Monday, August 02, 2010

MINAKSHI CASTINGS – RECAST THE LAW

Section 3A of the Central Excise Act 1944 was introduced in the year 1997, providing for duty payment on an assumed quantity determined as the Annual Capacity of production. Apart from providing solace to a helpless administration that could not contain the large scale evasion, this was expected to simplify the system and be a profitable proposition for the honest Tax Payer as he was not required to pay duty on the entire quantity manufactured by him but only on an assumed capacity of production. The formula for arriving at the annual capacity was so favourably loaded in favour of the assessee that the capacity determined would be much lower than the actual capacity to produce and there are no hassles of Modvat credit, cumbersome returns, declarations and frequent trips to Excise offices etc. Should have been a happy cozy situation. But No.

The litigation loving country that we are, disputes started pouring in. The very section was challenged as ultra vires as Central Excise was a duty on goods manufactured and not goods which are yet to be manufactured, for which duty is to be levied under section 3A. The Hon'ble Delhi High Court held that duty on goods manufactured included goods to be manufactured.


In the case of Hot Rolling Mills, several questions arose for clarification like



  1. What is pusher type and what is batch type?

  1. How is speed of the mill determined?

  1. Should the Commissioner's order determining Annual Capacity be a speaking order?


And procedural confusion continued merrily. While some thought that once the annual capacity is determined is determined, the assessee need not maintain any statutory records or file any returns. He only had to pay the duty as determined. But several Commissioners issued Trade Notices stipulating among others that


  1. RG1, PLA etc. are to be continued

  1. RT 12 returns are to be filed

  1. Removals are to be on invoices

  1. Declarations on parameters are to be filed annually.



The salient features of Section 3A and allied rules and notifications are as follows. For easy reference only hot rolled products are considered here though the section is applicable to induction furnaces and Textile processors.



Section 3A (1) provides for notifying the goods for levy of duty under this scheme. Accordingly a notification No. 37/97 was issued to notify certain products of Chapter 72 under the scheme.


Section 3A (2) provides that were a notification is issued, Government may by rules provide for determination of annual capacity by the Commissioner. Rules have been framed for determining Capacity of production.


Section 3A (3) says that duty on notified goods shall be levied at such rates specified by notification and collected in such manner prescribed. Notifications have been issued fixing the rates of duty.


Section 3A (4) provides for determining the actual production and the duty payable if the actual production was less than the Annual capacity determined by the Commissioner. This is the subject matter of dispute in the now famous Minakshi case.


Under Rule ZP (1), a manufacturer of notified goods is required to pay a total amount calculated at the rate of Rs.400/- PMT on the annual capacity as determined by the Commissioner.


Rule ZP (2) provides for granting abatement when there is no production for continuous periods of not less than seven days.


Rule ZP (3) gives an option to the manufacturer to pay duty at the rate of Rs. 300/- PMT on the annual capacity on a monthly basis subject to the condition that he does not avail the benefit of abatement or the actual production under Section 3A(3). The Minakshi case held that there was a conflict between this rule and Section 3A (3) and so the section will prevail. In effect a manufacturer who has chosen 96 ZP (3), if he , at the end of the year finds that his actual production is far less than the Capacity detrmined, inspite of hos option for ZP(3) and in spite of the rule barring Section 3A(3), will now be eligible to claim the benefit under the section.



My learned colleague, Mr. Prem Kumar Francis, in a scholarly and thought provoking article in the ist November 1999 issue of ELT entitled " REROLLING THE CONFLICT" analysed the problem in detail and opined that there is no conflict between the section and the rule if the intend of the legilature, the need for this law and other factors are considered. While I share his anguish, I am afraid Minakshi is now settled law as far as CEGAT is concerned and already some other cases have been decided following Minakshi. One such case was reported in November 1 ELT. 1999(113) ELT 837 in Avadh Pvt Ltd vs Commissioner, Meerut. So the prayer of Mr. Francis to the CEGAT to re examine the Minakshi case may ot materialise. In fact in Minakshi, the Hon'ble CEGAT had made an observation that if the Government did not agree with the CEGAT, the proper course would be to take the matter to a higher appellate authority. It reiterated that judicial discipline requires the Commissioner to obey the CEGAT directions. So as of now unless perhaps another bench gives a contridictory order, the doors closed with CEGAT and the department is bound to follow the order.



