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Balanced and exhaustive -- II

V. Nagarajan discusses the December 1999 ICWA (Intermediate) paper on indirect taxation

STATE whether the following elements are includable or not in the assessable value of excisable goods:

i) cost of recording songs on blank audio tape;

ii) repacking charges incurred by the manufacturer at the depot/godown;

iii) `discount in kind' -- 13 pieces of goods given against the price of 12;

iv) value of software loaded into the computer system; and

v) interest on advance deposits and/or security deposits advanced by the buyers.

b) Sigma Ltd asked for a quotation from Omega Ltd for the supply of 100 complete computer systems. Omega Ltd furnished the following quotation:

Components: CPU -- Rs. 20,000; monitor -- Rs. 10,000; keyboard -- Rs. 5,000; sub-total -- Rs. 35,000

Labour and overheads -- Rs. 10,000

Sub-total -- Rs. 45,000

Profit -- Rs. 5,000

Total price per unit -- Rs. 50,000

Advance to be paid per unit -- Rs. 20,000

Terms: Delivery within one month from the date of receipt of the firm order and advance.

Sigma Ltd accepts the quotation subject to the following alterations which are agreed to by Omega Ltd:

i) Keyboard would be supplied free of cost by Sigma Ltd to Omega Ltd as Sigma Ltd is able to purchase the keyboard for Rs. 3,000 per unit;

ii) Profit charged by Omega Ltd is to be reduced to Rs. 4,000 since Sigma Ltd would make an advance of Rs. 20,000. However, no interest is payable on the advance.

Determine the assessable value under Section 4 of the Central Excise Act, 1944, and the excise duty liability k 15 per cent ad valorem. (6 marks)

3) Write short notes on the following: a) first appraisement; b) daily list of imports and exports; c) declaration by owner of baggage; and d) import through post parcel. (4x4 = 16 marks)

4(a) Name the documents on which Modvat credit is permissible as per Rule 57-G of the Excise Rules, 1944. (4 marks)

b) A manufacturer received certain inputs. The cost of inputs was Rs. 2,00,000 and duty paid k 16 per cent was Rs. 32,000. After receipt of the inputs, the Modvat credit was availed of by the manufacturer. He further carried out some processes on the inp uts. The cost of processing was Rs. 50,000. The semi-processed material was sent to a small-scale unit for a job work.

What should be the duty payable at the time of removal of inputs for the job work? The material sent was not returned by the small-scale unit after the job work within 180 days. What will be the duty payable on such goods not returned after being sent ou t for the job work? (4 marks)

c) Machinotech Ltd purchased a lathe machine for Rs. 1,00,000 on which 20 per cent excise duty was paid and the company used Modvat credit on the said capital good. The lathe machine was purchased on January 27, 1999, and it was disposed of on April 29, 1999. Can the assessee enjoy the Modvat credit? Is it necessary to reverse the Modvat credit on disposal of the machine? If your answer is yes, quantify the amount. (4 marks)

d) Surya Ltd purchased certain inputs for Rs. 50,00,000 and also paid excise duty k 10 per cent ad valorem. The company also purchased a drilling machine for Rs. 5,00,000 and paid excise duty k 15 per cent ad valorem. The company used Modvat credit on th e inputs and on the capital good in April 1999 on the same day. On May 10, 1999, the company cleared the finished goods to Tara Ltd, the cum-duty price of which worked out to Rs. 70,80,000. The final product (finished goods) sold attracted excise duty k 18 per cent ad valorem. The company also deposited Rs. 6,00,000 through TR-6 challan on May 10, 1999, itself. It may be noted that the inputs were purchased from Usha Ltd and the drilling machine from Probha Ltd on credit in both cases. Pass the necessar y journal entries in the books of Surya Ltd.

