Industrial/ Institutional Consumers – the argument continues
By Shweta Kathuria
The Department of Consumer Affairs (Legal Metrology Division) by notification dated 14-5-2015 amended the Legal Metrology (Packaged Commodities) Rules, 2011 (“PC Rules”). The PC Rules were framed to safeguard the interest of consumers by ensuring that the dealers cannot take undue advantage of innocence of consumers 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. As per the present amendments, changes have been made in Chapter II of the PC Rules which deal with packages intended for retail sale i.e. retail packages.
Apart from making a few changes in the rules relating to declarations required to be made on packages, major amendment has been made in the definitions of “industrial customers” and “institutional consumers”. Before we analyse the changes relating to these definitions, let us see the other changes made.
Earlier, the provision relating to mention of the contact details of the person who could be contacted in case of consumer complaints made it optional to provide the email address of such person. However, from 1-1-2016, it would be mandatory to declare the email address of the person who can be contacted in case of consumer complaints. Another amendment relating to the information that needs to be declared has been made with respect to the complete address. From 1-1-2016, the address at which the firm or company is registered would need to be declared on the package in place of the factory where the goods are manufactured. The second part of the unamended rule continues to remain the same i.e. in any other case, premises of manufacturer/packer, where the business is carried on.
A perusal of the newly amended provision shows that the first portion of the amended rule relates to a company or a firm and the second part relates to other assessees. However, what needs further clarification from the department is whether the registered office is the one which has been registered for the purpose of PC Rules or it refers to the premises which has been declared as the registered premises for that company or firm. Further, it should also be noted that even though the address of registered office is required to be declared on the retail package, the registration certificate would continue to have the details relating to the actual manufacturing location.
Apart from the above, an amendment has also been made with respect to retail packages which are put in another package. This amendment has come into effect immediately. Earlier, if the outer cover was not transparent and the declarations were made on the outer package, then in terms of the proviso to Rule 9(3), the assessees used to avoid making declarations on the inner package. The said proviso has now been omitted. Consequently, if a retail package is packed in an outer cover which is not transparent, in terms of the amended Rule 9(3) of the PC Rules, it would be necessary that both the outer package and inner package have all the declarations.
Let us now move to the controversial amendment which has maximum tax impact i.e. the amendment relating to the definitions of “industrial consumer” and “institutional consumer”. A US author, Arthur Bloch once wrote that “every clarification breeds new questions”. This would be the most appropriate statement when it comes to the amendments that have been made over a period of time in the definition of institutional consumers.
A brief background of the relevant provisions will be helpful here. 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 issued Notification No. GSR 359(E) dated 6-6-2013 for making amendment in the placement and definition of “industrial consumer” and “institutional consumer” earlier given under Rule 3 of the PC Rules.
Prior to amendment dated 6-6-2013, “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” was 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.
The literal interpretation of the amended definition of institutional consumer led to confusion as to whether the definition of institutional consumers referred to three parties i.e. the institution, the intermediary service providers viz. the transporters, hotels, hospitals and such other service institutions; and the manufacturer selling goods directly to the intermediary service providers. This view led to confusion as to the service institutions that would be covered under the term “intermediary service providers”.
In order to seek clarification relating to the aforesaid amendment, an assessee filed an RTI application. The reply to the said RTI application said that there is no change in the position that was there till June, 2013 and the period after thereafter. The Department of Consumer Affairs, Legal Metrology Division also had to issue a clarification dated 9-5-2014. In the said clarification, it was mentioned that the exemption to industrial/ institutional consumers is given considering that they are not retail consumers and they buy the commodities directly from the manufacturers on a negotiated price. Thus, there is no need to declare MRP on the goods sold to these customers.” This letter also clarified that the intention and meaning of the term “institutional consumer” post 6-6-2013 was the same as it was before the amendment under the Explanation of Rule 3 and it was only shifted from the Explanation Part of Rule 3 to the definition part of Rule 2.
In order to bring clarity and to bring the definition of institutional consumer at par with the normal understanding that a consumer who does not further sell the goods but consumes the same for use by self, the definition of the said term has been amended as “the institution who hires or avails of the facilities or services in connection with transport, hotel, hospital or other organisation which buy packaged commodities directly from the manufacturer or from an importer or from wholesale dealer for use by that institution, and the package shall have declaration ‘not for retail sale”.
As can be seen from the above definition, sales made by importer to industrial/ institutional consumers have also been recognized. This change is in the context of the decisions in the cases of Henkel CAC Pvt. Ltd. v. CCE - 2012 (282) ELT 566 (Tri-Mum) and CC v. Nitco Tiles Limited – 2011-TIOL-737-Tribunal-Mumbai.
Apart from the above, the amended definitions of “industrial” and “institutional” consumer has made it mandatory to have a declaration on the package itself stating that the package is “not meant for retail sale”. This change would ensure that the retail package meant for industrial or institutional consumer is identified and separated from the rest of the lot of retail packages at the initial point itself. However, what needs to be seen are the implications that will follow if the goods bearing a declaration “not for retail sale” enter the retail market.
It will also need to be seen as to how a manufacturer keeps a check when a consignment cleared by it has both the packages meant for retail sale and the ones meant for industrial/ institutional consumer.
Another major amendment made in the definition is that sales made to wholesale dealers have also been considered for the purpose of exemption available to industrial/ institutional consumers. A wholesale dealer is the dealer who sells directly to industrial/institutional consumer and has no intermediaries. A perusal of the aforesaid rule implies that even if there is a chain of wholesale dealers, the exemption shall continue to be applicable. However, it would now be practically difficult for a manufacturer to keep a check that at no point of time, any wholesale dealer sells an industrial pack in the retail line.
As can be seen from the above, the Central Government intended to overcome the disputes by making the aforesaid amendments. However, the aforementioned changes have opened a Pandora’s box of practical difficulties. How the Legal Metrology Department and manufacturers actually implement them, will have to be seen in the time to come.
[The author is a Principal Associate, Lakshmikumaran & Sridharan, New Delhi]