TIOL-DDT 820 · the untouched capture
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<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong><font color="#663399" size="3">TIOL-DDT
820</font><br>
07.03.2008<br>
Friday</strong></font></p>
<p align="center"><strong><font color="#006600" size="2" face="Verdana, Arial, Helvetica, sans-serif">
What is the duty on naphtha?</font></strong></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">
Yesterday’s <strong>DDT</strong> query on the rate of duty on naphtha attracted several
queries from importers and Customs officers. Many complained that <strong>DDT</strong> should
have answered the question instead of leaving a question. We were under the
impression that it was CBEC’s job. <strong>DDT</strong> understands that Bills of Entry
are pending in several Customs stations for want of clarity on the rate of duty
applicable to naphtha. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Let
us see the position as on 29.2.2008. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">First
of all Naphtha is not mentioned in the tariff. Notification No. 23/2006 which
prescribes an effective rate of 16% excise duty for naphtha mentions only naphtha
falling under heading 2710 of the First Schedule to the Central Excise Tariff
Act, 1985. From this, we should infer that naphtha falls under heading 2710.</font></p>
<table width="450" border="1" align="center" cellpadding="3" cellspacing="0">
<tr>
<td width="71"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>2710</strong></font></td>
<td colspan="4"><div align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>Petroleum
oils and oils obtained from bituminous minerals, other than crude; preparations
not elsewhere specified or included, containing by weight 70% or more
of petroleum oils or of oils obtained from bituminous minerals, these
oils being the basic constituents of the preparations; waste oils </strong></font></div></td>
</tr>
<tr>
<td> </td>
<td width="44"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">-</font></td>
<td colspan="3"><div align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Petroleum
oils and oils obtained from bituminous minerals (other than crude) and
preparations not elsewhere specified or included, containing by weight
70% or more of petroleum oils or of oils obtained from bituminous minerals,
these oils being the basic constituents of the preparations, other than
waste oils: </font></div></td>
</tr>
<tr>
<td><font size="2" face="Verdana, Arial, Helvetica, sans-serif">2710 11</font></td>
<td><font size="2" face="Verdana, Arial, Helvetica, sans-serif">--</font></td>
<td colspan="3"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Light
oils and preparations: </font></td>
</tr>
<tr>
<td> </td>
<td><font size="2" face="Verdana, Arial, Helvetica, sans-serif">--</font></td>
<td colspan="3"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Motor
Spirit: </font></td>
</tr>
<tr>
<td><font size="2" face="Verdana, Arial, Helvetica, sans-serif">2710 11 11</font></td>
<td><font size="2" face="Verdana, Arial, Helvetica, sans-serif">--</font></td>
<td width="42"><div align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Special
boiling point spirits (other than benzene, toluol) with nominal boiling
point range 55-1 15°C</font></div></td>
<td width="122"><div align="center"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">kg.</font></div></td>
<td width="129"><div align="center"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">16%
+ Rs. 15.00 per litre</font></div></td>
</tr>
<tr>
<td><font size="2" face="Verdana, Arial, Helvetica, sans-serif">2710 11 12</font></td>
<td><font size="2" face="Verdana, Arial, Helvetica, sans-serif">--</font></td>
<td><div align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Special
boiling point spirits (other than benzene, benzol, toluene and toluol)
with nominal boiling point range 63-70°C<br>
</font></div></td>
<td><div align="center"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">kg.</font></div></td>
<td><div align="center"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">16%
+ Rs. 15.00 per litre</font></div></td>
</tr>
<tr>
<td><font size="2" face="Verdana, Arial, Helvetica, sans-serif">2710 11 13</font></td>
<td><font size="2" face="Verdana, Arial, Helvetica, sans-serif">--</font></td>
<td><div align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Other
special boiling point spirits (other than benzene, benzol, tolunene and
toluol)</font></div></td>
<td><div align="center"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">kg.</font></div></td>
<td><div align="center"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">16%
+ Rs. 15.00 per litre</font></div></td>
</tr>
<tr>
<td><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>2710 11 19</strong></font></td>
<td><font size="2" face="Verdana, Arial, Helvetica, sans-serif">--</font></td>
<td><font size="2" face="Verdana, Arial, Helvetica, sans-serif">other</font></td>
<td><div align="center"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">kg.</font></div></td>
<td><div align="center"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">16%
+ Rs. 15.00 per litre</font></div></td>
</tr>
</table>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">And
it should perhaps fall under heading 2710 11 19, for which the rate of duty
is 16% + Rs. 15/- per litre as per the tariff. However as per Notification No.
