CBEC: The root cause analysis of corruption reveals interpretation- Part I

Rajiv Gupta

Guru holds up two fingers. “Two men come down a chimney. One comes out with a clean face; the other comes out with a dirty face. Which one washes his face?”

The young man stares at the Guru. “Is that really a test in logic?” The Guru nods.

”The one with the dirty face washes his face“- he answers confidently.

“Wrong. The one with the clean face washes his face. Examine the logic. The one with the dirty face looks at the one with the clean face and thinks his face is clean. The one with the clean face looks at the one with the dirty face and thinks his face is dirty. So, the one with the clean face washes his face.”

“Very clever,” the young man says. “Give me another test.”

The Guru again holds up two fingers. “Two men come down a chimney. One comes out with a clean face, the other comes out with a dirty face. Which one washes his face?”

“We have already established that. The one with the clean face washes his face.”

“Wrong. Each one washes his face. Examine the logic. The one with the dirty face looks at the one with the clean face and thinks his face is clean. The one with the clean face looks at the one with the dirty face and thinks his face is dirty. So, the one with the clean face washes his face. When the one with the dirty face sees the one with the clean face wash his face, he also washes his face. So, each one washes his face.”

“I didn’t think of that,” says the young man. It’s shocking to me that I could make an error in logic. Test me again.”

The Guru holds up two fingers. “Two men come down a chimney. One comes out with a clean face; the other comes out with a dirty face. Which one washes his face?”

“Each one washes his face.”

“Wrong. Neither one washes his face. Examine the logic. The one with the dirty face looks at the one with the clean face and thinks his face is clean. The one with the clean face looks at the one with the dirty face and thinks his face is dirty. But when the one with the clean face sees the one with the dirty face doesn’t wash his face, he also doesn’t wash his face. So, neither one washes his face.”

The young man is desperate. Please give me one more test.”

He groans, though, when the Guru lifts two fingers. “Two men come down a chimney. One comes out with a clean face; the other comes out with a dirty face. Which one washes his face?”

Neither one washes his face.

Wrong. Tell me, how is it possible for two men to come down the same chimney, and for one to come out with a clean face and the other with a dirty face? Don’t you see? The whole question is nonsense, foolishness, and if you spend your whole life trying to answer foolish questions, all your answers will be foolish, too.

I read all this & then the first thought which came to my mind that this describes the way interpretation is practiced by the miraculous Indian bureaucracy to cheat the Indian citizens in numerous ways on everyday basis. They make a foolish law & then foolishness perpetuates in terms of interpretation to harass the assesses to no end & you may complaint right up to the Cabinet Secretary or the minister but to no avail. They all know about the gaming of the system through the detrimental interpretations but then who cares because in the rotten system, there is no responsibility & accountability. This article spells out one such instance of valuation & collection of excise duty.

In this case study, the foreign buyer has placed order on CIF basis & the contract represents the composite price of the goods for the delivery of goods at the named destination in the contract i.e. Ashdod, Israel @ US 10/Kg for export of item A. The excise invoice was therefore prepared @ Rs. 645/Kg. (Exch. Rate us\$1=Rs. 64.50). The estimated freight & insurance element is US\$ 0.10 or Rs. 6.45/Kg. Thus in case of CIF contract, the expenditure on freight & insurance is includible for determination of transaction value as it is in connection with sale and by reason of sale. The freight & insurance is being charged on fixed amount basis/estimated value and as per the definition of transaction value in the statute, freight & insurance i.e. outward handling charges is includible in the transaction value of the goods for determination of excise duty. Further, it is pertinent to point that the freight is not shown separately in the excise invoice pertaining to the removal of goods for the purpose of exports. The said invoices show the composite price. The exporter has issued a certificate that title transfer to the goods completes as per the export contract when the goods are received in sound condition by the buyer at Ashdod & delivery accepted by them.

Now, we deal with the applicable provisions of the Central excise Act in itself: The relevant extracts of the charging section read as:

Section 4. Valuation of excisable goods for purposes of charging of duty of excise. –

(1) Where under this Act, the duty of excise is chargeable on any excisable goods with reference to their value, then, on each removal of the goods, such value shall –

• (a) in a case where the goods are sold by the assessee, for delivery at the time and place of the removal, the assessee and the buyer of the goods are not related and the price is the sole consideration for the sale, be the transaction value;
• (b) in any other case, including the case where the goods are not sold, be the value determined in such manner as may be prescribed.

Explanation. – For the removal of doubts, it is hereby declared that the price-cum-duty of the excisable goods sold by the assessee shall be the price actually paid to him for the goods sold and the money value of the additional consideration, if any, flowing directly or indirectly from the buyer to the assessee in connection with the sale of such goods, and such price-cum-duty, excluding sales tax and other taxes, if any, actually paid, shall be deemed to include the duty payable on such goods.

Unquote:

Therefore, it is crystal clear that the duty has to be paid on the transaction value. Further, it is pertinent to point out that the explanation is very significant for arriving at the interpretation of the Transaction Value in case of an exciseable transaction. In case of a sale at a composite price, the  Transaction value can be arrived at by excluding the applicable taxes such as sales tax or any other taxes & Excise duty as applicable.

Next, we deal with the Transaction Value. Please see S 4 (3) (d) of the Central  Excise Act, 1944 & the same reads as:

(d) “transaction value” means the price actually paid or payable for the goods, when sold, and includes in addition to the amount charged as price, any amount that the buyer is liable to pay to, or on behalf of, the assessee, by reason of, or in connection with the sale, whether payable at the time of the sale or at any other time, including, but not limited to, any amount charged for, or to make provision for, advertising or publicity, marketing and selling organization expenses, storage, outward handling, servicing, warranty, commission or any other matter; but does not include the amount of duty of excise, sales tax and other taxes, if any, actually paid or actually payable on such goods.]

