The great Chinese philosopher Kong Qiu, famously known as Confucius, once said - “Life is really simple, but we insist on making it complicated”. This has exactly happened after the recent amendment made in the Legal Metrology (Packaged Commodities) Rules, 2011 (“PC Rules”) regarding packages supplied to “industrial consumers” and “institutional consumers”.
Before we understand the provisions, a brief overview of the same will be helpful. The PC Rules were enacted to safeguard the interest of the consumers by ensuring that the dealers can’t dupe an innocent consumer by selling a commodity in hidden packaged form. The said rules covered retail packages as well as wholesale packages which were meant for consumption by the customer. In the present amendment, changes have been made in Chapter II of the PC Rules which deals with packages intended for retail sale i.e. retail packages.
Rule 3 under Chapter II of the PC Rules specifies the list of packaged commodities to which provisions of Chapter II do not apply. There has been a consistent dispute with regard to applicability/ non-applicability of Rule 3 to various packaged commodities. To overcome such disputes, the Central Government recently issued Notification No. GSR 359(E) dated 6-6-2013 for making amendment in the placement & definition of “industrial consumer” and “institutional consumer” earlier given under Rule 3 of the PC Rules. Further, the definition of “retail package” as given under Rule 2(k) of the PC Rules was also amended. Through this article, we will discuss the implications of the above amendments.
Placement of definition of industrial consumer & institutional consumer – Implications
Prior to the amendment, the terms were defined under Explanation to Rule 3. Post amendment, the said definitions have been omitted from the Explanation to Rule 3 and have been inserted under the definition clauses as Rule 2(bb) & 2(bc) to PC Rules. Earlier, besides Rule 3 of the PC Rules, the terms ‘industrial consumer’ and ‘institutional consumer’ were also used in the proviso to definition of ‘retail package’ under Rule 2(k) of the PC Rules. There was always a dispute as to whether the said definition given under Explanation to Rule 3 would apply only to Rule 3 as the Explanation started with the phrase “For the purpose of this Rule” or would also apply to proviso to the definition of ‘retail package’. There have been contradictory High Court decisions in the past on this issue.
The Bombay High Court in the case of Larsen & Toubro Ltd. v. UOI [2012 (275) ELT 153] had held that the definitions given under Rule 2A of erstwhile Standards of Weights and Measures (Packaged Commodities) Rules, 1977 (“SWMPC Rules”) {predecessor of Rule 3 of the PC Rules} would also be read into proviso to Rule 2(p) of the SWMPC Rules {predecessor of Rule 2(k) of the PC Rules}. However, the Karnataka High Court in the case of EWAC Alloys v. UOI [2012 (275) ELT 193] had held exactly to the contrary.
As a result of change in placement of the definitions of industrial consumer & institutional consumer, the definitions would now apply to the whole of the PC Rules and would not be restricted to Rule 3 of the PC Rules. This amendment has set to rest the disputes arsing due to conflicting High Court decisions.
Change in the definition of industrial consumer Earlier as per the definition, “industrial consumer” meant an industrial consumer who buys packaged commodities directly from the manufacturer for use by that industry. Thus, there was always an anomaly regarding the meaning of industrial consumer as the definition of industrial consumer also referred to the term industrial consumer. The said anomaly has been removed vide recent amendment wherein the term ‘industrial consumer’ in the definition has been replaced by the term ‘consumer’.
Change in the definition of institutional consumer
Earlier “Institutional consumer” was defined to mean institutional consumers like transportation, airways, railways, hotels, hospitals or any other service institutions who buy packaged commodities directly from the manufacturer for use by that institution. Thus, earlier, all the service institutions including transportation, airways, railways, hotels, hospitals, etc. who bought packaged commodities directly from the manufacturer for their use were included in the definition of institutional consumer. Further, all packaged commodities bought by such institutions fell under Rule 3 of the PC Rules and were not subjected to provisions of Chapter II of the PC Rules.
After amendment, “Institutional consumer” is defined to mean any institution which hires or avails of the facilities or service in connection with transport, hotels, hospitals or such other service institutions which buy packaged commodities directly from the manufacturer for use by that institution.
Thus, the definition of institutional consumers now refers to three parties: (i) the institution; (ii) the intermediary service providers viz. the transporters, hotels, hospitals and such other service institutions; and (iii) the manufacturer selling goods directly to the intermediary service providers.
As per the new definition, the institution should avail the services of the intermediary service provider who has purchased the packaged commodities directly from the manufacturer for being used by it during provision of its service by supplying the same to end consumers. Let us now discuss certain issues which may arise due to change in definition of institutional consumer.
How the term ‘institution’ has to be construed?
The term ‘institution’ given in the definition can be construed in two ways. First, it can be read liberally to include all persons whether institutions or individuals receiving the above services. Secondly, we can give it strict interpretation to include only institutions. Generally, recipients of the above intermediary services are individuals. Thus, the term “institution” should be read liberally as its strict interpretation may make the definition redundant. However, the Department will always try to apply the strict meaning of the term ‘institution’ in the definition of institutional consumer and we will have to wait for clarifications or judicial pronouncements in this regard.
Which service institutions may be covered as intermediary service providers?
The term “such other service institutions” being a general term used after the specific terms viz. transport, hotels, hospitals has to be understood applying the principles of ejusdem generis. As per the said principle, such other service institutions should include only those institutions which provide services of a similar nature as are provided by the institutions specifically mentioned in the definition.
Thus, there will always remain an open question as to whether a service institution is providing service similar in nature to that provided by hotels/ hospitals/ transporters. Until this question is clarified by the Government or decided in any court of law, there will be unending disputes between the assessees and the department about inclusion of their institution under the term ‘such other service institution’.
Packaged commodities excluded from Chapter II of the PC Rules
Rule 3 of the PC Rules provides that provisions of Chapter II do not apply to packaged commodities meant for institutional consumers. The way new definition of institutional consumers is worded, only those packaged commodities which are bought by intermediary service institutions for providing service to institutional consumers i.e. institution and are also supplied to those consumers during the course of providing service would fall under Rule 3 of PC Rules and would not be subject to the provisions of Chapter II. The same will have to be examined by the assessees in detail on case to case basis.
Commodities supplied in unpacked form – Coverage under ‘institutional consumer’
The main requirement under the definition of institutional consumers is that the commodities should be supplied to the end consumers. It is not specified as to whether the commodities should be supplied in the packaged form or unpackaged form.
Generally the service institutions like hotels, transports etc. supply commodities to the end consumer both in packaged form i.e. in the form in which they are purchased and in the unpacked form without any modification/ alteration i.e. when the same is served to the consumer. Thus, as per the practice prevalent in a service sector, it would be logical to say that till such time same products i.e. without any modification/ alteration/ changes are supplied to end consumers, those products should get covered under the definition of institutional consumers irrespective of whether they are supplied in the packaged or unpacked form.
It is to be noted that Rule 3(b) of the PC Rules provides that the Chapter II provisions shall not apply to packaged commodities meant for institutional consumers. Thus, forming such a view may be prone to litigation from the department.
As can be seen from the above, though the Central Government intended to overcome the disputes by making the aforesaid amendments, the outcome has not been as desired. As a matter of fact, the aforementioned changes have opened a Pandora’s box of more confusion and leaving scope for divergent interpretations.
[ The authors are, respectively, Senior Associate and Principal Associate, Lakshmikumaran & Sridharan, New Delhi ]