INTERMEDIATE  EXAMINATION (Old Syllabus)

December 2001 - Indirect Taxation

SUGGESTED ANSWERS -

Q.1 (a) Under section 3 of the Central Excise Tariff Act, 1985, the Central Government has emergency powers to increase the duty of Excise. Under what circumstances and to what extent can these be exercised? (b) Can a manufacturer claim exemption from payment of Excise duty on any intermediate product manufactured and used within the same factory? Explain the provisions. (c) Explain the applicability of Courier Imports Regulations under the Customs Act, 1962. (d) Explain anti-dumping duty and its relevance in the present day scenario of globalisation and free trade. (e) Describe briefly the offences that attract penal provisions under section 10 of CST Act, 1956. – (4 x 5 = 20 marks)

Answer 1.(a) Duty can be levied or enhanced only by Parliament. Central Government can only exempt the duty, partly or fully. However, if Central Government is of the opinion that it is necessary to take immediate action, it may increase the duty as per section 3 of Central Excise Tariff Act.  The limit to which duty can be increased is as follows: i)if no duty was levied, then maximum duty leviable will be 50% ad valorem; ii) if duty was already levied, the rate of duty can be increased only to twice the existing rate of duty. The notification under this section should be placed before Parliament within seven days after it assembles, and Central Govt. shall seek approval of Parliament within 15 days, The Parliament may approve, annual or modify the notification, but it will not affect the validity of excess duty already recovered. [In January, 2002, an ordinance has been issued and the ceiling of 50% has been removed. Now, Central Government can increase excise duty to any extent without ceiling].

Answer 1(b) Intermediate products manufactured within the factory are exempt from excise duty in following cases –

(a)   If consumed captively for manufacture of : i) capital goods which are eligible for Cenvat Credit or ii) final products eligible for Cenvat made from inputs that are eligible for Cenvat. [Notification No. 67/95 dated. 16/03/1995]. This exemption is not available if final product is exempt from duty or is chargeable to ‘nil’ rate of duty.

(b)   As per excise provisions, no duty is payable if final product is supplied to a unit in SEZ, Free Trade Zone, 100% EOU, Electronics Hardware Technology Park,  Software Technology Park. In such cases, duty on intermediate product is not payable even if final product is cleared without payment of duty. Though the notification does not mention actual exports, it has been held that no duty is payable on intermediate product if final  product is cleared for export under bond without payment of duty.

(c)   Parts manufactured in factory for repairs or maintenance of machinery installed within the factory.

Answer 1(c) Imports and exports by couriers are treated as imports and exports as any other mode.  It is not treated as ‘baggage’.  There is no restriction on value of goods that can be brought through courier.  Courier imports and exports(clearance) Regulations, 1998 specify the procedure.

Import through courier is permitted only from Mumbai, Delhi, Chennai, Bangalore , Hyderabad, Ahmedabad, Jaipur and Kolkata. Weight of individual package should not exceed 70 kgs. Goods requiring any specific condition to be fulfilled under any other Act, rule or regulations are not permitted. Some items like animals or its parts, plants, perishables, precious stones, chemical products are not permitted to be brought through couriers. However, they can bring life saving drugs. Free gift samples upto Rs. 5,000 can be imported per consignment.

Import of gems and jewellery of EOU/EPZ and export of cut and polished diamonds, gems and jewellery is permitted if value of each consignment does not exceed Rs. 25 lakhs.

Only authorised couriers can import goods under the regulations. They should be registered with Commissioner of Customs and follow prescribed procedures for importing / exporting the goods.

Answer 1(d) Dumping means selling goods below normal price. With the world moving towards international economic co-operation, dumping of goods at a price well below the normal price with ulterior motives is incompatible. This is a monopolistic practice, with a view to not only disposing off surplus goods but also to cripple the domestic industry and capture entire market. In order to protect Indian industry from serious injury by dumping of goods, Central Govt. can impose antidumping duty under Sec. 9A of Customs Tariff Act.

There are however, some restrictions to imposing anti dumping duty in case of WTO countries and countries which are given ‘most favoured nation’ status. Nevertheless, anti-dumping duty  may be imposed if such act of dumping causes injury to domestic industry or retards establishment of industries. Detailed provisions are contained in Customs Tariff (Identification, Assessment, Collection of Anti dumping duty on dumped articles and determination of Injury) Rules, 1995. The process starts with identification of products that suffer from such dumping, finding the margin of dumping and extent of injury. The anti-dumping duty can be equal to ‘dumping margin’ or ‘injury margin’ which ever is lower. The dumping margin is fixed by ‘Designated Authority’ after giving notice and hearing to parties. Provisional duty can also be imposed upto 6 months, on basis of preliminary finding.

Answer 1(e) Sec. 10 of CST Act provides that punishment upto six months of simple imprisonment or with fine or both can be imposed for the following offences under CST Act :i) Knowingly giving declaration in form C, E-I, E-II, F or H which the person knows, or has reason to believe, to be false. ii) Not registering under CST Act when required to be registered. iii)  False representation by a registered dealer that the goods being purchased are covered under his Certificate of  Registration for concessional rate. iv) Falsely representing to be a registered dealer. v) Misusing or using for different purpose the goods obtained under C forms at concessional rate. vi) Having in possession C forms that are not obtained as per provisions of the Act. vii) Collecting any amount representing as Central Sales Tax by an unregistered dealer in contravention of provisions of Act. viii) Provisions regarding offences in ‘General Sales Tax Laws’ (except those enumerated above) are applicable in respect of offences committed by dealers in that State.

