2005 PLP (Trib (PTD)

2. According to the DR, excise duty being an indirect levy, properly pertains to the manufacturing/trading account and not to the P&L account.

3. The assessee/respondent is not present and no adjournment has been sought. The application will be decided ex parte on merits.

4. The question has been examined.

5. As clarified in "Carter's Advanced Accounts. (page 31):-- "Duty: This includes both Customs and Excise duties. Customs duties are levied on goods imported and exported; excise duties are imposed on goods produced and consumed in the country itself. A distinction must be made between duties on Purchases and duties of Sales, the former being debited to Trading Account and the latter to Profit and Loss". 5A. The Tribunal in (1960) 2 Tax (V-4) has referred to the well established accounting principle enunciated above and in I.T.A. No.7428/LB of 1996 (Assessment year, 1993-94), dated 30-10-2003, that principle has been followed by this Bench.

6. Excise duty is chargeable on the manufacture or sale of items of domestic consumption. Where in the case of a manufacturer/product the levy is charged with reference to production or purchase of inputs, it is an integral component of cost of production and for accounting purposes is required to be debited to the manufacturing/trading account. Where it is charged with reference to sales, it is to be debited to the P&L account. Contrary to the popular view that every levy of excise duty is bound to be passed on to the customer in its entirety, actual incidence of the duty will be determined by the manufacturer's/producer's relative competitive position vis-a-vis other manufacturers /producers and the elasticity of demand of the finished product. Where the manufacturer's relative position in the market is good (i.e. he is able to keep cost down at least to the level of his competitors) and the finished product has relatively inelastic demand (i.e. product is not price sensitive) the duty will be passed on to the purchaser in a greater degree than if the manufacturer's producer's position were otherwise. It is certainly not axiomatic that the duty will always be passed on to the purchaser in its entirety. Obviously if the duty cannot be passed on to the customer in its entirety it will erode the profit of the purchaser. Thus whereas income tax is invariably borne in full by the person earning income, it is not axiomatic that excise duty will always ultimately be borne in its entirety by the purchaser. Admittedly, the GP rate expressed as a percentage will rise where the duty is debited to the P&L account However, the GP rate is nothing "sacrosanct" and the Assessing Officer-and those who supervise them-need not be obsessed with it. While the significance of the GP rate as a ready reckoner of (gross) profitability is certainly there-hence its significance as a parameter in a Scheme of Self Assessment-charging excise duty to the manufacturing/trading account or the P&L account will not by itself alter the net profit of the business. However, since all expenses and receipts are required to be correctly marshalled and charged, excise duty is to be charged to the manufacturing/trading account or the P&L account depending on various aspects referred to supra. There is no golden rule that it has to be charged to the manufacturing/trading account under all circumstances simply because it is categorized as an indirect tax. Ultimately, all costs are reflected in sale price and while it is a truism that the producer has to recover all costs if he is to stay in business, this too, is not always true. Thus in "dumping", goods are actually sold below cost in order to capture a market.

7. If the excise duty is indeed passed on in full to the purchaser and is not relatable to inputs at all as appears to be the case here then obviously it has no bearing on product cost and it cannot therefore be charged to the manufacturing/trading account but is required to be charged to the P&L account. If on the other hand excise duties were relatable to inputs/production then to the extent that it enters into product cost, it is required to be charge to the manufacturing account.

8. Whatever GP rate emerges as a result of the accounting treatment for excise duty will be the appropriate GP rate for that business and this rate may or may not be consistent with the industry norm but it would not be proper to apply a higher GP rate simply because of the general industry norm.

9. The question as formulated is not fit for reference to the High Court.

10. Reference is refused. C.M.A./297/Tax (Trib.) Reference refused.