Motor Industries Company Limited, Bangalore vs State of Karnataka

By this revision the order of the Karnataka Appellate Tribunal dated 21st November, 1995, in respect of assessment years 1988-89, 1989-90 and 1990-91 have been assailed arising following questions of law:-

"1. Whether on the fact and in the circumstances of the case, the Tribunal was right in law in confirming the assessments and rejecting the claims of the petitioner?

Whether on the facts and in the circumstances of the case, the Tribunal''s conclusions are valid in law so as to reject the claims of the petitioner?

Whether on the facts and in the circumstances of the case, the Tribunal was right in arriving at these conclusions?

Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the MODVAT Credit Scheme does not reduce the purchase price component?

Whether on the facts and in the circumstances of the case, the conclusion of the Tribunal that entry tax was leviable on Industrial Machinery is proper and legal?

Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that entry tax was leviable on iron and steel components despite the fact that notification in question had not been rescinded?

Whether on the facts and in the circumstances of the case the conclusions of the Tribunal are based on any material and whether the conclusions are supportable in law?"

The facts of the case are that the assessee is a Public Limited Company, registered under the Karnataka Tax on Entry of Goods Act, 1979 (in short ''the Act'') which engaged in manufacture and sale of spark plugs, fuel injections equipments, special purpose machines, auto electricals, etc., In the return for the aforesaid period deduction in respect of MODVAT credit was claimed from the purchase value of the schedule goods imported by the assessee. The assessee is entitled for the benefit of MODVAT credit, which is not in dispute and according to the learned Counsel, the goods are imported from outside the local area. There is automatic credit facility available to the assessee under Rule 57(h) of the Central Excise Rules, 1944 (in short ''the Credit Rules''). Tabular form for the benefit under the MODVAT Scheme is available with effect from 1-3-1986 through the introduction of new part AA in Chapter V of the Central Rules. The scheme confers instantaneous credit on duty paid on specified inputs used in or in relation to manufacture of specified final product which are liable to excise duty. This MODVAT scheme replaces the proforma credit system in which the goods were liable to exercise duty at the specified rates without the benefit of any set-off of duty on inputs already paid. Under the scheme, the manufacturer intending to take credit of the duty paid on inputs under Rule 56 has to file declaration with the jurisdictional authority prior to taking advantage of the scheme. It is also found that under the scheme there is nothing to the effect that the purchase price of inputs shall be considered as reduced by an amount of excise duty paid at the time of purchase of such inputs. All that the scheme provides is that upon purchase of inputs subjected to excise duty, there is an instant credit of the amount of excise duty paid and there is no basis of MODVAT Scheme there is instant reduction in the price of the inputs purchased by an amount equal to the excise duty. Merely because the appellant covered by MODVAT Scheme is entitled to instantaneous credit on the purchase value of inputs, which credit can be utilised in arriving at the excise duty liability on the final product manufactured it does not automatically need that the purchase value of inputs gets reduced by the amount of excise duty paid. The contention raised was rejected. Method of accounting as recommended by the Institute of Chartered Accountants of India was also taken into consideration.

The learned Counsel for the petitioner relied on the judgment given in the case of Collector of Central Excise, Pune v Dai Ichi Karkaria Limited, AIR 1999 SC 3224, where the provisions of Section 4 of the Central Excises and Salt Act, 1944 and Rule 6 of the Central Excise (Valuation) Rules, 1975, were interpreted and it was observed thus:-

"We think it is appropriate that the cost of the excisable product for the purpose of assessment of excise duty under Section 4(1)(b) of the Act read with Rule 6 of the Valuation Rules should be reckoned as it would be reckoned by a man of commerce. We think that such realism must inform the meaning that the Courts give two words of a commercial nature, like cost, which are not defined in the statutes which use them. A man of commerce would, in our view, look at the matter thus: ''I paid Rs. 100/- to the seller of the raw material as the price thereof. The seller of the raw material had paid Rs. 10/- as the excise duty thereon. Consequent upon purchasing the raw material and by virtue of the MODVAT Scheme, I have become entitled to the credit of Rs. 10/- with the excise authorities and can utilise this credit when I pay excise duty on my finished product. The real cost of the raw material (exclusive of freight, insurance and the like) to me is, therefore, Rs. 90/-. In reckoning the cost of the final produce I would include Rs. 90/- on this account''. This, in real terms, is the cost of the raw material (exclusive of freight, insurance and the like) and it is this, in our view, which should properly be included in computing the cost of the excisable product".

The guidelines of the Chartered Accountant of India were to the following effect:-

"In the light of these observation, it is clear that MODVAT Scheme which provides for the instant credit being taken by the buyer of goods to reduce the purchase price of the goods and if it is so, there being a reduction of the purchase price, the same is required to be taken note of for purposes of levy of entry tax. It is also relevant to mention that the component of Excise Duty in the MODVAT Scheme becomes part of the price and that the reduction of that component is available in the MODVAT Scheme, there is consequently a reduction in the price of the goods. This being the position in law, the MODVAT credit component is not liable for entry tax".

