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PROFESSIONAL VIEW POINT

This column is our USP. Our associate professionals shall keep you postedwith their views on topics of current interest and also debatable issue.

CA Harsh Gadodia

• Anti-Profiteering 29

CA Pulak Shaha • CA Shrenik Mehta

• Readiness for GST migration 34

IMPACT ASSESSMENT

In this column, our associate professionals shall keep you posted with theirviews on impact of GST law on various sectors of business.

CA Rohit Surana

• GST impact – Transportation and Logistics Sector 6

CS Dharmendra Sharma

• GST Impact on MSME 12

GST DECODE

In this column, our associate professionals shall analyse legislation,subordinate legislations, circulars and notifications unfolding intricacies.

Bimal Jain

• Principles of Time and Place of Supply under Revised Model GST Law 47

ContentsVolume 1/2

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Pradeep K Mittal

• Input Tax Credit – Arbitrary and Deficient Provision 53

CA Rohit Surana

• Decoding Valuation under GST 58

WIDE ANGLE

In this column, our associate professionals will answer your queries in aneasy to understand format.

CA Rohit Surana

• Frequently Asked Questions on GST Pertaining to Retail Sector 21

CA Harsh Gadodia

• Frequently Asked Questions on registration (Part-I) 25

CASE REPORTS

Case Reports will take care of court judgments in both format of digest andfull reports.

SUPREME COURT

• CCE v. United Spirits Ltd. (SC) 5

HIGH COURT

• CCE v.Visteon Automotive Systems India (P.) Ltd. (Mad.) 29

CEST APPELLATE TRIBUNAL

• Zydus Nycomed Healthcare (P.) Ltd.v. CCE (CESTAT) 28

• Toyota Kirloskar Motors (P.) Ltd. v. CCE (CESTAT) 28

• CCE v. Partap Steel Rolling Mills Ltd. (1935) Ltd. (CESTAT) 30

• Bharat Heavy Electrical Ltd. v. CCE (CESTAT) 30

Contents

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[2017] 1 GSTPT (PV) 29

Anti-Profiteering

CA Harsh Gadodia

This article is intended to explain anti-profiteering measurewhich the Government takes if prices of products or servicesare escalated by the traders during transition orimplementation phase of GST.

Introduction

1. Goods and Service Tax (‘GST’) is a new tax and lot of uncertainty prevailswith regard to the impact GST is going to have on pricing of the products. TheGST has been implemented in various countries like Singapore, Australia,Malaysia, etc., where it has been observed that during transition or implementationphase, people are uncertain about their revised cost structures and tends tobehave impulsive in regard to the prices. So during transition phase, theyescalate the prices of the products or services which lead to an increase ininflation. The Government being aware of the GST impact, it would take aspre-cautionary steps various measures to control the inflationary pressure duringGST implementation. One such measure would be anti-profiteering.

What is anti-profiteering?

2. Anti-profiteering is a measure taken by the Government to protect the consumersfrom unreasonable increase in the price during the implementation of GST orwhere the prices of the products or services has been reduced due to GSTimplementation, to ensure that reduced price benefit is passed on to the consumer.So, it is basically a price control mechanism to ensure that prices would remainreasonable after implementation of GST. The question arises how the priceswould be reduced? The answer is as in the current regime, indirect tax basketconsists of various taxes in the form of central excise, service tax, VAT/CST,entry tax, purchase tax, etc., which are having different taxable event. As eachtax is having different set of provision, rules and restriction, it leads to asituation where tax becomes cost of the products or services. They are thefollowing :

ANTI-PROFITEERING

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• Cascading effect. For example, VAT is levied on cost + profit + excise dutythat amounts tax on tax.

• Restrictive provisions of claiming credit where certain input tax credit cannotbe set off against output tax which ultimately increases the price of the finalproduct and it is borne by consumers.

• One tax cannot be setoff against another tax. For example, VAT/CST cannotbe set off against service tax or central excise, etc.

As India is moving towards GST, all these taxes would be subsumed and onlyone tax would be levied, i.e., CGST, SGST, IGST due to which cascadingeffect would be removed, cenvat credit mechanism would be much smoothercompared to current regime, the various taxes which are becoming cost in thecurrent regime could be claimed in the GST regime which ultimately reducesthe prices. So, anti-profiteering clause has been introduces with the followingtwo motives :

To control the temporary inflation post-GST implementation

To pass on the benefits of reduced prices to the consumers

Anti-profiteering provisions under GST

3. The measure to control the temporary inflation, i.e., anti-profiteering hasbeen introduced in section 163 of the Model GST Law which states that theCentral Government has the power to constitute an authority or entrust anexisting authority constituted under any law to examine whether the registeredtaxable person has reduced the price charged on account of input tax creditavailed resulted in reduction in price, or reduction in tax rate resulted inreduction in price. The authority entrusted can exercise such function and incases where it is being found by the authority that price being charged has notbeen reduced in spite of reduction in price on account of aforesaid reasons, theyhave the power to impose a penalty also. However, as a respite, Union RevenueSecretary has clarified that these measures would not be invoked unless in theevent of a significant violation. Further, section 169 (transitional provisions)enumerated certain situation where the registered taxable person shall be entitledto claim credit of duties and taxes paid in respect of inputs held in stock andinput contained in semi-finished or finished goods held in stock on the appointedday. However, it is subjected to various conditions where one of the conditionsis : “the said taxable person passes on the benefit of such credit by way ofreduced prices to the recipient”. Thus, if claiming of duties under GST whichwas not eligible under current regime resulted in reduction in cost, such pricereduction must be passes on to the recipient.

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Anti-profiteering measures in other countries

4. Anti-profiteering measures have been implemented in various other countrieswhere GST has been brought like Australia, Malaysia, Canada, Singapore, etc.It has been most recently implemented in Malaysia in 2015. The following arethe salient features of anti-profiteering measures in Malaysiya and Austraila :

• Malaysia – In Malaysia, the mechanism to determine the unreasonable profitdoes not fall under the purview of GST but it has been introduced by PriceControl and Anti-profiteering (Mechanism to Determine Unreasonably HighProfit) (Net Profit Margin) Regulations, 2014 which was passed by the MalaysianParliament on 24th December, 2014. The Price Control and Anti-profiteeringAct, 2011 came into force on 1st April, 2011 which empowers the Ministry ofDomestic Trade, Cooperatives and Consumerism to monitor, control and takeaction on any price increase due to excessive profiteering. The purpose of theAct is to enable the Government to determine prices of goods or charges forservices with the object of curbing excessive profiteering of essential goods andservices by unscrupulous traders. Since GST was implementing in Malaysia, thenew mechanism or formulae, i.e., “Net Profit Margin” (NPM) was introducedin the aforesaid Act to determine the unreasonable high profit for a particularperiod, i.e., from 2nd January, 2015 to 30th June, 2016. Here NPM as on 1stJanuary, 2015 was kept as a base for a comparison to ensure that the NPM from2nd January, 2015 to 31st March, 2015 does not exceed the NPM as at 1stJanuary, 2015 and the NPM from 1st April, 2015 to 30th June, 2016 does notexceed the NPM as at 1st January, 2015. If by using the prescribed formulae itwas found that the net profit margin has been increased, then the business mustbe able to substantiate the increase with adequate documentation and properjustification to the Ministry of Domestic Trade, Cooperatives and Consumerism.If the person is not able to substantiate, then the same would be liable forpenalties prescribed under the Price Control and Anti-profiteering Act.

• Australia – In Australia, GST was implemented on 1st July, 2000 replacingthe wholesale sales tax system. In order to combat a temporary inflation due toGST implementation, the Government has entrusted the responsibilities to aspecial authority called Australian Competition and Consumer Commission(ACCC) to oversight pricing responses to the introduction of the new tax system(‘NTS’) during the three-year period from 8th July, 1999 to 30th June, 2002(the NTS transition period). The anti-profiteering measures in Australia revolvedaround the ‘Net Dollar Margin Rule’ serving as the fundamental principal for itsguidelines. That is, if the changes in NTS has caused taxes and costs to fall by$1, then prices should fall by at least $1. At the same time, if the cost of the

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business rose by $1 under NTS, then prices may rise by not more than $1.Implications of the Dollar Margin Rule are as follows :

Prices should be reduced immediately to pass on the full effect of net taxreductions

Any increase in price based on the GST should include a full offset for otherindirect tax reductions

No markup should be applied to the GST component of price

Prices should reflect only actual, not anticipated, tax increases

It can be seen from the aforesaid discussion that both the countries comes up withthe formulae to determine the unreasonable profit during GST implementationphase, i.e., in Malaysia ‘Net profit Margin’ and in Australia ‘Net Dollar MarginRule’. However, the question arises, whether price can so easily be determined onthe basis of the formulae ? No other factors come into play while determining theprices of the products and services. Whether the concept of free market will betaken away? All these questions are required to be seen once GST in India wouldbe implemented as the Government just came up with a small provision of anti-profiteering in the law. Mechanism or formulae to determine unreasonable profitis yet to be come. Moreover, we all know to determine the prices of the productsvarious economic factors plays a vital role. These features are as follows :

Demand and supply

Geographical conditions

Price discrimination

Market disequilibrium

Suppliers price, etc.

If because of any of these above economic factors prices are being increased, thequestion arises whether the supplier would be in a position to substantiate itsmarket price explaining the economic factors. Moreover, whether departmentalofficers would be able to understand the economy role in price changes? Theanswer is silent.

How to protect the business?

5. As it would be difficult to maintain the co-relation between the procurementand supply of goods and services especially common inputs, it is essential tomake a representation by the industry to the Government. Apart from therepresentation it is essential for a business to work out on the following areasfor determining the prices :

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• Impact of non-recoverable inputs becoming the cost in the current regime butnot in GST regime.

• Revision of the purchase cost by negotiating with the purchaser.

• Mapping of the various transaction conducted by business at product level andentity level and comparing the price changes to changes in the tax structure anddocumenting the same in order to substantiate before department.

• Change in the tax rate under current regime and GST regime.

• An analysis of the economic factors affecting the pricing of the products anddocumenting the same.

Every factor which affects the pricing of the goods and services is required tocapture in the earlier stage itself.

Conclusion

6. The anti-profiteering measure cannot be taken up lightly considering thepotential litigation that could take place. The Government should frame policyon anti-profiteering well in advance, with greater clarity. The business communitymust also respond to the challenge and ensure that prices on products are notescalated during transition phase of GST which may be labeled as profiteeringphase. Failure to do so by the business community could be labelled as profiteersand suffers financial loss if the hefty penalties for profiteering are imposed.

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[2017] 1 GSTPT (PV) 34

Readiness for GST migration

CA Pulak Shaha • CA Shrenik Mehta

In this article, discuss migration of existing tax payers tothe GST in terms of section 166 of of the revised ModelGST law.

Introduction

1. Whenever an economy undergoes a major change in taxation,the first step should be to provide a proper framework forexisting taxpayers to adapt to the new regime. As India movestowards the introduction of goods and services tax (‘GST’),the Union Government, amidst the outcry due to demonetisationin the last two months, has taken all necessary steps for a smooth transition.The Government has been proactive in providing support to existing registrantsof central excise, service tax and VAT, for proper transition into GST. Besidesconducting workshops and creating awareness amongst trade bodies, an exhaustivestep-wise procedure and frequently asked questions (FAQs) have been publishedto enable existing taxpayers migrate their existing registrations into GST.

Revised Model GST Law

2. The Union Government introduced the model GST law in June 2016 forpublic comments. Pursuant to public comments and representation from varioustrade bodies, the Union Government introduced a revised model law in November2016. The revised model law contains section 166 which discusses migration ofexisting taxpayers to the GST. Upon enactment of the GST Act, every personregistered under the existing law having a valid PAN shall be issued a certificateon provisional basis, which shall be valid for six months. The provisionalregistration would become final only upon submission of the necessary documentsand verification of details submitted at the time of provisional registration toGSTN. This provisional registration being the immediate point of action, theUnion Government introduced a State-wise and statute-wise schedule providingdue dates for taxpayers to enrol under the GST. For this, a new portal

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www.gst.gov.in has been created in which the taxpayers can login and completethe necessary steps to migrate their existing registrations into the GST.

Procedure for migration

3. The process started with State-VAT/ACES portal giving pop-ups/issuing circularsof updating mobile numbers and e-mail IDs of authorised persons on the State-VAT/ACES website, through which the one-time passwords (OTP) can becommunicated. Having updated the details, the procedure for migration beginswith logging into State-VAT/ACES portal and obtaining a provisional ID andpassword. With this, the taxpayer logs onto the GST portal. Taxpayers, who didnot update their mobile numbers and email-IDs on the State-VAT/ACES website,have the option of updating them on the GST portal. Upon logging into the GSTportal, it will send two separate OTPs to the mobile number and email-ID, whichwill remain valid for 15 minutes. By entering the OTPs simultaneously, a taxpayercan create a new user ID and password and log onto the portal in future. The userID and password can be obtained after answering 5 security questions asked at theportal (which may be used for retrieving the password in the future). Once thelogin formalities are complete, some details will be auto-populated in the GSTportal for the taxpayer as follows :

PAN of the taxpayer

Legal name of the taxpayer

State

Ward/Circle/Sector

Email address and mobile number of primary authorised signatory enteredduring enrolment at the GST system portal.

Pre-requisites for migration

4. Further, various other details are required for migrating into the GST. Whilepreparing to gather such information and/or documents, taxpayers should keepin mind the following that are pre-requisite for migration or required whenuploading data/information on GST portal :

Information related

Documentation related

Business related

A. Information related

• Registration details – While providing business details, the taxpayer is alsorequired to provide the details of various registrations obtained, i.e., VAT,CST, central excise, service tax, luxury tax, entertainment tax, etc.

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• Ward/sector/circle details – In the ward/circle/sector number drop-down listappearing on the portal, the taxpayer has to select the ward/circle/sector numberof their business.

• Details of promoters/partner/directors/other authorised signatory – Name,address, PAN, etc., of the concerned persons must be mentioned on the GSTportal.

• Details of primary authorised signatory – A primary authorised signatory isprimarily responsible for performing actions on the GST system portal onbehalf of the taxpayer. All communications from the GST portal relating to thetaxpayer will be sent to the primary authorised signatory. Therefore, the name,address and other details of the primary authorised signatory needs to bementioned on the GST portal. Further, the mobile number and e-mail ID of theprimary authorised signatory to whom future correspondences shall be sentshould be provided on the GST portal.

• Principal place of business and additional place of business – Details ofcomplete address and contact information of the place of business, nature ofbusiness activity being carried out at that particular place of business and thenature of possession (i.e., whether owned or rented) of the place of businessneeds to be filled up.

• Details of goods and services – Details of the top five goods and services needto be mentioned in the enrolment form. While providing the details of goods,the HSN Codes also need to be mentioned in the form.

• Details of bank accounts – Account number, type of account and the IFSCCode need to be mentioned on the portal.

B. Documentation related

• Proof of constitution of business – While providing the details of business, thetaxpayer is required to attach a proof of constitution of business, which can be acertificate of incorporation or any other valid document appearing in the drop-down menu.

• Details of directors – Photograph of the directors need to be uploaded on theportal. The maximum file size of the photograph should be 100 KB.

• Details of authorised signatory – The proof of appointment of an authorisedsignatory along with photograph needs to be uploaded on the GST portal. Incase of multiple authorised signatories for a single business entity, one authorisedsignatory should be designated as the primary authorised signatory and theemail-ID and mobile number of that person should be provided at the time ofenrolment. The size of the photograph should not exceed 100 KB while the sizeof authorisation letter should not exceed 1 MB.

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• Principal and additional place of business – Depending upon the type of placeof business, the following documents need to be submitted :

Type of ownership Documents

(a) Owned premises (a) Latest property tax receipt or municipal khata copyor electricity bill

(b) Rented or leased premises (a) Copy of rent/ lease agreement

(b) Any document in support of the ownership of thepremises of the lessor, such as the latest propertytax receipt or the municipal khata copy or a copyof the electricity bill

(c) For premises not covered (a) A copy of the consent letterin (a) and (b) above (b) Any document in support of the ownership of the

premises of the consenter such as municipal khatacopy or copy of the electricity bill

(c) The same documents may be uploaded for sharedproperties

• Details of bank accounts – Based on the details of the bank account mentionedin the information, the taxpayer has to attach the first page of the bank passbookor one page of the bank statement containing details of the account number,name of account holder, MICR, IFSC and branch details.

• Digital signature certificate (DSC) – Digitally signing the application is thelast step in the migration procedure for which a Class 2 or Class 3 DSC isrequired. Note that digital signing using a DSC is mandatory in case of LLP andcompanies.

C. Business related

For any taxpayer, one of the most important aspects is to analyse their businessorganisation and plan accordingly before migrating into the GST to avoid anyunwanted situations. The following examples explain this :

• More than one unit (same business vertical) in the same State – Currently,under the VAT regime, a company can have more than one registration in aState. There are no restrictions in obtaining and maintaining more than oneVAT registration. However, under the GST, a company can opt for State-wisesingle registration, i.e., single registration for all places of business in a State. Ifa taxpayer opts for separate registrations, i.e., different registrations for differentunits in the same State under GST (if permitted by the jurisdictional authority),it will pay GST on movements of goods between two units. Although the samewould be creditable to the recipient, it would lead to blockage of funds. Therefore,while migrating into GST, the taxpayer should take a considered decision

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whether they should take a State-wise single registration covering all units ortake unit-wise multiple registrations.

• More than one unit (different business verticals) in the same State – Under theGST regime, section 23 of the revised model GST law provides an option to optfor separate registrations for each business vertical in a State. The taxpayer mustclearly identify the business verticals as per the definition of “business verticals”.It may be noted that it is upon the decision of the taxpayer to obtain single ormultiple registrations for different business verticals. This would also have animpact on the unutilised credit pertaining to each business vertical.

