The letter of the law

As you read this column, the government is preparing to go into appeal against the judgement of Justices Ruma Pal and P Venkatarama Reddi of the Supreme Court absolving ITC of the charges of excise duty evasion of Rs 799.35 crore (Rs 7.99 billion).

Last week, the two judges threw out the government's case that ITC had deliberately printed a lower maximum retail price on its cigarette packs so as to attract a lower excise duty, but "consciously and deliberately" ensured that the price charged to customers was higher than this MRP, and this difference flowed back to the company in one form or the other.

Since the judges have categorically said "there is no allegation of any 'flow back' in the case", it is obvious the review petition will highlight this as tomes of evidence had been produced when the case hit the headlines in the early 1990s to show precisely this "flow back".

ITC wins mother of all excise wars

Indeed, the original showcause notice to ITC, also quoted in the Supreme Court's judgement, says that after the excise law changed in 1983 to bring in MRP-based taxation, ITC "drastically reduced the margins available to the wholesale dealers … and retailers … to a level of 10 paise (for the retailers) per thousand cigarettes."

In other words, the government was alleging ITC was getting its wholesalers/retailers to pocket the money directly from customers -- so it was a "flow back" even if not directly to the company.

But what the government may find difficult to counter is the point the judges make when they say the revenue department cannot go into whether the MRP printed is correct or not.

Shorn of all the legalese, the judges say that if excise officials are to go into the correctness of the MRP, this is simply going back to the old method of evaluating the value of a commodity based on its manufacturing costs.

In fact it is precisely because that was such a dispute-ridden system, the judgement quotes from the Central Board of Excise and Customs chief's testimony to the Public Accounts Committee in 1985-86 that the government moved to the new system.

Indeed, the CBEC chief says "even at that time (in 1983) we were conscious of the fact that there could be an overcharging of the prices by the retailer" but this, he felt, was something that could be tackled by taking legal action against the retailers under the Packaged Commodity Rules.

Indeed, this is the line the two judges have taken that if there was overcharging at the retailers' end, ITC cannot be held responsible for it and this is something the state governments should have dealt with under the Packaged Commodity Rules.

Since this kind of reasonable-sounding argument looked like it could be open to a lot of abuse, I'd be glad if a review petition got this point clarified further.

But the larger issue here is that the government needs to apply its mind clearly while drafting the law. As the two judges say while citing various other precedents, the taxpayer cannot be expected to go into the spirit of the law, but has to go by the letter of the law -- to cite a judgement quoted by the two judges, "… the operation of the notification has to be judged not by the object which the rule-making authority had in mind but by the words which it has employed to effectuate the legislative intent."

Why talk of the spirit of the law, in the case of the printing and selling of the International Herald Tribune earlier this year, there wasn't even the letter!

I remember speaking to Asian Age editor M J Akbar, who was bringing out the IHT when the controversy arose and the government spoke of how the Cabinet Resolution of 1955 prohibited this.

Akbar pointed out that his defence in court was that it may have been the government's intention, but there was no law to this effect since Cabinet resolutions are not law. At least not as yet!

What takes the cake as far as laws not being thought out, of course, is the famous case where a customs commissioner imposed a penalty of around Rs 2,000 crore (Rs 20 billion) on Indian Oil Corporation for not paying an import duty on the demurrage of Rs 170 crore (Rs 1.7 billion) it paid on its oil imports -- demurrage is the payment made to a shipping company when its ships have to stay on in the ports for extra periods when the ports are clogged up.

Since demurrage is not something the company is to blame for, the CBEC had, on August 14, 1991, issued a circular saying that demurrage was not part of the assessable value and so duties could not be paid upon it.

Not surprisingly, when the matter came up before the Central Excise and Gold Appellate Tribunal (now called the CESTAT), it dismissed the duties and penalties against IOC.

But since the government wished to challenge the CEGAT order in the Supreme Court, and this is the twist, it came up with another circular, on March 2, 2001, saying "the (earlier 1991) decision … was based on … a general perception … without specifically examining the implications (of various customs valuation rules)". The new circular goes on to say "it was never the intention of the Board to exempt ship demurrage charges from customs duty"!

And since the Supreme Court has thrown out the government's IOC appeal, there could just be another circular withdrawing the earlier withdrawal order!

The government needs to seriously apply its mind to the letter of the law, and not just make things up on the spirit it goes along. To my mind that, and not ITC's guilt or innocence, is the real lesson from the latest Supreme Court judgement.

Powered by