CA Pradeep Jain & CA Neetu Sukhwani
With the budget round the corner, the consultants are busy making representations whether it be related to rectification of apparent mistakes in the notifications or whether it be related to amendments desired in particular sectors. There is a huge wish-list of assessees operating in respective sectors but whether the pleas of the assessees will be heard by the Modi-led government or not is the talk of the town. We make an attempt to highlight certain legal issues that have catched fire of litigation and that need to be set off as early as possible.
1. Re-look at the amended penalty provisions contained in section 78 of the Finance Act, 1994/Section 11AC of the Central Excise Act, 1944:-The provision distinguishing the quantum of penalties in section 11AC in cases where short-payment or non-payments have arisen for reasons other than fraud and restricting penalties upto 10% of the tax or Rs. 5000 whichever is higher was appreciated. Moreover, the option to conclude the proceedings where short-payment or non-payments have arisen for reasons other than fraud by paying the tax along with interest within 30 days from the date of issuance of show cause notice and by paying 15% penalty within 30 days from date of communication of show cause notice in cases where fraud is being alleged was highly welcomed by the assessees. But, the beneficial provisions issued in the interests of assessees are rarely implemented in true spirit by the revenue authorities. It appears that the provisions regarding conclusion of proceedings should have been incorporated in the recovery sections like section 73 of Finance Act, 1994 or section 11A of the Central Excise Act, 1944. This is for the reason that the show cause notices are being issued by invoking other penalties also like that of section 70 of the Finance Act, 1994, section 77 of Finance Act, 1994, Rule 25 of the Central Excise Rules 2002, etc. In such cases, in spite of the fact that assessees want to conclude proceedings, they are unable to do so because the show cause notice also proposes penalties under other sections/rules which cannot be concluded in light of the amended provisions. Consequently, there is drafting lacunae on the part of the government to include conclusion provisions in penalty sections and rather such provisions should be incorporated in recovery sections under which show cause notices are issued. The impact of amended penalty provisions is that assessees are able to conclude proceedings only if penalties under section 11AC of the Central Excise Act, 1944/section 76 or 78 of the Finance Act, 1994 or Rule 15 of Cenvat Credit Rules, 2004 are being invoked against them and no other penalty is proposed in the show cause notices issued to them. The provision developed to reduce litigation will have its true impact if it is incorporated at the right place.
2. Mandatory Pre-deposit calculation:-The concept of mandatory pre-deposit was introduced in Central Excise, Customs and Service Tax with a view to reduce the work load of quasi-judicial authorities like Commissioner Appeals, Tribunals so that practice of filing stay applications is being dispensed with. However, the amendment did not explain the manner of computation of such pre-deposit in satisfactory manner. Thereafter, circular no. 984/08/2014-CX dated 16.09.2014 was issued wherein it was clarified that payment made during the course of audit or investigation is to be considered for the purpose of mandatory pre-deposit compliance. Not only this, Hon’ble Mumbai Tribunal in the case of ZIM LABORATORIES LTD. VS. COMMISSIONER OF CENTRAL EXCISE, NAGPUR [2014-TIOL-2436-CESTAT-MUM] held that even the amount already paid and appropriated in the order is to be treated as mandatory pre-deposit if it is sufficient. However, the adjudicating authorities are passing orders confirming only differential demands although entire demands are being raised in the show cause notice. Say for example, the show cause notice proposes demand of Rs. 10 Lakhs out of which assessee has already paid 8 lakhs as per its own assessment. However, while passing order, the differential demand of Rs. 2 Lakhs is only confirmed and there is no mention of appropriation of tax already paid amounting to Rs. 8 lakhs. In such cases, assessees are compelled to pay 7.5% of Rs. 2 Lakhs for filing appeal to Commissioner Appeals inspite of the fact that they have already paid 80% of the total demand proposed against them. This is due to reason that section 32F mandates payment of 7.5%/10% of duty demanded. Such practice followed by adjudicating authorities seeks to nullify the effect of above cited decision of Tribunal. This problem is being faced particularly when there are valuation disputes and the poor assessee is compelled to pay 7.5% irrespective of the fact that certain tax has already been paid by it.