5(a) You are the manager (taxation) of Eastern Ltd. Draft a note explaining the procedure involved in the export of excisable goods. (8 marks)

b) Give the procedure for re-export of imports goods and duty drawback available on such goods. (8 marks)

6(a) Geet Pvt Ltd, Chandigarh, made the following transactions in inter-State sale/purchase:

Goods sold to a government department in Maharashtra: Rs. 5,50,000

Goods sold to a trader in Himachal Pradesh: Rs. 5,00,000

Goods purchased when they were in transit from Rajasthan to Haryana and sold during movement of the goods to a manufacturer in Haryana by transfer of documents: Rs. 2,50,000

Goods exported directly: Rs. 12,00,000

Goods exported through agent: Rs. 1,00,000, the agent being paid commission k 1 per cent

Goods sold to an exporting agency in Delhi which in turn exported the goods: Rs. 1,50,000. Sales tax on the goods is 4 per cent if sold within the territory of Chandigarh.

What are the sales tax declaration forms obtainable from each of the above buyers? What will be the sales tax rate applicable in each case, if (a) the required declaration is obtained, and b) the required declaration is not obtained. (8 marks)

b) Write short notes on: i) sale price under the CST Act, 1956; ii) `sale or purchase of goods taking place outside a state' under Sec. 4 of the CST Act. (4x2 = 8 marks)

7) Distinguish between the following: a) direct tax and indirect tax; b) selective audit and special audit under the Excise Act; c) the DEEC and DEPB schemes; and d) self-assessment and provisional assessment under the Excise Act. (4x4 = 16 marks)

8(a) Lalit Fans Ltd is selling fans at Rs. 1,200 at the factory gate at Chandigarh, Rs. 1,275 from their depot at New Delhi and Rs. 1,250 from Calcutta. Two-hundred fans were despatched on March 1, 1999, to their depot at New Delhi which reached the depo t on March 20, 1999. Hundred fans were despatched on March 3, 1999, to Calcutta which reached on March 15, 1999. Lalit Fans Ltd revised the price of fans on March 15, 1999, as follows: ex-factory price -- Rs. 1,300; ex-Delhi depot -- Rs. 1,375; and e x-depot Calcutta -- Rs. 1,350.

The goods were actually sold from Delhi depot at Rs. 1,375 per fan on April 8, 1999. The Calcutta depot sold 90 fans k Rs. 1,250 and 10 fans k Rs. 1,350 per fan. Calculate the total duty payable, if the rate of excise duty is 10 per cent. Prices given ab ove are exclusive of taxes and duties. (8 marks)

b) Garima Enterprises, an SSI manufacturer, wants to pay excise duty even when it is eligible to pay concessional duty: i) Can it do so? ii) Why does it want to pay full duty? iii) What is the duty payable? (4 marks)

c) 200 cycles were sold by ABC Ltd to a related person, XYZ, at Rs. 1,500 per cycle. XYZ sold these cycles to independent buyers at Rs. 1,850 per cycle (prices exclusive of all taxes). The rate of excise duty is 10 per cent.

i) Determine the assessable value and the total duty payable.

ii) What would be the position if 50 cycles are sold by ABC Ltd to XYZ k Rs. 1,500 per cycle and 50 cycles are sold directly to an independent buyer k Rs. 1,700 per cycle? (4 marks)

Suggested answers

2(a) i) Blank audio tape falls under chapter heading (CH) 8523.11, and will be removed from the factory on payment of duty. The cost of recording songs thereon will not in any way be included therein. However, recorded audio tapes fall under CH 8524.31. Here, the manufacture gets completed only after recording the songs, hence, the cost of recording will have to be included in the value.

ii) Repacking charges: The inclusion or exclusion of repacking charges incurred by the manufacturer at the depot/godown depends on whether the depot/godown is a place of removal under Sec. 4(4)(b)(iii) of the CE Act or not. If it is a factory sale, repac king of duty-paid goods in the depot will not constitute manufacture and, thus, the charges are not includable in the assessable value. If, on the contrary, the depot is the place of removal, and the goods are sold therefrom, repacking charge is includab le in the assessable value.

iii) Discount in kind is also a trade discount normally given in the trade as quantity discount and is undoubtedly eligible for deduction from the price to arrive at the assessable value under Sec. 4(4)(d)(ii) of the CE Act and, therefore, not to be incl uded in the assessable value (Bombay Tyre International (1983); and SC & Punjab Chemicals and Pharma (1999) Tribunal).