Q.2 Determine the value on which Excise duty is payable in the following instances. Quote the relevant section / rules of Central Excise Law. (a) A. Ltd. sold goods to B Ltd., at a value of Rs. 100 per unit, In turn, B Ltd. sold the same to C Ltd. at a value of Rs. 110 per unit. A Ltd. and B Ltd. are related, whereas B Ltd. and C Ltd. are unrelated. (b) A Ltd. and B. Ltd. are inter-connected undertakings, under section 2(g) of MRTP Act. A Ltd. sells goods to B Ltd. at a value of Rs. 100 per unit and to C Ltd. at Rs. 110 per unit, who is an independent buyer. (c) A Ltd. sells goods to B Ltd. at a value of Rs. 100 per unit. The said goods are captively consumed by B Ltd. in its factory. A Ltd. and B Ltd. are unrelated. The cost of production of the goods to A Ltd. is Rs. 120 per unit. (d) A Ltd. sells motor spirit to B Ltd. at a value of Rs. 31 per litre. But motor spirit has administered price of Rs. 30 per litre, fixed by the Central Government. (e) A Ltd. sells to B Ltd. at a value of Rs. 100 per unit. B Ltd. sells the goods in retail market at a value of Rs. 120 per unit. The sale price of Rs. 100 per unit is wholesale price of A Ltd. Also, A Ltd. and B Ltd. are related. (f) Depot price of a company are –

Additional information: i) Quantity cleared to Amritsar Depot - 100 units ii) Quantity cleared to Bhopal Depot - 200 units iii) Quantity cleared to Cuttack Depot - 200 units iv) The goods were cleared to respective depots on 01/01/2001 and actually sold at the depots on 01/02/2001. [2 + 2 +2 + 2 +2 + 6 = 16 marks]

Answer 2.(a) Transaction value Rs. 110 per unit (Rule 9 of Transaction value Rules). [Sale to unrelated party]. (b) Transaction value Rs. 100 per unit for sale to B and Rs 110 for sale to C - Rule 10 read with Rule 4 [Note that inter connected undertakings will be treated as ‘related persons’ for purpose of excise valuation only if they are ‘holding and subsidiary’ or are ‘related person’ as per any other part of the definition of ‘related person’. Note that A is selling directly to C as per the question, and not through B Ltd.]. (c) Transaction value will be Rs 100, - section 4(1) - In case of sale to unrelated person, question of cost of production does not arise. (d) Transaction value Rs 31. – section 4. - Since the goods are actually sold at this price, administered price is not considered. (e) Transaction value Rs. 120 per unit - Rule 9 read with section 4 of Central Excise Act. Sale to an unrelated buyer. [Under new rules, there is no concept of ‘wholesale price and retail price’] (f) Under Rule 7, the price prevailing at the Depot on the date of clearance from the factory will be the relevant value to pay Excise duty. Hence - i) Clearance to Amrutsar  depot will attract duty based on the  price as on 01/01/2001. Transaction value Rs. 110* 100 units = Rs. 11,000/- ii) Clearance to Bhopal depot. Depot price on 01/01/2001 Transaction value Rs. 120 * 200 units = 24,000/- iii) Clearance to Cuttack Depot. Depot price on 01/01/2001. Transaction value Rs. 130 * 200 units = Rs. 26,000/-   Note The relevant date is 01/01/2001, since the goods were cleared to the depots on that date. No additional duty is payable even if goods are later sold from depot at higher price.

Q.3 Write short notes on the following with reference to Central Excise Law: (a) Fortnightly payment of Excise duty. (b) Procedures for claiming ‘Rebate’. (c) Restrictions on removal of Excisable goods on the Budget day. (d) Date for determination of ‘duty’ and ‘Tariff valuation’. [ 4 x 4 = 16 marks]

Answer 3. (a) Earlier, excise duty was payable before clearance of goods from the factory. However, as per the amended provisions of Central Excise Rules, Excise duty is payable on fortnightly basis by all units except SSI units. The provisions are : i) For the clearance pertaining to the period from the 1^st to 15^th of every month, duty is payable by the 20^th of the same month. ii)  For clearance pertaining to the period from the 16^th to the last day of the month, duty is payable by the 5^th of the following month.  iii) In the month of March, in respect of second fortnight (i.e. 16^th to 31^st March), duty is payable by 31^st March itself. - - SSI units are permitted to pay duty on monthly basis. For all clearances effected during a month, duty is payable by the 15^th of the following month. Even in case of March clearances, duty is payable by SSI units by 15^th April and not by 31^st March.