• Subsidies – If a taxpayer has two units in a State of which one unit is new andis currently enjoying State incentives/subsidies, whereas, there are no suchincentives/ subsidies for other unit. Currently, the taxpayer has obtained separateVAT registration for each unit. Under the GST regime, the taxpayer has tounderstand that whether the subsidies/ incentives would be available for singleregistration or not. For taxpayers who have already migrated as a single registrationin a State, in such situations the taxpayer may have to re-examine theirregistrations once there is some clarity on this aspect.

• Merger/de-merger/slump sale – In case a taxpayer has business plans formerger/de-merger/slump sale in the near future, the registrations of businessunits should be done keeping in mind the proposed plan.

4.1 Many more business aspects need to be considered before migrating into theGST, which depends on a case-to-case basis. The taxpayer should look into itbefore taking any decision on the migration of existing registrations into GST.Simultaneously, the taxpayer has to keep in mind the due dates specified formigration of various categories of registrants in the released enrolment schedule.

4.2 Upon successful verification, the GST portal system shall generate anacknowledgement containing the acknowledgement receipt number (ARN) within15 minutes of submission. This number should be stored as it is proof that thetaxpayer has successfully migrated and all future communications/tracking ofstatus shall be sent/ done using the ARN number.

Migration depict proactive attitude

5. With the wipe out of the winter Session of Parliament, there seems lesschances of the Union Government being able to implement the GST with effectfrom 1st April, 2017. However, the steps taken by the government for themigration of existing registrations into the GST depict the proactive attitude andthe inclination to make GST a reality. Howsoever, amidst all this politicaluncertainty, the taxpayers benefit, as they obtain ample time to smoothly migrateinto GST regime and plan better for future!!

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Input tax credit

7. Reconciliation of inward and outward supplies: If there is a mismatch betweenthe details of outward supplies uploaded on the GST Network by the vendorsand the inward supplies uploaded by the recipient, such mismatch will becommunicated to the recipient. If the mismatch is not rectified by the vendor inthe month of communication, the recipient will be liable to pay the differentialGST along with interest in the subsequent month. This provision places theliability for non-compliance on the recipients, i.e., the OEMs or the automobilecompanies, as against their vendors. Similar provisions have been prescribedwherein details of credit notes issued by a supplier have to match with thecorresponding reduction of input tax credit claimed by the recipient.

Stock in the hands of dealer on the transition date – possible doubletaxation

8. The transition provisions provide that credit balances admissible under thepresent regime can be carried forward under GST. In case of stocks lying withdealer which are procured on payment of excise duty and CST, such excise dutyand CST is not admissible as credit under the present regime. Accordingly, thetransition of such taxes/ duties included in the stocks lying with the dealer haveto be allowed. Otherwise, under the GST regime, such stocks would suffer taxagain, i.e., excise duty and CST paid, and CGST and SGST on supply after theappointed date. The Industry to evaluate the impact of stock in the hands ofdealers and plan for the same.

Conclusion

9. The automobile industry is looking forward to introduction of GST. However,there are quite a few concerns in the draft Model GST law, including some ofthe key aspects highlighted above, which need to be addressed. The creditmechanism should be more liberal. Proper GST administration and disputeresolution (more importantly on inter-state transactions) is very critical. Theindustry is also expecting the procedural changes to be notified in advance, andmay require a lead time of at least six months before introduction of GST.

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GST impact – Transportation and Logistics Sector

CA Rohit Surana

In this article, the author explains GST impact on transportand logistics sector comprising transportation, courier/postand clearing/forwarding agents.

1. Ambit of transport and logistics sector

Sector Operations

Transportation Surface, Air and Water

Courier/post Goods and documents

Clearing and forwarding agents Clearing, Handling and Deliver of Goods from factoryto Port and Vice-versa


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1.1 India’s transport network is one of the most extensive in the world. Theshare of the transport sector in overall infrastructure investments has increasedfrom 2 per cent of GDP during 1995-99 to an average of 2.6 per cent of GDPbetween 2007 and 2011. At the same time, accessibility and connectivity arelimited. Only 20 per cent of the national highway network (which carries 40 percent of traffic) is four-lane, and one-third of the rural population lacks access toan all-weather road.

1.2 It is estimated that the transport sector alone will require an investment ofnearly $500 billion (3.6 per cent of GDP) over the next 10 years. This isprojected to be part of an overall push to stimulate overall infrastructureinvestments to 6.8 per cent of GDP during the 12th plan and 8.0 per cent ofGDP during the 13th plan.

1.3 Ports and airports have inadequate capacity and often poor transportconnectivity. Trains move very slowly owing to poor maintenance, and theentire railway system is grappling with issues of financial sustainability. Poortransport safety, especially road safety (1,38,000 road fatalities recorded in2012, is a growing concern in a country that is adding new drivers at a recordpace.

1.4 Challenges in this sector :

India’s roads are congested and of poor quality

Rural areas have poor access

The railways are facing severe capacity constraints

Urban centres are severely congested

Ports are congested and inefficient

The other major challenge is taxation scheme on such transport and logisticssector where resources remains, unutilised due to various road permits, entrytax, inspection of documents, etc.

2. Impact of GST on such sector

2.1 Input tax credit

2.1.1 Currently, this sector is paying service tax under both reverse charge andforward charge and the effective tax rate after abatement comes to 4.5 per centsubject to condition that ITC is not available on all input and input services.This is because HSD is key input for this sector and it is not creditable at all ;therefore, abetment is kept to minimise tax burden. In the proposed GST regime

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initially HSD is not part of GST ; hence, again it will be non-creditable unlessit is included under GST.

2.1.2 Under the Model GST Law, input tax credit on transportation fuels willnot be permitted as the said products are proposed to be kept outside thepurview of GST. This proposal will cause significant hardship to service providersengaged in the provision of transport of goods by air. This is also on account ofthe fact that such service providers are presently able to avail CENVAT creditof excise duty paid on aviation turbine fuel.

2.1.3 Additionally, in accordance with the Constitutional Amendment Bill, theprovisions with respect to petroleum products provide that the GST Council willdetermine the approach and procedure for the inclusion of the said productsunder the GST regime. Given this, allowing credit of aviation turbine fuelunder the GST regime will not require an amendment in the ConstitutionalAmendment Bill.

2.1.4 The definition of inputs, capital goods and input services has been simplifiedto a large extent and a lot of restrictions on credit has been reduced and thebroad based credit mechanism we always desired is a reality.

2.1.5 In case there is a mismatch between the details of outward suppliesuploaded on the GST network by the vendors and the inward supplies uploadedby the recipient, the said mismatch would be communicated to the recipient. Ifthe mismatch is not rectified by the vendor in the month of communication, therecipient will be liable to pay the differential GST along with interest in thesubsequent month. This provision places the liability for non-compliance on therecipient as against their vendors. Changes in the mechanism of utilisation ofinput tax credit will require re-alignment of the IT systems as well as effectivevendor management. Businesses will need to ensure their vendors are compliant,by applying appropriate commercial safeguards such as release of payment onlyafter the vendor has uploaded its invoice on the GSTN, or the possibility ofvendor consolidations.

2.2 Place of supply of services provided to or received at multiple locations

2.2.1 The proposed taxation structure under GST is to have dual model whereCGST/SGST shall be levied on intra-State supply of goods and serviceswhereas IGST shall be levied on inter-State supply of goods and services.Important, therefore, is for this sector to work out the place of supply. Thedefinition of “location of supplier” and “location of recipient provides” thatthe establishment most directly concerned with the supply shall be considered.A company may receive a service in multiple registered establishments locatedin different States. In such situations, the place of supply provisions are

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unclear on which establishment would be regarded as the service provider/receiver, in order to determine whether the supply is an intra-State or inter-State supply.

2.2.2 The place of supply of services by way of transportation of goods,including by mail or courier to : (a) Registered person shall be the location ofsuch recipient (B2B), (b) Person other than a registered person shall be locationat which such goods are handed over for their transportation (B2C). Place ofsupply shall be identified under GST to know the nature of tax which shall bepaid under GST. If GTA is registered in West Bengal and services supplied toanother registered person (B2B) in UP, place of supply in this case shall be UPand accordingly IGST shall be paid. On the other hand, if services supplied toan end consumer (B2C) and goods are handed over in West Bengal for itstransportation, place of supply shall be the location where goods are handedover which is West Bengal and CGST/SGST shall be paid. So it becomes mostimportant to identify correct place of supply to pay taxes under GST.

2.2.3 Under the present regime, for transportation of goods by vessel, servicesprovided for the outbound movement of goods, i.e., exports, have been zerorated, whereas services provided for the inbound movement of goods i.e. imports,are subject to service tax. Further, for transportation of goods by air, theservices provided, whether for outbound or inbound movement of goods, areexempt from service tax. Based on the provisions of the Model GST Law, itappears that international freight (by air or sea) will be subject to GST, so longas the recipient is located in India. Though zero rated supplies have beendefined in the law, the same has not been applied to international freight.Ideally, zero rate international freight under GST, to keep the taxation offreight in line with global practices, with the objective of facilitating internationaltrade.

2.3 Classification of logistics services – Bundled versus unbundled

In the transport and logistics industry, the services typically provided by a liner/freight forwarder/logistics service provider are transportation, cargo handling,customs clearance, terminal handling and warehousing. This is definitely abouquet of different type of services. The current GST law defines compositesupply. “Composite supply” means a supply made by a taxable person to arecipient comprising two or more supplies of goods or services, or anycombination thereof, which are naturally bundled and supplied in conjunctionwith each other in the ordinary course of business, one of which is a principalsupply. However, taxability of such services is yet to be clearly defined as moreclarity is awaited on the same.


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2.4 Taxability of services provided to overseas entities

Freight forwarders and courier service providers typically provide services aspart of a global network in order to be able to provide last mile delivery for itscustomers in any country. The service providers, therefore, enter into networkcontracts whereby the Indian entity will provide services to its network entitywith respect to the last mile delivery in India and vice versa. Under the revisedGST Model Law, services provided to a non-resident entity will be construed asservices provided to a non-registered entity. Accordingly, the place of provisionof service will be the location where the goods are handed over for transportation,which will be India. Hence, services provided to the non-resident entity will besubject to GST on the basis of goods being handed over in India and therecipient being non-registered. At the same time, services received from thenon-resident entity will also be subject to GST under reverse charge on the basisof the recipient being in India.

2.5 Leasing of cars, trucks and aircrafts

An operating lease of an aircraft under the present indirect tax regime isconstrued as goods, whereas under the Model GST Law, it will be construed asa service. Presently, a carrier is not required to pay any indirect taxes on leasingan aircraft from an overseas entity. That is to say, aircrafts are not subject tocustoms duty (on account of an exemption) nor are the aircrafts subject to VAT(as the same are imported into India). However, under the Model GST Law,leasing an aircraft from a supplier located outside India, will be liable to tax asIGST on services under reverse charge.

2.6 Valuation of service in case of related persons

Under the GST Model Law, the concept of valuation for services in relatedparty transactions has been introduced. Therefore, for any services providedbetween group companies, such as agreements for logistics support betweennetwork entities, royalty for access to a global courier network, group companycost allocations, etc., it needs to be demonstrated that the transaction is at arm’slength. If this cannot be demonstrated, then the value shall be determined basedon the GST Valuation Rules, i.e., based on services of like kind and quality, orthe cost of providing the services, including profit.

Clarity is yet to come out on valuation rules.

2.7 Waybills and check-post related compliances

One of the biggest advantages of GST could be abolition of waybill system and,therefore, check-post related compliances. In all likelihood a TPIN system isgoing to be introduced where drivers can carry a Qwerty code and scan the same

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at check post and move ahead. Movement of goods within the State and fromone State to another entail stoppage of goods at check-post for verificationwhich leads to inefficiencies in the transportation system, increased cost due tohalting and compliance hassles for the business. Under GST, given that entireIndia is a single market place, it is hoped that the waybill requirement andcheck-post compliances should be done away with.


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[2017] 1 GSTPT (IA) 12

GST Impact on MSME

CS Dharmendra Sharma

This article is intended to explain impact of GST on micro,small and medium enterprises. The author believes that GSTwill bring in many positives in terms of easy process ofavailing input credit, single point tax, elimination ofcascading tax system and simpler taxation.

Background

1. Goods and services tax (‘GST’) is expected to make India ‘One CountryTax Market (OCTM)’ in terms of business. It will integrate and simplify theprocess of indirect taxation and will subsume complicated taxes such as Value-Added Tax (‘VAT’), Central Excise, Service Tax, Entry Tax or Octroi andother indirect taxes. It will bring uniform taxation rate across the country and isexpected to build a transparent and corruption free tax administration.

Effect on MSME

2. The major sector, which is expected to be affected positively by this majorregulatory policy in long term, will be Micro, Small and Medium Enterprises(‘MSME’) sector. The reform gives level playing field to both the big enterprisesand small businesses and removes the tax differentiation on stock transfer.Currently, majority of MSME players are unregistered in order to avoid payingtax and meeting compliance requirement. Following are the key challenges thatMSME face in current legal structures:

Non-creditable Central Sales Tax (CST).

Buying goods from across States against C-Form at 2 per cent getsinbuilt in cost raising sale margin. In times of stiff competition, 2 percent defines margin

MSME players also complained of delayed C-Form refund processing.

MSMEs, today, are reluctant to register themselves because of the cost ofcompliance and plethora of paper works. Under GST, free flow of credit and


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single tax structure would encourage more MSME player to come forward andpay taxes. However, increased compliance that GST brings could be a hindrance.

The positive impact of GST

3. The positive impact of GST on would be as follows :

Ease of starting and operating business – Currently, the sales tax department hasvarious turnover slabs which require VAT registration. A business with multi-state operation in this case has to follow varied tax rules applicable to di-fferentStates and they have to register themselves for central sales tax (CST) also.This not only creates excess complication but also adds to procedural fees, dueto which the price sensitive small businesses will be burdened. Uniform GSTwill standardise the process.

Opportunity for growth – In the current system, big corporations procured goodsfrom small businesses based on locality in order to reduce overheads. Thus,small businesses limit their customers within State as they will bear the ultimateburden of tax on inter-State sales, reducing their customer base. Withimplementation of GST, this will be nullified as tax credit will transferirrespective of location of buyer and seller. This allows SME segment to expandtheir reach across borders.

Lower transportation cost – GST will eliminate time consuming border taxprocedures and toll check posts and encourages supply of goods across borders.

One country tax market, ease a cumbersome tax market – GST will allowflexibility in transfer of goods across States and reduce the cost of doingbusiness, as the reform will cut down multiple taxes imposed by State andCentral Governments.

Stimulate investment – Due to raised compliance level and transparency in thefinancial matters, MSME would attract investment from foreign land and latesttechnology. It will boost production and generate employment in the country.

Removable negatives impact of GST

4. While the SMEs will enjoy the tax neutrality, reduction in duty threshold isone of their main concerns, removable concerns are as follows :

The burden of lower threshold – The GST bill proposes a reduction in thresholdto be around Rs. 10 lakh to increase the tax net, Rs. 5 lakh for North EasternStates. Under the reform, any service provider or retailer will be subject to taxlevy. In the current central excise law threshold is Rs.1.5 crore. This reduction

GST IMPACT ON MSME

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will signi-ficantly impact the SMEs’ working capital. For example, a manufacturerwho trades today at Rs. 25 lakh without any tax levy will be expected to payGST post-implementation. As the threshold is low, most MSMEs are nowexempted and will have to pay a chunk of their capital towards tax in future.

No tax differentiation for luxury items and services – The tax neutrality will notdifferentiate luxury goods and normal goods. Currently the State and CentralGovernments levy higher taxes on luxury goods and services. Under GSTimplementation, all goods and services will have to pay the same tax. This willlead to rich becoming richer and poor becoming poorer. It is not an idealsituation for SMEs competing against large businesses.

Increase in cost of product – SMEs that supply to the end customer will be theones to suffer. GST which will ultimately be levied on supply, will not beavailable for input credit. This will increase the cost of the product.

Selective tax levying – The industry rumours suggest that GST will not beapplicable to alcohol and petroleum based businesses, which creates further gapand does not support the “uni-fied market” ideology of GST.

Ambiguity in the minds of businessmen – The small entrepreneurs or businessmenare unaware of the process of getting themselves registered in the GST system.

Execution of new GST regime – Implementing the complex new tax systemcould be fraught with glitches. Migration from old tax structure to new GSTregime will put authority and businessmen on toes.

Conclusion

5. Every major reform tends to face opposition and criticism from variousstakeholders. However, from an SME perspective, GST will bring in manypositives compared to the current systems such as easy process of availing inputcredit, single point tax, elimination of cascading tax system, and simpler taxation.These pros o-ffset the negatives.The extent of such impact will depend on afavourable consensus on GST rates for all business segments and integratedimplementation of the same.

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[2017] 1 GSTPT (GSTD) 47

Principles of Time and Place of Supply under RevisedModel GST Law

Bimal Jain*

Revised Model Goods and Services Tax (‘GST’) Law, puton public domain on 26th November, 2016, reflects seemingefforts put in by the Government to look into the voluminoussuggestions submitted by various stakeholders. This articledeciphers the provisions of “time of supply” and “place of supply” containedin sections 12 to 14 of the revised Model GST Law.

TIME AND VALUE OF SUPPLY – SECTION 12, 13 AND 14 OF THE

REVISED MODEL GST LAW

The taxable event under the GST regime shall be ‘supply’ of goods and/orservices. However, the time of supply when the liability to pay CGST/SGST(Intra-State) or IGST (inter--State) on goods and/or services arises, shall bedetermined in the following manner:

1. General provision

The time of supply of goods and services shall be the earlier of the following :

Date of issue of invoice by the supplier or the last date on which he isrequired, to issue the invoice (under section 28) with respect to the supply

Date on which the supplier receives the payment with respect to the supply.

Provisions for raising invoice as per section 28 :

Supply of goods Supply of services

Before or at the time of, – Before or after the provision of service(a) removal of goods for supply but within a period prescribed [i.e., 30 daysto the recipient, where the supply in all cases/45 days in case of banking and financialinvolves movement of goods, or institution from the date of supply of services](b) delivery of goods or makingavailable thereof to the recipient,

in any other case

* FCA, FCS, LL.B, B.Com (Hons.). He can be reached at [email protected]

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Where amount up to Rs. 1,000 is received in excess of amount indicated inan invoice, the time of supply to the extent of such excess amount shall, at theoption of the said supplier, be the date of issue of invoice.

