In the Fiat India Ltd case, the Supreme Court held that the price at which the goods are sold by the manufacturer to the buyer shall not be accepted as the true transaction value for the purpose of payment of excise duty, as it is less than the cost of production of the goods manufactured. If a company has been making losses continuously for five years or more and the price charged is lower than the manufacturing cost, then it is not a normal price and the goods are not ordinarily sold at the factory gate. It can be concluded that the price adopted is an abnormal price.
In Commissioner of Central Excise, Ahmedabad vs Xerographic Ltd (2006), it was observed ?that the existence of any extra-commercial consideration while fixing a price would not amount to normal price.?
The Supreme Court has concluded that the sale price of the cars is not the normal price due to the following:
n Have been fixed at a lower price to penetrate the market; though the normal price for their cars is higher;
n That the selling of cars at a lower price was to compete with the other manufacturers of similar cars;
n That the market penetration strategy and expected higher volumes are the extra considerations flowing back to the assessee.
Hence, all the losses suffered are due to the deliberate act and be treated as part of transaction value for payment of excise duty.
However, the Supreme Court, in the case of Guru Nanak Refrigeration Corporation, held that there is no valid reason to doubt the genuineness of the sale price. It can, therefore, be safely concluded that the goods were sold at the normal price within the meaning of Section 4(1)(a) of the Act even though the cost of production of the goods was more than the wholesale price.
Post Fiat judgment, all the loss-making companies, particularly auto and auto component manufacturers, have been issued show-cause notices and ordered for special audit by various excise commissionerates. The field formation set aside the big picture of whether there was ?deliberate lower pricing? of the goods in order to compete and get a substantial market share or not, but focused on additional revenues to flow to the exchequer on accrual basis, which may or may not realise. Also, the revenue concluded that the losses have been incurred due to the lower pricing only and demanded differential duties.
The Central Board of Excise & Customs (CBEC) came up with a circular on January 15, 2014, clarifying the following:
n That the transaction valuation method holds good and shall be applicable;
n The field officers shall check all the facts of each specific case during audits and work out the percentage of loss at which a sale has taken place, the period for which such loss-making price prevailed, the reasons for the sale at such loss-making price and whether such sales were contrary to standard practices followed;
n Cost Accounting Standard (CAS4) methodology may be adopted to arrive at the manufacturing cost excluding abnormal/non-recurring costs and the idle capacity costs;
n That the show-cause notices be issued only post the Supreme Court judgment and not prior to that unless an existing show-cause notice is in place for undervaluation of goods;
n Due care may be taken at the level of the Commissioner to see whether the case at hand is similar to the facts and circumstances of the Fiat case.
There could be some products that may be loss making, but either due to huge investments or being a strategic product line may be continued. These are purely commercial in nature and strategised to minimise the overall costs, which is a prudent way of running the business. It has nothing to do with the under-valuation of goods for lower excise duty payment.
Under excise, the sale price is a fully-loaded price taking into account all the costs including post-manufacturing costs as well. This is the maximum price that can be realised by a manufacturer for his products sold. How can that price be an abnormal price?
In 1983, in the case of Bombay Tyre International before the Supreme Court, the government contended that cost of production and profit is not relevant and the sale price of the goods alone is relevant. After three decades, the government argued for cost-plus profit method contrary to their earlier stand and the Supreme Court also seemingly approved such a contention.
Now the important question before the excise officers will be whether the transaction value can be abnormal in nature. The answer is ?no?.
Transaction value is ascertained by factoring all the costs, at an optimum level of production, based on the demand and supply analysis and competitive pricing methodologies, adding a reasonable profit margin as well. When the optimal production quantities are not met due to lower demands, costs go up and the product line ends up with a loss situation. Where is the excise duty coming into play from a cost stand-point, when the sale price is an uninfluenced price which is paid by an unrelated party and the price being the sole consideration. It will be highly illogical to argue the business failures with that of the under-valuation of goods unless it is proven that there was a deliberate attempt to evade excise duty payment.
MS Vasan
The author is a senior tax practitioner and can be reached at dr.vasan1968@gmail.com