23/2006, the effective rate of duty is 16%. That is prior to 1.3.2008.</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">As
everyone knows from 1.3.2008, the Finance Minister announced a reduction in
excise duty from 16% to 14%.</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Then
what happens to Naphtha? </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">As
per Sl. No. 15 of Notification No. 2/2008 dated 1.3.2008, the effective rate
of duty applicable to naphtha is</font></p>
<table width="450" border="1" align="center" cellpadding="3" cellspacing="0">
<tr>
<td><font size="2" face="Verdana, Arial, Helvetica, sans-serif">15</font></td>
<td><font size="2" face="Verdana, Arial, Helvetica, sans-serif">2710 11 11,
2710 11 12, 2710 11 13, <font color="#FF0000"><strong>2710 11 19,</strong></font> 2710 11 20 and 2710 11 90</font></td>
<td><font size="2" face="Verdana, Arial, Helvetica, sans-serif">14% + Rs.15.00
per litre</font></td>
</tr>
</table>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">But
Notification No. 23/2006 which prescribes an effective rate of duty of 16% is
not amended. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">So,
as of now, we have two notifications, 23/2006 and 2/2008 prescribing two effective
rates of duty for naphtha.</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">1. 14%
+ Rs. 15 per litre, and</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">2. 16%</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Now
which of these rates should the assessee and the Department follow?. [It seems
some oil companies assume that there is a third rate of 14%, because the Finance
Minister announced a reduction from 16% to 14%. And because naphtha was charged
to 16% earlier, it should be charged to 14% now. But the fact is that there
is no 14% duty for naphtha.]</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">It
is now settled law that when two rates are applicable, the assessee can choose
the one beneficial to him. You may have a look at </font><font size="1" face="Verdana, Arial, Helvetica, sans-serif"><strong><a href="http://www.taxindiaonline.com/RC2/subCatDesc.php3?subCatDisp_Id=50&filename=legal/sc/2007/2007-TIOL-26-SC-CUS.htm" target="_blank">2007-TIOL-26-SC-CUS</a></strong></font><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><a href="http://www.taxindiaonline.com/RC2/subCatDesc.php3?subCatDisp_Id=50&filename=legal/sc/2007/2007-TIOL-26-SC-CUS.htm" target="_blank">.</a></font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>Further
the TRU JS DO Letter dated 29.02.2008, clearly states in para 2.2,</strong></font></p>
<blockquote>
<p align="justify"><font color="#FF6633" size="2" face="Verdana, Arial, Helvetica, sans-serif">2.2
Since the reduction in the general rate has been carried out by notification,
the possibility of the same product/ item being covered by more than one notification
cannot be ruled out. In such a situation, the rate beneficial to the assessee
would have to be extended if he fulfils the attendant conditions of the exemption.</font></p>
</blockquote>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">It
seems the Department wants to collect 14%+ Rs. 15 per litre for naphtha, while
the Oil Companies want to pay only 14%. BOTH ARE WRONG. The applicable rate
would be 16% if it is less than 14%+Rs. 15 per litre. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">The
fact is that the good Board forgot about Notification No. 23/2006 and so the
Oil Companies do not get the benefit of reduction in duty for naphtha, announced
by the FM. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">God
can give you only so many boons as the poojari is prepared to deliver!</font></p>
<p align="center"><strong><font color="#006600" size="2" face="Verdana, Arial, Helvetica, sans-serif">Exempted
and dutiable final products – reversal of credit – the Rule 6 conundrum
</font></strong></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Obviously
there is a maths graduate in the Board who thought that he could draft an impossible
formula, so that nobody takes credit on inputs used for manufacture and service
of both dutiable and exempted goods and services. He did draft the formula but
somewhere through the steps lost track and forgot to include certain vital links.