2. Supply under Reverse Charge Mechanism (‘RCM’)

Time of supply for goods Time of supply for services

Earliest of the following : Earliest of the following :

(a) Date of receipt of goods, or (a) Date on which payment is made, or

(b) Date on which payment is made, (b) Date immediately following 60 days fromor the date of issue of invoice by the supplier

(c) Date immediately following 30days from the date of issue ofinvoice by the supplier

Where it is not possible to determine the time of supply under the above clauses,thetime of supply shall be the date of entry in the books of account of the recipient of supply

In case of associated enterprise :

Where the supplier of service is located outsideIndia, the time of supply shall be the date ofentry in the books of account of the recipient or

the date of payment, whichever is earlier.

3. Supply of Vouchers

In case of supply of vouchers, by whatever name called, by a supplier, the time ofsupply for goods and services shall be – (i) date of issue of voucher, if the supplyis identifiable at that point; or (ii) date of redemption of voucher, in all other cases.

4. Residuary Provision

Where it is not possible to determine time of supply under the aboveprovisions, time of supply for goods and services shall be:

(i) in a case where a periodical return has to be filed, date on which suchreturn is to be filed ;

(ii) in any other case - date on which the CGST/SGST or IGST is paid.

5. Change in the rate of tax in respect of supply of goods or services

Here, the provisions provided under the Model GST Law are drawn on similar lineas existing rule 4 of the Point of Taxation Rules, 2011 (“POTR”). In other words,determination of rate of tax depends upon the following three important events :

Date of supply of goods or services

Date of invoice

Date of receipt of payment.

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Thus, the rate of tax would be the one prevailing when two out of three eventsoccur either prior to or after the date of change in rate of tax.

Manifestly, it seems that most provisions are borrowed from the presentPOTR under the Service tax laws, with some modifications. In the RevisedModel GST Law, number of parameters as provided in the First Model GSTLaw has been pruned down and events such as date of receipt of supply in thebooks of account of recipient, etc., have been removed. Thus, determinationof the time of supply provisions under forward charge has been mainlylimited to the following two parameters:

Date of issue of invoice or the last date on which the invoice isrequired to be issued

Date of receipt of payment

In First Model GST Law, provisions in respect of change in rate of tax wasrestricted for supply of services only, which now has been extended forsupply of goods as well. However, still no provision is provided in theRevised Model GST Law to determine the time of supply where goods orservices becomes taxable for the first time under the GST regime as providedunder section 67A of the Finance Act, 1994 read with rule 5 of the POTR.

PLACE OF SUPPLY OF GOODS AND/OR SERVICES – SECTIONS 7 TO 10OF THE REVISED MODEL IGST LAW

Principles for determining place of supply of goods and/or services are requiredfor the following reasons :

Taxpayer : To determine the nature of sale, i.e., intra-State/inter-State/import/export.

Government : To determine the State where State component of GSTwould accrue. Principles for determination of supplies of goods and/orservices in the course of intra-State or inter-State trade or commerce areprescribed in sections 3 and 4 of the Model IGST Act, 2016. Broadly,intra-State supply of goods/services means any supply of goods/serviceswhere the location of the supplier and the place of supply are in thesame State. Inter-State supply of goods/services means any supply ofgoods/services where the location of the supplier and the place of supplyare in different States.


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Section 7 – Place of supply of goods other than supply of goods importedinto, or exported from India

Scenario Place of supply

When movement of goods is involved Location of goods where movement terminatesfor delivery

When goods are supplied by transfer Principal place of business of third person onof documents during movement of whose direction goods were supplied to anothergoods (Bill to Ship to Model or personEI-EII model)

When movement of goods is not Location of goods at the time of deliveryinvolved

When goods are assembled or Place of such installation or assemblyinstalled at site

When goods are supplied on board a Location at which such goods are taken on boardconveyance (like food supplied byIndian Railways on journey)

Where the place of supply of goods Manner to be prescribed by the Centralcannot be determined as per above Government on recommendation of GST

principles Council.

Section 8 – Place of supply of goods imported into, or exported fromIndia

Scenario Place of supply

When goods are imported into India Location of the importer

When goods are exported from India Location outside India

Section 9 – Place of supply of services where location of supplier ofservice and location of the recipient of service is in India

Categories Place of supply

General Rule – Business to Business B2B supplies : Location of recipient(“B2B”) and Business to Consumer B2C supplies: Location of recipient where(“B2C”) address on record exists, if not, then the location

of supplier of services

Further, specific provisions for identified situations and different treatment for certain B2Band B2C transactions of specified services has also been provided in respect of the followingspecified services :

Services directly related to immovable Location of immovable propertyproperty

Where property/boat/vessel located in more thanone State proportionate allocation amongstStates as per the contract or on reasonablebasis

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Where location of the immovable property/boat/vessel is located or intended to be locatedoutside India Place of supply shall bethe location of the recipient

Specific services such as supply Place of actual performanceof restaurant and catering services,health service, etc.

Services in relation to training and B2B supply: Location of recipientperformance appraisal B2C supply: Place of performance

Admission to a cultural, artistic, Place where event held or where the park/othersporting, etc., events, amusement parks, place is locatedetc., and services ancillary thereto

Organisation of event and services in B2B supply: Location of recipientrelation to such event and ancillary B2C supply: Where event is heldservices or assigning of sponsorship Where the event is held in more than one State

and a consolidated amount is charged Proportionate value of services to beconsidered

Where event is held outside India Place ofsupply shall be the location of the recipient

Goods transportation services B2B supply: Location of recipient

B2C supply: Location at which such goods arehanded over for their transportation

Passenger transportation services B2B supply: Location of recipient

B2C supply: Place where the passengerembarks on the conveyance for a continuousjourney

Services on board a conveyance such Location of the first scheduled point of departureas vessel, aircraft, train or motor of that conveyance for the journeyvehicle

Telecommunication services including Fixed line/leased circuit, internet based circuit,data transfer, broadcasting, cable and cable or dish antenna Place of installationDTH services of the fixed line/leased circuit etc.

Mobile connection and internet services - Post-paid Billing address of the recipient on recordof the supplier

Mobile connection, internet services, DTH –Pre-paid (through physical voucher, etc.)

Through selling agent/re-seller/distributor:Address of the selling agent or re-seller ordistributor as per the record of the supplierat the time of supply

By any person to the final subscriber:Location where such pre-payment is receivedor such vouchers are sold


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In any other case Address of the recipientas per record of the supplier

Where address of the recipient as per records ofthe supplier is not available Place of supplyshall be location of the supplier of service

Where pre-paid service is availed or recharge ismade through electronic mode Place of supplyshall be location of the recipient as per record ofthe supplier

Where the leased circuit is installed in more thanone State and a consolidated amount is charged proportionate allocation amongst Statesas per the contract or on reasonable basis

Similarly, separate provisions have been provided for the following:

• Banking and other financial services

• Insurance services

• Advertisement services to the Central Government, a State Government, a statutory body

or a local authority

Section 10 – Place of supply of services where the location of supplieror the location of the recipient is outside India

Principles of place of supply of services when the location of supplier or thelocation of recipient is outside India, has been drawn on similar pattern asexisting in the Place of Provision of Services Rules, 2012 (“POPS”) fordetermining export/import of services from India/into India, with new inclusionof provision in case of “online information and database access or retrieval”(‘OIDAR’) services, wherein place of supply shall be the location of recipient.It is further provided that in order to prevent double taxation or non-taxation ofthe supply of a service, or for the uniform application of rules, the CentralGovernment shall have the power to notify any description of service orcircumstances in which the place of supply shall be the place of effective useand enjoyment of a service.

The place of supply principles have been expanded to provide separate set ofprinciples for import/export transactions. Place of supply provisions for servicesare drawn on similar line as the existing POPS with certain modifications.

Manifestly, it seems that honest attempt has been made by the Government toeradicate the daunting provisions in the First MGL, which can be very well seenin the above discussed provisions. However, it is required that the lawmakershould address the issues raised by stakeholders which are still left for thesmooth transition to GST regime.

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[2017] 1 GSTPT (GSTD) 53

Input Tax Credit – Arbitrary and Deficient Provision

Pradeep K Mittal*

In this article, the author decodes sub-sections (1) and (2)of section 16 which deal with eligibility and conditions fortaking input tax credit and sub-section (4) of section 17which lists out items in respect of input tax for credit shallnot be available. He concludes that there is a need to have re-look to theprovisions of law to make it more trade and industry friendly.

ENTITLEMENT TO TAKE CREDIT FOR INPUT TAX

1. Section 16 of Model GST Law released in November 2016, (‘MGL’) providesfor eligibility and conditions for taking input tax credit. Section 16 of MGLprovides for taking of input tax credit on :

supply of goods

services

pipeline and telecommunication towers fixed to earth by foundation orstructural support including foundation and structural support thereto

1.1 The close perusal of section 16 does not provide for taking input tax creditin respect of capital goods except pipeline and telecommunication towers fixedto earth by foundation or structural support including foundation and structuralsupport thereto. The proviso to sub-section (1) of section 16, inter alia, providesfor various stages at which the Input Tax Credit in respect of pipeline andtelecommunication towers shall be taken, but, however, conspicuously silent asto how and in what manner, the input tax credit on capital goods could be takenby the assessee unlike the provisions of rule 3 of Cenvat Credit Rules, 2004 –though the definition of capital goods is given in clause (19) of section 2 ofMGL.

* Past Central Council Member, Institute of Company Secretaries of India. e-mailid:[email protected]

INPUT TAX CREDIT

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TAXABLE PERSON WHEN NOT ENTITLED TO CREDIT OF INPUT TAX

2. The sub-section (2) of section 16 provides for taking on credit only when thesupplier of goods or services has paid the tax to the account of AppropriateGovernment. However, it is quite unlikely that the recipient of goods or servicesmay have paid the tax to the supplier but the supplier, in turn, may not havepaid to the appropriate Government Legally speaking, the supplier of goods orservices, who has not paid the tax to the Government should be penalised in astrongest way and not the recipient of goods or services who has acted as a lawabiding citizen by paying the consideration including the tax payable to thesupplier – yet such party is denied of its valuable right of ITC just becausesupplier, in a fraudulent and dishonest, manner had not paid the tax to thegovernment.

2.1 Similarly, sub-section (2) of section 16 provides that credit can be takenonly upon receipt of last installments when the goods have been received invarious installments. Ideally speaking, as and when the goods are received bythe recipient in one or more installments, the recipient should be allowed toavail the benefit of ITC.

ITEMS IN RESPECT OF WHICH INPUT TAX CREDIT IS NOT AVAILABLE

3. Motor vehicle – Clause (a) of sub-section 4 of section 17 provides that theinput tax credit shall not be available on motor vehicle. The professional usesthe vehicle both for official as well as personal purposes and, therefore, theinput tax credit on motor vehicle should be proportionately allowed restrictingthe credit for professional use may be in the ratio of 50 : 50.

3.1 Outdoor catering – Clause (b) of sub-section (4) of section 17 disallow ITCon “outdoor catering” except when the same is used for making outward taxablesupply of the same category of goods or services. In trade and industry, manytimes, seminars, sales conferences, workshop for technicians, trade meets areheld either for the dealers, engineers, staff, customers either within the organisationor outside the organization and, therefore, there is absolutely no reason as towhy the ITC paid on “outdoor catering” be disallowed.

3.2 Rent-a-cab – Likewise, ITC on “rent-a-cab” is sought to be disallowed evenin cases where the rent-a-cab has been used for the purpose of business of thecompany. Disallowing the credit of ITC for rent-a-cab is totally arbitrary andwithout any logic or reason. In the case of Reliance Industries Ltd. v. CCEMANU/CM/0374/2016, Bombay Bench of CESTAT has observed as under –though in respect of period post-2nd April, 2011 notwithstanding the amendment

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having been done disallowing cenvat credit on “outdoor catering” and “rent- a-cab”.

“Now the question that arises is regarding services which were excluded bythe amendment after 2nd April, 2011 to the definition of rule 2(1) of theCenvat Credit Rules, 2004. The said services are - outdoor catering, beautytreatment, health services, cosmetic and plastic surgery, membership of aclub, health and fitness centre, life insurance, health insurance and travelbenefits extended to employees such as leave or home travel concession.The amendment indicates when such services are used purely for personaluse for consumption of any employee, the cenvat credit cannot be allowed.On perusal of the records, we find that the appellants have been taking aconsistent stand that in their case outdoor catering services, club or associationservice, health and fitness services are three services on which cenvat creditfrom 1st April, 2011 is sought to be denied relying upon the said amendmentto rule 2(1) of the Cenvat Credit Rules, 2004, which is incorrect as theseservices are utilised for the business meetings held at various places includingannual general meeting.

On perusal of the records, show-cause notices and orders-in-original, wefind that the appellants have been taking the stand that the charges on clubor association service, health and fitness centre service and outdoor cateringservices are paid by the company and said claim of the appellant is notdispelled by the adjudicating authority in their findings. It is not the case ofthe Revenue that these services used for personal consumption of employees.In the absence of any such dispelling, it is to be held that these services onwhich cenvat credit have been availed are not for personal consumption ofthe employee but it was billed for service provided for business meetings.In our considered view, the judgment of the Tribunal in the case of J PMorgan Services (I) (P.) Ltd. v. Commissioner of Service Tax, MumbaiMANU/CM/0723/2015/[2016] 42 STR 196 (Tri-Mum), will cover the issuein favour of the appellant in respect of these three services for the periodafter 1st April, 2011.”

3.3 Construction of immovable property for logistic service – At the same time,as per clause (d) of sub-section (4) of section 17, if the immovable property issought to be constructed for the purpose of providing logistic services eventhen, cenvat credit is sought to be disallowed on the immovable property, i.e.,building, godown or premises. In my view, there is absolutely no reason as towhy the input tax credit for construction of immovable property should bedisallowed.

INPUT TAX CREDIT

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3.4 Goods/services used for personal consumption – Further, under clause (f)of sub-section (4) of section 17 seek to deny ITC on goods or services used forpersonal consumption. However, I do not find any provision in the MGL, whichexempts payment of tax on goods or services used for personal consumption.When the tax is payable even for goods or services used for personal consumption,therefore, there is no reason as to why the ITC should be allowed on such goodsor services used for professional consumption. It is contrary to the basic tenantand principle of Cenvat.

3.5 Goods disposed of by way of gift or free sample – Clause (g) of sub-section(4) of section 17 further disallows input tax credit when the goods have beendisposed of by way of ‘gift’ or ‘free sample’. Once again, it is beyond thecomprehension of any one as to why the input tax credit is sought to bedisallowed, when undoubtedly, MGL does not exempt gift or free sample fromthe levy of GST. It is a cardinal principle of cenvat credit, in case, when thereis a levy of tax on either gift or samples, the natural corollary is the assesseeshould be entitled to avail the input tax credit.

3.6 Tax paid in terms of section 67, 89 or 90 – Sub-clause (h) of sub-section(4) of section 17 further disallows the input tax credit of duty/tax paid undersection 67, 89 or 90. Again, it is cardinal principle of law that once the duty/taxhas been paid by the assessee, he should be entitled to Cenvat credit as has beenheld by the Supreme Court. The Supreme Court in the case of the Collector ofCentral Excise v. Dai Ichi Karkaria Ltd. MANU/SC/0467/1999/1999 (112)ELT 353 (SC) at para 17 held as under :

“17. It is clear from these Rules, as we read them, that a manufacturerobtains credit for the excise duty paid on raw material to be used by him inthe production of an excisable product immediately it makes the requisitedeclaration and obtains an acknowledgement thereof. It is entitled to use thecredit at any time thereafter when making payment of excise duty on theexcisable product. There is no provision in the Rules which provides for areversal of the credit by the excise authorities except where it has beenillegally or irregularly taken, in which event it stands cancelled or, ifutilised, has to be paid for. We are here really concerned with credit thathas been validly taken, and its benefit is available to the manufacturerwithout any limitation in time or otherwise unless the manufacturer itselfchooses not to use the raw material in its excisable product. The credit is,therefore, indefeasible. It should also be noted that there is no co-relationof the raw material and the final product; that is to say, it is not as if creditcan be taken only on a final product that is manufactured out of the

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particular raw material to which the credit is related. The credit may betaken against the excise duty on a final product manufactured on the veryday that it becomes available.”

It is not very uncommon that when the demands are raised invoking largerperiod of limitation and when the demand is confirmed, assessee pays the taxalong with interest and penalty – many a time penalty is equal to duty as provisoto section 11A of the Central Excise Act. Therefore, the assessee should be atleast allowed to take credit of input tax credit, otherwise it will be a doublejeopardy. On the one hand the assessee is not allowed input tax credit and on theother hand he is paying interest and penalty when the demand is confirmedunder section 67, 89 or 90.

CONCLUSION

4. In my humble view, there is a need to have re-look to the above provision oflaw to make it more trade and industry friendly.

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[2017] 1 GSTPT (GSTD) 58

Decoding Valuation under GST

CA Rohit Surana

Section 15 of the revised Model GST law lays down thevaluation aspects under GST, i.e., what would be the valueof taxable supply on which tax is payable. In this article,the author decodes section 15 of the revised Model GSTLaw dealing with valuation aspects of taxable supply under the revisedmodel GST law.

VALUE TAXABLE SUPPLY

1. Section 15 provides as follows :

“(1) The value of a supply of goods and/or services shall be transactionvalue, that is the price actually paid or payable for the said supply of goodsand/or services where the supplier and recipient of supply are not related andprice is the sole consideration for supply.

