Sukumar Mukhopadhyay: Implications of ITC judgment

The judgment will disempower the excise officer

The latest judgment of the Supreme Court on September 10 in the ITC case has received widespread media attention, not only because of several hundred crores of rupees of revenue involved but also because it is the end of a saga of a hotly contested case that originated 21 years back.

Before the 1983 Budget, the assessment of cigarettes was on the basis of normal value. It was replaced by assessment on the basis of maximum retail price, printed on the packets.

The case of the revenue department (which was based on searches conducted on the premises of ITC and its dealers in early 1987) was that immediately after the 1983 notification came, ITC drastically reduced the margin for the dealers to 10 paise for thousand cigarettes. The 10 paise were to be shared by several wholesale and retail dealers. It was so small compared to the previous margin that the dealers were naturally forced to sell at higher than MRP.

Investigations revealed that the appellant had unofficially fixed effective prices being the actual prices of the cigarettes (generally higher than the printed declared price) and clandestinely communicated to the dealers.

The appellants therefore deliberately printed false prices on the packs. The consistent view of the revenue department has been that the declaration must be honest and true.

The view of the appellant company was that they had no control on the price charged on cigarettes by nearly a million dealers. And in any case if they sell at higher than the MRP, action can be taken against the dealers under the Standards of Weights and Measures Act, 1976, and rules made under the law.

The tribunal agreed on the factual position that there was misdeclaration, leading to the evasion of duty but removed the penalty.

The Supreme Court has interpreted the words "may be sold" in the notification to arrive at the conclusion that it is the declaration made (or the MRP) that alone is the sale price.

The Court has also depended on some internal correspondence with the Public Accounts Committee (PAC) to say that even the Central Board of Excise and Customs admitted that if only there was a "flow back" of the profit made by dealers to the manufacturers, the revenue department could step in.

In this case, no flow back has been alleged. The Court has further said that the MRP declared by the manufacturer cannot be too fanciful because, if adhering to the MRP unreasonably narrows the retailers' margins, the retailer can demand a revision in the price from the wholesaler or desist from selling the product.

The wholesaler can also put pressure on the manufacturer to increase the MRP or lose distributors. The Court rejected the argument of the revenue department that the case did not attract the SWM Act because the Act was not mentioned in the notification.

The Court held that the SWM Act was applicable because Section 4(1) of the Excise Act mentioned "any Act in force". The Court further held that the declaration about the MRP was the responsibility of the dealer under the SWM Act and so the manufacturer could not be held responsible for charging customers above the MRP.

The Court said, "Assessment under Statute A is dependent upon a basis provided by Statute B. In such a case, the assessing officers under Statute A cannot question the basis. That is within the province of the authorities under Statute B."

Finally, the Supreme Court gives the crucial decision that "the notification does not envisage an inquiry into the correctness of the MRP printed on the packages by the Excise Officer.

As far as he is concerned, he is limited to satisfying himself that there is a declaration in the prescribed form." So it comes to this that an excise officer can look into the form and not the substance of a declaration. This is an absolute disempowerment of the excise officer in such cases.

The ramification of this conclusion will not affect cigarette manufacturers, because since 1987 the duty is being based on the length of the cigarette.

But there is likely to be impact on 98 commodities where under Section 4A assessment is made on the MRP basis. These commodities are chewing gum, chocolate, biscuit, pan masala, ice cream, aerated water, clock, pressure cooker, typewriter, magnetic disc, vacuum flask, etc. These are all general consumer goods. It is not practicable to have fixed duty relating to size because these are widely different in quality.

There can be two ways out of the problem. First, the section concerned, Section 4A, can be suitably amended to allow central excise officers scrutinise the veracity of the declaration on the package. Second, a review petition can be made, a procedure that is followed often. In case that course is resorted to, the following may be taken into consideration:

The judgment quotes an internal note written to PAC, which says that if only there is flow back "in some form or the other" there is scope for the application of Central Excise Law.

The Court agrees with this and says that there is no allegation about flow back in this case. The fact is, however, that the allegation is precisely about flow back, though indirect. The showcause is based on the allegation that the "appellant drastically reduced the margins available to the dealers" and "increased their sale price and sale realisations". This is nothing but indirect flow back.

It cannot be a coincidence that the margins were squeezed and effective prices were increased as the 1983 notification came. The indirect flow back was built into the pricing system. This is a case of flow back "in some form or the other".

The judgment says that the SWM Act is still relevant to the notification though it does not mention the Act since proviso (ii)in Section 4 (1) mentions maximum price "under any law". But the fact is that the above proviso is meant only for determining the "deemed normal price".

Where a notification is issued, there is no scope for normal price. So the proviso does not come in at all. So the notification is independent of the SWM Act.

The petition may also rely on the legendary judgment of the Supreme Court in the MacDowell case reported in AIR 1986 SC 649, which laid down the principle that the proper way to construe a statute is to see "whether a transaction is a device to avoid tax and whether the transaction is such that the judicial process may accord its approval to it."