Third Schedule requires rescheduling
SECTION 2(f)(iii) of the Central Excise Act, 1944 was amended in the year 2003 to provide that, in relation to goods specified in the Third Schedule thereof, packing or repacking in a unit container or labelling or re-labelling of containers including the declaration or alteration of retail sale price on it or adoption of any other treatment on the goods to render the product marketable to the consumer would amount to ‘manufacture'.
While inserting this Third Schedule, the Central Government instead of identifying the goods which are required to be inserted in this schedule, took the easier way out by copying the contents of notifications issued under Section 4A of the Act verbatim (except the abatement values) to begin with and later effected a couple of minor amendments to either incorporate or delete certain categories of goods from the Third Schedule in tandem with amendments to notifications issued under Section 4A.
This gave an impression that all the goods notified for assessment under Section 4A are invariably covered under the definition of ‘manufacture' in terms of Section 2(f)(iii) read with the Third Schedule. This is not true. In fact, as we understand, there is absolutely no relationship between Section 2(f)(iii) of the Act and the Third Schedule there under and Section 4A of the Act and notifications issued there under. It could be a matter of pure coincidence and/or convenience that the Central Government chose this simpler route.
But this probably has made life difficult for the trade and industry, if we go by a mail we received from one of the leading manufacturers of forklifts and related equipment:
“We have noticed that notification no. 19/2010 dtd. 29 th April, 2010 has amended notification no. 49/2008 to insert Sr. No. 109 with the intention of taxing “Parts, Components and Assemblies of goods falling under tariff item 8426 41 00, headings 8427, 8429 and sub heading 8430 10” on the MRP declared less abatement of 30% as prescribed therein. The said amendment affects us as we are manufacturers of Forklift Trucks-Chapter Heading 8427.
However, we notice that simultaneously similar entry has not been inserted in the “Third Schedule” to the Central Excise Act, 1944. Or have we missed seeing it? In the absence of a similar entry in the Third Schedule it would be difficult to implement the above.
Just to give you a brief background. We manufacture Forklift Trucks. We also manufacture parts and components and assemblies of such forklift trucks. For our own manufactured components there is no problem, as we are aware of the MRP / RSP at which we will be selling the said item and hence we will be paying the duty by affixing / declaring the RSP on the package at the time of clearance from the factory, hereafter.
However, for general items (batteries, bearings, hoses, gears, switches, tyres, etc…the list is endless) bought from other manufacturers it would be difficult. Even if we were to declare our MRP to them, will they be in a position to keep stocks separately for each such manufacturer to whom they sell their items and declare the MRP of each such manufacturer on their products.
If a similar entry is inserted in the Third Schedule then it would be possible to bring all such items to the manufacturing Plant and then avail Cenvat credit of the duty paid by the manufacturer and thereafter declare our MRP on the package and pay duty as per our MRP less the abatement. This would be permissible as the activity of altering the MRP would amount to manufacture in terms of the definition under Section 2(f) (iii), of the Act.
Can you please enlighten us?
While the grievance of this manufacturer for not bringing parity for goods notified under Section 4A and goods incorporated under Third Schedule of the Act is understandable, the apprehension that manufacturers of general items (batteries, bearings, hoses, gears, switches, tyres, etc) would have to keep stocks separately for OEMs and declare the MRP of OEMs on such products before clearing it to OEMs may be unwarranted for two reasons.
Firstly, merely because certain goods notified under Section 4A of the Act are procured in bulk by OEMs, the manufacturers of such goods need not follow the assessment under Section 4A, instead they can adopt the valuation under Section 4 of the Act because in terms of the amended provisions of Rule 2A read with Rule 6 of the Standards of Weights and Measures (Packaged Commodity) Rules, 1977, clearances to industrial consumers and institutional consumers are exempt from affixing retail sale price, which is a pre-requisite for bringing those goods under the purview of Section 4A. This was also the law laid down by the Apex Court in Jayanti Food Processing Pvt Ltd vs. CCE - 2007-TIOL-150-SC-CX.
Secondly, manufacturers of such goods i.e. goods notified under Section 4A can affix different MRPs on retail packages when such retail packages are sold in different areas in terms of Explanation 2(c) to Section 4A(4) of the Act. However, this aspect may not be applicable in the instant case because the OEMs may be situated in the same area and for such OEMs different retail sale prices cannot be affixed by the manufacturer. In any case, as stated above, clearances of goods to OEMs need not be subject to assessment under Section 4A so long as such industrial consumers buy the packaged commodities for using them in their industry for production. At this juncture it may be noted that OEMs primarily procure such goods only for further consumption in the manufacture of final products. However, if they procure it purely for the purpose of further retail sale, though they may not necessarily know when such goods will be released into the production line or when they will be sold as such as spares, then it may come under the purview of Section 4A (some OEMs have their own exclusive spare parts divisions which are primarily engaged in procuring spares in bulk and repacking and reselling them to their customers in the secondary market).
If the OEMs are engaged in the latter activity as mentioned above, then it would be prudent on the part of the Government to incorporate such goods in the third schedule as well. Otherwise, the activity of procuring the spares in bulk by the spare parts division of OEMs and repacking/relabeling them etc would not amount to manufacture and they may not be liable to pay excise duty at all in such instances. This may also be true in cases where OEMs do not have a separate spare parts division but still procure spare parts in bulk and repack/relabel etc and sell them to their customers in the secondary market.
The above issue is not confined to Notification No. 19/2010-CE alone. In fact, Notification No. 9/2010-CE (NT) dated February 27, 2010 amended Notification No. 49/2008-CE (NT) dated December 24, 2008 by substituting the contents of S. No. 108 thereof which expanded the scope of MRP based assessment to more automobile spares, components and accessories. However, S. No. 100 of the Third Schedule still retains the old description as it existed prior to issuing Notification No. 9/2010-CE (NT).
With the result if the processes specified in Section 2(f)(iii) of the Act are carried out on all those goods which were brought into the fold of MRP based assessment with effect from February 27, 2010 by virtue of amended S. No. 108 of Notification No. 49/2008-CE (NT), they will not amount to manufacture because these goods are not covered in S. No. 100 of the Third Schedule.
So in the interest of its own coffers, it will be a wise thing for the Central Government to amend the Third Schedule to bring it on par with the contents of notifications issued under Section 4A. This is because even if the primary manufacturers of spares/components/accessories of automobiles clear the notified goods in bulk and pay duty in terms of Section 4, those industrial/institutional consumers which procure them for repacking and reselling them in retail will necessarily pay duty by assessing those goods under Section 4A. Further the entire chain of transactions will come under the CENVAT chain which will benefit the OEMs.