Has Minakshi negated the very foundation of section 3A and brought us back to square one as Mr. Francis says? Unforunately YES.


This is now a "heads I win; tails you lose" situation as far as the manufacturer is concerned. Either way he is going to win. Let us assume a hypothetical situation for a manufacturer X. The annual capacity is fixed at 10,000 MTS. He opts for 96 ZP(3). For the whole year he is required to pay Rs. 30 Lakhs as duty. Now if his production is 15,000 MTS in the year or 20,000 in the year, he pays only Rs. 30 Lakhs. If unfortunately his production is only 5,000MTs in the year, he can claim Section 3A(4) and choose to pay Rs. 20 Lakhs. ( 5000x400). That is if his production( compared to the capacity) goes down by 50%. His duty liability gets reduced by 33.3%, but if it goes up by 100%, NOTHING HAPPENS, he need not pay a paisa excess. And this is the law. If it is so, there is something terribly wrong with it. Does it not defeat the very purpose of Section 3A? And what is the department's means of verifying the actual production? And if this is allowed why Section 3A at all? We can collect duty on the actual production and thereby we will get more duty when there is more production instead of not getting more when there is excess and getting less when there is less production. Every assessee can conveniently choose to opt for 96ZP(3) and at the end of the year if they find or can manipulate to find that the actual production was less, can take shelter under Section 3A(4) and happily claim relief. CERTAINLY THIS WAS NOT THE INTENTION OF THE LEGISLATURE.



The Hon'ble CEGAT has held that when there is conflict between the section and the rule, the section prevails. This is a well settled law. But if a rule as ZP(3) gives a benefit to certain persons subject to the condition that they do not take the benefit under the section if they want the benefit under the rule, can there said to be a conflict between the section and the rule? Any Indian Citizen is eligible to contest for election to the Lok Sabha, but however much I wish to become an MP, my being a Government Servant bars me from entering the Lok Sabha as a member. This is certainly not denial of my right to contest the elections. Nobody has forced me to be a Government Servant, but when I have chosen myself to be one, I have to lose the privilege of contesting.


Nobody has forced the manufacturer to opt for 96 ZP(3). He can as well operate under ZP(1) and avail Section 3A(4), if necessary. But 96 ZP(3) is a concession, a concession with strings; if you want to pay duty @ Rs. 300/-, no abatements, no reductions. This is a contract; "I give you a concession in duty, you forego your right on some other concessions"



Infact there is a similar issue in Central Excise which was also the subject of legal battles for years.


As per Rule 224(2A), for the goods cleared after 11AM on the budget day , if there is increase of duty, the increased rates are applicable. But as per the Provisional Collection of Taxes Act, the increase is applicable from the day following the Budget Day. There are afew decisions which held that the higher duty collected on the budget day is illegal, but one landmark judgement qoute





In any case there the very question of levy was involved and no such serious question is involved here.



To resolve the confusion, I have a humble suggestion to the Government. Delete Section 3A(4). It is unnecessary and troublesome. Whatever is aimed at by the concept of Annual capacity of Production is defeated by this sub section. If the manufacturer has an option to pay less duty when there is less production and has no obligation to pay more duty when there is more production, the law is heavily loaded against the state. As such the provisions of the Section, Rules and Notifications pertaining to Annual capacity are fair and just and with in built safety mechanism for the benefit of the manufacturers. There should be equity in favour of the Government also. Once we go for the concept of annual capacity of production, we should forget the concept of actual production.



That should be the best possible solution as yet another order by CEGAT and appeals are bound to take years and in the mean time, Government is going to lose heavily in duties. And before long , evasion techniques using this section will be perfected and then we will not be back to square one but somewhere outside the square and will realise that the pre 1997 system inspite of high evasion was better.



Before that happens the remedy should start. The Hon'ble CEGAT says that there is conflict between the Section and the Rule and the Government knows that that was not the intention. So the best remedy is amend the law to give effect to the intention of the legislature.


EXCISE LAW TIMES – 01.12.1999 – A 177


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