Central Excise Valuation - The Board's Fiat
VALUATION of goods sold at a price below the cost of production -
The Issue :The Supreme Court has in a recent decision in the case of CCE, Mumbai vs. Fiat India (P) Ltd. held that where products are sold at considerable losses for an unduly long period of time for the purpose of market penetration, the transaction value cannot be accepted for the purpose of levy of excise duty. Pursuant to this decision field authorities are asking assessees to furnish cost data of various products for past years.
Decision : The modality of implementation of the decision of the Hon'ble Supreme Court is under consideration of a committee of Chief Commissioners. The Circular in this regard will be issued by 15/01/2014.
And the Board has kept its date with destiny. They issued that Circular yesterday.
The Fiat decision was unexpected manna accidentally falling from heaven (read Supreme Court) into the revenue lap.For more background on this issue, please see DDT 1931 -30.08.2012.
The Circular explains the Supreme Court decision and what the Board makes of it.
The first clarification pertains to "Transaction Value below manufacturing cost and profit."
And the Board says - Therefore, mere sale of goods below the manufacturing cost and profit cannot be taken as the sole basis for rejecting the transaction value.
The second clarification deals with "Verification of payment of duty" -
The Board has the following answer -
++ The second issue is regarding the procedure to be adopted by the field officers to identify cases where the ratio of the judgment would apply. It may be noted that, under the self-assessment procedure, there is a legal obligation on the assessee to correctly assess and pay the duty in terms of the Central Excise Act, 1944 read with the Valuation Rules, 2000. Verification of this aspect may be conducted by the Central Excise officer during the audit of units. Aspects such as 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, may be looked into. In addition, 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. [If due care has to be taken at the level of the Commissioner, why is this not advised in the first place rather than asking the field officer to first raise objections, and then ask the Audit officers to conduct verification. And by making a mention of self-assessment, is the Board making a ground for invocation of the extended period?]
++ Calculations of manufacturing cost may be carried out using CAS-4 standards. Information submitted by the manufacturer, duly certified by a Chartered or Cost Accountant should normally be accepted. Only where a decision to investigate a case has been taken at the level of the Commissioner and it is considered necessary in the interest of investigation, steps such as ordering Cost Audit of the Unit or summoning of the Costing data should be undertaken. [The CAS-4 is to be certified by a Cost Accountant -now will the Board accept certification from a Chartered Accountant?]
The third and the trickiest issue is the period of application of this judgement, whether it can be applied for the period prior to 29.08.2012 by invoking the extended period of limitation.
The Board clarifies -
++ Under the provisions of valuation law, in a case where price is not the sole consideration for the sale, money value of any additional consideration flowing directly or indirectly from the buyer to the assessee is added to the transaction value in terms of rule 6 of the Central Excise Valuation Rules, 2000. However, in the FIAT judgment, sale of cars at an abnormally lower price to penetrate the market has been considered by the Hon'ble Supreme Court as constituting extra-commercial consideration, even when there was no additional consideration of money value flowing directly or indirectly from the buyer to the seller. For the period prior to the date of the judgment, in cases where a show cause notice has been issued on the grounds of the FIAT judgment alone, there may not be a case for invoking the extended period of limitation. In such cases, only the normal period of limitation will apply.
One thing is clear and that is that the Board subscribes to the view that inspite of the absence of any additional consideration, the sale at an abnormally lower price is to be considered as constituting extra-commercial consideration.
++ For the period after the date of the judgment, i.e from 29-8-2012 onwards, if there is a sale in the circumstances similar to the case of M/s FIAT and yet transaction value of goods is declared as the correct assessable value, then such declaration would amount to wilfulmis-statement of the assessable value.
Supreme Court has categorically said that in the case of FIAT the cars were sold at an abnormally low price to penetrate the market.
And the Board feels that from 28.09.2012, every manufacturer is expected to follow the diktat laid down by the Supreme Court and if anyone fails to do so, it will be treated as wilful mis-statement. This is unfair because the Board itself took almost seventeen months to come out with this Circular. Does the Board wish to convey that the Circular operates retrospectively!
Of course it has to be admitted that the Board was in a difficult situation and it is not easy to give any clarification on such tricky issues - the best way would have been to amend the Law with retrospective effect to undo the Supreme Court decision. To grant any relief to the assessee within the framework of law and the Supreme Court judgement is a real tightrope walk.
It is difficult to understand whether the Board Circular is beneficial or harmful. Now every assessee selling at a loss should “satisfy” the auditor that his case is different from FIAT. Further, limitation has to be examined on case-to-case basis.
Had the Board not issued this circular, the damage would have been only to a limited extent. Now we will see a number of disputes on this issue, as the officers will start applying FIAT case to every loss-making unit.
One thing is certain - the FIAT decision is going to make many assessees fall FLAT.
The fault is neither with the Law nor the Board nor the Supreme Court - it is with Fiat - in spite of being the sixth largest car manufacturer in the world, they failed in everything they did in India - including defence of their case in the Supreme Court.
CBEC Circular No. 979/03/2014-CX, Dated: January 15, 2014