Answer 3(b) Rule 12 of (earlier) Central Excise makes provision to allow manufacturer to export goods by first clearing then on payment of duty and then claiming refund /rebate. An application in Form R is to be submitted with the following documents.  i) Shipping bill ii) Export invoice iii) Duplicate copy of AR. 4 iv) Bill of Lading  v) Packing slip vi) market price declaration, v) Proof of duty payment  The rebate must be claimed within 6 months from the date of export of goods. 

Answer 3(c) Presently, there are no restrictions on clearances of goods on budget day. The goods can be cleared under old rates only. The new rates announced in budget become effective from next day, e.g. if budget is presented on 28^th February, the new rates become effective from 1^st March. Earlier, stock statement was required to be submitted by 5 PM on pre-budget day. Moreover, clearance on budget day was required to be made under supervision of excise officer and with permission of Excise Commissioner. Now, all these restrictions have been removed.

Answer 3(d) As per Rule 9A of Central Excise Rules, date for determination of duty and tariff valuation is as follows – (i) In case of goods removed from the factory or warehouse, rate and value applicable will be as on date of removal (ii) In case of goods removed from a factory for export under bond without payment of duty, but diverted to home market, relevant date will be rate when goods are diverted in local market  (iii) In case of molasses, manufactured in a Khandsari Sugar factory, the date on which molasses is received in the factory of the procurer . (iv) Where goods are re-warehoused, the date on which duty is paid or application of removal is made. v) Where any person diverts the goods, the date on which the duty is paid. vi)  In other cases, the date on which the notice of demand is issued or the date on which duty is paid, which ever is earlier.

Q 4 (a) An actual user imports following goods from England per S. S. Vishal: (1) Second hand numerically controlled horizontal lathe machine - Tariff heading – 84.5811, Value FOB - 1,000/- Pound Sterling (2). A. C. motors - Tariff heading – 85.0110, Value FOB - 500/- Pound Sterling. - - Other relevant data are: - Exchange rate 1 UK Pound = Rs. 65, Freight – 150 UK Pounds, Insurance – 25 UK Pounds. - - Rate of duty : Basic customs duty - 25%, CVD - 16%, SAD - 4%, Ignore landing charges. - - It is found that the lathe machine is undervalued. It is proposed to load the FOB value of the lathe machine by 25%. Party does not want show cause notice and personal hearing. Compute – (i) Assessable value; (ii) Total duty payable. Q 4 (b) A person makes an unauthorised import of 1000 pieces of ophthalmic rough blanks CIF priced at $ 1 per piece by air from USA (Tariff heading 70.1510). The consignment is liable to be confiscated. Import is adjudicated. AC gives to the party an option to pay fine in lieu of confiscation. It is proposed to impose fine equal to 50 % of margin of profit. The market price is Rs 100 per piece of opthalmic rough blank. The rates of duty are - Basic customs - 35%, CVD - nil, SAD - 4%, Exchange rate is - $ 1= Rs. 45. Compute: i) Amount of fine; ii) Total payment to be made by party to clear the consignment. What is the maximum amount of fine that can be imposed in this case? Quote section. [8 + 8 = 16 marks]

Answer 4. (a) Since FOB value of lathe machine is being loaded by 25% for under-valuation, the FOB Value of lathe machine for purpose of assessment is 1250 UK Pounds. Value of AC Motors is 500 UK Pounds. Thus, total FOB value for purposes of customs valuation is 1,750 UK Pounds. - - Total insurance and freight is 175 UK Pounds [freight is 150 UK Pounds and insurance in 25 UK Pounds]. This will be allocated on lathe machine and AC motors in proportion to value (as no other basis is available). Thus, allocation of freight and insurance charges will be in ratio of 1250/1750 and 500/1750, i.e. 125 UK Pounds to lathe machine and 50 UK Pounds to AC motors.

Hence, CIF value of lathe machine for purpose of customs valuation is 1,375 UK Pounds (1,250 +125) i.e. Rs 89,375 ( @ Rs 65 per UK Pound) and CIF value of AC motors is 550 UK Pounds (500 + 50), i.e. Rs 35,750 (@ Rs 65 per UK Pound). The same will be Assessable Value as landing charges are required to be ignored, as given in the example. [Otherwise, landing charges @ 1% will be addible].

Rate of Duty for both goods is - Basic duty 25%, CVD, 16 % ,SAD 4%. If AV is Rs 100, basic duty will be Rs 25. CVD @ 16% is payable on Rs 125 (AV + Basic). Thus, CVD will be Rs 20/-. SAD @ 4% will be payable on Rs 145 (AV + Basic + CVD). Thus, SAD is Rs 5.8. Hence, total duty is Basic – Rs 25, CVD – Rs 20 and SAD – Rs 5.8, i.e. Rs 50.80. Thus, total duty incidence is 50.8% of Assessable Value.

Hence, total duty on  lathe machine is Rs 45,402.50 (50.8% of Rs 89,375) and total duty on AC motors is Rs 18,161/- (50.8% of. Rs 35,750). Thus, total duty payable is Rs 63,563.50  (Rounded off to Rs 63,564).