iv) Value of software loaded into the computer system: Software is not connected with the computer system. In the Sunray Computers (P) Ltd case, the Madras Bench of the Tribunal held that the cost of software is not includable in the assessable value of the computers. Hence, the value is not includable.

v) Interest on advance deposits/security deposits: Under Rule (5) of the CE (Valuation Rules), 1975, any consideration received by the seller over and above the normal price under Sec. 4(1)(a) has to be included in the assessable value. In the event of a ny interest-free advance by the buyers, addition to the value of the notional interest thereon depends on whether there is a substantial reduction in the price established by the Department. If the price is not influenced in any way on account of such ad vances, the notional interest thereon need not be added to the price. If the nexus is proved and established, the interest element has to be added. At times, in trade parlance, advance is given by buyers against supply. In such cases, it has no influence on the price and, therefore, interest on such advance need not be included (Metal Box (I) Ltd (1995) SC).

3(a) First appraisement: Sec. 17 of the Customs Act, 1962 deals with the assessment of imported goods. After an importer has entered any imported goods under Sec. 46 by presenting a bill of entry, or an exporter has entered any export goods under Sec. 50 , the imported/export goods as the case may be, or such part thereof as may be necessary, may be examined and tested by the proper officer without undue delay. This examination and testing of the imported/export goods as regards quantity/number of packag es and so on, and making an endorsement thereon in the bill of entry/shipping bill is known as first appraisement.

b) Daily list of imports and exports: Export-oriented units (EOUs) take advance licence (quantity based) under the DEEC scheme, and exporters under the DE passbook scheme. The quantity permitted for import of materials and the export obligation thereon w ill be entered by the Department therein. The quantity of materials imported under QBAL and the quantity of finished goods exported will be endorsed in the licence under the DEEC by the Department. However, these entries are permitted to be entered in th e passbook by the exporters themselves under the DE passbook scheme. To help the Department monitor their activities, the licence-holders under the DEPB scheme are required to furnish to the Department a daily statement, which is known as the daily list of imports and exports.

c) Declaration by owner of baggage: Under Sec. 77 of the Customs Act, 1962, the owner of any baggage shall make a declaration of its contents -- in the prescribed form -- to the proper officer for clearing it. The articles to be declared as baggage shall be only household effects (Hamraj vs UOI -- 1991). Commercial quantities can also be permissible as baggage. The duty-free allowance for baggage may be claimed by various types of passengers as per Appendix A to F of the Baggage Rules, 1998. Goods listed in Annexure I (firearms, cartridges, and so on) and Annexure II (colour TVs, VCRs, VCPs, washing machines, and so on) are not eligible for baggage allowance.

d) Import through post parcel: Under Sec. 82 of the Customs Act, 1962, in the case of goods imported by post, any label or declaration accompanying the goods, which contains the description, quantity and value thereof, shall be deemed to be an entry for import of goods. After the entry in the form of label/declaration is made, the assessment of import duty will be made applying the rate of duty and tariff value in force as on the date on which the postal authorities present to the proper officer of Cust oms a list containing the particulars of such goods for the purpose of assessing duty thereon.

In the case of import by a vessel and if the above list was presented before the date of arrival of the vessel, it will be deemed to have been presented on the date of arrival of the vessel. After assessment and payment of duty, the post parcel will be d elivered to the importer.

4(a) The documents on which Modvat credit is permissible are as below (under Rule 57G):

i) invoices issued under Rule 52A (duplicate copy); ii) invoices issued for sales from depots/consignment premises; iii) triplicate copy of bill of entry (imported inputs); iv) certificate issued by the Customs appraiser posted in a foreign post office; v) invoices of first-stage dealer, pre-authenticated by the dealer; vi) invoices of second-stage dealer pre-authenticated by the dealer and authenticated by the proper officer; vii) invoices of importer authenticated by a proper officer of Customs; viii) invoices of the first and second stage dealers as regards imported inputs duly pre-authenticated by them and authenticated by the proper officer of Customs; ix) duplicate copy of bill of entry generated in EDIS of the Custom House; x) Form A certificate issued by the superintendent of CE under Rule 57E of the CE Rules for the differential duty relating to input invoices; and xi) input invoices issued under Rules 57F(3) and 57S.