3. Denial of cenvat credit to bonafide purchaser if there is absolute exemption on a product by invoking provisions of section 5A of the Central Excise Act, 1944:- The provisions of section 5A of the Central Excise Act, 1944 mandates that if there is absolute exemption on any excisable goods, the manufacturer shall not pay excise duty on such goods. However, if due to oversight, the excise duty is charged and paid by such manufacturer, the cenvat credit to the bonafide buyer of goods is being denied by invoking the provisions of section 5A (1A) of the Central Excise Act, 1944 read with Circular no. 940/01/2011-CX dated 14.01.2011 which states that manufacturer cannot opt to pay duty in respect of unconditionally fully exempted goods and the cenvat credit of such amount utilised by the downstream units also needs to be recovered in terms of Rule 14 of the Cenvat Credit Rules, 2004. Moreover, although these provisions are not applicable in Service Tax Laws, but inspite of this, show cause notices are issued to assessees for recovery of cenvat credit of service tax availed by them if service tax not required to be paid. Such, show cause notices are clear violation of the ratio pronounced by Apex Court in COMMISSIONER OF CENTRAL EXCISE & CUSTOMS VERSUS MDS SWITCHGEAR LTD. [2008 (229) E.L.T. 485 (S.C.)] wherein it was concluded that assessment of duty by supplier cannot be contested at recipient end and credit cannot be denied. When tax has been paid, although not required to be paid, where is the need to deny the cenvat credit to the buyer/receiver. As such, appropriate amendment should be made so that such frivolous issues do not burden already overburdened Tribunals.
4. Inclusion of subsidy in transaction value being granted by way of retention of sales tax:-One of the concern for assessees of Rajasthan is the excise duty demands being raised in lieu of subsidies received by the Rajasthan Government under Rajasthan Investment Promotion Policy-2003. The Rajasthan Government grants interest subsidy to certain assessees for interest paid by them on investments made and the subsidy is calculated on the basis interest paid on additional capital borrowed by the assessees. This interest subsidy is granted by allowing assessees to retain a part of sales tax collected by them. However, the Central Excise Authorities are raising excise duty demands on the portion of sales tax collected and retained by the assessees on the ground that under the concept of transaction value, the deduction is available only of service tax actually paid or payable but as certain portion of sales tax collected by assessees is being retained by them, the same cannot be excluded from the transaction value for the purpose of excise duty. In this regard, reliance is being placed on Apex Court decisions rendered in the case of Commissioner of Central Excise, Jaipur-II Vs Super Synotex India Limited [2014 (301) ELT 273 SC] and Commissioner of Central Excise, Delhi III Vs Maruti Suzuki India Limited [2014 (307) E.L.T. 625 (S.C.)]. However, if it is logically observed, retention of sales tax in lieu of interest subsidy to compensate certain assessees for interest paid on additional capital borrowed by them is of capital nature and mere adjustment between government and assessees. Instead of government paying subsidy in cash and assessees paying sales tax collected by them, there is arrangement similar to book entries in order to avoid unnecessary procedural formalities and revenue flow. Even otherwise, excise duty is not payable on subsidy received from the government. Moreover, it is not hidden that sales tax is levied on transaction value and no buyer will be ready to pay excise duty on sales tax. As such, if the interpretation is adopted in a fashion that leads to increasing costs to the assessees, it will definitely go against the ‘ease of doing business’ concept. Therefore, it is hoped that a suitable amendment in this regard is made so that assessees are not compelled to pay excise duty on subsidy received from the State Government.
Apart from the above issues, there are many legal matters that are obstructing the assessees in the smooth operation of their business. Well, all that can be hoped is that their appeal for tax friendly environment and ‘ease of doing business’ is taken in right and true spirit in the upcoming budget.