An equation that has two, three or four unknown elements, is manageable, but
when you have so many unknown factors from ‘a’ to ‘p’,
you are bound to miss some. Mathematics is very precise unlike Central Excise
notifications and when you try to blend both, you should have total command
over both and if you don’t, you end up with this kind of embarrassing
confusion. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">We
have lost count of the number of articles we have carried on this controversial
Rule 6. Even the topmost consultant in the country who wrote for us chose to
write on this Rule 6. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">One
of our most enlightened netizens, wrote in: </font></p>
<p align="center"><strong><font color="#006600" size="2" face="Verdana, Arial, Helvetica, sans-serif">Even
the Duckworth Lewis method would be put to shame by Rule 6(3A) of the Cenvat
Credit Rules, 2004.</font></strong></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">The
Duckworth Lewis method or D/L method is a set of formulas and tables created
by Frank Duckworth and Tony Lewis. The method was adopted by the International
Cricket Council (ICC) in 1999 to address the problem of delayed one-day cricket
matches for reasons of rain, poor light and floodlight failures although
it has also been used in events that have been shortened due to crowd problem,
sandstorms and even snowstorms.</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">A
website was also designed to help a range of users - from people with little
or no knowledge of the D/L method to professionals who would like assistance to
do the complicated calculations with ease. This site also allows users to run
complicated reports based on the results of the D/L calculations. There is also
a calculator on this site which allows one to make calculations by just feeding
in the data asked & pronto you get the revised target scores to be achieved
or if the play is stopped, which team won!</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">The
very fact that this formula is being used for nearly a decade itself indicates
that the same has correctly addressed the various variable factors involved
in a cricket match.</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Be
that as it may, the present amendment made in Rule 6(3) of the Cenvat Credit
Rules, 2004 by notification 10/2008CE(N.T) dated 01.03.2008 (w.e.f 01.04.2008)
tries to emulate the Duckworth-Lewis system excepting of course that none in
the TRU have sought recognition for the same.</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">As
to why there was no such ruckus when a similar sub-rule named clause (d) was
inserted last year by notification 10/2007CE(N.T) dated 01.03.2007 (w.e.f 01.04.2007)
in rule 6(3) of the CCR, 2004 [albeit optional, just like now] for output service
providers who provided both dutiable & exempted services & availed credit
on common inputs & input services, is not known.</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Truly
speaking & to be fair enough to the Board, it needs to be mentioned that
the amendments proposed in rule 6 & the new formula laid down in sub-rule
(3A) tries to achieve a harmony amongst the various permutations & combinations
that can emerge in a given situation where a manufacturer and/or a service provider
takes credit of inputs &/or input services &/or manufactures dutiable
and/or exempted final products and/or taxable and/or exempted services.</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Inasmuch
as since the said formulae was experimented with Service providers who provided
both dutiable & exempted services & availed the Cenvat credit on inputs
as well as input services, the Board has taken the next logical step –
extend it to manufacturer’s too & provide a unified formula.</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">I
am just about worried about certain things (though these apprehensions ought
to have been raised earlier) –</font></p>
<blockquote>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">++ What
if a manufacturer and/or service provider does not exercise the option yet follows
the provisions of sub-rule 3A of rule 6 of the Cenvat Credit Rules, 2004;</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">++ As
to why the interest rate is kept so high at @24% since if the assessee does
not pay the same (i.e interest) but only pays the finally determined amount,
the only provision to recover it is rule 14 of the CCR, 2004 & which in
turn stipulates that the provisions of section 11A & 11AB are to be applied
mutatis mutandis; since section 11AB requires payment of 13%, wouldn’t
a manufacturer not opt to not pay interest u/r 6(3A) of CCR, 2004;</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">++ If
short payment of amount can attract interest @24%, what about excess payment
of amount which credit is allowed to be taken suo motu as per clause (f) upon
self determination of final amount – can this fetch some interest!</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">++ Clause
(h) ought to have also expressly provided for a situation where the manufacturer/service
provider was not into existence in the preceding financial year.</font></p>
</blockquote>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Probably,
this is the Board’s way of compelling every manufacturer/service provider
to fall in line & pay the amount as per rule 6(3)(i) of the Cenvat Credit
Rules, 2004. Okay, if you still wish to go by rule 6(3A), let us make optimum
use of Section 14AA which is thoroughly underutilized nowadays!</font></p>
<p align="left"><strong><font size="2" face="Verdana, Arial, Helvetica, sans-serif">It
would be a good idea if the Board patents this formula without further loss
of time & give it a name!</font></strong></p>
<p align="justify"><font color="#FF6633" size="2" face="Verdana, Arial, Helvetica, sans-serif">What
we don’t understand is what takes the Board so much time to correct this
aberration! </font></p>
<p align="center"><strong><font color="#006600" size="2" face="Verdana, Arial, Helvetica, sans-serif">Today’s
case - Sale of originally held and bonus shares - Long-term capital gains arising
to non-resident company - benefit of 10% rate u/s 112 cannot be denied : Advance