b) Under Rule 57F(4) of the CE Rules, when the inputs as such or after any processing is sent for job-work, 10 per cent of the value thereof should be debited to Modvat credit account (RG-23A). If they are not received back after processing within 180 da ys, the duty relatable to the inputs sent for job-work should be reversed:

Cost of inputs -- Rs. 2,00,000; cost of process carried out -- Rs. 50,000; total value of input sent for job-work -- Rs. 2,50,000; amount debitable to RG23A (10 per cent of value) -- Rs. 25,000; if the inputs are not received within 180 d ays, balance of credit availed is to be debited (Rs. 32,000 - Rs. 25,000) -- Rs. 7,000.

c) Under Rule 57Q, Modvat credit can be used on capital goods only after installation or on being put to use. In this case, no information on whether the lathe was installed or not is available.

Presuming that it was not installed, the Modvat credit of Rs. 20,000 may be used and the entire amount debited to RG23C on April 29, 1999, the date of disposal.

On the other hand, if it is presumed that the lathe was installed on January 27, 1999, then under Rule 57S of the CE rules, the duty payable at the time of removal, that is, April 29, 1999, is to be calculated by allowing a deduction of 2.5 per cent of c redit per quarter of use in a year or fraction thereof from the date of using the credit.

From January 27, 1999 to April 29, 1999, it works out to two quarters:

Duty credit availed on January 27, 1999 = Rs. 20,000

Deduction at 2.5 per cent per quarter of use 2 x 2.5 = 5 per cent = Rs. 1,000

Duty debitable to RG23C on April 29, 1999 = Rs. 19,000

5(a) The procedure for export of excisable goods is as follows:

i) the excisable goods must be packed in cases or packages legibly marked for easy identification;

ii) Form AR4 in quintuplicate has to be filed before the excise officials;

iii) the goods must be stuffed in the presence of the excise official;

iv) invoice must be prepared in triplicate;

v) the container must be sealed in the presence of excise officer and the endorsement of the Department should be obtained in AR4S that the goods had been stuffed and sealed in his presence;

vi) the CE officer (Superintendent) will certify the AR4 and will return the original and duplicate copies to the exporter. He will forward the triplicate copy to the Maritime Commissioner or the Jurisdictional Assistant Commissioner. The quadruplicate w ill be sent to the Chief Accounts Officer of the Central Excise Commissionarate. The quintuplicate copy will be retained by the superintendent of Central Excise as office copy;

vii) the exporter must submit the original and duplicate AR4s along with the shipping bill and GR form to the Customs authorities;

viii) the Customs authorities will verify the seal of the container and, after satisfying themselves, permit the shipment. The original AR4 will be forwarded by the Customs officer directly to the Maritime Commissioner or the jurisdictional Assistant Com missioner. The duplicate will be returned to the exporter by the Customs officer directly to the Maritime Commissioner or the jurisdictional Assistant Commissioner. The duplicate will be returned to the exporter; and

ix) the exporter will have to file the duplicate AR4 with the Maritime Commissioner/Assistant Commissioner to obtain the proof of export if the export has been made under Rule 13 of the CE rules without payment of duty after executing a B-1 General bond (under Rule 14) or obtain the refund of excise duty paid if the export has been made on payment of excise duty under Rule 12.

6(a) i) The government department of Maharashtra should give Form D declaration. The rate of tax would then be 4 per cent. If not given, it is 10 per cent.

ii) The trader in Himachal Pradesh should furnish Form `C' declaration. In that case, the rate of tax is 4 per cent, otherwise, 10 per cent.iii) The manufacturer in Haryana should submit Form `C' declaration and the Rajasthan dealer should furnish E1 or E2 declaration giving the details of the goods sold by him.