*Emphasis supplied by us.

Please note that it is pertinent to point out the choice of words in the definition of transaction value wherein it is categorical that transaction value does not include amount of duty of excise, sales tax and other taxes.

On the other hand in terms of inclusion, it says any amount whether payable at the time of the sale or at any other time, including, but not limited to, i.e. the statute makes it absolutely clear that this is illustrative & not exhaustive list. The outward handling finds a mention in the illustrative list contained in  the statute leaves no room for any doubt that freight & insurance are part of  the transaction value.

No statute can be more specific & clear than this because it leaves no room  for interpretation as the same is precisely worded & the CBEC can in no way  distort the same. The legislature has thought it wise to elevate the definition of transaction value to the statute thus making no distortion/ deviation  possible by the CBEC.

The transaction value as defined in S 4 (3) (d) of the CEA, 1944 is the correct value on which the duty liability is to be discharged in terms of the charging section then how this can be defied by way of convoluted argument in the  name of interpretation. Therefore, the moot point to be answered is how the  Statute/Act of Parliament can be defied/distorted by the bureaucracy of this country by cracking a joke in the name of interpretation. How is the authority then trying to interpret that outward handling i.e. freight & insurance is not  part of the transaction cost?

Any person with little knowledge of the law will understand that any Rules/Notification/Circular cannot be contrary to what is appearing in the statute in itself.

Now, as per the legal provisions, there is no scope for any interpretation or manipulation possible by the CBEC/implementing authorities. This is for the simple reason that neither the Charging Section nor the Transaction Value definition has undergone any change since the year 2000 when the revised C. Ex. Valuation Rules were put in place. Therefore, it cannot be the case of the department that no one in the MoF could understand up to 2009, the Charging Section & the Transaction Value & therefore the error continued in the collection of duty & refund thereof. It is pertinent to point out that the terms & conditions for the domestic trade as well as the exports for the collection of duty are the same. The department paid rebate on exports to the exports on Rs. 645/Kg. till 2009 but reduced this value to be Rs. 638.55/Kg. in reference to our case study. Therefore, it is incumbent on the CBEC that on what basis in 2009, the reversal in assessment of duty & refund thereof in respect of the exports has been carried out. The authorities need to very clearly specify the same & also refer to the note circulated by the then JS (TRU) regarding the change in Valuation Rules. It cannot be the case of the MoF that the then JS (TRU) deliberately abstained from specifying the fact that freight & insurance are no longer part of the transaction value & then CBEC & the implementing authorities continued with that error for 9 long years & caused a loss of several thousand crores purposefully by keeping their eyes shut & remaining oblivious of the implications. If the CBEC officials defrauded the nation by allowing rebate on the freight & insurance element for 9 long years then what action the CAG has taken in the matter against the culprits responsible for this fiasco! If there is no action taken then why CAG should allow such corruption in the system & keep quiet about it? Where is the responsibility & accountability in the system? On the other hand, the duty is being wrongly recovered from the exporters simply by harassing them & making their life miserable in complete defiance of the statute. The exporters are not only denied their legitimate entitlement but they are being forced to effect refund with 18% interest without the authority of law. This is the game of interpretation & manipulation played by the Indian bureaucracy in the name of interpretation & such practices are the sole cause of widespread corruption in the system. This article is put in the mail box of all concerned & any one is free to respond because this is the most logical way of resolving the ghost issues created out of detrimental interpretation. I will keep the readers informed of the response from the authorities. The bureaucracy blames the citizens for compliance but then it is incumbent on them to at the very least honour the Act of Parliament because they are otherwise law unto themselves. This cannot be the way of functioning of the CBEC wherein the exporters are forced to succumb to an illegality & keep their mouth shut about it. The DGFT gives rewards to the exporters over & above their legitimate entitlements, which fall in the category of actionable subsidy & levy of countervailing duty then why the MoF should curb the legitimate entitlement but continue with the rewards scheme. Can we not be more rational in our approach to promote exports? However, the bureaucracy is more happy spoiling everything!

(Above are personal view of Author and he can be reached at rajiv.pec@gmail.com)

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Category : Excise Duty (4154)
Type : Articles (17613)
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2 responses to “CBEC: The root cause analysis of corruption reveals interpretation- Part I”

1. Subhash Modi says:

As per excise law value as on the date. time and place of removal is the value exigible to excise duty and even in case of exports factory gate should be place of removal and excise duty ought to be paid on the comparable domestic value of the goods rattier than FOB/C&F/CIF which is value relevant for Section 14 of the Customs Act ,1962. The export value may be more or less than the transaction value of comparable domestic goods (due to export incentives and duty free inputs, machinery imports). The export value is a post removal value emerging later upon placing the goods on board the ship at shipment port. Whether under claim of rebate or under bond the value and the duty involved ought to be on the basis as to what would be the value had the same goods been removed for home consumption. If goods of value Rs. 10 Lakhs are being exported at Rs 8 Lakhs because of duty free inputs, machinery imports and FTP Reward Schemes
should the bond be given for duty on 8 or 10 Lakhs and duty recoverable on 8 or 10 Lakhs if the export does not take place; obviously 10 Lakhs the domestic value of the export goods which ought to the date, time and place of removal i.e the factory gate and not the place of export which may be relevant for service tax credit but not duty on goods.

2. Sanjay Singhal says:

Sir, being an ex-excise official, find it difficult to understand whether this is any particular case. Rebate of excise is given on the value declared in the AR4/ARE1 form, which has the factory gate price & not the Commercial Invoice value. Hence the case seems to be a specific case of lapse & not across all excise formations.