EXCISE AND CUSTOMS

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A Comment on Associated Cement Companies Ltd. v. Commissioner of Customs
by N.C. Mehta*

Cite as : (2001) 7 SCC (Jour) 51

The judgment in Associated Cement Companies Ltd. v. Commr. of Customs1 delivered on 25-1-2001 by a Bench of three Judges of the Supreme Court is inconsistent with the 46th Amendment of the Constitution and a number of Supreme Court decisions including the one in Builders Assn. of India v. Union of India2.

The main issue before the Bench was whether customs duty could be levied on drawings, diskettes, manuals, architectural designs, etc. imported by the appellants. As customs duty is levied on import of goods only, the appellants contended that since the articles imported by them could not be goods, no levy of duty was permitted. The appellants urged that what they imported were intellectual property and not marketable commodities. In support of this contention appellants relied upon Supreme Court judgments in Asstt. STO v. B.C. Kame3, State of T.N. v. Anandam Viswanathan4 and Everest Copiers v. State of T.N.5

The Bench apparently relied on Article 366(29-A) of the Constitution, though it did not specify the exact provision. However, considering the issues discussed by the Bench, it is apparent that the Bench had in mind sub-clause (b) of clause (29-A) of Article 366. Article 366(29-A)(b) is as under:

"366. In this Constitution, unless the context otherwise requires, the following expressions have the meanings hereby respectively assigned to them, that is to say-

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(29-A) 'tax on the sale or purchase of goods' includes-

(a)

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(b) a tax on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract;"

This provision does not have any relation to transfer of property. There are no provisions in the Constitution providing for the levy of customs duty, or for that matter, levy of excise duty which contain the expression "tax on the sale or purchase of goods". How then could the 46th Amendment of the Constitution, in particular Article 366(29-A), have any bearing on the issue to be decided by the Bench? Levy of customs duty could have no bearing on the transfer of property in goods, much less that involved in the execution of a works contract!

Goods — movable property

Customs duty is leviable on import of goods while excise duty is leviable on manufacture of goods; so also sales tax on sale of goods. For all these three levies, "goods" are the focal points. Clause (22) of Section 2 of the Customs Act, 1962 provides that "goods" includes-(1) vessels, aircraft and vehicles; (2) stores; (3) baggage; (4) currency and negotiable instruments; and (5) any other kind of movable property. This inclusive definition requires us to find out what can be said to be "goods". In common law, "goods" have been understood to be movable property in contradiction to immoveable property. Clause (22) of Section 2 refers to all kinds of movable property and in addition, the four types specifically mentioned therein. Thus clause (22) does not help to understand the meaning of "goods". As such, judgments of the Supreme Court about "goods", while dealing with excise and sales tax laws, do not have any connection with Article 366(29-A) as understood by the Bench.

An attempt was made to have the concept of marketability to describe a thing as goods for levy of excise duty. In Moti Laminates (P) Ltd. v. CCE6 a three-Judge Bench had taken note of the evolution of this concept thus-

"13. Having traced the development of law that any goods produced or manufactured ipso facto do not attract duty unless they are marketable or capable of being marketed, we may now examine the dutiability of goods captively consumed."7

This concept of marketability came to be accepted as law in subsequent judgments. In Union of India v. Delhi Cloth & General Mills Co. Ltd.8 again a three-Judge Bench observed:

"5. We have perused the Moti Laminates judgment6 with care and have heard the learned counsel. We find that the view expressed in Moti Laminates judgment6 is based on earlier judgments. It has been affirmed by this Court thereafter. We may refer to one such later judgment, Dharangadhra Chemical Works Ltd. v. Union of India9, and that is also by a Bench of three learned Judges. We do not entertain any doubt as to the correctness of the ratio of Moti Laminates judgment6."10

Thus it has to be accepted that for the levy of excise duty the particular thing has to be "goods" - a marketable commodity. Same should be the criterion applicable to the levy of customs duty.

