Excise valuation on retail sales price

SERVICE TAX

A recent judgment of the Supreme Court, in the case of Jayanti Food Processing Pvt Ltd vs CCE (2007-TIOL-150-SC-CX), authoritatively holding that the applicability of the provisions of the Standards of Weights and Measures Act, 1958 (SWMA) and the rules made thereunder is a pre-requisite for the application of Retail Sales Price (RSP)-based valuation methodology under excise law has again brought the methodology into the limelight.

It was in order to put an end to the prolonged and vexatious litigation surrounding excise valuation that the Government introduced an alternative methodology for determination of value based on the RSP of goods through the insertion of Section 4A in the Central Excise Act in 1997.

The methodology shifts the basis of determination of valuation from the price at which the manufacturer sells the goods, typically in wholesale, to the price at which such goods are sold in retail, typically by retailers to end consumers.

Since the excise duty continues to be a tax on manufacture, the tax was required to approximate the manufacturer's selling price despite being based on the RSP. This was achieved through grant of appropriate percentage deductions, called abatements, from the RSP of the goods, in order to arrive at this approximation. The basic idea, in introducing the alternate methodology, was to simplify the determination of excise values.

A full decade has since passed and while it is fair to suggest that a significant degree of simplicity has been introduced to the exercise of excise valuation as a result, there are nevertheless several challenges that remain.

The fundamental dispute starts with whether or not a particular product is covered under Section 4A, under the RSP-based method, or it continues to be determined by the underlying provisions of Section 4, based on transaction value i.e. manufacturer's selling price. This fundamental problem arises largely because the abatements which are allowed as deductions from the RSP are essentially industry averages of 'post manufacturing costs' and are hence not necessarily reflective of the actual costs.

This dispute leads straight to the provisions of Section 4A which lay down the condition that are required to be fulfiled in order for a product to be charged to excise valuation thereunder. These conditions are essentially two-fold. The first condition is that the product in question must be sold in a retail package to which the provisions of the SWMA and the rules made thereunder, requiring the RSP to be printed thereon, are applicable. The second condition is that such goods must also be notified under Section 4A for the purpose of coverage thereunder.

The point as to whether or not a package is a retail package has been the subject matter of considerable litigation. This article will not go into the various provisions of the SWMA or Section 4A but the broad point is that they have been varyingly interpreted.

Accordingly, various conflicting decisions have been pronounced on whether or not the goods in question were liable to duty under the RSP methodology. In the aforesaid judgment in Jayanti Foods, the apex Court has authoritatively held that the nature of sale is not relevant and that the goods in question need to be expressly covered under the relevant provisions of the SWMA, in order for Section 4A to apply.

Further, in January 2007, the Government has amended the definition of 'retail package' in the SWMA. The new provisions now define 'retail package' as one which is intended for retail sale to the retail consumer for the purpose of consumption and specifically exclude industrial and institutional consumers therefrom.

Industrial and institutional consumers have also been appropriately defined. This amendment will significantly reduce the uncertainty surrounding the definition. It is hoped that with the aforesaid judgment in Jayanti Foods and the amendment in the relevant SWMA provisions, this fundamental dispute is finally at rest.

An independent and important problem relates to the manner in which the abatements are determined and periodically revised. The Government has set up an abatement committee comprising of senior officials from the Ministry of Finance to undertake comprehensive costs studies relating to the products covered under Section 4A in order to determine the distribution related expenses which would comprise the post manufacturing expenses in relation to such products.

There have been several instances where manufacturers have claimed that the abatement percentages are inadequate and not in line with the actual post manufacturing expenses relating to their products.

It is also the position today that these abatements have remained relatively static and have not undergone periodic modifications in line with the dynamic market conditions and hence the problem that the excise tax is based on a derived price which does not adequately reflect or closely match the manufacturer's selling price.

It is hoped that the Government would look into these aspects of the RSP basis of determination of excise valuation and effect the necessary changes to make it simpler, transparent and more in line with market conditions.

The Author is leader, Indirect Tax Practice, PricewaterhouseCoopers. Views expressed are his own.