The Excise Bungle

IN the tobacco business, the steak under the table is said to be juicier than what’s usually on the top. Repeated excise evasion notices served on ITC only go to prove that. The latest claim involves Rs 799 crore of excise evasion and Rs 74 crore in penalties (including fines on its top bosses), and was unceremoniously slapped the day after Deveshwar took charge on Jan 1, ‘96.

ITC protested and went on appeal but was forced to provide for Rs 170 crore in its 1995-96 balancesheet. For, the Customs, Excise and Gold Appellate Tribunal (CEGAT) directed it on March 16, to predeposit Rs 350 crore, irrespective of the outcome of the appeal—Rs 110 crore by April 30 and the rest in six or eight monthly installments. For the balance Rs 449 crore, it was told to furnish a bond assuring payment if the CEGAT decision went against it.

ITC predeposited Rs 170 crore and put up a brave front. At its August 23 AGM, a defiant Deveshwar told shareholders that it was prepared to resort to "the last legal remedy available in the country". "Even today the company feels there’s no excise liability," he said. But the worst had already happened. The market favourite was forced to axe dividend to 25 per cent from 55 per cent the previous year, forcing its share to lose ground from Rs 322 to Rs 285 on the AGM day.

In terms of both amount and size—the order runs into 1,267 pages—it’s the biggest excise claim ever served on any company in India. The case started with the show-cause being issued on March 27, 1987 (by the directorate of anti-evasion, central excise, in Calcutta for an original amount of Rs 803 crore, or Rs 80 core more than the company’s combined sales turnover for the past three years) and ended on Dec 29, ’95. The period covered is March 1, 1983, to Feb 28, ’87.

The order charged the company with "following a deliberate pricing strategy" that visualised "higher effective prices than those prevailing on the packets". It said the company circulated specific higher prices at which cigarettes were to be sold and printed a lower MRP (maximum retail price) on packets. Central excise on cigarettes is based on length, not quality. During 1983-87, the duty was on the printed MRP. For instance, for the slab of 60 paise to Rs 1.70, the duty was Rs 2.25 per packet.

The Enforcement Directorate(ED) argued that since ITC had a fixed level of effective prices in its forecasting documents, on which it based its calculations, that set of prices should therefore qualify as effective MRP, which was higher than the declared MRP. It also said the company squeezed retailer’s margin to such a low level that the retailer had to charge higher than printed prices. Even though the company challenged the ED with lack of documentary evidence, the latter found it impossible to accept that such affairs would originate in the organisation and continue for years without the knowledge and approval of top managers.