Sukumar Mukhopadhyay: Goods manufactured in bond excisable

EXPERT EYE

The dutiability of goods manufactured in bond in India is still an open issue despite three tribunal judgments. Will the goods manufactured in a bonded warehouse in India from imported raw materials pay Customs or excise duty is the issue.

The reason why the raw materials are used for manufacture of final goods in a bonded warehouse under Section 65 of the Customs Act is to defer the duty on the imported raw materials. It is paid only when the final goods are cleared out of the warehouse for consumption.

The practice was to char-ge excise duty but it has suddenly been turned upside down by a set of three tribunal judgments, which held that the final goods manufactured in bond in India were to be deemed to be have been manufactured in a foreign country and so they have to pay Customs duty and not excise duty.

The three orders were in the M Teherbhai vs Collector case, 2000 (125) ELT1001 (T), the Dempo Engineering Works Ltd vs Commissioner of Central Excise case, Goa 2002 (139) ELT 316 (T-Bombay), and Mustan Teher-bhai vs Customs Collector case, Ahemedabad 2003 (154) ELT 472 (T-Bombay).

In all these judgments it has been said: "Manufacture under Customs Warehousing Bond was the same as manufacture in a foreign country".

The third judgment also said the Customs duty was to be charged because the final goods were to be treated as warehoused goods since they had not so far been cleared from the warehouse and, therefore, only Customs duty could be charged as Section 58, which was for warehoused goods for charging customs duty.

But these judgments are wrong. First, the thesis that the manufacture in bond under Section 65 is deemed to be taking place in a foreign country is a figment of imagination. There is no warrant in the Customs Act to dream such wild dreaming. It is actually nothing but manufacture in bond on Indian soil.

Second, the duty liability of the goods manufactured under Section 65 goes absurdly high if they are assumed to be made in a foreign country. Then they have to pay the Customs duty on input plus CV duty on input plus Customs duty on output plus CV duty on output.

And Customs duty on input cannot get the benefit of the Modvat credit since it cannot be adjusted with Customs duty. So it has to bear an extra burden of CV duty on input compared to the goods, which are imported and go for manufacture in the normal course without bonding.

Obviously, the act of manufacture in bond cannot be made to pay more duty compared to the normal system of manufacturing since that will be absurd. Manufacturing in bond is intended to defer the payment of duty and certainly not to punish them with extra burden of duty.

Last but not the least, the charging section in the Excise Act (Section 3(a)) says "excisable goods, which are produced or manufactured in India" will pay excise duty (Cenvat). So these goods having been manufactured in India will have to pay only excise duty.

Thus the goods manufactured in bond under Section 65 of the Customs Act are excisable goods and they are leviable to excise duty on clearance for domestic consumption and not Customs duty.

The tribunal judgments quoted above, not having been appealed against, have tremendous capability of creating confusion among taxpayers and tax collectors. Earlier this is removed by adding an explanation to the Section 65, the better. This Budget should do it.

smukher2000@yahoo.com