(2) The value of supply shall include –

(a) any taxes, duties, cesses, fees and charges levied under any statue, otherthan (SGST Act/CGST Act) and the Goods and Service tax (Compensationto the State for Loss of Revenue) Act, 2016, if charged separately by thesupplier to the recipient ;

(b) any amount that supplier is liable to pay in relation to such supply butwhich has been incurred by recipient of the supply and not included inthe price actually paid or payable for the goods and/or services ;

(c) incidental expenses, such as, commission and packing, charged by thesupplier to the recipient of a supply, including any amount charged foranything done by the supplier in respect of supply of goods and/orservices at the time of, or before delivery of the goods, or as the casemay be, supply of the services ;


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(d) interest or late fee or penalty for delayed payment of any considerationfor any supply ; and

(e) subsidies directly linked to the price excluding subsidies provided by theCentral and State governments ;

Explanation : The amount of subsidy shall be included in the value of supplyof the supplier who receives the subsidy.

(3) The value of supply shall not include any discount that is given :

(a) before or at the time of supply provided such discount has been dulyrecorded in the invoice issued in respect of such supply ; and

(b) after the supply has been effected, provided that :

(i) such discount is established in terms of agreement entered into at orbefore the time of such supply and specifically linked to relevantinvoices ; and

(ii) Input tax credit has been reversed by the recipient of the supply as isattributable to the discount on the basis of document issued by thesupplier.

(4) Where the value of supply of goods and or services cannot be determinedunder sub-section (1), the same shall be determined in such manner as maybe prescribed.

(5) Notwithstanding anything contained in sub-section (1) or sub-section (4),the value of such supplies as may be notified by the Central or StateGovernment in this behalf on the recommendation of the council shall bedetermined in such manner as may be prescribed.

Analysis

Let us break down the aforesaid section for constructive analysis:

First limb – Understanding “transaction value”

Value of supply shall be transaction value for the supply of goods andservices. The following points are important to understand the definition of‘transaction value’ :

The value of supply of goods and services on which GST is payable isknown as ‘transaction value’

Transaction value is nothing but price actually paid or payable for thesaid supply of goods and/or services

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Transaction value must be a value which has relation to supply ofgoods or services

Illustration – A business house is getting its office designed and decoratedfrom an interior decorator and enters into three separate agreements withthe same interior decorator :

Supply of furniture and décor items for Rs. 10 lakh

Consultancy for architecture for Rs. 5 lakh

Vastu consultancy for Rs. 2 lakh

Assuming furniture and décor items are subject to GST at 18 per cent andservices are subject to GST at 12 per cent.

Question – Whether the interior decorator can treat the entire contracts assupply of services and charges GST at 18 per cent?

Answer – Transaction value is value for supply of goods or services. Eachtransaction which are not bundled and clearly distinguishable, even thoughentered into with the same person, is to be treated as separate transactionand transaction value has to be worked out accordingly. The transactionvalue must have relation to the supply of goods or services. In the instantcase, one may argue that supply of furniture has no relation with vastuconsultancy. Therefore, supply of furniture and décor items is a separatetransaction for goods and transaction value would be Rs. 10 lakh and GSTwould be charged accordingly. Similarly the consultancy for architectureand Vastu Consultancy are separate supply of services and transaction valuehas to be Rs. 7 lakh (5 + 2) and GST will be charged accordingly.

Second limb – The transaction value would be accepted only if thesupplier and recipient are not related

An inherent assumption or suspicion arises as to the veracity of the value ofsupply when two related parties are involved. The principle behind theconcept of “related person” has been accepted by the Supreme Court inBombay Tyre International’s case wherein it was observed :

‘Veil of corporate entity could be lifted to pay regard to the economicrealities behind the legal façade, for example, where the corporate entitywas used for tax evasion or to circumvent tax obligation… The definitionof related person (after “reading down” it in respect of provision of‘distributor’) does not suffer from any constitutional infirmity. It is withinthe legislative competence of Parliament.’

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Who are related parties? – Clause (84) of section 2 of the Revised ModelGST states that a person shall be deemed to be related persons on thefollowing situations :

If they are officers or directors of one another businesses :

Mr. A is running a business of paints and has Mr. B as officer/directorand Mr. B is running the business of coatings and has Mr. A as officer/director.

This refers to the case of ‘interlocking Directorate’ where both thebuyer and seller participate as executive manager or director of eachother’s business. For example, the chief executive officer of the Buyermay also act as president of the seller. In such positions, Individualscan influence or manipulate pricing decisions of one business to theadvantage of the other.

If they are legally recognised partners in the business :

Similarly X and Y are partners in a partnership firm carrying out RealEstate Business. X and Y are also carrying their separate business ofLeather Goods and Button fitting respectively. Any transaction betweenX’s Leather Goods and Y’s Button fittings would be a related partytransaction.

If they are employer and employee :

Mr. Z is working in employment with Mr. X who is into LeatherBusiness. Mr. Z is also running a trading firm of textile material andsupplies goods to Mr. X. This would be a related party transaction.

If they are members of the same family :

Members of the same family could be : (i) brothers and sisters, (ii)husband and wife, (iii) parent and child, (iv) grandparent and grandchild,(v) uncle or aunt or nephew or niece, (vi) parent-in-law and son-in-lawor daughter-in-law, (vii) brother-in-law and sister-in-law. Any transactionbetween members of the same or affiliated business enterprises byvirtue of the aforesaid relation would be a related party transaction.

If any person directly or indirectly owns, controls or holds twenty-fiveper cent or more of the outstanding voting stock or shares of both ofthem

A buyer and seller are related if a third person directly or indirectlyowns, holds or controls 25 per cent or more of the outstanding votingstock of both the buyer and seller. This definition describes the case

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when the buyer and seller are members of the same corporate family.One person or entity (the corporate parent) is in a position to exerciseinfluence both on the buyer and seller as a result of ownership interestit has in each of them (a ‘person’ could include a legal person, such asa company or other business entity, which owns or control the buyerand seller, which themselves might also be such business entities). Whyis voting stock of 25 per cent important? It is likely intended to mark aboundary between the pure portfolio type investments, where the investoris interested only in the financial returns from investment in a business,from a direct investment which an investor make for purposes ofexercising management control.

One of them directly or indirectly controls the other

Both of them are directly or indirectly controlled by a third person

Together they directly or indirectly controls a third person;

CONTROL CONCEPT

Stock ownership does not cover all business arrangements whereby one businessmay be in a position to exert influence over the pricing or the other commercialor strategic decisions of another firm. There are other ways by which thedecision making could be influenced or restrained. For example, consider thesecases:

The majority shareholder of the company S (the seller) is also a directorof B (the buyer).

Company S the seller direct, under a management contract, the day-to-day operations of independent company B the buyer.

Company B the buyer is a franchise of the company S the seller.

Company S (the seller) is the majority creditor of a company B (thebuyer or holds a mortgage against its asset.

Company S the seller and company B the buyer together form a jointventure company. Company C, which is the ultimate consignee of theimported goods.

Company B controls the Board of directors of company C as majorityshareholders of company B are directors in Company C.

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Related party test:

Rider: Even if the supplier and the recipient is related, transaction value canbe adopted if it can be proved that such relationship has not influenced theprice – Rule 3(4) of the Draft GST Valuation (Determination of the Value ofSupply of Goods and Services) Rules, 2016

Revised Model GST law read with probable Rules does not permit thedepartment to reject a price simply because the buyer and seller are related.Based on the available information whether supplied by the supplier orrecipient or obtained from other sources, the department must have somegrounds for finding that the supplier and recipient relationship influenced theprice. It may also be seen that it is not incumbent upon the department toexamine every related party transaction before it can accept the transactionvalue. Given the volume of related party trade, it would be impractical forthe department to do so. The department would rather select for examinationthose related party transactions. ‘’where there are doubts about the acceptabilityof price”. There may in fact be related party transaction value for which thedepartment will have no doubt.

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For example : The GST administration may have previously examined therelationship, or it may already have the detailed information concerning thesupplier and the recipient, and may already be satisfied from such examinationor information that relationship did not influence the price.

What if the relationship has influenced the price between supplier and recipient?– In case the department finds that the relationship between supplier and recipienthas influenced the price then it would resort to Draft GST Valuation(Determination of the Value of Supply of Goods and Services) Rules, 2016.

Third Limb : When else can department refer to Draft GST Valuation(Determination of the Value of Supply of Goods and Services) Rules, 2016?

Answer is when Price is not the sole consideration for supply between thesupplier and the recipient.

What do you mean by “price is not the sole consideration for supply”?

The Model GST Law does not define or explain the meaning of ‘price being thesole consideration for supply’. Since this terminology was used in earlier statutesas well, we take help of some of the landmark judicial pronouncements tounderstand its scope and reference. These are as follows :

• In CCE, Ahmedabad v. Xerographic Ltd. [2006] 9 SCC 556, the SupremeCourt has observed that the existence of any extra commercial considerationwhile fixing a price would not amount to normal price.

• The Supreme Court in the case of Fiat India has observed that the Revenuedoes not allege that the buyer is a related person, nor do they allege element offlow back directly from the buyer to the seller, but certainly, they allege that theprice was not the sole consideration and the circumstance that no prudentbusinessman would continuously suffer huge loss only to penetrate the marketand compete with other manufacturer of more or less similar cars. A prudentbusinessman or woman and in the present case, a company is expected to actwith discretion to seek reasonable income, preserve capital and, in general,avoid speculative investments. The Court also held that the main reason for theassessees to sell their cars at a lower price than the manufacturing cost and profitis to penetrate the market and this will constitute extra commercial considerationand not the sole consideration.

• The Tribunal in the case of Sun Pharmaceuticals has held that the fact that theprice is not sole consideration is sufficient for rejecting the transaction value :the whole arrangement is on paper only with a view to avoid duty and in factthere is no sale. Agreed price is not the sole consideration and is influenced bythe factor that free distribution is to be done by the appellants themselves

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through its medical representatives and whole planning thereof is to be done bythe appellants. Thus, the buyer had been absolved of all the expenses incurredon the marketing and distribution of physician samples and the expenses to thiseffect have been incurred by the appellants themselves and, therefore, the agreedprice is influenced by the factor that the distribution expenses have been takenover by the appellants themselves. Therefore, even if there is no flow back ofany money, the fact that the price is not sole consideration is sufficient forrejecting the transaction value.

• In CCE v. IFGL Refractories Ltd. 2005 (186) ELT 529 (SC), the seller hadadvanced licence. It was surrendered to enable the supplier-manufacturer to getadvanced intermediate licence, due to which the seller agreed to sale the goodsat prices much lower than the prices quoted earlier. It was held that this is‘additional consideration’ to assessee, since, in absence of such licence, priceswould have been higher. Hence, this is included in assessable value.

Other examples could be where the seller establishes the price of the goods onthe condition that the buyer will also buy other goods in specified quantities.

Fourth limb – Inclusions in Transaction Value

Taxes, duties, cesses, fees and charges levied under any statute, other than GST,if charged separately by the supplier to the recipient

Let’s say a cess is levied on pan masala and the value of pan masala includesthat cess, then GST is to be levied on that value which is including cess.Similarly an additional duty is levied on textile items, then GST is to be leviedon the value including such additional duty.

Any amount that supplier is liable to pay in relation to supply but has been paidby the recipient of such supply

Let’s say, we give a contract for construction of cement factory on a turn-keybasis. However being a manufacturer of cement, the recipient undertakes tosupply the cement to the contractor for construction on FOC basis. The value ofcement so supplied by the recipient of works contract Service will be added onto the transaction value.

Incidental expenses, such as, commission and packing, charged by the supplierto the recipient of a supply, including any amount charged for anything done bythe supplier in respect of supply of goods and/or services at the time of, orbefore delivery of the goods, or as the case may be, supply of the services

Let’s say A orders a mobile phone to B. Normally B supplies the phone in pre-packed condition along with a carry bag. However A requests B to carry out aspecial packaging which will be shock absorbent as the mobile is to be sent far

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off. A also request to carry out a gift packing over and above the specialpacking. B charges Rs. 10,000 for mobile and Rs. 700 for additional packaging.GST would be payable on Rs. 10,700.

Interest or late fee or penalty for delayed payment of any consideration for anysupply

Let’s say X supplies goods to Y on the condition that payment has to be madewithin 60 days, failing which interest at 1.5 per cent would be charged for eachmonth of delay or part thereof. Y fails to make payment for 2 more monthsafter the scheduled 60 days and then makes the payment along with interestthereto. X, who would have raised invoice earlier only for the goods and wouldhave charged GST thereon would now have to raise a fresh invoice for interestamount along with GST thereto.

It may be interesting here to note that in earlier legislations (Excise, ServiceTax and VAT), Courts have held that interest charged for delayed paymentscannot form part of transaction value as it is not related to manufacture or salebut is purely punitive in nature.

Subsidies except subsidies received from Central or State Government

Let’s say that ONGC decides to pass on the subsidy to LPG marketing companiesand sell the gas at a lower price. The said subsidy may also form part ofTransaction Value.

GST VALUATION RULES

Coming up in next issue

Section 15(4) : When to resort To rules ?

In our next issue, we shall discuss in depth about the GST Valuation Rules.

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Frequently Asked Questions on GST Pertaining toRetail Sector

CA Rohit Surana

Whether input tax credit can be availed or needs to be reversedin case of damaged and defective items, popularly known asDAD in retail sector?

As per clause (4) of sub-section (4) of section 17 of revised Model GST Law(‘MGL’), input tax credit shall not be available on goods lost, stolen, destroyedor written off. Strangely the provision of remission of duty on such goodswhich was there in section 11 of the first draft Model GST Law is missing inthe revised MGL.

What will be the scenario for reversal of input tax credit where the damagedgoods are sold at let us say 80% discounted value?

There are lot of second’s sale in retail sector. Goods originally priced are sold athefty discounts. The MGL clearly allows input tax credit even where the goodsare sold at discount provided certain conditions are met. Merely because thegoods are partially damaged and are to be per force sold at a discounted price toclear the stock, the intention of MGL does not appear to be disallowing inputtax credit in such cases. One may take a view that ITC is not available onlywhen the goods are completely destroyed or damaged beyond repair reducing itsvalue to nullity. Such a view appears plausible as then there is no output GST insuch cases. However, the MGL will evolve into legislation and Rules are to beissued and, hence, one should be alert for more clarity.

Is there any provision under the MGL to attribute a deemed consideration ondisposal of damaged and defective goods?

Section 3 states that the term ‘supply’ includes disposal of goods and/or servicesfor a consideration. The term ‘supply’ also includes a supply specified inSchedule I made without consideration. The Schedule I, inter alia, includespermanent transfer/disposal of business assets where input tax credit has beenavailed and supply of goods between related party transactions. The term businessassets has not been defined under the MGL.


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Normally, disposal of damaged or defective items without consideration maynot be termed a supply unless one takes a view that such goods are businessassets and there disposal would be a deemed supply as per Schedule I or such adisposal is to or through related party. Therefore, if a transaction is not asupply, it is a futile exercise for the purpose of lay of GST to attribute a deemedconsideration to such transaction.

In case it is termed as deemed supply, we will have to take recourse to valuationRules. However, the author believes that such disposal to unrelated party shouldnot be attributed a deemed consideration for the purpose of levy of GST.

What should be the transaction value for scrap sale where obviously theconsideration is lower than the original value?

Scrap of goods other than capital goods sold to unrelated parties shall be valuedat transaction value, i.e., the value of sale. Capital goods sold as scrap, eitherinput tax has to be reversed after reducing the same by such percentage as maybe prescribed or transaction value whichever is higher.

In retail sector, sometimes certain goods are found extra than what wasinvoiced as is popularly known as positive shrinkage. These extra goods arealso sold. What is the implication on such goods found extra and sold?

In case of positive shrinkage, GST has to be paid on transaction value of suchgoods sold. Input tax credit can be taken only on the invoiced amount. Sincethese goods have not been invoiced, these are free receipts for which no notionalinput tax credit can be taken. In case the vendor decided to invoice it later, inputtax credit may be taken subject to certain conditions.

If insurance claim received on damaged/defective/lost/stolen goods, what wouldbe the implications under the MGL?

One has to analyse the definition of ‘supply’ and ‘consideration’ as per MGL.As per section 3, normally Supply can only take place when such supply ismade in course or furtherance of business. Further, ‘consideration’ as definedunder clause (28) of section 2 states that any payment made has to be in respectof, in response to or for the inducement of supply of goods and/or services. Inour view, goods destroyed/damaged/lost/stolen cannot be said to be in course orfurtherance of business and Insurance claim cannot be called a consideration forsupply of goods and/or services, hence, no GST is payable. It is also noteworthythat there have been judicial pronouncements where it has been held that neitherexcise duty nor VAT is payable on Insurance claims received.

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What will be the transaction value in case of stock transfer?

The MGL states that the value in case of inter-State stock transfer would be‘transaction value’. Since stock transfer takes place between two related parties,transaction value would be the value at which the goods are sold to unrelatedparties from that place at the time of supply.

What will be the transaction value in case of ‘buy 1 get 1 free’ offers (1 unit= Rs. 100) and GST liability?

GST would be payable on Rs. 100, i.e., the value at which both the units aresupplied. However, since one unit is chargeable and the other is free, input taxcredit apropos one unit has to be reversed. However, law needs to have a relookat this. In order to circumvent this provision, I might sell both the units at adiscount of 50 per cent. In such a case output GST liability remains the samebut ITC reversal is not required.

What are Implications on issue of gift voucher?

• When issued free of cost but worth Rs. 1,000 – No GST is payable at the timeof issue but when the Gift Voucher is redeemed, proportionate ITC has to bereversed.

• When issued for a consideration, i.e., for Rs. 1000 and charged Rs. 1,000 – Ifthe supply is identifiable at the time of issue of voucher, then GST is payable atthat time otherwise GST is payable when the voucher is redeemed.

• Voucher worth Rs. 2,000 sold for Rs. 1,500 – GST would be payable on Rs.1,500 if the supply is identifiable at the time of issue of voucher, then GST ispayable at that time otherwise GST is payable when the voucher is redeemed.

• Voucher issued worth Rs. 2,000 for Rs. 2,000 and customer purchased goodsworth Rs. 1,800 only – GST would be payable on Rs. 2,000

• Voucher issued worth Rs. 2,000 for Rs. 2,000 and customer purchased goodsworth Rs. 3000 – GST would be payable on Rs. 3,000

What will be implication if gift voucher sold for consideration and not redeemedtill expiry?