Answer 4(b) Declared CIF value of goods is $ 1 per piece and price for consignment of 1000 pieces will be $ 1000  (CIF). Rate of exchange is $ 1 = Rs. 45. Hence, CIF value is Rs 45,000. Add landing charges @ 1%. Hence, total Assessable Value in Rupees will be  Rs. 45,450/-. [Rs 45,000 CIF plus Rs 450 landing charges]

Basic duty @ 35% will be Rs 15,907.50 (35% of Rs 45,450). There is no CVD. SAD @ 4% is payable on AV + Basic i.e. on Rs 61,357.50 (45,450 + 15,907.50). Thus, SAD is Rs 2,454.30. Hence, total duty payable is Rs 18,361.80 (15907.50 + 2,454.30) [rounded off to Rs 18,362].

Total cost to the importer is price plus duty, i.e. Rs 45,450 plus Rs 18,362. Thus, total cost to the importer is Rs 63,812/-. The market value is Rs 100 per piece, i.e. Rs 1,00,000 for the consignment. Hence, his margin of profit is Rs 36,188. Fine equal to 50% of Margin of profit will be Rs 18,094/-.

Hence, total amount payable is – Duty – Rs 18,362 and fine Rs 18,094 i.e. Rs 36,456/-.

The maximum amount of fine that can be imposed as per proviso to Sec. 125 is market value of goods less amount of duty. Hence, the maximum fine that can be imposed in Rs 81,638/- (Market price Rs 1,00,000 less amount of duty Rs 18,362).

Q.5 Distinguish between the following with reference to the Customs Act, 1962: (a) SEZ (Special Economic Zone) and EPZ (Export Promotion Zone); (b) CVD and SAD; (c) Cess and Duty; (d) Penalty and Fine. [4 x 4 = 16 marks]

Answer 5(a) SEZ and EPZ - SEZ (Special Economic Zones) have been set up on Chinese model. In SEZ, export production can take place relatively free from elaborate rules and regulations. There is greater freedom of operations. EPZ (Export Processing Zones) is a slightly restricted version of SEZ. [In fact, some earlier EPZ were converted into SEZ in November, 2000]. Major features of distinction between SEZ and EPZ are : i) No minimum export performance (NFEP) is laid down in SEZ, unlike in EPZ ii)  Joint monitoring is done by Development Commissioner and Customs. iii) Duty with interest is recovered only on shortfall in achieving NEEP iv) Unlimited sales to DTA at full duty in case of SEZ, while it is at concessional rate of 50% for EPZ. v) Duty free material procured is to be utilised in 5 year in SEZ, as against 1 year in EPZ vi) All exports in EPZ are self certified, unlike is EPZ. viii) 100% foreign investment is permitted in SEZ.

Answer 5(b) CVD and SAD - CVD (Countervailing duty) is a duty of Customs.. This is levied u/sec 3(1) of the Customs Tariff Act, and is leviable even if no such goods are produced in the country. SAD @ 4% is levied under Sec. 3A(1) of the Customs Tariff Act. The rationale of this duty is that indigenous goods are subjected to Sales Tax , local taxes and other charges, while imported goods are not subjected to such charges.  Hence to put the imported goods on comparable basis , SAD is levied .  The duty is calculated after taking into account the amount of CVD. The CVD is equivalent to excise duty while SAD @ 4% is normally equivalent to sales tax. The purpose of both these duties is to put the indigenous industry on an even keel with imports

Answer 5(c) Cess and Duty:- Cess is a charge levied and collected for specified purposes. It may be on production of goods or on export of goods. Under Customs Tariff Act, certain cesses are leviable on specified articles of export, under various enactments of Govt. of India, e.g. Tobacco Cess Act, 1986.  Cess is collected as duty of Customs and handed over to agencies in charge of administration of the Commodity concerned. Cess is also levied on indigenous manufactured goods like automobiles, beedis, jute products etc. The cess is levied under various Acts for specific purposes. The rules, procedures and penalties for collecting duty is same as that of excise duty. Cess may be advalorem as well as specific. On the other hand, duty (customs duty or excise duty) is a kind of indirect tax. Duty is for general revenue purposes, while Cess is for a definite purpose. Duty becomes a part of general revenue of Government of India.

Answer 5(d)  Penalty and Fine :- Penalty can be imposed by departmental authorities for offences under the Act. These are quasi judicial authorities. On the other hand, fine is imposed by Magistrate, who is a judicial authority. One exception is that u/s 125 of Customs Act, fine in lieu of confiscation of goods can be imposed by quasi judicial authorities while adjudicating a case. This ‘redemption fine’ is different from ‘fine’ imposed by Magistrate, which is by way of punishment. The redemption fine is on the offending goods. A person who is interested in taking possession can pay the redemption fine and can take delivery of the goods. If no amount is paid, the goods become absolute property of Government. The ‘fine’ imposed by magistrate in prosecution proceedings is on the offending person.

Q. 6 Briefly discuss the following: (a) Searches under Customs Act: (b) Adjudicating authority, adjudication and departmental adjudication under Customs Act; (c) Recovery of sums due to Government; (d) Warehousing without warehousing. [4 x 4 = 16 marks]

Answer 6(a) Searches under Customs Act are stipulated under three categories : i) searches of premises, godowns, bank vaults, etc., u/s 105; ii) searches of persons under Customs Area u/s 100; iii) searches of conveyances, vehicles, etc. u/s 106. - - A basic requirement of search is that proper officer should have reason to believe that goods/documents are liable to confiscation. In cases of search u/sec 105, search of a female must be conducted by a female. It is customary to bring two or three independent persons known as ‘panchas’ and the search is conducted in the presence of the owner and the ‘panchas’. After the search, a ‘panchanama’ is to be prepared and duly signed by the owner/the person in possession. A list of items is prepared and a copy is given to the party searched. Report of the search is to be submitted to Commissioner.

