Wednesday, April 16, 2014

Income tax - Whether assessee can claim deduction u/s 80HHC, ignoring the deduction already claimed and allowed u/s 80IA - NO: High Court

Income tax - Whether assessee can claim deduction u/s 80HHC, ignoring the deduction already claimed and allowed u/s 80IA - NO: High Court
By TIOL News Service
CHENNAI, APR 16, 2014: THE substantial questions of law before the High Court:
1. Whether the Tribunal is right in holding that the labelling and re-labelling activity performed by the respondent is not amounting to "manufacture" as per Note 5 of the Chapter 38 of the Central Excise Tariff Act, 1985?
2. Whether the Tribunal is right in holding that the first respondent had labelled their name, address and brand name on the barrels to meet the requirements of (Packaged Commodities) Rules, 1977 especially when the first respondent is not obliged to follow the provision of Standards of Weights and Measures Act, 1976 and the Rules made there under and had erased the markings on the imported barrels and inscribed the first respondent's name (IAL) and address, taken samples, tested them and enclosed the test report to make the product marketable?
The assessee is engaged in the manufacture of Lubricating Oil Additives and also importing additives and trading the same locally. The imported barrels are affixed with certain markings containing name and address and other details of the assessee and samples are tested and a test report is also enclosed with each consignment, which is sent to the customers. The assessee treated their activity as a trading activity and did not pay any duty of Excise for the clearances affected. The Department pursuant to certain investigation, issued three show cause notices for the period from March 1997 to January 1999, February 1999 to August 1999 and September 1999 to January 2000, alleging that the activity done by the assessee amounted to "manufacture" in terms of Note 5 to Chapter 38 of the Central Excise Tariff Act Schedule (CETA Schedule] and therefore excise duty should have been paid on the goods sold by them in India. The Department invoked the extended period of limitation for issuance of the show cause notice alleging that the assessee had suppressed facts. The show cause notices also proposed to impose penalty. The assessee submitted their reply and the Commissioner who adjudicated the three show cause notices rejected the case of the Department and dropped the proposals made therein by order dated 30.12.2000. As against this, the Revenue preferred appeal to the Tribunal which was rejected by order dated 21.03.2007, against which the Revenue is in appeal before the High Court.
The short question, which falls for consideration in these appeals is as to whether the operations carried on by the assessee amounted to manufacture in terms of Note 5 to Chapter 38 of the CETA Schedule?
For better appreciation, the said provision is quoted herein below:
"Chapter 38 - Miscellaneous Chemical Products
Note :5 . In relation to products of this Chapter [other than products of heading No.38.08] labelling or re-labelling of containers and re-packing from bulk packs to retail packs or the adoption of any other treatment to render the product marketable to the consumer, shall amount to manufacture. "
The Original Authority, who adjudicated the show cause notices found that the assessee had sold the goods under dealer invoices and in the dealer invoices the particulars of the original supplier has been mentioned and such documents were pre-authenticated by the Central Excise Inspector before each and every clearance and the assessee never intended to suppress the import identity of the goods and the buyers of the assessee were very well aware that they are getting under the said dealers invoices goods, which were imported and not manufactured by the first respondent/assessee. Further more, the inscription of the name of the assessee along with other details was with a view to comply with the statutory requirements as required under Rule 33 of the Standards of Weights and Measures [Packaged Commodities] Rules, 1977.
Therefore, the High Court found it is evidently clear that the inscription of the name and other details by the assessee was a statutory requirement and cannot be said to be covered under Note 5 of Chapter 38 of CETA Schedule.
As regards taking of samples and the issuance of test services, the High Court found from the facts that all the barrels have not been tested and samples are drawn from one barrel in each consignment with a view to ensure with the quality of the product, which has been imported. Since the cap, which was used to seal the barrel had been removed while taking the samples, such barrels have to be re-capped. That apart, the Original Authority noticed that the entire activities done by the assessee is with the knowledge of the customers and not at the back of them and the activity was not for the purpose of rendering the product marketable since the product was assured by a buyer and there was no uncertainty about its sale. Therefore, what has been done by the assessee was totally unrelated to the sale of the product and such activity would fall outside the scope and purview of Note 5 of Chapter 38 of the CETA Schedule.
Then coming to the aspect as to whether the activity done by the assessee would amount to adoption of any other terms to render the product marketable, the High Court found from the facts that the activities done by the assessee is not in any way to transform the imported product into different product, which was distinct in name, character and use and were not incidental or ancillary to the completion of the finished product and thus not covered by the definition of "manufacture" under Section 2(f) of the Central Excise Act, 1944 read with Note 5 of Chapter 38 of the CETA Schedule. The Tribunal, rightly placed reliance on the decision of the Supreme Court in the case of Johnson and Johnson Ltd ., reported in 2005-TIOL-132-SC-CX wherein the Supreme Court was considering the case relating to re-labelling of certain retail packs of assorted medicines. While considering the facts of the said case, the Supreme Court pointed out that the Commissioner of Central Excise has found that the product is ready for sale to consumers in retail packs and these retail packs were then taken to the importers ware houses where stickers were affixed containing information such as name and address of the importers, maximum retail price, net weight, etc., and as they merely imported ready to market retail packs and in the absence of any evidence to show that they indulged in further activity, which required packing or re-packing of bulk packing into retail price within the extended meaning of "manufacture", the Supreme Court dismissed the appeals.
The provisions under Note 5 to Chapter 38 is not different from that under Note 3 to Chapter 18 and Note 3 to Chapter 19 of the Central Excise Tariff Act, 1985 on the meaning assigned to the expression "manufacture". On the facts found, except for re-labelling, the assessee had not broken the bulk packs into smaller packs. Hence, the High Court did not find any justifiable ground to accept the plea of the Revenue.
Consequently, the appeals are dismissed.
The questions are answered in favour of the assessee.

Prarthana Jalan

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