In August 2012, the Supreme Court (in the case of Fiat India Pvt Ltd), noting the fact that cars were sold at loss in order to penetrate the market and compete with other manufacturers, held that excise duty was required to be paid on the basis of cost of production plus a notional mark-up and not on the sale price.
While this unexpected verdict was in the context of the automobile sector, it took the entire Industry by surprise, which so far was under the belief that the authorities have no basis to challenge the sale price for levy of duty, as long as the transaction is between independent parties. Till this judgment of the apex court, the practice followed by the Industry was to charge excise duty on the value of the goods when cleared from the place of removal, even if such value was less than the cost of production of the goods.
By virtue of this judgment, the excise authorities started questioning the valuation mechanism adopted by manufacturers. The authorities sought to collect cost data of various products for the past years to assess ?extra-commercial consideration? and various manufacturers were subjected to enquiry/investigation. This started with the large automobile manufactures and gradually moved to other sectors.
Given this, various representations were made by the industry associations to the Central Board Excise and Customs (CBEC) to amend the law or issue guidelines to avoid undue litigation.
Recently, the CBEC has issued a circular clarifying the modalities for implementation of the aforesaid judgment. As per this circular, mere sale-at-loss does not warrant duty demand in all cases. If sale-at-loss is due to genuine business/commercial reasons such as switching over business, distress-sale in case of perishable goods, duty paid on the sale price need not be questioned. Thus, applicability of the judgement needs to be examined thoroughly on the basis of the facts of each case and due care should be taken at the level of the Commissioner. Further, the cost of production needs to be determined as per the Cost Accounting Standards, i.e., CAS?4. Such calculations, when duly certified by a Chartered or a Cost Accountant, should normally be accepted. Only in exceptional cases should a cost audit be ordered.
It is also clarified that show-cause notice for the period prior to the date of judgment can be issued within the normal period of limitation, which is one year. With respect to the later period, it can be issued within 5 years by invoking extended period of limitation.
This circular is indeed a positive step and does provide for some guidance as to the circumstances in which the decision can be invoked. However, the circular also leaves several unanswered questions. It illustrates the instances where the duty demand cannot be made. Perhaps, elaboration on parameters in details that would warrant duty demand could have been more helpful for the field officers.
The circular does not throw any light on certain practical difficulties?for instance, on the evaluation of cases where a unit manufactures multiple products achieving overall profit margin but incurs loss on the sale of one/few products. It is not clear whether the duty can be demanded where unit makes loss owing to high overheads, lower capacity utilisation, etc, especially in the initial years of operation. It is also not clear whether a duty demand can be made where a unit earns a low profit vis-?-vis its competitors, whether the cost computation should be done at the product-category level or the product-level or the product-variant level. More importantly, it is still not clear what ?reasonable? profit or loss is or what is the period to be considered.
The allegation of extra-commercial consideration, in the absence of any established industry benchmark, is fraught with subjectivity. Tax calculations, based upon costs on a subjective allegation vis-?-vis the price, would not only introduce administrative difficulties for the taxpayers but would also result in substantial litigation.
While the circular provides some relief to the Industry with respect to unbridled enquiries and show-cause notices, it does not remove the room for unwarranted inquires and disputes. It is now for the Industry to keep their records ready for any scrutiny by the excise authorities and provide business and commercial rationale to defend the ?extra-commercial consideration?.
The long-term solution to this problem is an amendment of the excise laws to clearly provide that only the amount received by the seller from the buyer would be considered for excise duty calculations. This would be in line with VAT principles across the world, which essentially provide for tax on value addition. In the meanwhile, the circular gives enough homework for both taxpayers and excise authorities.
With inputs from Priyajit Ghosh, senior manager?Indirect Tax, KPMG in India
The author is partner?Indirect Tax, KPMG in India. Views are personal