Clause (14) of Section 2 of the Customs Act defines "dutiable goods" to mean any goods which are chargeable to duty and on which duty has been paid. Similar has been the definition of "excisable goods". Section 12 of the Customs Act provided for the levy of customs duties on goods imported into, or exported from, India at such rates as may be specified under the Customs Tariff Act, 1985 or any other law for the time being in force. The Bench in the present case has stated that the rate at which the customs duty is to be imposed has to be such as may be specified in the Customs Tariff Act11. And this is stipulated by Section 12 of the Customs Act. Thus the two Acts have to be read in conjunction with each other.12 The Bench has referred to Section 49 of the Customs Tariff Act and the First Schedule. It has then explained:

"30. Drawings, plans, manuals etc. specified in Chapter 49 of the Tariff Act are thus statutorily regarded as goods attracting a specified rate of customs duty on their import into India."13          (emphasis supplied)

Thus according to the Bench where particular items were once specified in the Schedule, they would be goods which could be subject to customs duty. In other words, marketability or otherwise may not be relevant in deciding a thing as goods. This conclusion runs counter to the established precedents of the Supreme Court which both in Bhor Industries Ltd. v. CCE14 and Moti Laminates (P) Ltd. v. CCE6 categorically ruled thus-

"Simply because a certain article falls within the Schedule it would not be dutiable under excise law if the said article is not 'goods' known to the market. Marketability, therefore, is an essential ingredient in order to be dutiable under the Schedule to the Central Excise Tariff Act, 1985."15

The Court reiterated its view in another subsequent decision thus:

"Therefore, any goods to attract excise duty must satisfy the test of marketability. The Tariff Schedule by placing the goods in specific and general category does not alter the basic character of leviability. The duty is attracted not because an article is covered by any of the items or it falls in residuary category but it must further have been produced or manufactured and it is capable of being bought and sold."16

Appellant's case

As levy of customs duty could be only on import of goods into India, the appellants contended that they were not liable to pay duty as what they imported were not goods. The transaction between the appellants and their respective foreign collaborators was one for the transfer of technology. This knowledge or know-how though valuable was intangible. The technology when transmitted to India on some media did not get converted from an intangible thing to a tangible thing or chattel. Media was only a vehicle for transmission and was wholly incidental to the main transaction. By way of analogy, it was submitted that legal opinions or judgments of courts when communicated on legal briefs or as certified copies would not constitute transfer of goods by the counsel to his clients or by a court to a litigant.

Appreciation of the above submission did not warrant consideration of sub-clause (b) of clause (29-A) of Article 366 as it is concerned not with "goods" but with tax on transfer of property in goods. This is evident from an examination of Article 366(29-A)(b). This article came to be interpreted in Rainbow Colour Lab v. State of M.P.17 The appellants in this case took photographs of the objects desired by their customers, developed the negatives and supplied the prints. They also developed the films brought by the customers, made positive prints thereof and supplied the prints and returned the negative films. In some cases the appellants might undertake making enlargements of the photoprints. The Madhya Pradesh High Court held that to the extent of the photopaper used in the printing of positive prints, there was transfer of property in goods. Therefore, to this extent, the job done by the appellants became a "work contract" as contemplated under Article 366(29-A)(b) of the Constitution and as incorporated in Section 2(n) of the M.P. General Sales Tax Act, 1958.

The Division Bench of the Supreme Court on appeal reversed it and held that unless there was sale or purchase of goods, either in fact or deemed, and which sale was primarily intended and not incidental to the contract, the State could not impose sales tax on a works contract simpliciter in the guise of the expanded definition in Article 366(29-A)(b) read with Section 2(n) of the State Act. On the facts, it was held that the work done by the photographer which, as held by the Supreme Court in Kame case3 was only in the nature of a service contract not involving any sale of goods. The Bench was of the opinion that the view taken by the Division Bench of the M.P. High Court could not be substantiated. The issue was whether the transactions were sales of goods or "works contracts". Decision on this issue depended on the nature of transactions and the primary intention of the parties underlying the transactions. While reasoning, the Court explained as to when a transaction could not be deemed to be a works contract within the meaning of Article 366(29-A)(b) of the Constitution. In the case under comment there was no issue as to whether the transaction of import could be deemed to be a works contract or not under Article 366(29-A)(b). As such, reliance on this decision was not appropriate.

