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The case of
Sadhu Overseas, Faridabad Vs State of Haryana decided by Haryana
Tax Tribunal on 21.10.03 has held DEPB as equal to money and thus
not goods taxable under HGST Act, 1973. DEPB was earlier decided
as taxable goods liable to tax by Delhi High Court. Whether DEPB
is eligible goods under Central Sales Tax Act, 1956 for charging
of lower rate of tax? Whether form C under CST Act can be issued
for purchase of DEPB? Whether Tax invoice can be issued by seller
of DEPB in the State of Haryana under Haryana Value Added Tax Act,
2003? And Whether a buyer registered dealer of DEPB avail the
input tax credit of tax paid on such purchase?
Hon'ble
Haryana Tax Tribunal in its judgement in the case of Sadhu
Overseas, Faridabad Vs State of Haryana has held that DEPB is not
'Goods' and are not chargeable to tax under the provisions of
Haryana General Sales Tax Act, 1973. Earlier, Hon'ble Supreme
Court of India, in the case of Vikas Sales Corporation had held
that 'REP licenses' are goods and are chargeable to tax under the
State sales tax Act. In the case of Philco Exports, Hon'ble Delhi
High Court held that 'DEPB' as goods and upheld the right of the
State of Delhi to tax this. In the case of KMA Finished leather
private Limited, Hon'ble Madras High Court held that ' Duty
drawback' availed of by the exporter dealer is not goods and
should not be subject to tax as goods.
The Haryana State Cabinet approved proposal of Excise and Taxation
Department Haryana on 7th January 2004 to amend Section 61 of
Haryana Value Added Tax Act, 2003 to reduce tax rate on DEPB under
Haryana General Sales Tax Act. In view of the judgement of Hon'ble
Tax Tribunal of Haryana, the question of rate of tax on DEPB does
not arise. Thus, the move of Haryana cabinet on the issue is not
very clear.
Before analyzing the above judgements and their impact, let us
first look at various export benefit schemes provided to the
exporters. Idea behind all the schemes is to make exports free
from the impact of excise duties paid on domestic inputs.
Rep License / Exim Scrips
The scheme of issuance of REP Licenses (Replenishment licenses)
was in vogue till around six years back. Under this Scheme
exporter of goods was given benefit to replenish his stocks of
inputs by importing the same without payment of customs duty, used
in the exports made by him. In other words, an exporter making
export of goods by using domestic inputs on which excise duty has
been paid is given the facility to import inputs without payment
of customs duty, which virtually replenish the input stocks used
by the exporter in making that export. The said REP licenses were
transferable.
DEPB Scheme
DEPB (Duty Entitlement Pass Book) Scheme is an export incentive
scheme provided in Import and Export policy. The objective of the
scheme is to neutralize the incidence of basic custom duty on the
import content of the exported products. Under the scheme, an
exporter is eligible to claim credit as a specified percentage of
value of exported product and is available at a rate of exported
product as may be determined by Director General of Foreign Trade
(DGFT). The credit amount in DEPB only entitles you to adjust that
amount for payment of customs duty and is not permitted to be
withdrawn or adjusted in some other manner. There is no bar for
transfer of this credit to another person and from him to another
person ie this credit amount is freely tradable.
Duty Drawback Scheme
The duty drawback scheme is another option available to exporters.
Instead of opting for REP license or DEPB, an exporter can choose
to take Duty drawback also. Under this scheme, exporter of goods
is allowed to take back refund of money to compensate him for
excise duty paid on the inputs used in the products exported by
him. It neutralizes the duty impact in the goods exported. In
comparison to DEPB, this is the refund of money to exporter and is
not an instrument which can be transferred to anybody. Let us now
consider the definition of goods under Haryana Value Added Tax
Act, 2003 and under Central Sales Tax Act, 1956.