Ruling Authority</font></strong></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">The
Authority held that the tax payable on a long-term capital gains arisen to Moron
Holdings PLC on the sale of originally acquired shares of Moron Tea Company
(India) Ltd. will be @ 10% in consonance with the proviso to section 112(1)
of the Act. Even in respect of sale consideration arising out of the bonus shares,
the tax liability of the non-resident foreign company will be @ 10% only as
per the proviso to section 112(1) of the Act. </font></p>
<p align="center"><font color="#006600" size="3" face="Verdana, Arial, Helvetica, sans-serif"><strong><font size="2">Jurispruden</font><font color="#FF6633" size="5">tiol</font> <font size="2">- Monday’s cases</font><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong><b><img src="http://www.taxindiaonline.com/RC2/image/stories/ddt_31.gif" alt="Legal Corner Icon" width="191" height="160" hspace="5" border="0" align="left" /></b></strong></font></strong></font></p>
<p align="justify"><font color="#663399" size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>Income
Tax - AAR</strong></font></p>
<p align="justify"><font color="#FF6633" size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>Payment
received by US Co for repair of hardware is not liable to tax in India but payment
for software maintenance support is to be taxed in India - AAR</strong></font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">For
a better understanding of this case, please go back a little through the pages
of history and have a look at </font><font size="1" face="Verdana, Arial, Helvetica, sans-serif"><strong><a href="http://www.taxindiaonline.com/RC2/subCatDesc.php3?subCatDisp_Id=55&filename=legal/ara/2005it/2005-TIOL-05-ARA-IT.htm" target="_blank">2005-TIOL-05-ARA-IT</a></strong></font><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><a href="http://www.taxindiaonline.com/RC2/subCatDesc.php3?subCatDisp_Id=55&filename=legal/ara/2005it/2005-TIOL-05-ARA-IT.htm" target="_blank">.</a> In
that case, Authority for Advance Rulings has ruled that payment received by
Non-Resident US Company in regard to repair of hardware does not fall within
the meaning of income from the furnishing of services as defined in article
12. The payment, would, therefore, be business profits within the meaning of
para 7 of article 7 of DTAA. Since US Company has no permanent establishment
in India the payment will not be taxable in India in view of the provisions
of article 7. However, the payment made for repair of software will be outside
the purview of para 7 of article 7. Having regard to provisions of para 2 of
article 12 the same shall be taxable in India.</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">And
so the applicant is not legally required to deduct tax on the payments made
to Raytheon Company, USA. And the rate at which the tax has to be withheld in
relation to the payments made to Raytheon Company on the Software Maintenance
Contract should be 10% (ten per cent), apart from the applicable surcharge.</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">The
same decision is now reiterated in Round 2.</font></p>
<p align="justify"><strong><font color="#663399" size="2" face="Verdana, Arial, Helvetica, sans-serif">Customs:
</font></strong></p>
<p align="justify"><font color="#FF6633" size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>Exemption
to copper waste and scrap used within factory of production applicable for imported
scrap : Supreme Court</strong></font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>NOTIFICATION
</strong>No. 8/96- Central Excise dated 23rd July 1996, exempts, Copper waste
and scrap used within the factory of production for the manufacture of unrefined
or unwrought copper, copper sheets or circles and handicrafts. The issue involved
in these appeals is as to whether the scrap imported by the appellants is chargeable
to 'NIL' rate of additional customs duty under Section 3 of the Customs Tariff
Act, 1975. Is the Notification applicable to imported goods?</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">The
test laid down by the Tribunal that the benefit of the notification/tariff heading
would be admissible to only that copper waste and scrap which is generated in
the factory of production and not the imported waste and scrap, is not supported
either by the text of the exemption notification, heading 74.04 or any other
authority.</font></p>
<p align="justify"><font color="#663399" size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>Mens
rea?</strong></font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Selling
of part of goods procured for manufacture against conditions imposed –
mens rea evident – penalty imposable : Supreme Court</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">APPELLANT
manufactures Steel Ingots. It purchased iron scrap from the Railways in public
auction. Iron scrap is melted and converted into the finished products. Appellant
had been accorded recognition under Section 4-B (2) of the U.P. Trade Tax Act
in terms whereof it became entitled to purchase raw-materials for manufacturing
purpose at a concessional rate of tax. In the year 1985-86, it purchased 2532.989
M.T. of iron scrap. Allegedly, the lots contained various categories of iron
scraps as it was purchased on "as is where is basis".</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Moreover,
the assessing authority as also the appellate authority had held that the appellant
sold the goods knowingly and, it must, therefore, be inferred that the finding
in regard to mens rea had also been arrived at.</font></p>
<p align="justify"><font color="#FF6666" size="2" face="Verdana, Arial, Helvetica, sans-serif">Until
Monday with more DDT </font></p>
<p align="justify"><font color="#FF6666" size="2" face="Verdana, Arial, Helvetica, sans-serif">Have
a nice time.</font></p>
<p align="justify"><font color="#FF6666" size="2" face="Verdana, Arial, Helvetica, sans-serif">Mail
your comments to</font><font size="2" face="Verdana, Arial, Helvetica, sans-serif">
<font color="#0000FF"><a href="mailto:vijaywrite@taxindiaonline.com">vijaywrite@taxindiaonline.com</a></font></font> </p>
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