Every work is not "works contract"

Every transaction which involved work would not be a "works contract". "Works contract" has a special connotation in tax laws as observed by the Supreme Court itself in Associated Cement Co. Ltd. v. CIT18. It is in this sense the Supreme Court uses the phrase in several cases. This explains reference by the Supreme Court to works contracts as "works contracts" (in inverted commas) at as many as five places in Rainbow case17. In State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd.19 also "works contracts" referred to by the Constitution Bench of the Supreme Court as "works contracts" (in inverted commas) at as many as five places. Apparently import of goods for the levy of customs duty could not be equated with execution of a "works contract", whether or not the 46th Amendment of the Constitution was applicable.

Rainbow Colour Lab case

In Rainbow Colour Lab case17 the Bench had laid down that after the 46th Amendment of the Constitution, States could divide works contracts into two separate contracts by a legal fiction, one for sale of goods and the other for labour and service. However, such division could be made only if the works contract involved dominant intention to transfer property in goods and not in contracts where the transfer takes place as an incident of contract of service. The amendment does not empower the State to indulge in a microscopic division of contracts involving the value of materials used incidentally in such contracts. What is pertinent to ascertain in this connection is what was the dominant intention of the contract. The three-Judge Bench in Associated Cement case1 observed that the Forty-sixth Amendment was made precisely with a view to empower the State to bifurcate the contract and to levy sales tax on the value of the material involved in the execution of the works contract and to levy sales tax on the value of the material involved in the execution of the works contract notwithstanding that the value may represent a small percentage of the amount paid for the execution of the works contract. Even if the dominant intention of the contract is the rendering of a service, which will amount to a works contract, after the Forty-sixth Amendment the State would not be empowered to levy sales tax on the material used in such contract. The Bench held that the conclusion in Rainbow Colour Lab case17, in its opinion, runs counter to the express provision contained in Article 366(29-A) and also the Constitution Bench decision in Builders Assn. of India v. Union of India2.

Dealing with the issue whether the imported articles were goods, the three-Judge Bench observed that it was true that what the appellants had wanted was technical advice or information technology. Payment was to be made for this intangible asset. But the moment the information or advice was put on a media, whether paper or diskettes or any other thing, that what is supplied becomes chattel. The Bench clarified that it was not concerned with the quality of information given to the appellants. The question is whether the papers or diskettes, etc. containing advice and/or information are goods for the purpose of the Customs Act. The answer, the Bench observed, was in the affirmative.

It is respectfully submitted that decision of the three-Judge Bench in Associated Cement Companies case1 requires consideration by a larger Bench of the Supreme Court, the earliest the better.

*    N.C. Mehta and Co., Chartered Accountants, Mumbai Return to Text

1. (2001) 4 SCC 593 Return to Text
2. (1989) 2 SCC 645 Return to Text
3. (1977) 1 SCC 634 Return to Text
4. (1989) 1 SCC 613 Return to Text
5. (1996) 5 SCC 390 Return to Text
6. (1995) 3 SCC 23 Return to Text
7. Ibid., p. 32, para 13 Return to Text
8. (1997) 5 SCC 767 Return to Text
9. (1997) 5 SCC 765 Return to Text
10. Supra fn 8, pp. 770-71, para 5 Return to Text
11. Supra fn 1 (para 28) Return to Text
12. Supra fn 1 (para 28) Return to Text
13. Supra fn 1, pp. 610-11, para 30 Return to Text
14. (1989) 1 SCC 602 Return to Text
15. Supra fn 14, 611, para 8 Return to Text
16. Supra fn 6, 30, para 11 Return to Text
17. (2000) 2 SCC 385 Return to Text
18. (1993) 2 SCC 556, 560 Return to Text
19. (1958) 9 STC 353 Return to Text