Definition Of 'Goods'
The term "goods" in Haryana Value Added Tax Act, 2003 in
Section 2(1)( r ) has been defined to mean Every kind of
movable property, tangible or intangible, other than newspapers,
actionable claims, money, stocks and shares or securities but
includes growing crops, grass, trees and things attached to or
forming part of the land which are agreed to be severed before
sale or under the contract of sale; In Central Sales Tax Act,
1956, it has been defined as including materials, articles,
commodities and all other kinds of movable property, but does not
include newspapers, actionable claims, stocks, shares and
securities. In Haryana General Sales Tax Act, 1973, it was
defined as Every kind of movable property other than newspapers,
actionable claims, money, stocks and shares or securities but
includes growing crops, grass, trees and things attached to or
forming part of the land which are agreed to be severed before
sale or under the contract of sale.
Nature Of DEPB
REP license were held as goods by the Hon'ble Supreme Court
of India in the case of Vikas Sales Corporation Vs Commissioner of
Commericial Taxes, (1996) 102 STC 106 (SC).
In the case of KMA Finished Leather private Limited Vs State of
Tamil Nadu and others (2004) 184 STC 185, the Hon'ble Madras High
Court held Duty Draw back as not goods. The Court held that
" The drawback which is effected by issue of cheque by the
Government for the amount of the drawbak, or by crediting the
amount to the bank account of the exporter, is in effect a refund
of the monies that had been paid by the exporter towards customs
duty. What is refunded is only money. The amounts refunded are not
traded and there is no sale of those monies."
DEPB has been held to be goods liable to tax in a land mark
judgement of Hon'ble Delhi High in the case of Philco Exports Vs
STO (2001) 124 STC 503 (Del). A contrary view has been taken by
Haryana Tax Tribunal, Chandigarh in the case of Sadhu
Overseas, Faridabad Vs State of Haryana decided on 21.10.03. This
case decided under the provisions of Haryana General Sales Tax
Act, 1973 held that DEPB is sort of money which can be used by the
dealer himself or any body else to discharge the custom duty
liability. As money is not goods, DEPB is therefore not covered
by the definition of goods. In the said case, the judgments of
Delhi High Court in the case of Philco Exports (Supra) and also of
Hon'ble Supreme Court in the case of Vikas Sales Corporation
(Supra) were not referred and not considered for arriving at the
above decision. In the case of Philco Exports (Supra) before Delhi
High Court, the petitioner had argued that even if it is conceded,
for the sake of argument, that the same can be equated with goods
they are part of excluded items either as actionable claim or
money. The Hon'ble court in this connection referred to the
judgement of apex court in the case of Vikas Sales Corporation and
held that "As was observed by the apex Court in Vikas Sales'
case [1996] 102 STC 106, when there is no restriction on the
purchase and sale of DEPB freely and it has a value unrelated to
the goods there is no scope of their being treated as actionable
claim. DEPB for all practical purposes represent merchandise and
is treated and dealt with as such in the commercial world. DEPB is
neither a chose in action nor an actionable claim. It has a value
of its own." After the land mark judgment of Delhi High Court
on this issue, It looked that the issue of taxability of DEPB has
been settled but the above judgment of Hon'ble Haryana Tribunal
seemed to have created another controversy.
Though the words "Tangible or Intangible" has been included in the
definition of 'goods' in HVAT Act, 2003, the same was not there in
the definition of goods in HGST, 1973. But the above judgement
equaled the DEPB with money while excluding it from the definition
of goods under HGST Act. On the same ratio, DEPB should not be
treated as " goods even under HVAT Act, 2003.
Further DEPB is an " Incorporeal" Property.
Salmond (Jurisprudence, Eleventh Edition, P. 156) says: "Corporeal
property is the right of ownership in material things; incorporeal
property is any other proprietary right in rem."
Paton in his Text Book of Jurisprudence (Second Edition, p. 408)
states:
(1) A thing in the material sense which is corporeal and tangible
and has an organic or physical unity, e.g., a horse or a block of
marble.
(2) A thing which is neither material, corporeal, nor tangible but
is an element of wealth, e.g., a copyright or a patent...
Applicable Rate Of Taxation On DEPB
Under Haryana Value Added Tax Act, 2003
"Incorporeal or Intangible goods" appear at entry no. 38 in
Schedule C of Haryana Value Added Tax Act, 2003. The taxability of
items appearing in Schedule C is provided in Sub clause (iii) of
clause (a) of sub section (1) of Section 7, which providing for
the rates of tax states that 7(1)(a)(iii) - in the case of
goods specified in Schedule C, shall be calculated at four percent
or such other rate not exceeding ten percent as the State
Government may, by notification in the Official Gazette, direct ;
As no notification has been issued in respect of rate under the
provisions of above section. The applicable rate of tax is 4%.