It is clear that consideration has been received when the voucher was issued asthe definition of ‘consideration’ includes any payment in respect of or inresponse of or in inducement of supply of goods or services in this.

• The moot question is whether there was a supply – In case of vouchers, time ofsupply is at the time of issue of voucher if the supply is identifiable or else

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when the voucher is redeemed. Now if the voucher has been issued for specificproduct, let us say X brand of Jeans then the supply is identifiable at the time ofissue of voucher and GST is payable at the time of issue of voucher. However,if the product is not identifiable and a general voucher is issued and the same isnot redeemed till the expiry date, whether there is a supply and whether GST ispayable. Supply as per section 3 of the MGL includes all forms of supply ofgoods/services such as sale, transfer, barter, licence, rental, lease or disposalmade or agreed to be made for a consideration.

• Whether issue of voucher can be treated as supply of goods or services? – Oneview could be that since the voucher has not been redeemed, there is no supplyof goods or services. However, is there another view possible? A voucher issuedby a retail store carries a right – a right to take a specific or general product, asthe case may be, from that retail store of the value specified in the voucher andwithin the time specified therein. Therefore, it creates a right in goods whichmay be specific to a product or to any product in the store. It is implicit thatvoucher is not goods but can we take a view that issue of voucher is a servicewhich is defined as anything other than goods and includes an activity relatingto the use of money. Schedule II lays down that any transfer of right in goods isa supply of services. This view could be a plausible one and GST could bepayable accordingly.

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Frequently Asked Questions on registration (Part-I)

CA Harsh Gadodia

Who are the persons liable to take a Registration under theModel GST Law (‘MGL’)?

Registration under GST has to be obtained by the followingclass of entities :

• Persons currently assessed under any tax that is proposed to be subsumedunder GST

• Persons who is supplying taxable goods and services and exceeds aggregateturnover of Rs 20 lakh. Exception – A person supplying goods and servicesfrom a State specified in sub-clause (g) of clause (4) of article 279A of theConstitution, the threshold limit is 10 lakh.

• Casual suppliers of goods and/or services

• Non-resident suppliers of goods and/or services

• Specified persons (UN, WHO, etc.)

Who are the states covered under sub-clause (g) of clause (4) of article 279Aof the Constitution?

States covered are as follows :

Arunachal Pradesh

Assam

Jammu and Kashmir

Manipur

Meghalaya

Mizoram

Nagaland

Sikkim


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• Tripura

• Himachal Pradesh

• Uttarakhand

Whether the assesee who is already registered under the current tax regime isrequired to make fresh application for registration under GST?

No, except input service distributor, all other person who is already registeredunder the earlier law is not required to apply for fresh registration. However,they need to apply for migration into GST.

What is aggregate turnover?

As per clause (6) of section 2 of the MGL, aggregate turnover includes theaggregate value of the follows :

All taxable supplies

Exempt supplies

Exports of goods and/or service

Inter-state supplies of a person having the same PAN

The above shall be computed on all India basis and excludes taxes chargedunder the CGST Act, SGST Act and IGST Act.

Note – Aggregate turnover does not include value of supplies on which tax islevied on reverse charge basis and value of inward supply.

Whether non-taxable supplies are included under the purview of aggregateturnover?

As per clause (44) of section 2 of the MGL, “exempt supply” means supply ofgoods and/or services which are non-taxable under the Act and includes suchsupply of goods and/or services which attract nil rate of tax or which may beexempt from tax under section 11. Considering the above definition, it statesthat exempt supplies include non-taxable supply. Since exempt supply is includedin the value of aggregate turnover, therefore, non-taxable supplies shall alsoform part of aggregate turnover.

Who are liable to take registration irrespective of threshold limit as stated inSchedule V of the MGL?

Following categories of persons shall be required to be registered compulsorilyirrespective of the threshold limit :

Persons making any inter-State taxable supply

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Casual taxable persons

Persons who are required to pay tax under reverse charge

Non-resident taxable persons

Persons who are required to deduct tax under section 37

Persons who supply goods and/or services on behalf of other registeredtaxable persons whether as an agent or otherwise

Input service distributor

Persons who supply goods and/or services, other than branded services,through electronic commerce operator

Every electronic commerce operator

An aggregator who supplies services under his brand name or his trade name

Such other person or class of persons as may be notified by the CentralGovernment or a State Government on the recommendations of the Council.

What is the time limit for taking a registration under MGL?

As per sub-section (1) of section 23 of the MGL, every person liable to takeregistration under schedule V shall apply for registration within 30 days fromthe date on which he becomes liable to registration. In case of casual taxableperson or a non-resident taxable person, they shall apply for registration at leastfive days prior to commencement of business.

Suppose, a company is supplying goods from Karnataka (threshold limit 20 lakhis applicable) and also supplying goods from Mizoram (threshold limit 10 lakhis applicable). The question arises here is whether the company is required totake registration once he crosses the turnover of Rs. 10 lakh and starts payingGST or when it crosses 20 lakh?

As of now, the law is not clear in this regard, as aggregate turnover is to becalculated in all India PAN basis and not on individual basis.

If a person is operating in different States, with the same PAN number,whether he can operate with a single registration?

As per Schedule V of the MGL, every State from where he makes a taxablesupply of goods and/or services, he shall take a registration in each such Stateseparately.

Whether a person having multiple business verticals in a State can obtain fordifferent registrations?

As per sub-section (2) of section 23, a person having multiple business verticals

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in a same State may obtain a separate registration for each business vertical,subject to such condition as may be prescribed. For example, ABC ltd. is havingtwo segments in Karnataka, where in first segment ; the company is runningbanquets for a social function and in second segment, dealing in jewellery.Since both are two different verticals in same State, ABC Ltd. can obtain twoseparate registrations for both the segments in same State.

What is business vertical?

As per clause (18) of section 2 of the MGL, business vertical means adistinguishable component of an enterprise that is engaged in supplying anindividual product or service or a group of related products or services and thatis subject to risks and returns that are different from those of other businessverticals.

What are the factors that need to be considered in determining whetherproducts and services are related?

As per explanation to clause (18) of section 2 of the MGL, factors that need tobe considered in determining whether products or services are related includethe following :

Nature of products or services

Nature of production processes

Type or class of customers for products or services

Method used to distribute the products or provide the services

If applicable, nature of the regulatory environment, for example l banking,insurance, or public utilities.

Is there a provision for a person to get himself voluntarily registered thoughhe may not be liable to pay GST?

Yes, as per sub-section (3) of section 23 of the MGL, a person, though, may notliable to be registered under Schedule V of the MGL, may get himself registeredvoluntarily and all provisions of this Act, as are applicable to a registeredtaxable person, shall apply to such person.

Why voluntarily registration would be required?

Taking a voluntarily registration is all about tax planning. One of the situationwhere taking registration voluntarily is beneficial is when input tax credit ismore than output tax at the time of commencement of business. Business whichare more capital intensive rather than labour intensive, would accumulate huge

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amount of input tax credit at the time of commencement of business whichwould otherwise be lost if registration has not been taken. There may be someother reasons for taking voluntarily registration, i.e., pricing effect on theproduct, buyers policy, etc.

What are the documents required for registration?

Documents required for registration are as follows :

Proof of constitution of business (certificate of incorporation, partnershipdeed, etc.)

Details of proof of principle place of business

Details of bank account of applicant

Details of authorised signatories

Photographs of authorised signatories

Is possession of a permanent account number (PAN) mandatory for obtaininga Registration?

Yes, as per sub-section (4) of section 23 of the MGL, every person shall have aPAN under the Income-tax Act, 1961 in order to be eligible for grant ofregistration under the MGL. However, PAN is not mandatory for a non-residenttaxable person who may be granted registration on the basis of any otherdocument as may be prescribed. Provided a person, who is to require deduct taxunder section 46, in lieu of having a PAN, shall have tax deduction andcollection account number (TAN) issued under the Income-tax Act in order tobe eligible for grant of registration.

Whether the Department through the proper officer, can suo motu proceedwith registration of a person under the Act?

Yes, as per rule 10 of the GST Registration Rules, where a person who is liableto be registered under the Act fails to obtain registration, the proper officermay, without prejudice to any action that is, or may be taken under the MGL,or under any other law for the time being in force, proceed to register suchperson on a temporary basis and issue an order in Form GST REG 13.

Whether the proper officer can reject an application for registration?

Yes, as per sub-section (4) of section 26 of MGL, the proper officer can rejectan application for registration after due verification. However, it is also providedthat the proper officer shall not reject the application for registration or theunique identity number without giving a notice to show cause and withoutgiving the person a reasonable opportunity of being heard.

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Whether the registration granted to any person is permanent?

Yes, the registration certificate once granted is permanent except in case of suomotu registration by the proper officer.

Is it necessary for the UN bodies or other person mentioned in sub-section (7)of section 23 to get registration under MGL?

As per sub-section (7) of section 23 of the MGL, all UN bodies, consulate orembassy of foreign countries and any other class of persons so notified would berequired to obtain a unique identification number (UIN) from the GST portal.The structure of the said ID would be uniform across the States in conformitywith GSTIN structure and the same will be common for the Centre and theStates. This UIN will be needed for claiming refund of taxes paid by them andfor any other purpose as may be prescribed in the GST Rules.

What is the responsibility of the taxable person supplying to UN bodies,consulate, embassy, etc.?

The taxable supplier supplying to these organisations is required to mention theUIN on the invoices and treat such supplies as supplies to another registeredperson (B2B) and the invoices of the same will be uploaded by the supplier.

Whether amendments to the registration certificate is permissible?

As per section 25 of the MGL, the proper officer may on the basis of suchinformation furnished either by the registrant or as ascertained by him, approveor reject amendments in the registration particulars in the manner and withinsuch period as may be prescribed. It is to be noted that permission of the properofficer for making amendments will be required for only certain core fields ofinformation, whereas for the other fields, the registrant can himself carry outthe amendments.

Whether cancellation of registration certificate is permissible?

Any registration granted under this Act may be cancelled by the proper officer,in circumstances mentioned in sub-section (1) of section 26 of the MGL. Theproper officer may, either on his ownmotion or on an application filed, in theprescribed manner, by the registered taxable person or by his legal heirs, in caseof death of such person, cancel the registration in such manner and within suchperiod as may be prescribed.

Whether cancellation of registration under the CGST Act means cancellationunder the SGST Act also?

Yes, as per sub-section (6) section 26 of MGL, the cancellation of registration

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under one Act (say CGST Act) shall be deemed to be a cancellation of registrationunder the other Act (i.e., SGST Act).

Can the proper officer cancel the registration on his own?

As per sub-section (4) section 26 of the MGL, in certain circumstances specifiedunder the MGL, the proper officer can cancel the registration on his own. Suchcircumstances include not filing return for a continuous period of six months(for a normal taxable 36 person) or three months (for a compounding taxpayer),and not commencing business within six months from the date of registration.However, before cancelling the registration, the proper officer has to follow theprinciples of natural justice.

What happens when the registration is obtained by means of wilful mis-statement, fraud or suppression of facts?

As per sub-section (3) of section 26 of the MGL, the registration obtained bymeans of wilful miss-statement, may be cancelled with retrospective effect bythe proper officer subject to provisions of section 37.

Is there an option to take centralised registration for services under MGL?

No. There is no such option.

If the taxpayer has different business verticals in one State, will he have toobtain separate registration for each such vertical in the State?

No, however, the taxpayer has the option to register such separate businessverticals independently in terms of sub-section (2) of Section 23 of theMGL.

What could be the liabilities (insofar as registration is concerned) on transferof a business?

As per Schedule V, point 4, of the MGL, the transferee or the successor shall beliable to be registered with effect from such transfer or succession and he willhave to obtain a fresh registration with effect from such date.

Whether all assesses/dealers who are already registered under existing centralexcise/service tax/vat laws will have to obtain fresh registration?

No, GSTN shall migrate all such assessees/dealers to the GSTN network andshall issue GSTIN number and password. They will be asked to submit allrequisite documents and information required for registration in a prescribedperiod of time. Failure to do so will result in cancellation of GSTIN number.The service tax assessees having centralised registration will have to applyafresh in the respective States wherever they have their businesses.

REGISTRATION

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At the time of registration will the assessee have to declare all his places ofbusiness?

Yes. The principle place of business and place of business have been separatelydefined under the MGL, respectively. The taxpayer will have to declare theprinciple place of business as well as details of additional places of business inthe registration form.

Is there any system to facilitate smaller dealers or dealers having no ITinfrastructure?

In order to cater to the needs of taxpayers who are not IT savvy, followingfacilities shall be made available :

Tax Return Preparer (TRP) : A taxable person may prepare his registrationapplication/returns himself or can approach the TRP for assistance. TRP willprepare the said registration document / return in prescribed format on the basisof the information furnished to him by the taxable person. The legal responsibilityof the correctness of information contained in the forms prepared by the TRPwill rest with the taxable person only and the TRP shall not be liable for anyerrors or incorrect information.

Facilitation Centre (FC) : FC shall be responsible for the digitisation and/oruploading of the forms and documents including summary sheet duly signed bythe Authorised Signatory and given to it by the taxable person. After uploadingthe data on common portal using the ID and Password of FC, a print-out ofacknowledgement will be taken and signed by the FC and handed over to thetaxable person for his records. The FC will scan and upload the summary sheetduly signed by the Authorised Signatory.

Is there any facility for digital signature in the GSTN registration?

Taxpayers would have the option to sign the submitted application using validdigital signatures (if the applicant is required to obtain DSC under any otherprevalent law then he will have to submit his registration application using thesame). For those who do not have a digital signature, alternative mechanismswill be provided in the GST Rules on Registration.

What is the process of refusal of registration?

In case registration is refused, the applicant will be informed about the reasonsfor such refusal through a speaking order. The applicant shall have the right toappeal against the decision of the authority. As per the MGL, any rejection ofapplication for registration by one authority (i.e., under the CGST Act / SGSTAct) shall be deemed to be a rejection of application for registration by theother tax authority (i.e., under the SGST Act / CGST Act).

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CENTRAL EXCISE LAW

[2017] 1 GSTPT 5 (SC)

IN THE SUPREME COURT OF INDIA

Civil Appeal No. 5003 of 2006

CCE

v.

UNITED SPIRITS LTD. AND ANOTHER

Dipak Misra & N V Ramana, JJ

5th January, 2016

Appellant Rep by :

Mr. B. Krishna Prasad, Adv

Respondent Rep by :

Mr. Prashant Singh, Adv. Mr. Tanvir Nayar, Adv. Mr. Vikas Mehta, AOR

Manufacture implies a change, but every change is not manufacture, suchchange is normally a result of treatment, labour and manipulation

Central Excise Act, 1944 – Section 2(f) – Manufacture – What it means –Process of mixing essence to obtain food flavour in certain proportions – Does itnot amount to manufacture.

‘Manufacture’ implies a change, but every change is not manufacture andyet every change of an article is the result of treatment, labour andmanipulation. But something more is necessary and there must betransformation ; a new and different article must emerge having a distinctivename, character or use. Commonly manufacture is the end-result of onemore process through which the original commodity is made to pass. Thenature and extent of processing may vary from one case to another, andindeed there may be several stages of processing and perhaps a differentkind of processing at each stage. With each process suffered, the originalcommodity experiences a change. But it is only when the change, or a seriesof changes, take the commodity to the point where commercially it can nolonger be regarded as the original commodity but instead is recognised as anew and distinct article that manufacture can be said to take place. Thus,where order of the Tribunal is ambiguous and inconclusive on the exactnature of the process undertaking and how mixing is undertaken and theprocess involved is not discernible actual position of the claim of the

CCE v. UNITED SPIRITS LTD.

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manufacturer that about 26 per cent of the sales of odoriferous substanceswere brought from the third party and sold without any modification orprocess cannot be validated as these are all questions of fact which must befirst authenticated. It is not open to the Tribunal to decide in favour of themanufacturer without the background check as to the actual processinvolved and undertaken.

The Supreme Court remitted the matter to the Tribunal for reconsideration of thevarious aspects on the basis of observations made by it in para 13 of thejudgment and the law in the field without expressing anything on the merits ofthe case.

Case law Cited :

Pepsi Foods Ltd. v. Collector of Central Excise (2005) 9 SCC 28

Union of India v. Delhi Cloth & General Mills Co. Ltd. 2002-TIOL-13-SC-CX-LB

South Bihar Sugar Mills Ltd. v. UOI 1978 ELT (J 336)

Moti Laminates (P.) Ltd. v. CCE 2002-TIOL-24-SC-CX-LB

Kilpest India Ltd. v. CCE 1999 (108) ELT 786

XI Telecom Ltd. v. Supdt. of Central Excise (AP-DB) 1999 (105) ELT 263

CCE v. Jagatjit Industries (SC) 2002 (141) ELT 306

Bhor Industries Ltd v. CCE 2002-TIOL-38-SC-CX

Union Carbide v. CCE - 2002-TIOL-70-SC-CX-LB

Union of India v. Sonic Electrochem (P.) Ltd. 2002-TIOL-212-SC-CX

Gopal Zarda Udyog v. CCE 2005-TIOL-123-SC-CX-LB

O.K. Play (India) Ltd. v. CCE 2005 (180) ELT 291 (SC)

Nestle India Ltd. v. CCE 2004-TIOL-346-CESTAT-DEL.

T.N. State Transport Corporation Ltd. v. CCE 2004 (166) ELT 433 (SC)

Kothari Products Ltd. v. Government of Andhra Pradesh 1998 (98) ELT 315(AP)

CCE v. Crane Betel Nut Powder Works 2005 (187) ELT 106 (Tri-Bang)

Henna Export Corporation v. CCE 1993 (67) ELT 907 (Tribunal)

CCE Chennai v. Fountain Consumer Appliances Ltd. 2004-TIOL-517-CESTAT-MAD.