Answer 6(b) - Section 2(a) of Customs Act defines adjudicating Authority as any authority competent to pass any order or decision under the Act, but does not include the Board (CBEC), or Commissioner (Appeals) or Appellate Tribunal. Adjudication is a quasi judicial process. It arises, when some offence or irregularity occurs and it is to be decided quasi-judicially. The process involves issue of show cause notice, reply by the person, personal hearing and coming to a decision by issuing a order with reasons. The order has legal force. Commissioner of Customs and Additional Commissioner have power to adjudicate cases without limit as per Sec. 122, Restriction of Rs. 10 lakhs placed on Additional or Joint Commissioner is only by administrative instructions. Assistant / Deputy Commissioner also has adjudicating powers.

Answer 6(c) Section 142 of Customs Act provides that where any duty demanded or drawback is to be recovered or penalty is to be recovered from any person, it can be done by - i) deducting from any amount payable by any Customs Officer to such person ; ii) detaining and selling goods belonging to such person; iii) enforcing the terms of bond; iv) detaining any property belonging to such person; v) issuing a detention certificate to the District Collector where the property of such person is situated, to recover as land revenue. - - Sec. 142 (i) and (ii) provide that on authorisation from the Commissioner, Asst. Commissioner may detain any movable/immovable property in possession of the person and recover the amounts due by selling the same. Procedure has been prescribed for detaining and then selling the goods.

Answer 6(d) Under Sec. 49 of the Customs Act, where goods imported for home consumption, whether dutiable or not, cannot be assessed for want of information, such goods may be warehoused in a public warehouse, or in its absence, in a private warehouse on application in writing by the importer. On application by the importer, the Asst. / Deputy Commissioner may allow such goods to be warehoused without assessment. The purpose is to save the goods from demurrage, pilferage in docks. Goods are then assessed and cleared from warehouse.

Normally ‘warehousing’ is done after goods are assessed. However, u/s 49, goods are stored in warehouse without enforcing the provisions of warehousing, i.e., without assessment, and hence it is called ‘warehousing without warehousing’. In actual practice, such cases are rare, but the provisions are very beneficial if such occasion arises.

Q.7 (a) State whether the following duties are entitled for ‘Cenvat’ credit. Quote the relevant rules of Central Excise. i) Cess, ii) Basic Excise Duty (Cenvat), iii) AED (T & T), iv) AED (GSI), v) Special Excise Duty, vi) National Calamity Contingent Duty, vii) Additional Customs Duty. (b) Enumerate the groups of commodities excluded from the purview of rule 57AD of Cenvat Rules. (c) Under Tariff Notification No. 6/2001 meant for SSI units, mention the clearances not includible in the aggregate value of clearances. [7+4+5 = 16 marks]

Answer 7(a) i) cess - No Cenvat ii) BED - Cenvat is permissible iii) AED (T & T) - Cenvat is permissible  iv) AED (GST) - Cenvat is permissible v) Special Excise Duty - Cenvat is permissible vi) National Calamity Contingent Duty - Cenvat is permissible   vii) Additional Customs Duty - Cenvat is permissible.  In the case of AED and NCCD, the duty paid on inputs can be utilised only for payment of AED and NCCD respectively, as the case may be.

Answer 7(b) Groups of commodities excluded from the purview of Rule 57 AD of Cenvat Rules [Now rule 6(3)(a) w.e.f. 1.7.2001] are as follows - i) Final products falling under Chapters 50 to 63 of ETA, 1985; ii) tyres used in animal drawn vehicles or hand carts and their tubes; iii) news print in rolls or sheets. In case of these goods, if the final product is cleared without payment of duty, the Cenvat credit availed on inputs has to be reversed. In case of other products, an 8% ‘amount’ is payable.

Answer 7(c) The following clearances are not includible in the aggregate value of clearances in respect of SSI units’ i) clearances that are exempt from the whole of Excise duty leviable thereon; ii) clearances having a brand name or trade name of another person, which are ineligible for exemption; iii) clearances of specifies goods that are used as inputs for further manufacture of any specified goods within the factory of production of the specified goods; iv) job work if done under notification No. 214/86-CE (v) Goods exported under bond without payment of duty (vi) clearances of strips of plastics used within the factory of production for wearing of factories or for manufacture of sacks or bags made of polymers of ethylene or propylene. [Note that the actual notification is 8/2001-CE and not 6/2001-CE as mentioned in the question set].

