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Central excise duty evasion: Revenue Board unable to ascertain beverage output data

ISLAMABAD (February 12 2003) : Despite all-out efforts, the Central Board of Revenue (CBR) has not been successful in collecting the exact production data from a Dubai based leading soft drink company to ascertain whether its unit operating in Pakistan has evaded central excise duty (CED) or not.

The issue was raised when CBR auditors claimed that a top manufacturer of soft drinks had violated Central Excise Act, 1944 during clearance process in 1999-2000.

The unit strongly contested that the excise authorities had penalised the unit on certain presumptions whereas all bottled material (soft drinks) was cleared in supervision of the representative of excise department.

The CBR, through commercial counsellor at Pakistan Embassy in Dubai made several attempts to get the exact production data from this company to figure out the actual amount of CED.

Now, the CBR has decided to directly approach the soft drink giant to obtain production figures for framing case against its unit operating in Pakistan.

The Large Taxpayer Unit (LTU), Karachi, East, and Collectorate of Sales Tax and Central Excise have been given the job to jointly work on the case, sources said here on Tuesday.

The Collectorate of Sales Tax and Central Excise (West), Karachi, reported that audit of central excise record of a unit of Karachi was conducted during 1999-2000.

The unit was engaged in manufacture of aerated beverages under various brand names under a franchise agreement with an international company of Dubai.

On scrutiny of raw material and production records encompassing RG-2 Register, PT3 Returns register and RT-1 returns, it was found that the factory had consumed 3817 units of 'first brand', 1496.5 units of 'second brand', 1462 units of 'third brand' and 2981 units of 'fourth brand' of concentrates during 1999-2000.

It showed production yield to the tune of 6356031.6 crates of 250 ml of 'first brand'; 830274.7 crates of 250 ml of 'second brand'; 807743.0 crates of 250 ml of 'third brand'; and 1650335.26 crates of 260 ml of 'fourth brand'.

On the other hand, it appeared that a quantity of 2,30,137.13 crates of 250 ml bottles of various brands, valuing at Rs 3,45,80,800.42, involving central excise duty of Rs 51,87,120.06, had not been accounted for in the prescribed registers.

Obviously, these quantities had been cleared clandestinely and that, too, without payment of central excise duty amounting to Rs 51,87,120.06, the audit said.

The company contravened the provisions of Rules 52, 52A, 226 and 236 of Central Excise Rules, 1944, punishable under Rule 210 of Central Excise Rules, 1944. It has evaded Rs 51,87,120.06 as CED, which is recoverable under Rule 10 of Central Excise Rules along with additional duty under Section 3-B of Central Excise Act, 1944.

The was called upon to show cause as to why central excise duty amounting to Rs 51,87,120.06 should not be recovered.

Rejecting the audit viewpoint, the unit replied to the show-cause notice and stated that the entire case was based on the presumption that the manufacturing unit must produce the excisable goods in conformity with the optimum level of production from raw materials and in case of failure of the unit to achieve that level the unit should pay CED for the differential quantities.

There is no provision in the central excise laws to support a demand made on the aforesaid presumption.

Furthermore, the excise rules do prescribe procedures for the maintenance of records pertaining to raw materials/finished goods.

There is no allegation in the show-cause notice that the company failed to maintain the prescribed records, or that any false statement or declaration was made in the maintained records or the submitted returns.

The allegations are entirely based on the presumption that the unit was unable to achieve the optimum level of production.

The department, however, miserably failed to take into consideration the variables mentioned in the letter; the fact that even according to their parent company, the wastages in Pakistan were higher than the western countries and that the formula did not take any wastages into account.

The case relates to the most recent period ie financial year 1999-2000 when the unit was under close scrutiny of the department due to the aforementioned adjudication proceedings pending in the Collectorate.

The goods manufactured by the company were cleared under the supervised clearance of the staff and repeated visits of audit teams and supervisory officials.

The actual production of beverages was being closely watched and no incident of evasion or shortfall in production was ever reported by any field or supervisory official.

In the aforesaid circumstances, the charge of clandestine or illegal removal of goods is apparently baseless and unjust, the unit said.

The unit further stated that according to section 3 of Central Excise Act 1944, the excise duties are levied and collected on the excisable goods manufactured in Pakistan.

No excise duty can be demanded on goods not produced and not manufactured by a licensed unit.

The failure of a unit to attain the optimum level of production results in the non-production of optimum quantities and no duties can be demanded on the goods that could have been produced but were not produced.

The unit further pointed out that the excise department could not discriminate between various beverage factories for the purpose of raising demand of excise duty.

The federal government allowed the revision filed by a beverage company and set aside the above demand, apparently for the reason that section 3 of the Central Excise Act does not warrant the levy of excise duty on the basis of the expected yield from concentrates dispatched by the supplier.

The company added that duty and taxes short levied have been calculated on the basis of a formula for manufacture of finished aerated waters from a given quantity of concentrate. The unit cannot be penalised on presumption.

In view of these circumstances, the department should vacate the show-cause notice.

On the other hand, the excise officers were of the view that Rule 226(2) of Central Excise Rules, 1944, empowers a Central Excise Officer not below the rank of Superintendent to determine the duty payable whenever a manufacturer of excisable goods as well as raw material shows a lesser quantity of excisable goods than should have actually been shown on the basis of quantity of raw material consumed.

The Excise officer may demand duty on such goods which are not accounted for in the prescribed registers/accounts books but actually produced by using inputs/raw material.

In fact, this case was made on the basis of records maintained by the unit itself, which do not justify the input/output ratio according to the principles laid down by the company itself.

The manufacturer of excisable goods is responsible to maintain daily stock accounts of such raw materials (Prescribed by the Board) which are received in the factory, used in the factory issued out of the factory and remaining in balance in the prescribed RG-2 (raw material) register.

There is no column provided for initial of Supervisory Officer as prescribed in the production and clearance register (RG-2).

Nevertheless, the manufacturer of excisable goods is bound to submit quarterly return (in the form RT-3) of raw material maintained in the RG-2 register completed in all respects within seven days after the close of each quarter under Rule-55 of Central Excise Rules, 1944.

It is pertinent to mention here that the unit did not furnish information regarding nature of completion and formulation of raw materials as provided by the parent company which was required to be declared before commencing operation under Rule-43 of Central Excise Rules, 1944.

Afterwards the unit submitted fabricated input/output ratio, which did not conform to the main company, the audit added.

After considering the viewpoints of both sides, the Collectorate of Customs, Sales Tax and Central Excise (Adjudication) Karachi-III observed, through an order of December 31, 2001, that the unit is under contractual obligation to purchase concentrate from the principals in Dubai. This concentrate is used by the unit in production of beverages in Pakistan.

Each unit of concentrate is sufficient, together with other inputs, to produce a particular number of bottles of aerated beverages.

This is why both sides are claiming a reasonable accuracy in production figures through taking into account the number of concentrate units but weaving various factors around the numbers.

Adjudication authorities regretted that no serious and diligent efforts seemed to have been made by the Collectorate staff to gather information required to institute a contravention case.

Collectorate staff has made a probe, which is lackadaisical in nature.

It added that the concerned collectorate should immediately contact main company in Dubai to obtain the production figures during the period in question, and base the demand of additional duty and taxes, if any, on the authentic figures.

The above-mentioned order was issued by the adjudicating authorities on December 31, 2001.

After a lapse of over year, the CBR has started this exercise in February 2003 to explore new possibilities to collect production figures from international company in Dubai.

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