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Tega India Ltd. v. CCE 2004-TIOL-17-SC-CX

State of Maharashtra v. Mahalaxmi Stores (2003) 1 SCC 70

CCE Chennai v. Titanium Equipment & Anode Manufacturing Co. Ltd. 2002(142) ELT 162 (Tri-Chennai)

Servo Med Industries (P.) Ltd. v. CCE 2015 (6) SCALE 137

Union of India v. Ahmedabad Electricity Co. Ltd 2003-TIOL-17-SC-CX

Hindustan Zinc Ltd. v. CCE 2005-TIOL-39-SC-CX-LB

Satnam Overseas Ltd. v. CCE 2015-TIOL-66-SC-CX

CCE v. Osnar Chemicals (P.) Ltd. 2012-TIOL-03-SC-CX

Meerut v. Goyal Gases (P.) Ltd. - 2002-TIOL-793-SC-CX-LB

Crane Betel Nut Powder Works v. Commr. of Customs & Central Excise 2007-TIOL-37-SC-CX

Shyam Oil Cake Ltd. v. CCE-I 2004-TIOL-93-SC-CX-LB

CCE v. S.R. Tissues (P.) Ltd. 2005-TIOL-101-SC-CX

Municipal Corporation of City of Thane v. Vidyut Metallics Ltd. (2007) 8 SCC688

Cosmic Dye Chemical v. CCE 2002-TIOL-236-SC-CX-LB

Padmini Products v. CCE 2002-TIOL-289-SC-CX

Pushpam Pharmaceuticals Co. v. CCE 2002-TIOL-235-SC-CX

Uniworth Textiles Ltd. v. CCE 2013-TIOL-13-SC-CUS

Union of India v. Delhi Cloth & General Mills Co. Ltd. 2002-TIOL-12-SC-CX-CB

Anheuser-Busch Brewing Assn. v. United States 207 US 556 (1908)

Deputy Commissioner of Sales Tax (Law), Board of Revenue (Taxes), Ernakulamv. Pio Food Packers 2002-TIOL-67-SC-CT-LB

Anwarkhan Mahboob Co. v. State of Bombay AIR 1961 SC 213

A. Hajee Abdul Shakoor & Co. v. State of Madras AIR 1964 SC 1729

State of Madras v. Swastik Tobacco Factory AIR 1966 SC 1000

Ganesh Trading Co., Karnal v. State of Haryana (1974) 3 SCC 620

Tungabhadra Industries Ltd., Kurnool v. CTO AIR 1961 SC 412


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C.S.T., U.P. v. Harbilas Rai & Sons (1968) 21 STC 17 (SC)

Collector of Customs v. S.H. Kelker & Co. Ltd. (2000) 10 SCC 478

Income-tax Officer v. Arihant Tiles and Marbles (P.) Ltd. 2009-TIOL-127-SC-IT-LB

CIT v. N.C. Budharaja & Co. 2002-TIOL-632-SC-IT

Additional Commissioner of Commercial Taxes v. Ayili Stone Industries 2016-TIOL-176-SC-CT

JUDGEMENT

Misra, J

1. The respondent is a manufacturer of Indian Made Foreign Liquor (‘IMFL’)and is a registered owner of several known brands of IMFL. The respondent, asthe facts have been unfolded, also “manufactures” food flavours at its unit atShayura Orchards, Kumbalagodu, Bangalore and the present appeal pertainsonly to food flavours.

2. The respondent has got its own distillery units at various places. In addition,it has entered into agreements with various manufacturers of liquor who hadtheir bottling plants and also appropriate licences to manufacture liquor. Withthese liquor manufacturers the respondent had entered into Usership Agreementwhereby they were permitted to use the trade mark of the respondent on IMFLmanufactured by them on the terms and conditions mentioned in the agreement.The respondent had also entered into another agreement with the liquormanufacturers called the manufacturing agreement which provides formanufacture and sale by liquor manufacturers of IMFL under the respondent’sbrand names or its purchase by the respondent on the terms and conditionsmentioned in the agreement. It is stipulated in the agreement that sale andpurchase of IMFL under the agreement shall be on principal-to-principalbasis. These liquor manufacturers were to purchase raw materials such asrectified spirit, extra-neutral alcohol and blending and packing materials inaccordance with the standards and specifications set forth in the agreement andfrom the approved suppliers. It was also provided in the manufacturingagreement that modalities of price payable by the respondent to the liquormanufacturers for sale of IMFL and the price was to be the aggregate of costof rectified spirit, extra-neutral alcohol, blending and packing materials, storage,insurance premium and all manufacturing costs and expenses as mentioned in

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the agreement. In addition, the liquor manufacturers were entitled to themargin of profit called service charges in the agreement. The total price sopaid to the liquor manufacturers was the sole consideration for the sales andsuch price is known as ex-distillery price (‘EDP’), which includes all costs,charges and expenses incurred by the liquor manufacturers for manufacture ofIMFL as well as their margin described as service charges. The IMFLmanufactured by liquor manufacturers was affixed with the brand namesowned by the respondent. It provided the manufacturing logo, quality control,product research, etc. The respondent provided technical know-how/expertiseto liquor manufacturers for manufacture of IMFL.

3. The liquor manufacturers sell IMFL manufactured by them either to therespondent or to the customers identified by the respondent or to the government-owned corporations. The sales personnel of the respondent contact the customers,book orders, collect outstanding amounts from the market, collect statutoryforms like C-Forms, Excise Verification Certificates, Permits, etc., and forwardthe same to the liquor manufacturers. The respondent would promote its brandsthrough marketing teams and operation of various promotional schemes andadvertisements and all expenses with regard to the same are incurred by therespondent. The liquor manufacturers were entitled to receive EDP which includethe actual cost of IMFL manufactured by them plus the profit margin. Theprices were negotiated by the respondent even when the goods were sold by theliquor manufacturers to such buyers and they would bill by such buyers at therates negotiated and determined by the respondent.

4. The respondent, however, asserts that such rates/prices negotiated withoutside buyers were either more or less than the EDP with certain consequences,namely, (a) if the selling price to outside customers is more than EDP, thedifference was paid by the liquor manufacturers to the respondent by calling itunder different nomenclature like royalty or service charge ; (b) if the sellingprice to outside customers was less than EDP, the difference/shortfall is borneby the respondent and paid to the liquor manufacturers ; and (c) if the pricerealised from outside buyers is more than EDP, the difference accrued to therespondent.

5. As has been stated earlier, the respondent ‘manufactures’ food flavours at itsfood flavour manufacturing unit at Bangalore. On the said aspect, the respondentasserts that the food flavours were ‘prepared’ by mixing of various essences(odoriferous substances) purchased by the respondent from different suppliers.

6. Food flavours it is accepted play a role in the flavour profile of the liquor.


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Food flavours are not used in all brands of IMFL. There are certain brands ofIMFL in which no food flavours are used and wherever they are used in IMFL,the percentage is very low ranging from 0.0001 per cent to 0.0019 per cent perlitre. However, it is not the case of the respondent, that food flavours do notmatter in the IMFL business.

7. Food flavours were supplied by the respondent to their IMFL manufacturingunits and also sold to liquor manufacturers who were manufacturing IMFL undermanufacturing/usership agreements. Food flavours were also sold to third partymanufacturers of IMFL. The liquor manufacturers under the manufacturingagreement would use food flavours in such proportions as identified by therespondent and the blending proportion was maintained as a trade secret of therespondent.

8. The respondent stands registered under the Central Excise Act, 1944 (‘theAct’) for manufacture of food flavours falling under Sub-Heading No. 3302.10of the Central Excise Tariff since 1994 and holds the Central Excise RegistrationCertificate No. 8/94. Food flavours manufactured by the respondent have beenalways cleared on payment of central excise duty. As a procedure, the respondentused to file price lists/declarations from time-to-time declaring the assessablevalue of food flavours in accordance with law. The assessable value included theentire cost of raw material, labour cost, overheads and profit margin and werecleared from the factory on payment of central excise duty. The price of foodflavours supplied to the respondent owned IMFL manufacturing units, liquormanufacturers and to other independent IMFL manufacturers, it is asserted bythe respondent, did not vary and remain identical.

9. The royalty paid to the respondent by the liquor manufacturers, as asserted, isthe difference between their selling prices of IMFL to outside buyers and theEDP of such IMFL. As pleaded, the payment of royalty has no nexus orconnection with the food flavours. There are several brands of IMFL where nofood flavour was supplied by the respondent to liquor manufacturers. However,royalty on the difference between the selling price of IMFL and EDP was stillpaid. The respondent claims that there were several instances where food flavourswere sold and used in IMFL but no royalty was received. In those cases theselling price of IMFL was lower than the EDP and rather than receivingroyalty, the respondent had borne the shortfall and reimbursed the same toliquor manufacturers. On this ground, the respondent intends to put forth thestand that royalty was solely relatable to the higher selling prices of IMFL overand above EDP and has nothing to do with food flavour. The food flavourswere not used in IMFL products like Signature Whisky, Centenary Whisky,

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Single Malt Whisky, etc., which were manufactured without using food flavours.In respect of the same, the liquor manufacturers manufacturing the said brandwere paying royalty to the respondent, that being the difference between theirselling price of the said brands and their EDP.

10. We have narrated the aforesaid factual scenario as substantially put forth bythe respondent. At this juncture, it is necessary to state that revenue issued ashow cause notice on 11th April, 2000 on the ground that the respondent-assessee received additional consideration from its franchisees in the form ofroyalty for supplying food flavours which were essential ingredients of theIMFL manufactured by the franchisees. The proviso to section 11A of the Actwas invoked by the adjudicating authority and it was proposed to re-determinethe assessable value of food flavours by including the royalty received by theassessee. The differential duty demanded for the period April 1997 to March,2009 was 35,45,865,860 (sic–the actual figure is 35,45,85,860 - Editor). Penaltieswere proposed on the unit and on the Senior Manager (Taxation) and interestwas also levied. The adjudicating authority confirmed the demand vide his orderdated 29th August, 2002. The respondent approached the Customs, Excise andService Tax Appellate Tribunal (‘Tribunal’) which in its order dated 8th July,2003 remanded the matter to the learned Commissioner as certain invoices ofsales were produced before the tribunal which were not considered by theconcerned Commissioner. While remitting the matter, the Tribunal observedthat as the matter was being remitted, the issue of limitation and such otherissues were kept open for the adjudicator to re-determine and pass an appropriateorder granting the opportunity to the parties for effective hearing. The issue ofpenalty was also kept open.

11. After the remit, the adjudicating authority passed an order on 27th February,2004. It placed reliance on the decision in Pepsi Foods Ltd. v. Collector ofCentral Excise, Chandigarh (2005) 9 SCC 28, and held that the royalty from thevarious units under the manufacturing agreement deserve to be included in theassessable value of the food flavour supplied to them and accordingly confirmedthe demand under proviso to section 11A of the Act. Equal amount of penaltywas imposed under section 11AC and interest under section 11AB was alsolevied. A penalty of Rs. 3,00,000 was imposed on the Senior Manager (Taxation)under rule 26 of the Central Excise Rules, 2002.

12. Before the tribunal, it was contended by the assessee that it purchased dutypaid essences from various suppliers and simply mixed them by a process ofmanual mixing in the proportion developed by the respondent and which waskept as a top secret and the mere process of manual mixing of the essence did


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not amount to manufacture ; that though the said issue was raised before thejurisdictional Assistant Commissioner on 18th February, 2000 and a prayerwas made to consider their plea that the food flavour produced by them wasnot excisable and, pass an appropriate order, the concerned authority did notrespond to the same and thereafter, the assessee informed the department thattill a final decision was taken, the duty would be paid under protest. It isfurther contended that food flavours were odoriferous compounds and thequantum of food flavours used in IMFL wherever used were very negligibleranging from 0.0001 per cent to 0.0019 per cent per litre of various IMFLproducts and such use had no relevance in the marketability of IMFL productnor its final market price. Referring to the letters dated 18th February, 2000and dated 4th September, 2001 wherein the assessee had taken a stand thatmixing of duty paid flavours would not amount to manufacture. It reiteratedthe stand that it was not a manufacture on the basis of the decision rendered inUnion of India v. Delhi Cloth & General Mills Co. Ltd. 1997 ELT (J199) SC/2002-TIOL-13-SC-CX-LB. Reference was also made to the order passed bythe Commissioner, Central Excise, Hyderabad who vide his letter dated 22ndSeptember, 2003 had held that the mixing of duty paid food flavours couldnot result in emergence of a new product and the resultant essence whichcomes into existence in the premises of Shaw Wallace Co. (‘SWC’) does notanswer the test of marketability and as the facts are identical in the case of theassessee, the same should have been followed by the jurisdictional Commissioner.To bolster the said stand, reliance was placed on Delhi Cloth & Generals MillsCo. Ltd. (supra), South Bihar Sugar Mills Ltd. v. UOI 1978 ELT (J 336), andTata Chemicals Ltd. v. R.M. Desai, Inspector, Central Excise, Moti Laminates(P.) Ltd. v. CCE (SC) 1995 (76) ELT 241/2002-TIOL-24-SC-CX-LB, KilpestIndia Ltd. v. CCE 1999 (108) ELT 786, XI Telecom Ltd. v. Supdt. of CentralExcise (AP-DB) 1999 (105) ELT 263 and CCE v. Jagatjit Industries (SC)2002 (141) ELT 306.

13. It was further argued that in certain cases, the flavours which were notbought are not even mixed but were supplied directly to the bottlers, only thelabels were changed in order to maintain secrecy and such an activity could notbe regarded as ‘manufacture’ inasmuch as under Chapter Heading 3302.10 re-labelling does not amount to manufacture. It was argued that mixing of flavoursdoes not bring into existence a new product and even after mixing flavours, theresultant products still remains to be a flavour only. Attention of the Tribunalwas invited to Board’s Circular No. 247/81/96-CX dated 3rd October, 1996clarifying that mixing duty paid paints to obtain paint in different shade wouldnot amount to manufacture. Further submission before the Tribunal was that

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flavours were either mixed or supplied in the form in which they were purchasedto the bottlers and cannot be marketed to anyone else and no other manufacturerwould buy these flavours, for they were meant only for use in the productmanufactured for the assessee.

14. Commenting on the nexus between the royalty and the price of foodflavours, it was canvassed before the Tribunal that the royalty and servicecharges were received by the assessee for use of the trade mark and formarketing services provided by it to the contract bottling units and eventhough flavours were supplied to independent manufacturers, neither royaltynor service charges were received from them and, hence, the royalty bill hadno nexus with the price of the food flavour. That apart, it was argued that theassessee sold food flavours to contract bottling units who employed them tomanufacture IMFL products or to different other brand owners to whom theywere paying royalty and service charges. However, the other brand ownerspaid only the price of flavours to the assessee and this would be indicative ofthe fact that the royalty had no nexus with the price of the flavours. Additionally,it was propounded that material was purchased before the concernedCommissioner showing that assessee had sold some kind of flavour to certaindistilleries with whom there was no bottling agreement nor there was anyreceipt of royalty or service charges because the contract unit had not appliedthe brand of the assessee nor secured services of the assessee for marketingand in such a case, the Commissioner could not have asserted that the agreementwas for sale of flavour and receipt of royalty and service charges. Reliance onthe Pepsi Foods Ltd. (supra) was seriously criticised before the Tribunal asthe ratio laid down was not applicable to the case at hand. Before the Tribunalthe learned counsel for the assessee had drawn attention that the manufacturingagreement and usership agreement to highlight certain aspects, to drawdistinction and the adjudicating authority could not have proceeded to allocatethe entire receipts to the value of food flavours alone without any basis.Criticising the invocation of the jurisdiction under section 11A of the Act, itwas contended that there was no suppression on the part of the appellants asthe factum of payment of royalty was known to the department and it wasclear from the note of the Range Officer to the Deputy Commissioner whichclearly laid down that the amount paid towards royalty was only for use of thebrand name for sale of flavour and prior to the issue of show cause notice,there was an audit inspection on 28th March, 2001 and the assessee was askedto clarify various points raised which had been clarified vide letter dated 28thApril, 2001 and all these aspects had not been taken into consideration whileinvoking the jurisdiction. It was also put forth that as royalty had no nexus


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with the price of food flavours, the assessee was not expected to declare itand, therefore, it could not be treated as suppression. That apart, at the time ofaudit objection even the Range Superintendent was of the view that there wasno nexus between the royalty received by the appellant and the price of foodflavours sold by the assessee and, therefore, in the obtaining circumstances,the notices were clearly barred by time.

15. The stand and stance put forth by the assessee was controverted by therevenue contending, inter alia, that the department had raised the question ofexcisability of the product in question, when it found the modification of stayOrder Nos. 838 and 839/2004 dated 10th August, 2004 by the High Court. Itwas also urged that there was an earlier proceeding in 1995 relating to foodflavour and the case was adjudicated by the then Commissioner, consequentupon which the assessee had started paying duty and, hence, excisablity of theproduct in question was never an issue at all as the conduct of the assesseewould reflect. Reference was made to Entry 3302 in the Tariff and 3302.10 tohighlight that the tariff itself recognises mixtures of odoriferous substances asexcisable product and, hence, it could not be said that no manufacture wasinvolved in the mixing of the essences to produce such food flavours. It wasurged that goods to fit into the term ‘manufacture’ must be capable of beingbought and sold in the market and to be known as such. In that regard, placingreliance on Bhor Industries Ltd. v. CCE (1989) 1 SCC 602/2002-TIOL-38-SC-CX, Union Carbide v. CCE 1986 (24) ELT 169 (SC)/2002-TIOL-70-SC-CX-LB, Moti Laminates (P.) Ltd. v. CCE (1995) 3 SCC 23/2002-TIOL-24-SC-CX-LB, Union of India v. Sonic Electrochem (P.) Ltd. (2002) 7 SCC 435/2002-TIOL-212-SC-CX and CCE v. Jagatjit Industries Ltd. (2002) 3 SCC614, it was canvassed that in the case at hand the food flavours manufacturedby the assessee were marketable as evidenced from the assessee’s admissionsthat it has been selling food flavours to other independent bottlers who werenot manufacturing the IMFL brands of McDowell but their own brands whichestablish marketability of the product. It was further argued that the inputswere essences and once they were mixed or prepared, they lost their originalidentity. It was also urged that though the input and finished goods wereunder the same tariff heading, still there was manufacture and the finishedgoods were having distinct, separate and identifiable function, with referenceto the product, i.e., IMFL. The further stand was that mixing amounts tomanufacture as has been laid down in Gopal Zarda Udyog v. CCE 2005 (188)ELT 251 (SC)/2005-TIOL-123-SC-CX-LB, O.K. Play (India) Ltd. v. CCE2005 (180) ELT 291 (SC), Nestle India Ltd. v. CCE 2004 (169) ELT 315(Tri-Del)/2004-TIOL-346-CESTAT-DEL, T.N. State Transport Corporation Ltd.

