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Excise duty depends on manufacture, not ownership
May, 21st 2012

Some times the lack of knowledge on the part of senior officers of the Revenue Department on some fundamental issues with regard to the leviability and chargeability of tax leads to serious harassment to the assessees. An occasion has been reported in the media about a field office of the Central Excise department issuing show cause memo to a manufacturer of pharmaceutical products which was availing of exemption due to it. There are exemptions granted by the government to those who manufacture certain products within Himachal Pradesh and similar under developed areas. While the factory was availing of it already, the excise department noticed that it has been sold to a new owner after March 31, 2010. The exemption was not to be granted to a new factory which asked for it after this date for the first time. But if the exemption has already been availed of, it could continue. The contention of the excise department was that since it has been sold to a new owner after this cut-off date, the exemption could not be continued. This contention presupposes that ownership makes the difference to the chargeability of duty. This is precisely wrong . The issue is not ownership but manufacture. I am not writing this article in relation to this particular case since no more facts have been reported in the media. I am writing it only from the theoretical point of view to clarify the basic issue namely whether ownership is relevant for the purpose of levying central excise duty.

This issue has been settled in many judgements before starting with the judgement by the Supreme Court in the case of Re: Sea Customs Act, 1878 reported in 1963-AIR SC 1760. Depending on this the Delhi High Court in the case of Sulekh Ram and Sons vs. UOI 1978(2)ELT525(Del.) held that the taxable event is manufacture and not ownership and therefore, the incidence of excise duty on re-rollable scrap was on Hindustan Steel who manufactured it and not on the then owner who purchased it. The Supreme Court clarified it in the case of Empire Industries vs. UOI 1985(20)ELT179(SC) that the fact that the petitioners are not the owners of the end products is irrelevant. Taxable event is manufacture, not ownership. The Supreme Court depended on some of its previous judgements.

The Supreme Court further confirmed its view in the case of Ujagar Prints vs. UOI 1988(38)ELT535(SC), when it held that duties of excise are imposed on the production or manufacture of goods and are levied upon the manufacturer or the producer in respect of the commodity taxed. The question whether the producer or 2 the manufacturer is or is not the owner of the goods is not determinative of the liability. In a very recent case of Medley Pharmaceuticals Ltd. vs. Commissioner of Central Excise & Customs (Daman) - 2011 (263) E.L.T. 641 (S.C.), the Supreme Court has clarified that liability under excise law is the taxable event based on manufacture irrespective of whether the goods are sold or captively consumed.
Excise duty is not concerned with ownership or sale.

Correspondingly even on the customs side the same principle is true that it is the act of importation which is the taxable event and not the ownership. It comes to saying that the person who has committed the act of importation only is liable to pay the import duty and not the person who owns the goods.

The conclusion is that it is well settled right from 1964, that the taxable event is manufacture and not ownership. It follows, therefore, that the liability to pay the duty is not the owner but on the manufacturer irrespective of whether he is owner or not.

If somebody has already started manufacture, the liability to pay duty has already started. When the factory is sold out to somebody else the owner pays the duty not because of he is the owner as such but because he is the manufacturer.

In spite of this clear position if certain officers issue show cause memo on a complete misunderstanding of the fundamental position, they deserve to be sent to the training school once again.

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