The Hindu Business Line : Complying with tax notification conditions isn't an empty formality

FLEX Industries supplied structures, reservoir tanks and so forth on behalf of Triveny Engineering to Punjab Energy Development Agency (PEDA) for use in a mini hydel project on a canal in the State. The World Bank had financed the project and, therefore, Flex nurtured fond hopes that the goods it supplied were exempt from excise duty. The company knew that a benign Notification No. 108/95 exempted all excisable goods from payment of excise duty when supplied to the UN or international organisations for their office use or supply to the project financed by such organisations.

However, things turned sour when the taxman declined the benefit citing the stipulations mentioned in the notification: One, that the project had been duly approved by the Government of India and, two, that before clearing the goods, the manufacturer should produce before the Asst Commissioner of Central Excise, a certificate from the international organisation that the goods are to be supplied to a project financed by the organisation. On the latter, the Department was not happy with what Flex had to offer.

At the New Delhi tribunal, where the case came up, K.K. Anand, Flex's advocate submitted that the company had produced "the necessary certificate from the Project Authority, i.e., Punjab Energy Development Agency which is the agency of the State Government of Punjab" and also "copies of relevant correspondence establishing the fact that the project in question is funded by an International Organisation which has been approved by the Government of India."

Flex said it made sincere efforts to get the certificate required by the excise officials, but there was no such practice of issuing such type of certificate directly from the international organisation, argued the company's advocate. Also, "there was the standard practice of clearing the goods claiming exemption on the basis of certificate issued by the concerned project authority," Anand added.

A case he cited was that of Bindawala Electrical Industries where the tribunal had held that the Notification was issued to reduce the cost of project financed by the international organisation and it would be unreasonable to reject the eligibility certificate issued by a duly authorised person and approved by the Government of India as it would amount to defeating the purpose of the notification.

Another case that Anand relied upon was that of Automatic Electric; there the tribunal had allowed the benefit of notification on the basis of certificate given by Ministry of Power, Government of India; but to be fair, as the Department's counsel pointed out, this decision was post the 1998 amendment made to the notification — that the certificate may be given by the nodal ministry in the Government of India.

Arguing for the Department, U. Raja Ram submitted that the conditions imposed in the notification were very specific. Therefore, certificate given by an agency other than the international organisation would not satisfy the requirement. He referred to an apex court ruling in the Eagle Flask case, that the condition of making a declaration and giving an undertaking in notification was not an empty formality since it was the foundation for getting the benefit of notification.

Tribunal members V. K. Agrawal and P. S. Bajaj heard the arguments and said that the proviso to the notification was clear that exemption is available on production of the certificate before clearance of the goods. Since Flex had not produced any certificate from the international organisation, such a pre-requisite has not been complied with, said the tribunal, and drew reference to an earlier ruling where the tribunal did not agree with the view that "this was only a technical requirement and for non-complying with the same they should not be penalised."

The tribunal highlighted the Supreme Court's view in the Eagle Flask case — that for enjoying the benefit under the exemption notification, conditions have to be strictly complied with.

On the supplies made by Flex post-amendment too, the benefit of notification will not be available, said the tribunal, because the company had only produced certificate from PEDA and not from the nodal ministry.

"The least flexible component of any system is the user," said Lowell Jay Arthur. Flex perhaps thought that the notification is the most flexible component of the tax regime, though the taxman was quick to retort by saying that the conditions laid down in the notification are the least flexible when it comes to extracting exemption from the system.

Underwater batteries

THE Standard Batteries case that came up before the Mumbai tribunal was not about the standard batteries that we use. It was the `underwater electric storage battery' that had sparked off a dispute between the company and the excise officials. Standard had cleared goods declared as `underwater batteries' at nil rate, taking benefit under Notification No. 68/86.

But you never know the depths to which a taxman can plunge to, in search of truth, and so when the Department went behind the underwater thing it was found that the goods were `cells for submarine batteries' for use by the Indian Navy. Gasping for air, the officials read the notification searching for `cells' but didn't find any; and I'm sure that should have activated the forensic brain cells to deny the excise benefit to Standard.

Promptly, a demand was issued for duty adding up to several crores, covering a period from 1988 to 1995. However, the Commissioner of Central Excise took a benevolent view and granted the benefit of exemption to Standard under a different notification, No. 70/77 — that grants exemption to excisable goods other than cigarettes supplied as stores for consumption on board a vessel of the Indian Navy. The Department was not happy with the order and challenged the same at the tribunal saying, "cells for underwater batteries are never stored on board vessel but are used in the manufacture of underwater batteries at navel energy block/onboard a submarine vessel". It was pointed out that cells were packed and despatched to the Indian Navy for manufacture of batteries to be fitted to a submarine vessel.

Jyoti Balasundaram and M. Moheb Ali of the tribunal looked at Section 2(38) of the Customs Act defining `stores' as "goods for use in a vessel or aircraft and includes fuel and spare parts and other articles of equipment, whether or not for immediate fitting."

Consumption connotes use, said the tribunal. "In respect of battery type Upg-125 for Foxtrot class of submarines, there are 460 cells out of which 448 are used at a time on board the submarine. Four cells are kept at `energy block', as spares and remaining eight cells are also spares, which are to be used for replacement purpose," are lines in the order to educate you on how the submarine works. "All cells get used onboard," reasoned the tribunal, and ruled that test cells are also supplied as ship stores "for consumption on board a vessel of the Indian Navy".

"Marriage has no guarantees. If that's what you're looking for, go live with a car battery," is a cautionary quote of Erma Bombeck. Likewise, a taxman too offers no guarantees. If that's what you're looking for, don't go live with a car battery but try underwater instead.

Tailpiece

"To save on fuel I have... "

"Stopped using the bike?"

"No, I shed some weight to get more mileage!"

Detaxification@TheHindu.co.in

D. Murali

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

Stories in this Section
Dabhol re-powered

EU: Clash of fundamentals

Emergency: Memories of the dark midnight

Complying with tax notification conditions isn't an empty formality

Glaring omission in a commission case

Zero rate stock transfer for export

Loan, cash credit: No source, will tax

"If the wind comes from an empty cave, it's not without a reason"