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v. CCE 2004 (166) ELT 433 (SC), Kothari Products Ltd. v. Government ofAndhra Pradesh 1998 (98) ELT 315 (AP), CCE v. Crane Betel Nut PowderWorks 2005 (187) ELT 106 (Tri-Bang)/2007-TIOL-37-SC-CX and HennaExport Corporation v. CCE 1993 (67) ELT 907 (Tribunal). The revenuefurther contended that as per section 4 of the Act, the assessable value dependson the nature of transaction and each price in a transaction was an assessablevalue and it cannot be compared if the type of transaction was different. Theassessee received royalty charges from buyers who were contract bottling unitsand separate assessable value was computable for these types of customers andin such cases, the royalty charged by the assessee from the buyers has to betreated as additional consideration.

16. After noting down the submissions of the learned counsel for the parties, theTribunal adverted to the issue of nexus between the royalty and the price offood flavours. The Tribunal clearly stated that in the year 1995, the departmenthad proceeded against the assessee for non-payment of central excise duty on thefood flavours produced by them and the Commissioner confirmed the demandsraised and at that time, the excisability of food flavours was not questioned bythe assessee. After the adjudication order dated 30th January, 1995, the assesseewas clearing the goods on payment of duty. During 2001, the departmentalaudit raised certain objections with reference to the receipt of certain amountstowards royalty, service charges, etc., from the contract bottling units (‘CBUs’)engaged in the manufacture of IMFL and according to the audit, the royaltycharges should be added to the value of the food flavour sold to the CBUs. Atthat juncture, the assessee gave justification for non-inclusion of royalty charges.The Tribunal, as the impugned order would reflect, has adverted in detail to thejustification given by the assessee before the adjudicating authority which wasbasically founded on the conditions set out in the agreement that royalty waspayable by the manufacture for use of the brand name and that the royalty hadno relevance with the goods or various inputs that go into the manufacture ofthese goods. It was also set forth that the brands of the company had their ownvalue and the royalty receivable from the manufacturer was primarily on accountof company’s brands of finished goods, namely, IMFL, viz., No. 1 Brandy, No.1 Whisky, Diplomat Whisky, Premium Whisky, Dry Gin, etc. It was alsocontended that the audit party had erroneously mis-interpreted the concept ofroyalty as one which was capable of being subdivided into and allocable tovarious manufacturing inputs, for it is neither feasible nor a correct procedure toapportion the royalty which was accruing to the company on the company’sbrand image. It was also contended that such an understanding would defeat thepurpose of the agreement. Though such a stand was explained by the assessee,


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yet the department was of the view that the royalty should be added to theassessable value and consequently first show cause notice dated 11th April,2002 was issued. The Tribunal thereafter chronologically analysed the factsand order of remit and the de novo order and perused the relevant agreementsof the appellants with the CBUs. On scrutiny of the agreements, the Tribunalfound that there were two agreements, one is called the manufacturing agreementand the other is usership agreement. As per the terms and conditions of theagreement, the products were to be manufactured by the second party wouldinclude the products whose trade mark was owned by the assessee-appellantbefore the Tribunal and any other associate company of it. The second partyto the agreement was required to purchase blending and packing materialsfrom such suppliers specified by the assessee and above condition was for thepurpose of ensuring quality specification. The agreement defined the blendingmaterial. The Tribunal referred to the definition of “blending material” andopined that the said definition includes food flavours. It referred to para 18 ofthe agreement which stipulates that during the currency of the agreement, thesecond party (as pointed out by the Tribunal) Gemini Distilleries (Tripura)(P.) Ltd. (‘GDPL’) shall not use trade mark to or adopt any trade marksimilar to any of the trade marks on or in connection with any product. Onthat basis, the Tribunal opined that on careful reading of the agreementreveals that the assessee has good control over the manufacture of IMFL byGDPL and it ensures the quality of the product, which bears the trade mark ofthe assessee. Referring to the usership agreement, the Tribunal observed thatthe proprietor was the assessee and the user was GDPL and according to thesaid agreement, at the request of the user, the proprietor had agreed to permitthe user to use the trade marks in respect of the goods on the terms andconditions mentioned in the agreement. The Tribunal referred to para 12 ofthe agreement which postulates that in consideration of this licence, the usershall pay to the proprietor such sum per case manufactured of the goods asmay be mutually agreed upon by the parties from time-to-time and theconsideration shall be paid by the user by the following month. It furtherobserved that though the word royalty has not been used in the agreement, itwas clear that the sum mentioned in para 12 of the agreement refers to royaltyand the royalty was for the use of trade mark and there was no indicationwhatsoever to infer that the royalty was paid for supply of food flavour. Ittook note of the fact that food flavour was one of the blending materials andnot the sole blending materials sold by the assessee to the CBU and, hence,prima facie, there does not appear to be any close nexus between royalty andthe food flavour.

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17. Be it noted, the assessee before the Tribunal highlighted that there werethree types of transactions, namely, receipt of royalty and also supply of foodflavours ; royalty was received though there was no supply of food flavours ;and royalty was not received even though there was supply of food flavours.Accepting the said submission, the Tribunal held, thus :

“The appellants took us through the various documents and showed us thatthere is practically no difference in price in respect of sales to independentbuyers and the prices at which food flavours are sold to CBUs. This factclinches the issue. It is very clear that there is no nexus between the royaltyand the food flavours. The adjudicating authority has relied on the ApexCourt’s decision in the Pepsi case. In our view, the ratio of the abovedecision should not have been blindly applied as done by the adjudicatingauthority. In the Pepsi case, both the concentrate and the final product areexcisable which is not the case in the present appeals. The final product hereis IMFL for which royalty is paid. IMFL is not subjected to central exciseduty. In the Pepsi case, the concentrate is the most essential ingredient ofPepsi Cola whereas in the present case, it is not so. There are certain brandsof IMFL which do not require any food flavour. In the Pepsi case, theconcentrates are sold only for the franchisees. In the instant case, the appellantshave sold food flavours to independent manufactures of IMFL who will notbe using the brand name of the appellants. Such independent manufacturerswould not pay any royalty. In the Pepsi case, an express prohibition restrictingthe bottlers to purchase the concentrate from any other source was there. Nosuch express prohibition is there in the present agreement. It was furtherpointed out by the appellants that there are instances wherein the appellantshave paid an amount to bottlers when the sale price of IMFL is much belowthe ex-distillery price. It is further seen that apart from food flavour, theappellants supplied other blending materials to these CBUs. In thesecircumstances, the entire royalty paid cannot be attributed to the food flavourwhose cost is only 0.45 per cent according to the appellants. Further we findthat even in 2001, at the time of audit inspection, the appellants have taken afirm stand not only regarding the includibility of royalty but also the questionof very excisability of the food flavour itself. In these circumstances, there isno justification for alleging suppression of facts to invoke the larger period.Hence, the show cause notices dated 11th April, 2002 and 8th March, 2004are clearly time barred. For the above mentioned reasons, the royalty has nonexus with the price of the food flavour and hence, not includible in theassessable value. Moreover, the first two show cause notices are time barredas there is no suppression of facts.”


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18. After so stating, the Tribunal addressed the issue pertaining to excisabilityof food flavours. It took note of the fact that there was purchased duty paidodoriferous compounds called essences and these essences were mixed manuallyto obtain food flavour. In what proportion and which essences were to be mixedhas been kept a trade secret and different brands of IMFL require food flavourof different profiles. In order to ensure the quality consistency in the variousbrands of IMFL, the production of food flavour was centralised at Bangalorewhich does not use power. The Tribunal referred to Board’s circular dated 22ndNovember, 1999 wherein it has been clarified that agarbati manufacturing processinvolving simple mixing of a few aromatic chemicals with the base oil in acontainer in liquid form, which was mixed directly with the dough or appliedon agarbati in the required proportion used for rolling of agarbati is not excisableproduct and, therefore, no duty was leviable on such compounds during thecourse of manufacture of agarbati. It was urged before the Tribunal that the factsituation in the case of assessee was similar, as has been clarified in the Board’scircular in respect of agarbati. It is further urged that there was a simple mixingof essences of different flavour profile and the food flavours produced by theassessee are exclusively used for making their brands of IMFL in their ownunits and contract units and it cannot be sold in the market as such. TheTribunal posed a question whether the process of mixing of essences results in adistinct commodity, which was different from the original inputs. In that context,it held, thus :

“We find that both the essences and the resultant product food flavour fallunder the same Tariff Heading. Since different proportion of the ingredientsgive different flavours to the resultant product, we cannot say that aingredients give different flavours to the resultant product, we cannot saythat a completely distinct product emerges. The comparison with agarbathimention in Board’s Circular is justified. Board’s Circular dated 3rdNovember, 1996 deals with the process of tinting of duty paid base whitepaint with duty paid strainer to obtain paint of different shades. It has beenclarified that the above process does not amount to manufacture on theground that the process of tinting does not bring about any new commoditywith different commercial identity as the resultant emulsion/enamel pointand, hence, it may not be appropriate to consider this process as amountingto manufacture. While clarifying the above position, the Board has appliedthe ratio of the classic judgment of the Apex Court in the DCM casewherein it has been held that “Manufacture implies change, but everychange is not manufacture and yet every change in an article is a result oftreatment, labour and manipulation, but something more is necessary and

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there must be transformation; a new and different article must emergehaving distinctive name, character and use.”

In another Circular dated 13th July, 1992, the Board has clarified thatconversion of plain plastic granules into coloured plastic granules wouldnot amount to manufacture.

In all these cases, the commercial identity of the ingredients and the finishedproduct remained the same. In the present case also, the process of mixingtwo or more essences in certain proportions does not bring into existenceany new product. The essence remained essences only and because of thedifferent proportion, a distinct flavour is imparted to the resultant product.That cannot make the process as manufacture.”

19. To arrive at the said conclusion, it placed reliance on CCE Chennai v.Fountain Consumer Appliances Ltd. 2004 (171) ELT 329 (Tri-Chennai)/2004-TIOL-517-CESTAT-MAD, Tega India Ltd. v. CCE, Calcutta II (2004) 2 SCC727/2004-TIOL-17-SC-CX, State of Maharashtra v. Mahalaxmi Stores (2003) 1SCC 70, and CCE Chennai v. Titanium Equipment & Anode Manufacturing Co.Ltd. 2002 (142) ELT 162 (Tri-Chennai).

20. We have heard Mr. Yashank Adhyaru, learned senior counsel for the appellantand Ms. Indu Malhotra and Mr. S.K. Bagaria, learned senior counsel for therespondents. It is submitted by the learned counsel for the appellant that thefinal product ‘food flavour’ is classified under Chapter Heading 3302.10 and,hence, is excisable and dutiable. According to him, the assessee itself hadadmitted that it was selling the food flavours to independent bottling units andthat establishes the marketability of the product. The assessee had claimed thatits product is custom made and the formula is a trade secret and further it hadavailed CENVAT credit of inputs for payment of duty on final product. As thefacts had been established, contend Mr. Adhyaru, the finished goods are sold ondifferent code numbers assigned by the assessee, hence, a new identity isestablished. Learned senior counsel would urge to construe a particular good hasbeen manufactured, the goods must be capable of being bought and sold in themarket, as has been held by this court in Bhor Industries Ltd. (supra), JagatjitIndustries Ltd. (supra) and Servo Med Industries (P.) Ltd. v. CCE 2015 (6)SCALE 137. Learned senior counsel would contend that mixing which is prefixedby simple fixing by the assessee is not acceptable because the process of mixingcan amount to manufacature as has been held in Gopal Zarda Udyog (supra)and O.K. Play (India) Ltd. (supra). As far as the royalty is concerned, it isurged by him that the assessee had received royalty charges from buyers whoare CBUs and separate assessable value is computable for this type of customers.


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21. In the instant case, as the revenue would put forth, the royalty/servicecharge received by the assessee under the various agreement with othermanufacturers of IMFL forms additional consideration and is includible in theassessable value under section 4 of the Act read with Valuation Rules as hasbeen held in Pepsi Foods Ltd. (supra).

22. Mr. Bagaria and Ms. Indu Malhotra, learned senior counsel appearing forthe assessee in their turn would contend that the food flavours were odoriferouscompounds and are prepared by way of simple mixing of various essences(odoriferous substances) purchased from different suppliers and, thus, thefood flavours that were obtained from simple mixing of duty paid essences/flavours done manually cannot be regarded as manufacture, for by such mixingno new commodity having existing name, character or use emerges. Thatapart, in around 26 per cent of the cases even such mixing was not done andthe flavours purchased from the market were cleared as such merely afterrelabeling and when flavours fall under the Heading No. 3302.10, no extendedmeaning is to be given to the expression ‘manufacture’. Reliance has beenplaced on Circular No. 247/81/96-Cx. dated 3rd October, 1996 issued byCBEC, Ministry of Finance, Government of India, which had clarified thatthe process of tinting of base emulsion/enamel paint with strainers to obtainpaint of different shades does not amount to ‘manufacture’ within the meaningof section 2(f) of the Act. It was their further submission that Tribunal hasrightly made the comparison between the process of tinting of base emulsion/enamel paint with strainers with the process of mixing two or more essencesin certain preparation to arrive at the conclusion that no process of manufacturewas involved in the case of the assessee. It was urged that it is well settled thatmere mention of the goods in one of the Entries in the Schedule to the CentralExcise Tariff would not render them exigible to excise duty unless the twintests of manufacture and marketability were satisfied. It has also been repeatedlyheld that manufacture implies a change but every change was not manufacturerand in order to attract the concept of manufacture, there must be transformationof the raw materials into a new and different article having a distinctive name,character and use. In that regard reliance has been placed on Union of India v.Ahmedabad Electricity Co. Ltd. (2003) 11 SCC 129/2003-TIOL-17-SC-CX,Hindustan Zinc Ltd. v. CCE, Jaipur (2005) 2 SCC 662/2005-TIOL-39-SC-CX-LB, Delhi Cloth & General Mills (supra) and Satnam Overseas Ltd. v.CCE, New Delhi (2015) 13 SCC 166/2015-TIOL-66-SC-CX. It has beenemphatically put forth that a simple process of mixing do not amount tomanufacture as there is no transformation of the inputs into any new ordifferential commodity and for the said proposition, reliance has been placed

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on CCE, Bangalore-II v. Osnar Chemicals (P.) Ltd. (2012) 2 SCC 282, CCE/2012-TIOL-03-SC-CX, Meerut v. Goyal Gases (P) Ltd. (2000) 9 SCC 571/2002-TIOL-793-SC-CX-LB and Crane Betel Nut Powder Works v. Commr. ofCustoms & Central Excise, Tirupathi (2007) 4 SCC 155. Further stand of therespondent is that in respect of the Sub-Heading 3302.10 which covers foodflavours, no artificial or extended meaning has been given to the expression‘manufacture’ by the Legislature by exercising the power under section 2(f)(iii)and, hence, it cannot be regarded as manufacture. Heavy reliance is placed onthe decisions in Shyam Oil Cake Ltd. v. CCE-I, New Delhi, Jaipur (2005) 1SCC 264/2004-TIOL-93-SC-CX-LB and CCE v. S R Tissues (P.) Ltd. (2005)6 SCC 310/2005-TIOL-101-SC-CX As far as the stand of the revenue that theassessee at one point of time had accepted the process of mixing and manufactureand paid the duty under the specified heading, it would debar the assessee toraise the plea again is sans substance as the Commissioner himself had admittedthat food flavours were prepared by simple manual mixing of odoriferoussubstances but by the assessee. That apart, the assessee was entitled to raisesuch an issue in respect of the subsequent period and is not stopped to do so inview of the decision in Municipal Corporation of City of Thane v. VidyutMetallics Ltd. (2007) 8 SCC 688. As far as the conclusion arrived at by theTribunal that two show cause notices dated 11th April, 2002 and 30th April,2004 are barred by limitation, no fault can be found with it inasmuch as thesaid show cause notices were issued after expiry of one year from the periodcovered thereunder and, hence, plea barred by limitation as provided undersection 11A(1) of the Act. As regards the limitation, learned senior counselfor the respondent have drawn inspiration from Cosmic Dye Chemical v.CCE, Bombay (1995) 6 SCC 117/2002-TIOL-236-SC-CX-LB, Padmini Productsv. CCE, Bangalore (1989) 4 SCC 275/2002-TIOL-289-SC-CX, PushpamPharmaceuticals Co. v. CCE, Bombay 1995 Supp (3) SCC 462/2002-TIOL-235-SC-CX and Uniworth Textiles Ltd. v. CCE, Raipur (2013) 9 SCC 753/2013-TIOL-13-SC-CUS. As far as penalty imposed under section 11AC isconcerned, it is urged that there has been no fraud or collision or wilful mis-statement or suppression of facts or contravention of provisions of the Act orthe Rules with the intention to evade payment of duty and, therefore, theauthorities could not have mechanically imposed the penalty and the Tribunalis absolutely justified in setting aside the same.

