Valuation of goods under excise law has had a very chequered history. It is perhaps true to say that this has been the most litigated area of indirect taxes in general. It was in recognition of this that revised principles of valuation were brought into force in the year 2000. Thereafter, there has been a very significant reduction in disputes relating to excise valuation. However, a very recent decision of the Larger Bench (LB) of the indirect tax Tribunal (Tribunal) appears to unsettle what was long considered a settled principle in excise valuation.
Before we come to the decision itself, it is worthwhile to consider in brief the revised valuation principles brought into force in 2000. Section 4 of the Central Excise Act was amended in order to introduce the concept of Transaction Value (TV). The TV was defined to mean the price actually paid or payable for the goods, when sold, and included, in addition to the amount charged as price, any amount that the buyer was liable to pay to, or on behalf of, the assessee, by reason of, or in connection with the sale whether payable at the time of the sale or at any other time, including, but not limited to, any amount charged for, or to make provision for, advertising or publicity, marketing and selling organisation expenses, storage, outward handling, servicing, warranty, commission or any other matter; but did not include the amount of duty of excise, sales tax and other taxes, if any, actually paid or actually payable on such goods.
In addition to this long and elaborate definition, the Central Excise Valuation (Determination of Price of Excisable Goods) Rules 2000 (Valuation Rules) were also notified. Rule 6 thereof prescribed that the value of goods shall be deemed to be the aggregate of the TV and the amount of money value of any additional consideration flowing directly or indirectly from the buyer to the assessee.
Immediately after the introduction of the revised provisions, several excise valuation disputes were resolved by the Courts and the Tribunal by an appropriate application of these revised principles. One such matter pertained to the automobile industry as to whether the Pre Delivery Inspection (PDI) and after sales service charges collected by the dealers from individual buyers of motor vehicles were includible in the TV, for the purpose of payment of excise duty. Applying the revised provisions, it was consistently held by the Tribunal that in a situation where the automobiles had been sold by the manufacturer to dealers and such dealers were thereafter required to carry out the PDI of the motor vehicle, prior to delivery to the customers upon sale, and also carry out after sales services thereafter, recoveries made by the dealer from such buyers on account of the above charges were not includible in the TV since such recoveries did not accrue to the manufacturer at all nor were such charges paid to the dealer by the buyers on behalf of the manufacturers. It was also held that such charged paid by the buyers to the dealers could not amount to any additional consideration flowing either directly or indirectly from the buyers of motor vehicles to the manufacturers thereof.
This seemingly settled position of law has been recently upturned by the Tribunal in its decision in Maruti Suzuki Ltd. vs. C.C. EX. (2010 TIOL 1127-CESTAT). This decision took into account that in the particular appellants own case in the year 2004, the Tribunal had held that such PDI and after sales charges recovered by dealers from the buyers of motor vehicles were not to be included in the TV (2004 (170) ELT-245). The appellants, namely, Marti Suzuki, argued that this earlier decision had attained finality since the Supreme Court had dismissed the Departmental appeal against the aforesaid order. It was therefore argued that the issue stood concluded and the Department could not reagitate the matter. It was argued that the earlier decision had held that the PDI and after sales service charges could not included in the TV since they did not accrue to the manufacturer but were instead paid over by the buyers to the dealers. The earlier decision had also held that Rule 6, on flow back of additional consideration, could not apply in the circumstances since no part of the PDI and after sales charges accrued to Maruti Suzuki. Despite these categorical findings, the LB, in its recent decision, has distinguished the earlier decision on the ground that it was based on admitted facts that no consideration flowed to the assessee i.e. the manufacturer, as a result of these charges. The LB therefore held that the earlier decision did not contain any general principles and findings and was therefore restricted to the facts of that case. On this reasoning, which appears doubtful, the LB has chosen not to follow the earlier decision in the appellants’ own case. It has also concluded that the dismissal by the Supreme Court of the Departmental appeal against the earlier order of the Tribunal was for reason of the delay in filing such an appeal and hence the Supreme Court could not be said to have decided the matter in favour of the appellants.
The LB thereafter proceeded to consider the issue afresh. It came to the conclusion that in view of the expanded definition of the TV, as contained in new Section 4, payments made by the buyers of motor vehicles to the dealers on account of PDI and after sales service charges were to be added back to the TV since these were indirect benefits received by the manufacturer in the course of or on account of the sale of the motor vehicles. The Tribunal held that flow back of consideration, as per Rule 6 of the Valuation Rules, extended to discharge of sales obligations both in the present and future and would include the amounts paid by the buyers to the dealers since these were pursuant to the contract between the manufacturer and the dealer in relation to the sale of motor vehicles. The Tribunal took into account the particular expressions/terms used in the amended Section 4 to hold that the TV was very broadly defined so as to include all elements integrally connected with the sale of excisable goods. The Tribunal took note of the fact that such payments made by the buyers to the dealers accrued to the benefit of the dealer as well. It nevertheless held that this fact could not take away the conclusion that as a result of the PDI and after sales service being rendered by the dealers to the buyers of motor vehicles, indirect consideration flowed to the manufacturer himself. Finally, the LB held that the reference to the sale of goods in the valuation provisions was only to identify the stage in which the product was cleared to the customer and it could not mean therefore that post sales consideration could not flow back to the manufacturer.
This decision of the Tribunal is bound to have far reaching implications. It is of course most likely to be taken up on appeal to the Supreme Court but until such time that it is not set aside, the decision will be in force. It could mean that activities/obligations carried out by dealers and buyers, in regard to the goods purchased by them from the manufacturer, could all be construed as indirect benefit/consideration flowing to the manufacturer, even though nothing by way of any monetary amount would at all be paid by anybody to such manufacturer. As long as such activities/obligations are interpreted as flowing back from the contract of sale of goods by the manufacturer to the dealers/buyers, the recoveries relating thereto would form part of the TV and would be charged to excise. Clearly, this decision of the LB unsettles what was considered to be a settled point in law.
Under the forthcoming GST, the taxable event for the charge of the tax will shift from ‘manufacture’ of goods or ‘sale’ of goods to ‘supply’ of goods. It is expected that clear rules will be laid down in the GST law with regard to the time and place of supply of goods and valuation of goods for the purpose of the GST would flow from the above rules. As a result, it is expected that there would be no deeming provisions in the GST law, as is the case at present. It is therefore the expectation that the valuation disputes, as described above, would no longer remain in the GST.
The author is Leader Indirect Tax Practice PricewaterhouseCoopers pwctls.nd@in.pwc.com
Supported by Rahul Renavikar