Thus DEPB is taxable at the rate of 4% under the Haryana Value
Added Tax Act, 2003.
Under Central Sales Tax Act. 1956
Section 8 of Central Sales Tax Act, 1956 provides the applicable
rate of tax on declared and undeclared goods. As DEPB is not a
declared goods, the applicable rate of tax on it has been provided
in clause (b) of sub section (2) of Section 8 as under ;
" in the case of goods other than declared goods, shall be
calculated at the rate of ten percent or at the rate applicable to
the sale or purchase of such goods inside the appropriate state,
whichever is higher."
Thus, in the case of inter state sales, DEPB is taxable at the
rate of 10% under the provisions of Central Sales Tax Act, 1956.
Lower Rate Of Tax
Under Haryana Value Added Tax Act, 2003
All sales made to Government or to VAT dealers is covered by sub
section (2) of Section 7 of the Act. Clause (b) of sub section (2)
of section 7 provides the rate of 4% or such lower rate applicable
on the sale of such goods had it been a sale falling under clause
(a) of sub section (1) :
As the rate of applicable tax rate on DEPB is 4%, the benefit
given by sub section (2) becomes irrelevant, thus not discussed
further.
Under Central Sales Tax Act. 1956
All inter state sales made to registered dealers are covered by
clause (b) of sub section (1) of Section 8, which provides that
sale to registered dealer other than Government of the goods of
the description referred to in sub section (3) shall be liable to
tax at a rate of 4% or at the rate applicable to the sale or
purchase of such goods inside the appropriate state under the
sales tax law of that state, whichever is lower.
The goods for which a registered dealer is eligible for lower rate
of tax are provided under sub section (3) of Section 8 which
states as (b) "the goods of the class or classes specified in the
certificate of registration of the registered dealer purchasing
the goods as being intended for re-sale by him or subject to any
rules made by the Central Government in this behalf, for use by
him in the manufacture or processing of goods for sale or in the
telecommunication network or in mining or in the generation or
distribution of electricity or any other form of power." Clause (
c ) and (d ) deal with containers and packing material, thus not
discussed. Sub section 4 requires the selling dealers covered by
sub section (1) to procure form 'C' from Buying dealer in respect
of the sales so made.
Rule 13 of Central Sales Tax (Registration & Turnover) Rules in
respect of eligible goods under Sub section 3 of Section 8
prescribes as under. "(13) The goods referred to in clause (b) of
sub section (3) of section (8), which a registered dealer may
purchase, shall be goods intended for use by him as raw materials,
processing materials, machinery, plant, equipment, tools, stores,
spare parts, accessories, fuel or lubricants, in the manufacture
or processing of goods for sale, or in mining, or in the
generation or distribution of electricity or any other form of
power."
Eligibility To Purchase Depb On Form C
In the light of above discussions, let us now analyse the
eligibility of any dealer to buy DEPB at lower rate of tax ie 4%
on the strength of declaration in Form 'C".The case of trader in
DEPB, who buys it for the purpose of selling the same is squarely
covered by first part of Section 8(3)(b), thus such dealer is
eligible to buy DEPB at lower rate of tax on the strength of
declaration in form 'C". A manufacturer of goods to be eligible to
buy at lower rate of tax has to ensure that the goods or class of
such goods are listed in his registration certificate and also are
one from goods listed in Rule 13. Going by the nature of DEPB, it
cannot be said to be anything provided in Rule 13. Taking the
plea, that it is a medium for use of goods which fall under the
rule 13 will also not hold good because of the following 1. DEPB
can be used to pay off custom duty on imported goods only, which
are not covered by any tax in the country. 2. DEPB may be used to
import any goods, which may not be used in manufacture or
processing of goods for sale. It may be noted in this connection
that Rule 13 has been worded in this manner that it excludes all
other items and any thing to be eligible has to fall in any of the
items provided in Rule. In view of the above, it may be
concluded that a manufacturer of goods is not eligible to use form
C for purchase of DEPB at lower rate of tax ie 4% in inter state
purchase.
