the same; that the rate obtained of Indian Hume Pipes could not be relied upon "as their rate was based on their costing and independent of data rate of the Board"; that the CA's certificate was produced in 1995 though the Department chose not to initiate any action till 2000; that duty could not be demanded on mere assumption and presumption; and so forth.

In response, the Department's side reiterated the observations of the Commissioner to justify the Revenue's stand.

No gospel truth

"In a composite contract, there is no way of knowing the real cost of the PSC pipes," stated the tribunal, and added that there was nothing wrong in Pragathi clearing the goods on the basis of cost certified by the CA. Pragathi had cited the apex court comment in the Union Carbide case that cost as reckoned by a man of commerce was to be adopted.

"But the Revenue is not bound to accept the Chartered Accountant's certificate on its face value when certain items of cost as found by the Commissioner were not included," said the tribunal. If that's heartbreaking for CAs, here's more: "The Chartered Accountant's certificate is not a gospel truth to be accepted uncritically. As the cost certified by the Chartered Accountant did not appear to be correct, the Revenue was right in adopting Rule 7 of the Central Excise (Valuation Rules) 1975." Rule 7 is a.k.a. the best judgment method.

The tribunal noted that Indian Hume Pipes also supplied similar products to the Board; that the Board's data rates had been arrived at in a scientific manner based on manufacturing process; that the rates adopted by Indian Hume Pipes were comparable to the Board's rates; and that the Commissioner's method for arriving at the assessable value was very scientific and not based on assumptions and presumptions as contended by Pragathi.

On the use of `confidential' document, Pragathi had cited a Madras High Court decision in Ashok Leyland Ltd vs Controller of Imports and Exports, that the Departmental Circular marked `confidential' could not be held against the citizen if he has not fulfilled the instructions contained therein, because the public was unaware of its contents. But the tribunal felt that Pragathi's advocate quoted the decision out of context.

Yet, the tribunal could not ignore the long delay involved. "The Department had not taken action for more than five years. The appellant's unit had also been audited several times. They had also filed their periodical returns properly. In these circumstances, there is no justification for invoking the longer period. Hence, the demand of duty on account of under valuation is clearly time barred," said the Tribunal, setting aside a major chunk of demand.

In truth, professional accountants expect their opinions and certificates to be accepted unchallenged; and Blaise Pascal may affirm, "The gospel to me is simply irresistible." But the gospel of the taxman is different. To them, this quote of Saint Augustine should appeal instead, in all fairness: "If you believe what you like in the gospels, and reject what you don't like, it is not the gospel you believe, but yourself."

What's alien to excise men

"IT SHOULD be appreciated that the agreement among the oil companies has been entered into on a directive from the Government of India. This results in an optimal utilisation of the marketing facilities of the various companies in the country and reducing the cost of transportation. It is better for a refinery to market its products at a nearby marketing facility owned by another company than to send the same goods to its own marketing facility at a far off place.

"Alternatively, when the company having a refinery has a marketing outlet at some other place, nearer to a refinery of a different company, then it would be better for that marketing outlet to purchase the product from that refinery rather than receive from their own refinery. This arrangement definitely reduces the transportation cost and is only in public interest.

"The Central Excise Authority cannot question this. Excise men better do not enter into territories alien to them. Even if the agreement between the companies results in mutual benefit, we don't understand why the Excise department should feel unhappy as long as duty is paid on the transaction value. On going through the agreement we do not find any ground to hold that the transactions are not at arms length." (Excerpt from the ruling of Bangalore tribunal in Hindustan Petroleum Corporation Ltd vs CCE)

Tailpiece

"If we can show a negative income... "

"Uh... "

"Can't he submit a reverse resignation?"

Detaxification@TheHindu.co.in

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