Expert Advisory Committee

1.2 Query:

Treatment of disputed additional excise duty.

1.A private limited company is carrying on business as “Processors” for the last several years. The company receives copper ingots from its customers and, after processing, returns the same to the customers in the form of copper wire rods. The company neither purchases copper ingots from customers nor sells copper wire rods to its customers. It only charges the customers for its labour for conversion of their copper ingots into copper wire rods.

2.Copper is an excisable item. Previously, for the purposes of excise duty, copper ingots and copper wire rods were being treated at par by the Excise Department under Notification No. 119/66, whereunder the rate of excise duty on both the items was Rs. 3,000 plus 10% surcharge (i.e. Rs.3,300/-) per metric tonne. This rate of excise duty has always been paid by the customers of the company either at the time of import or at the time of first purchase. Therefore, the company was never required to pay any additional excise duty on the copper wire rods it converted from the copper ingots received from the customers while the Department released the wire rods from the company’s premises. This went upto 28.2.1984 and the excise duty on copper ingots and copper wire rods remained the same, i.e., Rs. 3,300/- per M.T. in accordance with Notification No. 119/66.

3. With effect from 1.3.1984, by a separate notification, the excise duty payable on copper wire rods was enhanced from Rs. 3,300/- per M.T. to Rs. 4730/- per M.T. (i.e. Rs. 4300/- + 10%). Notification No. 119/66, however, was not withdrawn and, as a result of such non-withdrawal of Notification No. 119/66, no additional excise duty was demanded from the company on the copper wire rods converted by it from copper ingots received from the customers till August 1984. The aforesaid Notification No. 119/66 was ultimately withdrawn on 1.8.1984 and, since then, the company has been collecting from its customers and paying to the Department the enhanced rate of excise duty on copper wire rods while clearing the goods form its factory premises.

4. According to the querist, there was some confusion as to what rate of excise duty was payable during the period from 1.3.1984 (when the rate of duty on copper wire rods was enhanced) to 31.7.1984 (when the earlier notification No. 119/66 was withdrawn). As a matter of fact, during this period of 1.3.1984 till 31.7.1984, the authorities kept on allowing the movement of goods on the basis of Nil gate pass, treating the tariff rate to be the same in case of both the items, i.e., ingots and wire rods, as per Notification No.119/66.

5.The company received a show-cause notice from the Excise Department as to why excise duty @ Rs. 4730/- per M.T. be not charged on the goods processed by the company during the said period from 1.3.84 to 31.7.84. The company duly sent its reply to the notice contending that the copper ingots received by it had already suffered excise duty @ Rs. 3300/- per M.T. and exemption under Notification No. 119/66 had not been withdrawn during this period. The matter is still pending and has not been finally determined by the Excise Department.

6.However, in order to secure itself against any possible liability of paying enhanced rate of excise duty, the company consulted its customers and all of them assured the company that, in the event any additional duty is determined payable, they will pay the same as the goods in both the forms-ingots and wire rods-belonged to them. Some of the customers agreed to keep with the company, amounts equivalent to the difference of excise duty already paid on copper ingots at Rs.3300/- per M.T. and the new tariff rate of Rs. 4730/- per M.T. on copper wire rods, i.e., Rs 1430/- per M.T. as security in trust for payment as and when the liability is finally determined, with the clear stipulation that if no additional duty is determined payable for the conversion during the said period, the amount kept in trust and security shall be returned to the respective customers. In these circumstances, the company received and kept an amount of approximately Rs. 22.12 lakhs from its customers in a separate ‘Contingency Deposit Account’ to safeguard its interests against possible financial liability to the extent of additional duty, if any, determined. The amount so received from the customers is lying in the ‘Contingency Deposit Account’ as credit from the respective customers. Similarly, the customers have also made entries in their own account books debiting the amounts to the account of the company. No deduction in this regard has been claimed by the company in its profit and loss account.

7.In view of the above, the querist has sought the opinion of Expert Advisory Committee on the following issues:

(a) What is the nature of the amount received by the company from its customers? Whether it is a case of ‘debtor’ and ‘creditor’ or whether the amount can be termed as ‘revenue receipt’ in the hands of the company subject to income-tax thereon-particularly since the liability to pay additional duty has not as yet been determined finally?

(b) In view of the non-determination of liability of additional excise duty, does section 43-B of the Income-tax come into play in this case?

Opinion November 27, 1990

1. The Committee notes the following decisions of the courts affirmed by the Supreme Court:

(i) CIT v. Nizam Sugar Factory: S.L.P. (Civil) No. 8499 of 1980:(1984) 145 ITR (St) 5 (SC), and

(ii) CIT v. Basti Sugar Co. Ltd: S.L.P. (Civil) Nos. 7727 and 7880 of 1982: 150 ITR (St) 79 (SC)

Wherein it was held that where the question of fixation of correct price is pending, the difference in price allowed by the Court to be collected from customers by the assessee and the levy price fixed by the Government cannot be said to represent additional sales price until a decision is arrived at on this issue. The difference in price collected by the assessee was held not to be a revenue receipt.

2. The Committee also notes section 43B of the Income-tax Act which states, inter alia:

“Notwithstanding anything contained in any other provision of this act, a deduction otherwise allowable under this Act in respect of-

(a) any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force, or

(b) …………………

(d) ………………….

shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him…………….

Explanation 2: For the purposes of clause (a), as in force at all material times, “any sum payable” means a sum for which the assessee incurred liability in the previous year even though such sum might not have been payable within that year under the relevant law……….”

3.The Committee is of the view that the amount of additional excise duty @ Rs. 1430/- per M.T. collected by the company from its customers is not in the nature of a revenue receipt but is in the nature of a ‘security deposit’. The Committee is also of the view that the additional excise duty shall become a revenue receipt if the Excise Department determines that the additional excise duty is payable by the company and it shall become part of the income of the company in the year in which such determination is made by the Excise Department. This is in view of the fact that as and when Excise Department determines the additional excise duty to be payable, the amounts so collected by the company will not be refundable to the customers. In case, the Excise Department determines that the additional excise duty is not payable by the company, the security deposits shall be refunded to the customers and the question of chargeability to income-tax will not arise.

4. The Committee is also of the view that the additional excise duty shall become an expense deductible under Income-tax Act subject to the provisions of section 43-B of the Act only in the year in which the Excise Department determines that the additional excise duty is payable by the company. Till such determination is made, the question of deduction of excise duty will not arise. Even when the same becomes deductible as mentioned above, it will be allowed as a deduction subject to the provisions of section 43-B.

5. The Committee is accordingly of the following opinion:

(a) The amount of additional excise duty received by the company from its customers is in the nature of ‘security deposits’ to be treated as a ‘current liability’. The same shall become a revenue receipt in the hands of the company when the Excise Department determines that the additional excise duty is payable by the company.

(b) The additional excise duty will become an expense in the year in which the same is determined payable by the Excise Department. Further, in view of section 43-B, it will be allowed as a deduction in the year in which it is paid to the Excise Department.

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