23. From the factual narration and the submissions advanced at the Bar, we findthree issues, namely, (i) whether there was ‘manufacture’, (ii) whether therewas nexus in royalty received and the price paid for the food flavour sold, and(iii) whether two show cause notices have been correctly determined to be


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barred by limitation by the Tribunal. First we shall advert to the issue of‘manufacture’. The submission of the respondent is that they are mixing essencesand in some cases merely selling food flavours purchased from third partieswithout any processing and in any case mixing of essences under no circumstancescan amount to manufacture. The said submission is founded on the principlethat by such process of mixing change takes place and no separate and marketablecommodity comes into existence. Various judgments have been cited at the Barto explain the term ‘manufacture’. It is well settled in law that ‘manufacture’implies change, but every change is not manufacture, such change is normally aresult of treatment, labour and manipulation. In this regard, we think it appropriateto reproduce a passage from Union of India v. Delhi Cloth & General Mills Co.Ltd. AIR 1963 SC 791 = 2002-TIOL-12-SC-CX-CB wherein the ConstitutionBench quoted with approval from an American judgment in Anheuser-BuschBrewing Assn. v. United States 207 US 556 (1908), which is to the followingeffect :

‘“Manufacture” implies a change, but every change is not manufacture andyet every change of an article is the result of treatment, labour andmanipulation. But something more is necessary and there must betransformation; a new and different article must emerge having a distinctivename, character or use.’

24. In Deputy Commissioner of Sales Tax (Law), Board of Revenue (Taxes),Ernakulam v. Pio Food Packers 1980 Supp. SCC 174/2002-TIOL-67-SC-CT-LB, a three-Judge Bench while interpreting section 5A(1)(a) of the KeralaGeneral Sales Tax Act, 1963 opined that :

“There are several criteria for determining whether a commodity is consumedin the manufacture of another. The generally prevalent test is whether thearticle produced is regarded in the trade, by those who deal in it, as distinctin identity from the commodity involved in its manufacture. Commonlymanufacture is the end result of one more processes through which theoriginal commodity is made to pass. The nature and extent of processingmay vary from one case to another, and indeed there may be several stagesof processing and perhaps a different kind of processing at each stage. Witheach process suffered, the original commodity experiences a change. But itis only when the change, or a series of changes, take the commodity to thepoint where commercially it can no longer be regarded as the originalcommodity but instead is recognised as a new and distinct article that amanufacture can be said to take place. Where there is no essential differencein identity between the original commodity and the processed article it is

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not possible to say that one commodity has been consumed in the manufactureof another. Although it has undergone a degree of processing, it must beregarded as still retaining its original identity.”

25. After so stating, the court posed the question : does the processing oforiginal commodity brings into existence a commercially different and distinctarticle? In that context, the three-Judge Bench analysed the ratio in previousdecisions and stated, thus :

“Some of the cases where it was held by this court that a differentcommercial article held come into existence include Anwarkhan MahboobCo. v. State of Bombay AIR 1961 SC 213 (where raw tobacco wasmanufactured into bidi patti), A Hajee Abdul Shakoor & Co. v. State ofMadras AIR 1964 SC 1729 (raw hides and skins constituted a differentcommodity from dressed hides and skins with different physical properties),State of Madras v. Swastik Tobacco Factory AIR 1966 SC 1000 (rawtobacco manufactured into chewing tobacco) and Ganesh Trading Co.,Karnal v. State of Haryana (1974) 3 SCC 620, (paddy dehusked intorice). On the other side, cases where this Court has held that although theoriginal commodity has undergone a degree of processing it has not lostits original identity include Tungabhadra Industries Ltd., Kurnool v. CTOAIR 1961 SC 412, (where hydrogenated groundnut oil was regarded asgroundnut oil) and CST, UP, Lucknow v. Harbilas Rai & Sons (1968) 21STC 17 (SC) (where bristles plucked from pigs, boiled, washed with soapand other chemicals and sorted out in bundles according to their size andcolour were regarded as remaining the same commercial commodity, pigsbristles).”

26. Adverting to the fact situation which pertained to pineapple fruit and cannedpineapple slices, the court held :

“In the present case, there is no essential difference between pineapple fruitand the canned pineapple slices. The dealer and the consumer regard bothas pineapple. The only difference is that the sliced pineapple is a presentationof fruit in a more convenient form and by reason of being canned it iscapable of storage without spoiling. The additional sweetness in the cannedpineapple arises from the sugar added as a preservative. On a total impression,it seems to us, the pineapple slices must be held to possess the same identityas the original pineapple fruit.”

27. In Collector of Customs, Bombay v. S.H. Kelker & Co. Ltd. (2000) 10 SCC478, the assessee had imported an organic chemical ‘abbalide’ which the assesseehad classified under Chapter 29 and not as an odoriferous substances under


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Heading 33.02 of the tariff. Reversing the judgment of the Tribunal, it was heldby the Court as under :

‘10. Heading 33.02 of the Tariff refers to “mixtures of odoriferous substancesand mixtures (including alcoholic solutions) with a basis of one or more ofthese substances, of a kind used as raw materials in industry”.

It envisages (i) mixtures of odoriferous substances, and (ii) mixtures(including alcoholic substances) with a basis of one or more of odoriferoussubstances and the mixtures are of a kind used as raw materials in industry.In the present case, it has been found that the chemical, in its original form,consists of various isomers and is an odoriferous substance. It has beendissolved in diethyl phthalate, a non-odoriferous substance. The odoriferoussubstance is the basis of the mixture. It is not disputed that the mixture isused as a raw material, viz., perfume in industry. It can, therefore, be saidthat the compound is a mixture with a basis of an odoriferous substance andsince it is for use as a raw material in industry, it would be classifiableunder Heading 33.02.

11. In our opinion, the Tribunal was in error in construing clause 1(e) ofChapter 29 and in holding that the said product was classifiable underChapter 29. Clause 1(e) of the Notes in Chapter 29 postulates that if aproduct mentioned in sub-clause (a), (b) or (c) of clause 1 is dissolved in asolvent and the solution constitutes a normal and necessary method ofputting up these products adopted solely for the reasons of safety or fortransport then the product would fall within Chapter 29 only if the solventdoes not render the product particularly suitable for specific use rather thanfor general use. As per the certificate dated 19th September, 1986 issued bythe manufacturer the compound imported by the respondents cannot beused in the condition it is manufactured and for making it suitable for useand for retaining its suitability for use it has to be dissolved in a solvent.The need of a solvent is not only for the purpose of storage and transport ofthe chemical, but also for retaining the suitability of the product after it ismanufactured. Its dissolution in the solvent is necessary in order to makethe product suitable for use. Since the product is used only for perfumeryand not for any other purpose, it has to be held that the product is intendedfor specific use only. In view of clause 1(e) of the Notes in Chapter 29, itmay be held that the product imported by the respondents cannot be regardedas falling under Chapter 29 of the Tariff and would fall under Heading33.02 in Chapter 33 of the Tariff. We are, therefore, unable to uphold theimpugned judgments of the Tribunal.”

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28. We have referred to the decisions to highlight the concept of essentialchange in the character of the product. In this regard, useful reference may bemade to the authority in Income-tax Officer, Udaipur v. Arihant Tiles andMarbles (P.) Ltd. (2010) 2 SCC 699/2009-TIOL-127-SC-IT-LB, the court afterreferring to CIT v. N.C. Budharaja & Co. 1994 Supp (1) SCC 280/2002-TIOL-632-SC-IT, opined, thus :

“25. Applying the above tests laid down by this court in Budharaja case tothe facts of the present cases, we are of the view that blocks converted intopolished slabs and tiles after undergoing the process indicated above certainlyresults in emergence of a new and distinct commodity. The original blockdoes not remain the marble block, it becomes a slab or tile. In thecircumstances, not only is there manufacture but also an activity which issomething beyond manufacture and which brings a new product into existenceand, therefore, on the facts of these cases, we are of the view that the HighCourt was right in coming to the conclusion that the activity undertaken bythe respondent-assessees did constitute manufacture or production in termsof section 80-IA of the Income-tax Act, 1961.

26. Before concluding, we would like to make one observation. If thecontention of the Department is to be accepted, namely, that the activityundertaken by the respondents herein is not manufacture, then, it wouldhave serious revenue consequences. As stated above, each of the respondentsis paying excise duty, some of the respondents are job-workers and theactivity undertaken by them has been recognised by various governmentauthorities as manufacture. To say that the activity will not amount tomanufacture or production under section 80-IA will have disastrousconsequences, particularly in view of the fact that the assessees in all thecases would plead that they were not liable to pay excise duty, sales tax,etc., because the activity did not constitute manufacture.”

29. At this juncture, it is obligatory to state that revenue has heavily relied uponon Pepsi Foods Ltd. (supra). In the said case the court had found that theconsideration payable as royalty was an inevitable consequence of the sale of theconcentrate and in such circumstances the price paid for the concentrate was notthe sole consideration paid by the purchaser. The terms of agreement hadobligated the bottler to purchase the concentrate from the assessee alone, use theassessees’ trade mark on the bottled beverage and also pay royalty for assessees’trade mark at the specified percentage of the maximum retail price of eachbottle. In the given circumstances and evidence available, it was held that theprice actually paid for sale of concentrate was not to be the determinative factor


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as the price paid for the sale of concentrate, i.e., invoice would not bedeterminative, as the royalty payment was inseparably linked with the saleconsideration paid for the concentrate. The indelible nexus and connect wasestablished to club the two considerations.

30. The respondent, in its turn, has placed reliance on Shyam Oil Cake Ltd.(supra) and contended that mere separate tariff entry is not indicative whether thesame amounts to manufacture, for tariff entry can be merely for the purpose ofidentifying the product and the rate applicable to it. In such case, it would nothave the effect of rendering the specified commodity to be excisable. Section 2(f)defines ‘manufacture’ and by deeming effect, a process can amount to manufacture.Albeit, for a deeming provision to come into play, it must be specifically statedthat a particular process amounts to manufacture. The respondent has also placedreliance on Circular No. 495/61/99-CX-3 dated 22nd November, 1998, but thesaid circular relates to compound preparation during the course of manufacture ofagarbati. In the context of the said product, clarification was issued. It is noticeablethat the respondent had pleaded a different factual matrix which has been acceptedby the Tribunal, albeit, without referring to specific details. General observationand broad brush approach need not reflect true consideration paid for all transactions.A far greater and deeper scrutiny of facts is required before forming any opinion,one way or the other. It would be wrong to be assumptuous without full factualmatrix being lucent and absolutely clear.

31. Recently, in The Additional Commissioner of Commercial Taxes, Bangalorev. Ayili Stone Industries Civil Appeal Nos. 1983-2039 of 2016 dated 18thOctober, 2016 – 2016-TIOL-176-SC-CT the court was dealing with the issue ofgrant of exemption on polished granite stone and the view of the revenue thatthe polished and unpolished granite stones are under separate Entries in theSecond Schedule to the Karnataka Sales Tax Act, 1957. The question arosebefore this court pertained to interpretation of polished and granite stones and inthat context the concept of manufacture and after referring to various judgments,it held that :

“28. There is a distinction between polished granite stone or slabs and tiles.If a polished granite stone is used in a building for any purpose, it willcome under Entry 17(i) of Part S of the Second Schedule, but if it is a tile,which comes into existence by different process, a new and distinctcommodity emerges and it has a different commercial identity in the market.The process involved is extremely relevant. That aspect has not been goneinto. The Assessing Officer while framing the assessment order has referredto Entry 17(i) of Part S but without any elaboration on Entry 8. Entry 8

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carves out tiles as a different commodity. It uses the words “other titles”. Agranite tile would come within the said Entry if involvement of certainactivities is established. To elaborate, if a polished granite which is a slaband used on the floor, it cannot be called a tile for the purpose of comingwithin the ambit and sweep of Entry 8. Some other process has to beundertaken. If tiles are manufactured or produced after undertaking someother activities, the position would be different. A finding has to be arrivedat by carrying out due enquiry and for that purpose appropriate exercise hasto be undertaken. In the absence of that, a final conclusion cannot bereached.”

32. In the case at hand, as we find from the order of the Tribunal the exactnature of the process undertaking and how mixing is undertaken and the processinvolved is not discernible and has not been ascertained and commented. Itremains ambiguous and inconclusive. The respondent claims that about 26 percent of the sales of odoriferous substances were brought from third party andsold without any modification or process. These are all questions of fact whichmust be first authenticated and the actual factual position validated. The Tribunalhas answered the question in favour of the respondent without the backgroundcheck as to the actual process involved and undertaken. Different flavours mayhave different processes.

33. The third issue relates to the issue of limitation. The Tribunal has held thatcertain show cause notices are barred by limitation. Mr. Bagaria, learned seniorcounsel has submitted that the said conclusion is absolutely flawless, if the datesare taken into consideration. For the aforesaid purpose, he has commended us tothe decision already referred to hereinabove. As we notice, the Tribunal on thisscore has also not scrutinised the dates appropriately, but has returned a crypticfinding.

34. In view of the aforesaid analysis, we are constrained to remit the matter tothe Tribunal for reconsideration of the aforesaid aspects on the basis ofobservations made hereinabove and the law in the field. However, we mayproceed to state that we have not expressed anything on the merits of the caseincluding the imposition of penalty and interest. We expect the Tribunal shalladvert to each and every facet in detail so that this court can appropriatelyappreciate the controversy.

35. Resultantly, the appeal is allowed and the matter is remitted to the Tribunalfor fresh determination. There shall be no order as to costs.


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CENTRAL EXCISE ACT

[2017] 1 GSTPT 28 (CESTAT)

IN THE CUSTOMS, EXCISE AND SERVICE TAX APPELLATETRIBUNAL, WEST ZONAL BENCH, MUMBAI

Appeal No.E/1659/2012

ZYDUS NYCOMED HEALTHCARE (P.) LTD.

v.

CCE

C J Mathew, Member (T)

24th August 2016

Commercial and industrial construction service utilised for the establishment of aplant is not an input service in terms of rule 2(i) of the Cenvat Credit Rules, 2014

Cenvat Credit Rules, 2014 – Rule 2(I)(i) – Input services – Service used by aprovider of taxable service for providing output service – When input servicequalify for cenvat credit – Whether commercial and industrial constructionservices utilised for establishment of a plant is an input service.

An ‘input service’ is one that finds use in manufacture of ‘output’, for afactory is essential for manufacture of an output. Therefore, whereappellant-manufacturer utilises commercial and industrial constructionservice for establishment of a plant, service cannot be held to be an inputservice and it would be eligible for cenvat credit for input service tax creditas per rule 2(I)(i).


IN THE CUSTOMS, EXCISE AND SERVICE TAX APPELLATETRIBUNAL, SOUTH ZONAL BENCH, BANGALORE

E/2995/2011, E/2996/2011, E/2997/2011-SM

TOYOTA KIRLOSKAR MOTORS (P.) LTD.

v.

CCE

S S Garg, Member (J)

26th August, 2016

Input service, as defined under rule 2(I)(ii), has wider connotation to includeany service used directly or indirectly in or in relation to manufacture and

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implies that any input service used directly or indirectly in or in relation tomanufacture would qualify for cenvat credit to the manufacturer.

Cenvat Credit Rules, 2004 – Rule 2(I)(ii) – Input services – Service used bymanufacturer in or in relation to manufacture of final products – When inputservice qualify for cenvat credit – Whether cenvat credit for input service oncommission and brokerage paid for providing residential accommodation to theex-pat employees can be denied.

Whether the appellant-manufacturer is under obligation to provide residentialaccommodation to the ex-pat employees as per the arrangement made betweenthe appellant and its overseas joint venture partners, the cenvat credit forinput service cannot be denied on brokerage and commission on the groundthat the appellant is providing residential accommodation to the ex-patemployees voluntarily and it has no direct or indirect relation to themanufacture of final products which are cleared on payment of duty.

[2017] 1 GSTPT 29 (Mad.)

IN THE HIGH COURT OF MADRAS

CMA No. 2586 of 2016

CCE

v.

VISTEON AUTOMOTIVE SYSTEMS INDIA (P.) LTD.

Huluvadi G Ramesh & Anita Sumanth, JJ

8th December, 2016

Transporting the workers to and fro from the factory is included under inputservices in relation to the manufacture of excisable goods

Cenvat Credit Rules, 2014 – Rule 2(I)(ii) – Input service – Service used bymanufacturer in or in relation to manufacture of excisable goods – Transportingworkers to and fro from factory – Is it included under input service and iseligible for cenvat credit.

The expression “extended services” defines not only output service butincludes picking up workmen to and fro from factory. Therefore, followingthe decision of the Supreme Court in Ramla Sahkari Chini Mills Ltd. v.CCE [2010] (260) ELT 321, the assessee is eligible for the service credit asinput services for the tour operator service and rent a cab service.

CCE v. VISTEON AUTOMOTIVE SYSTEMS INDIA

81

30

GSTPT – Vol. 1

Case Reports


IN THE CUSTOMS, EXCISE AND SERVICE TAX APPELLATETRIBUNAL

Appeal Nos. E/3015-3016/2007-EX(DB)

CCE

v.

PARTAP STEEL ROLLING MILLS LTD (1935) LTD.

Ashok Jindal, Member (J) & Devender Singh, Member (T)

28th September, 2016

Job worker is entitled to clear the goods without payment of duty if it has beenpaid by the principal manufacturer

Central Excise Act, 1944 – Excise duty – Exemption – Benefit of NotificationNo. 214/86 – Duty has been paid by principal manufacturer – Can job workerbe denied exemption.

In terms of Notification No. 214/86, the job worker is entitled to clear thegoods without payment of duty provided the duty has been paid by theprincipal manufacturer. The benefit of notification cannot be denied bythe Revenue on the sole ground that the principal manufacturer has notpaid duty which ground is untenable considering the fact that the principalmanufacturer has exported the goods under the bond which means thatthough duty is leviable but is not be paid for reasons of export.

SERVICE TAX

[2017] 1 GSTPT 30 (CESTAT-DEL)

IN THE CUSTOMS, EXCISE AND SERVICE TAX APPELLATETRIBUNAL

Service Tax Appeal Nos. 52365-52368/2016

BHARAT HEAVY ELECTRICAL LTD.

v.

CCE

V Padmanabhan, Member (T)

30th September, 2016

Where the service tax is paid by the manufacturer and services have been usedfor export of the goods by it, rebate under Notification is liable to be sanctioned

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