Q.8 (a) Distinguish between ‘sale in the course of export’ and ‘export sale’. (b) With reference to section 5(3) of the CST Act, 1956, examine whether the following goods are ‘same’. i) ‘Rice’ and ‘Paddy’, ii) ‘Copper wire’ and ‘Insulated wire’, iii) ‘Cashew nuts’ and ‘Cashew nut kernels’, iv) ‘Fresh prawns’ and ‘Dressed prawns’ (c) Determine the rate of tax applicable under CST Act 1956 and fill up the blanks from the following information:

[4+4+8 = 16 marks]

Answer 8(a) The term ‘export sale’ is not as such used or defined in CST Act. The term ‘export sale’ is used for direct exports. ‘Sale in the course of export’ is a broad term. As per section 5 of CST Act, ‘sale is deemed to be in the course of export if (a) sale occasions the export or (b) is effected by transfer of documents of title to goods after goods have crossed customs frontiers of India. As per section 5(3), even penultimate sale is also deemed to be in the course of export.

Thus, if a sale occasions export, i e. if export is the result of sale, it is in the course of export. Thus, even indirect sale could be ‘sale in the course of export’.

Answer 8(b) i) Rice and Paddy - same goods, as per specific provision of section 15(ca) of CST Act. ii) Copper wire and Insulated wire - not same goods. iii) Cashew nuts and cashew nut kernels - not same goods – Vijayalakshmi Cashew Co. v. Dy CTO 1996(1) SCC 468 = 100 STC 571 (SC 3 member bench) iv)  Fresh prawns and Dressed prawns - same goods – Sterling Foods v. State of Karnataka (1986) 3 STC 239 (SC) = AIR 1986 SC 1809. If any change results in a new, separate commercial commodity, it cannot be said that the goods are one and the same u/sec. 5(3) of CST Act, 1956.

Answer 8(c) The rate of tax applicable in each case is as follows –

Notes – (1) In case of declared goods, sales tax rate for sale within the State cannot exceed 4%. To that extent, the rate of local tax in case of products D, E, F and G as shown should be read as 4% if the goods are ‘declared goods’.(2) When local sales tax rate is less than 4%, the same rate applies to inter-state sale, even to un-registered dealers, as per section 8(2A) of CST Act.

June 2001 - Indirect Taxation -

SUGGESTED ANSWERS -

Q 1. Distinguish between the following: a) “Penultimate Sale” and “Consignment Sale” under CST Act, 1956. b) “Normal Price” and “Transaction Value” under Central Excise Act, 1944. c) “MODVAT” and “CENVAT” under Central Excise Rules. d) “Territorial Waters” and “Indian Customs Waters” under The Customs Act, 1962. e) “Interest on delayed payment of duty” and “Interest on delayed refunds” under Customs Act, 1962. [4 x 5 = 20 marks]

Answer 1 (a) Penultimate sale is the sale before final export sale. It is the last sale or purchase preceding the sale or purchase which occasions the export. The penultimate sale is exempt from sales tax, even if it is not actual export sale. The ultimate exporter has to submit form H to the seller who is making penultimate sale. This exemption is given as export incentive, as export is a specialised business and many manufacturers are not in a position to undertake direct exports. In case of ‘consignment sale’, there is no ‘sale’ when goods are dispatched from factory / head office. Goods are dispatched to branch, depot or consignment agent in other State. These are stocked and then sold from that State. In case of consignment transfer, there is no ‘sale’ and no CST is payable. The branch / depot / consignment agent has to submit form F to the consignor. 

Answer 1(b) As per section 4 of Central Excise (as existed upto 30.6.2000), excise duty was payable on ‘Assessable Value’ which was based on ‘normal’ price i.e. the price at which goods are normally sold in wholesale market to an unrelated buyer where price is sole consideration. It was a notional price. The ‘normal price’ had to be determined with reference to Valuation Rules, 1975. The old section 4 was replaced by new section 4 w.e.f. 1.7.2000. As per new section 4, ‘Assessable Value’ is required to be determined on the basis of ‘transaction value’ i.e. the actual price realised. Even in this case, the sale should be to unrelated person and price should be sole consideration. The transaction value has to be determined with reference to Valuation Rules, 2000. The new section 4 is a shift from ‘deemed price’ i.e. ‘notional price’ to ‘actual price’ subject to certain conditions.

Answer 1(c) Modvat (Modified Value Added Tax) was replaced by Cenvat (Central Value Added Tax) w.e.f. 1.4.2000. Principally, there is no difference between Cenvat and earlier Modvat. However, some differences are given below -

Answer 1(d) Territorial waters means that portion of sea which is adjacent to the shores of a country. ‘Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zone Act, 1976' has been passed. Section 3 of the said Act specify that territorial water extend upto 12 nautical miles from the base line on the coast of India and include any bay, gulf, harbour, creek or tidal river. (1 nautical mile = 1.1515 miles = 1.853 Kms). Sovereignty of India extends to the territorial waters and to the seabed and subsoil underlying and the air space over the waters.

