Transaction value clarified for excise duty purposes

Facing a slowdown, India’s automobile industry has more than one reason to heave a sigh of relief. While the interim budget announced in mid-February reduced central excise duty rates across certain vehicle segments, a circular dated 15 January issued by the Central Board of Excise and Customs (CBEC) set out guidelines for administering and implementing the judgment of the Supreme Court in Commissioner of Central Excise, Mumbai v Fiat India Pvt Ltd.

The cause for concern

The Supreme Court in August 2012 held that the price declared by Fiat as the “normal price” for levy of central excise duty in respect of cars manufactured by it was not acceptable, and rejected the same on the basis that it was way below the manufacturing cost and profits. The court observed that loss making/reduced prices were adopted for a continuous period of five years and driven by the extra-commercial/additional consideration of market penetration, hence the price was not the sole consideration. Since excise duty is leviable on the value of goods as manufactured, in this case, an acceptable price was to be determined for the levy on the basis of cost of production plus the notional profit, as computed by a cost accountant.

A possible consequence is the attempt state tax authorities may make to enhance the value of the goods for sales tax purposes, by including in the sale price the enhanced excise duty.

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Impact of the judgment

The judgment in Fiat’s case has been seen by some to be at variance with the Supreme Court’s acceptance of loss-making/lower-than-cost prices as the transaction value in the cases of Guru Nanak Refrigeration Corporation and Bisleri International, either on account of being one-off transactions or there being no finding as to additional consideration or flow-back of money or monetary value from the buyer to the manufacturer. These precedents were distinguished, on facts, in the Fiat judgment, where it was also observed that in every case it will be for the Revenue Department to determine, on evidence, the existence of extra-commercial considerations as also the price to be taken into account as the value of the excisable article for the purpose of excise duty.

This judgment may be seen as unsettling the position of law as regards valuation, consequently sending the Revenue Department into overdrive as regards initiation of investigations to demand additional duty. Having perceived that a fall-out of the Fiat judgment could be its application and perhaps misapplication including in other industries and sectors, the industry sought clarity from the CBEC on the implementation and application of the decision.

Relief from the CBEC?

The circular clarifies that: (a) mere sale of goods below the manufacturing cost and profit cannot be taken as the sole basis for rejecting the transaction value, as has been clarified in the judgment; (b) prior to rejection of the price adopted, revenue officers are obligated to exercise due care to ascertain whether the facts of a given case are similar to those in the judgment and undertake verification of critical aspects such as such the percentage of loss at which sale has taken place, the period for which such loss-making price has prevailed, reasons for sale at such loss-making price, whether such sales are contrary to the standard and accepted business practices, and whether such sale is leading to erosion of capital of the company; (c) each case depends on its own facts and a close similarity between one case and another is not enough because a single significant detail may alter the entire aspect; (d) revenue officers should order a cost audit or summon costing data only if it is considered necessary in the interest of investigation; in all other cases, calculations of manufacturing cost (and profit) using the cost accounting standard on the cost of production for captive consumption, duly certified by a chartered or cost accountant, must be accepted; and (e) for the period after the date of the judgment, if there is a sale in circumstances similar to the case of Fiat and yet transaction value of goods is declared as the assessable value, then such declaration would amount to wilful misstatement of the assessable value, and appropriate consequences would ensue; where demand notices have been issued prior to 29 August 2012, the normal one-year limitation period will apply.

The circular seeks to assuage the concerns of the Indian manufacturing sector, more so the automobile segment, as revenue officials are now obliged to adopt a reasonable approach in invoking investigation proceedings and demanding duty where sale price is below the manufacturing costs and profits. The CBEC is to be commended on seeking to address the negative fall-out of the judgment, but the key challenge is whether the revenue officers will act in the letter and spirit of the circular.

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Economic Laws Practice is a full-service law firm with offices in Mumbai, New Delhi, Pune, Ahmedabad, Chennai and Bengaluru. Ranjeet Mahtani is a senior associate and Anuradha Mohanty is an associate manager at the firm.