Central Excise Valuation - What is mutuality of Interest? - AG Audit recommends Changes in Law
SOME facts as noted by the CAG:
Section 4(3)(b) of the Central Excise Act provides that persons shall be deemed to be "related" if
i. they are inter-connected undertakings;
ii. they are relatives;
iii. amongst them the buyer is a relative and a distributor of the assessee, or a sub-distributor of such distributor; or
iv. they are so associated that they have interest, directly or indirectly, in the business of each other.
Explanation below Section 4(3)(b) details the circumstances in which two undertakings would be treated as ‘inter-connected undertakings'.
Sub-clause (F) of Explanation provides that if the undertakings are owned or controlled by the same person or by the same group, they would be inter-connected undertakings for the purposes of the Act.
Further, vide Explanation V to Section 4,"group" includes, inter alia, two bodies corporate which exercise control, directly or indirectly over any body corporate.
Rule 10 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 envisages that when an assessee so arranges that the excisable goods are sold by him only to or through an inter-connected undertaking, the value of goods shall be determined as follows:-
(a) If the undertakings are so connected that they are also related in terms of sub-clause (ii) or (iii) or (iv) of clause (b) of sub-section (3) of Section 4 of the Act or the buyer is a holding company or subsidiary company of the assessee, then the value shall be determined in the manner prescribed in rule 9.
(b) In any other case, the value shall be determined as if they are not related persons for the purpose of sub-section (1) of Section 4.
Further, rule 9 envisages that where excisable goods are sold by an assessee only to or through a person who is related in the manner specified in either of sub-clauses (ii), (iii) or (iv) of clause (b) of sub-section (3) of Section 4 of the Act, the value of the goods shall be the normal transaction value at which these are sold by the related person at the time of removal to buyers (not being related person).
CAG opines that:
1. Neither the Act nor the Rules provide clarity on when undertakings would be termed as being so associated that they have interest, directly or indirectly, in the business of each other.
2. By including an additional requirement of "holding and subsidiary relationship" between the two parties in addition to their being inter-connected undertakings, rule 10(a) has very significantly diluted the provision of Section 4 (1) of the Act.
3. The rule has gone beyond the scope envisaged in the substantive statutory provisions. What the statute intended was that in any case where the parties are deemed to be related including where the parties are "inter-connected undertakings", the value would be determined as prescribed. There was no exception made by Parliament that as regards inter-connected undertakings not fulfilling an additional criterion, such as holding-subsidiary relationship, assessable value would be the transaction value/normal transaction value. In fact, the impact of rule 10(a) is clearly seen in the fact that it totally nullifies/makes irrelevant the existence of Section 4(3)(b)(i) and the detailed definition of inter-connected undertakings in the Explanation under Section 4(3) of the Act. Rule 10 requires that either the two parties should share holding company-subsidiary company relationship or they should meet the criterion as per one of the other three sub-clauses under Section 4(3)(b).
4. The absence of clear provisions concerning what would constitute mutuality of interest for the purposes of sub-clause (iv) of Section 4(3)(b) coupled with the introduction of the additional requirement of "holding and subsidiary relationship" may in fact have resulted in providing a means for several inter-connected undertakings to pay tax on lower value than envisaged by Parliament.
5.Until July 2000 when the amended Section 4 was introduced, "related person" meant a person so associated with the assessee that they have interest, directly or indirectly, in the business of each other and includes a holding company, a subsidiary company, a relative and a distributor of the assessee, and any sub-distributor of such distributor. Thus, rule 10 in fact has had the effect of restoring/ reintroducing the previous definition of "related person".
Recommendations : CAG has recommended that:
(a) The Ministry should review rule 10 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, as it imposes an additional requirement of "holding and subsidiary relationship" not envisaged by the Act.
(b) Clear provisions need to be introduced indicating what would constitute "mutuality of interest in each other's business" for the purposes of clause (iv) of Section 4 (3) (b) of the Act just as the expressions "inter-connected undertakings", "group", "related persons", "under the same management" have been explained in the law.
Why did CAG wait for 14 years to discover this eureka and will the Board oblige the AG by upsetting settled law?
Source: CAG's Report No.33 of 2014