Section 2(28) of Customs Act state that 'Indian Customs Waters' means the waters extending into the sea up to the limit of contiguous zone of India under section 5 of the Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act, 1976, and includes any bay, gulf, harbour, creek or tidal river. As per provisions of that Act, contiguous zone of India comes immediately after territorial waters. The outer limit of contiguous zone is 24 nautical miles from the nearest point of base line. Thus, area beyond 12 nautical miles and upto 24 nautical miles is 'contagious zone of India'. The Central Government has powers to take measures in this area for security of India and immigration, sanitation, customs and other fiscal matters. [section 5(4) of Territorial Waters - . - . - . - Act, 1976]. Thus, 'Indian Customs Waters' extend upto 12 nautical miles beyond territorial waters, i.e. total 24 nautical miles from base line. Significance of definition of 'Indian Customs Waters' is that powers of customs officers extend upto 12 nautical miles beyond territorial waters.

 Q 2. a) State the different types of duties leviable on Excisable goods. Also state under which Act such duties are levied. b) Name at least eight commodities on which Excise duty is leviable under section 4A of the Central Excise Act, 1944. c) Determine the transaction value and the Excise duty payable from the following information: i) Total Invoice Price Rs. 18,000 ii) The Invoice Price includes the following: [4+4+8 = 16 marks] 

Answer 2(a) – Following type of duties are leviable on excisable goods.

Basic excise duty to be termed as Cenvat - Basic excise duty (also termed as Cenvat as per section 2A of CEA added w.e.f. 12-5-2000) is levied at the rates specified in First Schedule to Central Excise Tariff Act, read with exemption notification, if any. – section 3(1)(a) of CEA]. The present general rate is 16% w.e.f. 1-3.2000. There is partial exemption to a few products.

Special duty of excise - Some commodities like pan masala, cars etc. are leviable with special duty. – section 3(1)(b) of CEA]. The present rate is 16% w.e.f. 1.3.2001. The products are mainly luxury goods.

National Calamity contingent Duty – A ‘National Calamity Contingent Duty’ has been imposed vide section 136 of Finance Act, 2001. This duty is imposed on pan masala and cigarettes.

Additional Duty on goods of special importance - Some goods of special importance are levied Additional Excise under Additional Duties of Excise (Goods of Special Importance) Act, 1957. Some items covered are textile articles like cotton fabrics, silk and wool fabrics, man-made fibres, terry fabrics, metallised yarn, embroidery; sugar and cigarettes. These goods are same as ‘declared goods’ under Central Sales Tax Act. The 'Additional Duty' is in addition to excise duty.

Additional Duty on Textile Articles - Additional excise duty of 15% on certain textile and textile articles like articles of silk / wool / cotton, man-made filaments, metallised yarn etc. is imposed under Additional Duties of Excise (Textile and Textile Articles) Act, 1978. The revenue from these levies goes fully to Central Government.

Duty on Medical and Toilet preparations - A duty of excise is imposed on medical preparations under Medical and Toilet Preparations (Excise Duties) Act, 1955.

Additional duty on mineral products - Additional duty on mineral products (like motor spirit, kerosene, diesel and furnace oil) is payable under Mineral Products (Additional Duties of Excise and Customs) Act, 1958.

Cess - A cess has been imposed on certain products under various Acts.

Answer 2(b) Duty is leviable u/s 4A on about 85 products, based on MRP printed on the packing. Some of the products covered are given below -

Answer  2(c) It is assumed that the Invoice Price of Rs 18,000 is depot price. Hence, deduction of insurance and transport charges from factory to depot will not be available. The deductions available will be – Sales Tax Rs 1,000. Surcharge on Sales Tax – Rs 100 and Octroi Rs 100. Thus, net price excluding taxes on final product (but inclusive of excise duty) is Rs 16,800. The rate of excise duty is 40% [16% basic plus 24% special]. Hence, duty payable is as follows –

                                16,800 x 100
Assessable Value =  .                 .   = Rs 12,000
                                     140

Excise duty payable (basic plus special) is 40% of Rs 12,000 i.e. Rs 4,800.

Q 3. Write short notes on any four of the following with reference to the Customs Act, 1962 a) Duty Entitlement Passbook Scheme (DEPS). b) Foreign Privileged Person. c) Summons under Customs Act, 1962. d) All Industry Rate of Drawback. e) Noting of Bill of Entry. [4 x 4 = 16 marks]

Answer 3 (a) The DEPB scheme has been introduced w.e.f. 1st April, 1997. The scheme is similar to Cenvat credit scheme. The exporter gets credit when he exports the goods. The credit is on basis of rates prescribed. This credit can be utilised for payment of customs duty on imported goods. The object of the scheme is to neutralise the incidence of basic customs duty and surcharge on customs duty on the import content of export product. The neutralisation is provided by way of grant of duty credit against the export product. The duty credit is calculated by taking into account deemed import content of the export product as per standard input output norms (SION) and determine the basic and special customs duty payable on such 'deemed imports'. The value addition by export of product is also taken into account.

Under this scheme, exporters will be granted duty credit on the basis of notified entitlement rates. The entitlement rates will be notified by DGFT based on standard input-output norms (SION). The entitlement rates will be a % of FOB. Government has announced DEPB credit rates for more than 5,000 items. In case of items where DEPB rate is more than 10%, value caps are being fixed based on average export price.

Value of exports in free foreign exchange. (i.e. export earnings) should be in freely convertible currency like US dollars, French Francs, British Pounds, DM, Yen etc. Thus, the DEPB scheme is not available in case of exports to Nepal or Bhutan where we have Rupee trade or to Russia etc. if the export is not in hard currency.

