Sukumar Mukhopadhyay: Taxable event in customs, excise and service tax

Taxable event is a fundamental concept since it is the basis of understanding what makes something taxable and others not. An improper understanding causes such loose statement often found amongst economic writers that excise duty is analogous to manufacturers` sales tax (as found in some recent expositions on tax structure). The difference between sales tax and excise is fundamental and one is not like or analogous to the other.

The Supreme Court has given several judgments to determine exactly what taxable event is. It held that taxable event is the act of manufacture for Excise Duty. Just as the taxable event for Customs Duty in the act of importation and the act of sale for sales tax. It is the generation of income in the case of income tax.

 This principle has been enunciated by a landmark judgment delivered in May, 1963 In Re: Sea Customs Act, 178 reported in 1963 AIR SC 1760 and 1964 (3) SCR 787 at 822.

This judgment was given by the Full Bench of the Supreme Court on a reference made by the President of India to the Supreme Court (Special Reference No. 1 of 1962). The issue involved was about the competence of the Union Govt. to levy customs and excise duty and income tax in view of the Article 289 on the Constitution, which gives immunity to State from Union taxation on property and income. Upholding the competence of the Union Govt., the Supreme Court came to the conclusion that import duty, export duty, excise duty and sales tax are not on the goods themselves but on the act of importation, act of exportation, act of manufacture and the act of sale. The same view has been reiterated by the Supreme Court in several judgments thereafter viz., Shinde Brothers v. Deputy Commissioners (AIR 1967 SC 1512), Devi Das Gopal Krishnan v. State of Punjab (AIR 1967 SC 1895), Dunlop India v. U.O.I (1983 ( 13) ELT 1566 (SC), Bhor Industries v. CCE (1989) (40) ELT 280 (SC). The last judgment, particularly removed a popular misconception by saying that “taxable event in the case of duties of excise is the manufacture of goods and the duty is not directly on the goods but on the manufacture thereof.”

In one of the latest judgments in the case of LML Ltd. v. Collector of Central Excise, Kanpur 2002 (142) ELT 273 (SC), the Supreme Court has relied on the previous judgment and has held once again that “for the purposes of customs duty, the taxable event occurs on the date on which the goods are cleared from a bonded warehouse for house consumption. It is that date when is relevant for the purposes of the rate of customs duty and any additional duty thereon. The Supreme Court has further clarified in this judgment that the position under the Excise Act is that the taxable event occurs when the goods are manufactured but collection of duty may be deferred for administrative convenience. It is the date of manufacture, which is relevant for the purposes of Excise Duty and any additional duty thereon. That is not the case in the case of goods bonded in the Customs warehouse. In the case of goods bonded in the Customs warehouse, the taxable event takes place when the customs barrier is crossed, that is to say when the goods are cleared from the bonded warehouse for home consumption.

About service tax, the Supreme Court has now clarified in the case of Laghu Udyog Bharati vs UOI that the taxable event is that taxable event is the providing of service and “the imposition is on the person rendering the service”. It also said that it is the person rendering the service who alone can be regarded as the assessee and not the customer.

The fact that there have been three successive Supreme Court judgments on this issue is proof enough that there was a prevailing confusion about this basic and fundamental point. But now with the latest judgments it is hoped that clear thinking will prevail.

Sukumar Mukhopadhyay

Former Member CBEC