If these declarations are obtained, the rate of tax is `nil' (Sec. 6(2)(b)sales). Even if E1 or E2 is obtained, but not Form `C' declaration, the rate of tax is 10 per cent.

iv) In this case, the goods are stated to be exported under Sec. 5(1). There is no need to obtain any declaration as the charging of tax under Sec. 6(1) could be made only on inter-State sales. Hence, no tax.

v) The agent is persona-non-grata. It amounts to export directly by Geet Pvt Ltd. No declaration is required to be obtained and there is no tax liability. (same as in (iv) above).

vi) Export is different from export sale. This is a case of pre-export sale. The Delhi agent, in turn, exported the goods. Presuming that the Delhi agent made the export sale (Sec. 5(3), Form H declaration is to be obtained from the exporter by Geet Pvt Ltd. If the declaration is obtained, there is no tax. Form `C' declaration should be obtained from the exporter, if it is mere export and not export sale. In that case, the tax rate will be 4 per cent. If Form `C' is not obtained, the rate of tax shall b e 10 per cent.

Sale price: Sale price means the amount payable to a dealer as consideration for the sale of any goods less any sum allowed as cash discount according to the prevailing normal trade practice. However, it includes any sum charged for anything done by the dealer in regard to the goods at the time of or before the delivery thereof. Anyhow, it excludes the cost of freight or delivery or the cost of installation separately charged.

Sale or purchase of goods taking place outside a State: Sec. 4 of the CST Act states that when a sale or purchase of goods takes place inside a State, such sale/purchase shall be deemed to have taken place outside all other States. It is called deemed s ale.

A sale/purchase of goods shall be deemed to take place inside a State if the goods are within the State a) at the time the contract of sale is made as regards specific or ascertained goods; and b) in the case of unascertained or future goods at the time of their appropriation to the contract of sale by the seller or the buyer.

Where there is a single contract of sale or purchase of goods situated at more places than one, it will be taken as separate contracts in respect of the goods at each of such places.

8(a) The assessable value of goods will be the normal price at which they are sold with reference to time and place of removal as defined under Sec.s 4(4)b(i) to (iii) and (ba). The price relating to each place of removal shall be the value, and duty sho uld be paid on such a price at the time of removal from the factory. Here, depot is a place of removal. In the question, sales relating to the Delhi and Calcutta depots are dealt with.

Delhi depot: Value of 200 fans sold on April 8, 1999 (price revised from March 15, 1999 for Delhi depot) k Rs. 1,375 per fan = Rs. 2,75,000

Calcutta depot: 100 fans reached Calcutta on March 15, 1999 and they should have been sold on or after that date (date of sale not given) at Rs. 1,350 per fan.

Value of 100 fans at Rs. 1,350 per fan 1,35,000 -- Rs. 1,35,000

Total assessable value -- Rs. 4,10,000

Total duty payable at 10 per cent ad-valorem -- Rs. 41,000

b) Concessional rate of duty is available under Notification No. 8/99 dated February 28, 1999, subject to not availing Modvat credit up to Rs. 100 lakhs value of clearances. If an SSI wants to avail itself of Modvat credit from the beginning, alternative Notification 9/99 dated February 28, 1999, is available under which duty payable is as below:

Up to Rs. 50 lakhs worth of clearances = 60 per cent of normal duty

Above Rs. 50 lakhs and up to Rs. 100 lakhs value of clearances = 80 per cent of normal duty.

Above Rs. 100 lakhs = normal duty

No SSI will pay duty on a par with big manufacturers. It is presumed that the SSI wants to pay duty under the 9/99 notification.

i) It can do so; ii) to avail Modvat from the beginning, and iii) duty payable is as given above.

(c)(i) According to proviso (iii) to Sec. 4(1)(a) of the CE Act, if the goods are sold to a related person, then the assessable value will be the price at which the goods are sold by the related person.

Hence, the price of Rs. 1,850 will have to be taken as the assessable value.

Assessable value of 200 cycles at Rs. 1,850 each = Rs. 3,70,000

Total duty payable at 10 per cent ad-valorem = Rs. 37,000

ii) The position in (i) above will apply to 50 cycles only.

Assessable value of 50 cycles at Rs. 1,850 each sold to XYZ -- Rs. 92,500

Assessable value of 50 cycles at Rs. 1,700 each sold to an independent buyer -- Rs. 85,000

Total assessable value -- Rs. 1,77,500

Duty payable at 10 per cent ad-valorem -- Rs. 17,750

Note: It is presumed here that XYZ is a related person and the 50 cycles were sold by them at Rs. 1,850 each as given in (i) above.

(Concluded)