The credit of duty in pass book will entitle the exporter to import raw materials, components, packaging materials etc. duty free. Goods which are otherwise eligible for imports can be imported under the credit. However, capital goods cannot be imported under DEPB.

DEPB scrip is transferable and present premium is about 10%. The premium is because goods imported under DEPB are exempt from SAD. DEPB scheme is popular for products where drawback rates are not available or are low.

Answer 3(b) Foreign Privileged Persons (Regulation of Customs Privileges) Rules, 1957 make provisions for privileges to specified foreign privileged persons i.e. Diplomats (High Commissioner, Ambassadors, Consul General etc). The imports of goods for their personal use or official use are allowed duty free. They have to produce exemption certificate in prescribed form signed by Head of Diplomatic Mission. Generally, the goods are not checked, but these can be checked if there is suspicion.

Answer 3(c) Section 108 of Customs Act authorises Customs officers to issue summons. The term 'summons' means asking a person to appear before the named authority and give evidence and produce documents or other things. Person summoned is bound to attend and state the truth upon any subject respecting which they are examined. [Section 108(3) of customs Act].

These power of 'summons' are different than powers of Courts to issue summons under CPC or CrPC. The power of 'summons' to investigating officer only means 'demand presence of ' or 'call upon a person to appear'. The investigation officer cannot administer oath to person being interrogated.

Summons for producing documents should specify which documents are required. Authority issuing summons should apply his mind with regard to necessity to obtain and examine documents mentioned in the order.

Statement can be recorded during such enquiry. It should be recorded before a Gazetted Officer. Such statement can be used against the person during any legal proceedings. It is admissible as evidence, even if retracted later. Statement should be signed by the person.

Section 108(3) of Customs Act specifically provide that all persons summoned shall be bound to state the truth upon any subject respecting which they are examined and to produce such documents and other things as may be required. Thus, there is no right of silence. [Under section 164 of Cr PC, there is no compulsion that he must tell the truth. Statement is optional]. These are ‘judicial proceedings’.

Answer 3(d) An exporter is entitled to get rebate of duty on basis of duty drawback rate. All industry rate of duty drawback is fixed under rule 3 of Drawback Rules by considering average quantity and value of each class of inputs imported or manufactured in India. Average amount of duties paid is considered. These rates are fixed for broad categories of products. The rates include drawback on packing materials. Normally, the rates are revised every year from 1st June, i.e. after considering the impact of budget, which is presented in February every year. All Industry drawback rate is not fixed if the rate is less than 1% of FOB Value, unless the drawback claim per shipment exceeds Rs 500. Drawback rates are fixed by Directorate of Drawback, Dept. of Revenue, Ministry of Finance, Govt. of India, Jeevan Deep, Parliament Street, New Delhi - 110 001. Data from industry is collected for this purpose. The table of rates gives allocation of the drawback allowed under two heads namely - Customs and Central Excise. The Customs portion covers basic customs duty, surcharge and SAD. Excise portion covers basic and special excise duty and CVD. Duty drawback of customs portion can be paid even if exporter has availed Cenvat credit, as Cenvat credit is only of excise duty and CVD.

The All Industry Rate (AIR) is fixed on the basis of weighted averages of consumption of imported / indigenous inputs of a representative cross section of exporters and average incidence of duties. Hence, individual exporter is not required to produce any evidence in respect of actual duties paid by him on inputs.

Answer 3(e) Bill of Entry submitted by importer or Customs House Agent is cross-checked with ‘Import Manifest’ submitted by person in charge of vessel / carrier. It is noted if the description tallies. ‘Noting’ really means taking on record by customs officer. This date is relevant for determining rate of customs duty. Thoka number (serial number) is given in the import section. Otherwise, it is returned for clarifications. Date of presentation of bill of entry is highly relevant and the rate of duty as applicable on this date will be considered for calculating the duty payable. Bill of Entry is accepted only after proper scrutiny vis-a-vis import manifest and various declarations given in bill of entry and attached documents like invoice, bill of lading etc. If such documents are not attached, the authorities can refuse to accept the Bill of Entry, and hence submission of such incomplete Bill of Entry cannot be taken as date of presentation of Bill of Entry.

Q 4. a) Compute the Customs duty from the following data:

Local agents’ commission to be paid in Indian Rupees is Rs. 4,500 (say equivalent to US Dollars 100), The exchange rate is 1 US Dollars = Indian Rupees 45., Customs duty on Machinery - 25% ad valorem, Customs duty on Accessory (normal rate 30 % ad valorem), Surcharge on Customs duty - 10%, CVD - 16% ( Effective Rate is 8% by a notification), SAD - 4%.

b) What is the relevant date for rate of duty, rate of exchange and tariff valuation of imported goods? Will it be different, i) if Bill of Entry (BE) is presented before the import of goods, ii) if goods are imported by post, iii) for baggage?

c) Anukool imported several consignments of goods under proper license valid up to 31st December 2000. A consignment was imported per “S. S. Vaishali” on 28th December 2000. Before the goods were unloaded, strike broke out and goods could not be unloaded. Ship was