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Ground rules for excise

M J Antony | September 15, 2004

After the agony and ecstasy over the ITC excise judgement last week, a quiet reading of the decision would indicate that the Supreme Court has tried to lay down certain ground rules for charging excise and other duties on goods.

It has stated that the maximum retail price should be the benchmark for calculating the duty. If the retailer or wholesaler demands a higher price, and the consumer is willing to pay it, the manufacturer should not be penalised.

The Standards of Weights and Measures Act and the Packaged Commodity Rules impose a duty on the manufacturer to print the MRP on the packages.

Levying tax according to the printed price would be the proper procedure. The revenue department would not be advised to go behind it and presume illegality on the part of the dealers.

The court felt that it would not be practical to print a single "reasonable", retail price of a brand for the whole country. It would require an excise officer in one part of the country to determine the reasonable market price throughout the country.

The court reiterated that words in a notification should be construed strictly according to their ordinary and natural meaning, particularly in economic legislations.

If there is ambiguity in the language of the law, it may be resolved by referring to the legislative intent. If the language is clear, the legislature must be deemed to have intended what it has said.

The assessable value of the goods with reference to the printed MRP was intended to do away with the disputes, litigation and consequent delay in the determination of the value of the goods.

In the 1980s, at the time of introducing the new system, the finance minister had clarified this in his Budget speech. The new method has stood the test of time. Therefore, it need not be undone.

These observations are bound to benefit the manufacturers, but not, perhaps, the retailers or the consumers. The court states that the consumer can insist on paying the MRP and the retailer is legally bound to sell the goods at that price.

If adhering to the MRP unreasonably narrows the retailer's margin, he can demand a reduction in price from the wholesalers or desist from selling the product.

This chain of pressure starting from the consumer goes up to the manufacturer. Therefore, the manufacturer cannot print a fanciful or whimsical MRP on the packages.

However, the allegation of the revenue department in this case was exactly what the court had expected to not happen. In the late 1980s, it carried out raids in the various factories and offices of ITC all over the country.

Then it issued a show cause notice that alleged that ITC consciously and deliberately ensured that the actual retail prices of its cigarettes were higher than the declared or printed prices.

It was controlling the margins and prices of the dealers and sellers. The effective price was higher than the printed price and the declared price on the packs was false.

Therefore, the company was not entitled to the exemptions granted in the two notifications of 1983 and 1985.

The government argued that it would be inconsistent with public policy to interpret a taxing statute or notification granting exemption in such a manner as to condone, facilitate or sanction false claim.

It further argued that any ambiguity in the exemption notification should be resolved in favour of the revenue department.

The Supreme Court rejected all these arguments and dismissed its appeal, while allowing the company's appeal against orders of the high court and Customs, Excise and Gold Appellate Tribunal.

The judgement has cleared the grey area that had existed over the method of arriving at the assessable value of commodities.

The government did attempt to do so earlier, but it was caught in litigation. The manufacturers have won, and it looks as if it is for the customers and retailers to be more responsible in their transactions in order to save revenue for the government.

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