Eligibility Of Vat Tax Paid On Depb As Input Tax Credit
Under the Haryana Value Added Tax (HVAT), a manufacturer of goods
is eligible to take credit of tax paid on the eligible inputs
(input tax) used in the manufacture.
Input tax has been defined in Section 2(1)(w) as the amount
of tax paid to the State in respect of goods sold to a VAT dealer,
which such dealer is allowed to take credit of as payment of tax
by him, calculated in accordance with the provisions of section 8;
VAT dealer has been defined in Section 2(1)(zs) as a
registered dealer who is not a casual trader and in whose case
composition of tax under section 9 is not in force, whether by
choice or exclusion of law;
Registered dealer has been defined in Section 2(1)(zc) as a
dealer registered under the Act.
Section 8(1) prescribes " Input tax in respect of any goods
purchased by a VAT dealer shall be the amount of tax paid to the
State on the sale of such goods to him and .............. but
shall not include tax paid in respect of goods specified in
Schedule E used or disposed of in the circumstances mentioned
against such goods."
Sub section
(2) prescribes " A tax invoice issued to a VAT dealer showing
the tax charged to him on the sale of invoiced goods shall,
subject to the provisions of sub - section (3), be sufficient
proof of the tax paid on such goods for the purpose of sub -
section (1)." Sub section (3) deals with a situation when input
tax credit is called into question in any proceeding under the Act
.. not relevant for our discussion.
Tax Invoice
has been defined in Section 2(1)(zl) as an invoice required to be
issued according to the provisions of sub - section (2) of section
28 by a VAT dealer for sale of taxable goods to another VAT
dealer for re-sale by him or for use by him in manufacture or
processing of goods for sale, and which entitles him to claim
input tax in accordance with the provisions of section 8; Section
28(2) relates to requirements of issuance of invoice for every
sale ……….. not relevant to our discussion.
Retail Sale
Invoice in Rule 54(1) has been prescribed to be issued by a
VAT dealer ........ when making sale of goods in the State to a
consumer or to an unregistered dealer.
From the above it emerges that to avail of input tax credit, the
VAT purchasing dealer needs to have a tax invoice issued by the
selling VAT dealer. Considering that both the dealers ie Buyer and
Seller of DEPB are registered under the Act, question remains that
1. Can tax invoice be issued by registered dealer for sale of
DEPB or Retail invoice needs to be issued for sale of DEPB
considering buying dealer as Consumer of DEPB?
2. On what basis a selling VAT dealer decides that buying VAT
dealer is buying the concerned item (DEPB in this case) for
re-sale or use by him in manufacture or processing of goods for
sale?
3. Should selling VAT dealer agree with the declaration in form
VAT - D1 submitted by buying VAT dealer that DEPB purchased by him
is meant for use by him in manufacture or processing of goods for
sale?
Thus only in the case of sale of DEPB to a VAT dealer who intends
to buy this for resale, a tax invoice can be issued. No
declaration has been prescribed in the rules to be submitted by
buying VAT dealer to Selling VAT dealer certifying that the
proposed goods are meant for re sale by him. In the given
scenario, all the selling dealers before issuing TAX invoice are
advised to take a declaration from the buying dealers that the
DEPB purchased but them are meant for resale. Such buying dealer
of DEPB is also eligible to take input tax credit of tax paid by
Selling VAT dealer.
The manufacturer dealers have to submit a declaration in form VAT
- D1 to the selling dealer that they intend to use the goods (DEPB)
in manufacture or processing of goods for sale. There does not
seem to be any basis for issuance of such declaration in D1 for
purchase of DEPB by manufacturing dealer.
At the same time, denial of input tax credit on DEPB is also
against the spirit of Value Added Tax. When DEPB has been
determined to be goods by the judicial pronouncements, it remains
to be now determined whether user of these goods will be treated
as final consumer of these or will these be related to the goods
purchased with it ie in case goods meant to be used in manufacture
are purchased by it, the input credit should be allowed and in
case goods meant for consumption are purchased, input tax credit
should be denied.
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Authored by Sanjeev Malhotra and can be reached at
: skm123@vsnl.com
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