Section 3 of the Act is the charging section, which creates liability of tax on entry of goods specified in the I Schedule into the local area for consumption, use or sale therein. The tax is to be levied on the value of the goods. The words ''value of goods'' is defined as under:

"Section 2(A)(8-a). ''Value of the Goods'', shall mean the purchase value of such goods, that is to say, the purchase price at which a dealer has purchased the goods inclusive of charges borne by him as cost of transportation, packing, forwarding and handling charges, commission, insurance, taxes, duties and the like, or if such goods have not been purchased by him the prevailing market price of such goods in the local area".

In the case of Commissioner of Income-tax, Hyderabad v P.J. Chemicals Limited, AIR 1994 SC 2727, while interpreting the provisions of Section 43(1) of the Income-tax Act, 1961 (in short ''Tax Act'') the words ''Actual Cost'' was interpreted. In the explanation to Section 43(1), it was provided that ''for the purpose of this sub-section, the expression ''actual cost'' means the actual cost of the assets to the assessee reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by Government or by any public or local authority....''. Since the subsidy was granted by the Government was considered to be an incentive not for the specific purpose of meeting a portion of the cost of the assets, though quantified as or geared to a percentage of such cost. It was held that, it does not partake of the character of a payment intended either directly or indirectly to meet the ''actual cost''.

So far as the second contention regarding the Industrial Machinery brought within the local area is concerned, for installation for production line, the matter being covered by the judgment of this Court in the case of J.S. Auto Machine Shop v State of Karnataka and Another, 1991(35) Kar. L.J. (Tri. Supp.) 77 (HC), whereunder it was held that the word ''use'' means that it does not necessarily mean ''used up'' that the industrial machinery brought for the purpose of executing job works and for use and therefore held liable to tax. In view of the above decision given by this Court the matter is to be decided against the petitioner.

The last contention with regard to iron and steel components, for which the petitioner was entitled for exemption under notification dated 27-11-1984. There was an amendment by Act No. 41 of 1996, with effect from 1-4-1983 by inserting Entry No. 16-B in respect of material components and inputs, which are used for manufacturing of an intermediate or finished product. By Act No. 18 of 1989, Explanation II was inserted with effect from 27-11-1984, by which certain components of iron and steel were specified therein. By Act No. 38 of 1984, Entry Nos. 17 and 18 were inserted in the Schedule, which were in respect of industrial packing materials and raw materials, component parts and any other inputs, etc., Entry Nos. 17 and 18 of the Schedule were omitted by Act No. 42 of 1996, with effect from 1-4-1983. The claim of the assess is that the various items mentioned in the notification dated 27-11-1984 shall still be considered to be in existence as there is no rescinding of the notification dated 27-11-1984.

We have considered over the matter.

Various items specified in the notification dated 27-11-1984 were under 2nd Explanation of Item No. 18 to the Schedule of the Act. Once Act No. 18 of 1989 came into effect from 27-11-1984, by specifying various other items of iron and steel, the notification issued under the earlier entry no longer survives.

Full Bench of this Court in the case of Shaw Wallace and Company Limited v State of Karnataka, 1992(36) Kar. L.J. (Tri. Supp.) 411 (HC), has taken into consideration the effect of an amendment of the Act and consequence of the notification issued thereunder. In the case of Kirloskar Electric Company Limited v State of Karnataka, (1999)114 STC 460 (Kar.), this very questions was considered and it was held that by Amending Act No. 18 of 1989, notification dated 27-11-1984 no longer survives.

The decision given in the case of Dai Ichi Karkaria Limited, supra, refers to the provisions of Section 4 of Central Excise Act, 1944, as also Rule 6 of the Central Excise (Valuation) Rules, 1975. It is for the purpose of levy of excise duty that the costs has to be considered at Rs. 90/- instead of Rs. 100/- , when the assessee has to rebate of Rs. 10/- under the MODVAT Scheme. The definition of value of goods refer to the purchase price at which dealer has purchased the goods. The purchase price at which the goods have been purchased is at Rs. 100/- and the goods accounted as debt by Rs. 100/-. It is a subsequent act by which Rs. 10/- credited in the goods account and debited to Central Excise duty account for claiming the benefit of MODVAT and for that purpose under Central Excise Act the value would be considered as Rs. 90/- only. Central Excise duty is not leviable on the Central Excise duty and it is only on the costs. For the purpose of Central Excise Act, it is Rs. 90/- only for levy of duty. To take another example, in case of fertilizers and other commodities, the Government gives subsidy to the dealer; can it be considered to be a part of the price? The answer is no. Because, it is only the sale price which has been received by the assessee from the purchaser, of which liability of sales tax could be fixed and any further payment received from the third party may be referrable to the transaction cannot be considered as sale price. Similarly, so far as the assessee is concerned, he has paid Rs. 100/- to the seller as value of the goods. In subsequent benefit by way of MODVAT it would not be claimed at the time of entry of goods into the local area. Act of claiming the MODVAT is after the goods enter in the factory premises and not at the stage when the entry is in the local area. In these circumstances for the purpose of Entry Tax the purchase value of goods is as specified in the bill including all other charges as mentioned in Clause 2(8-A) thereof included. Therefore the above decision cannot give any benefit to the assessee.

In the above view of the matter, the petition is dismissed. No costs.