ITC – The FERA Violation Controversy

In March 1987, excise authorities issued a show-cause notice to ITC for alleged evasion of excise duty during 1983-87. Prior to this, excise authorities raided ITC factories at Bangalore, Kidderpore, Parel and Saharanpur and pertaining to duty evasion. Excise authorities claimed that ITC allegedly conspired with the retailers to sell cigarettes at a price higher than that printed on the pack. (Between 1983-87, excise duty payable on cigarettes was based on the printed price on the pack). Excise authorities also claimed that ITC declared large stocks of good cigarettes as damaged and therefore ‘deemed for destruction’ (classified internally as DD). ITC then claimed a refund of excise duty paid for these cigarettes. Distributors sold these cigarettes to traders and passed on a part of the realization to company executives. Excise duty evaded by the retailers in this manner amounted to an estimated 8.04 billion. ITC was asked to show cause as to why it should not be required to pay differential excise duty corresponding to the higher price alleged to have been charged by retailers.

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In March 1987, excise authorities issued a show-cause notice to ITC for alleged evasion of excise duty during 1983-87. Prior to this, excise authorities raided ITC factories at Bangalore, Kidderpore, Parel and Saharanpur and pertaining to duty evasion. Excise authorities claimed that ITC allegedly conspired with the retailers to sell cigarettes at a price higher than that printed on the pack. (Between 1983-87, excise duty payable on cigarettes was based on the printed price on the pack). Excise authorities also claimed that ITC declared large stocks of good cigarettes as damaged and therefore ‘deemed for destruction’ (classified internally as DD). ITC then claimed a refund of excise duty paid for these cigarettes. Distributors sold these cigarettes to traders and passed on a part of the realization to company executives. Excise duty evaded by the retailers in this manner amounted to an estimated 8.04 billion. ITC was asked to show cause as to why it should not be required to pay differential excise duty corresponding to the higher price alleged to have been charged by retailers.
Hearing of the show-cause notice was held before the Commissioner of Central Excise, Delhi, who issued an order in December 1995, confirming a differential excise duty demand of 6.815 billion against ITC. A penalty of 665 million was imposed and a personal penalty of 31.5 million was collectively imposed on six ex-directors who were allegedly involved in these deals. ITC appealed for an injunction against the order to the Customs Excise and Gold (Control) Appellate Tribunal (CEGAT). It also asked for a waiver of the pre-deposit of the differential duty amount and penalty amounts, payable under the Commissioner’s order. The contract manufacturers and the six ex-directors of ITC followed suit and appealed to CEGAT against the Commissioner’s order for seeking waiver of the pre-deposits of differential duty and penalties payable by them.
Following the appeals, CEGAT directed that the pre-deposit of differential duty and penalties payable by the contract manufacturers and the six ex-directors, be waived. Further, in its order dated March 15th, 1996, CEGAT directed ITC to deposit 1.10 million by April 30th, 1996, and a further amount of 2.40 billion in eight equal monthly installments commencing June 1st, 1996. CEGAT waived the pre-deposit of the remaining amount (3.315 billion) and the penalty of 665 billion. ITC made a provision of 1.10 billion in 1996-97 and 1.90 billion in its 1997-98, as part of the ‘Contingency Reserve,’ for meeting future liabilities. It however maintained that it was not legally obliged to pay any additional excise duty.
CEGAT proceedings ended in May. In its order issued in September 1998, CEGAT set aside the demand for differential excise duty on the contract manufacturers of ITC and the penalties imposed on ITC, six ex-directors and its contract manufacturers. CEGAT also disqualified the quantification of the excise duty demand on ITC and directed the matter to an adjudicating authority for fresh quantification of duty demand on ITC as per the guidelines given in the order. The order also stated specifically that ITC should be given an opportunity for personal hearing.   ITC did not accept legal liability to pay any differential excise duty and hence, filed an appeal in the Supreme Court contesting CEGAT’s Order. The Excise Department also filed an appeal in the Supreme Court challenging CEGAT’s Order. Following this, in January 1999, the Supreme Court passed an order admitting the appeals filed by ITC as well as the Excise Department. The matter remained unresolved until early 2002 with ITC declining to accept any liabilities.