Valuation of excisable goods is one of the most important aspects of excise law. Since the 1980s, there have been a large number of amendments in excise law and the related rules to reduce the scope for ambiguity and disputes on the issue of valuation. One of the important amendments was to change the value on which excise duty is levied, from ‘normal price’ to ‘transaction value’.
With all the changes that were effected in the law over time, the issue of valuation for excise duty purposes changed from an extremely contentious issue to a non-issue. Until the Fiat judgment, that is. The Fiat judgment (Commissioner of Central Excise vs. M/s Fiat India Private Limited & Anr (2012-TIOL-58-SC-CX)) delivered by the Supreme Court recently, has the potential to create enormous litigation in many industries on the issue of excise valuation.
The broad facts in the above case were as follows. Over the period of five years, relevant to the above case, commencing from 1996 to 2001 Fiat India manufactured and cleared the Fiat Uno model of car on a declared wholesale price. On an investigation by the authorities under Central Excise it was found that the declared whole sale price on which these cars were sold by the Fiat India was less than the cost of production.
In response, Fiat India submitted that they were facing severe competition in the market. Their cost structure was not competitive, which forced them to sell these cars at price below cost. This was necessary to build and capture market share for their cars in India.
The authorities held that the selling of cars at a loss for as long as five years does not reflect dealing in normal course of business. Therefore, the declared wholesale price could not be taken as the normal price and the strategy to penetrate market constituted an extra consideration. Based on this premise, the excise authorities demanded excise duty on a valuation of cost plus 5 per cent, as against the declared valuation, which was on the wholesale price.
As mentioned earlier, excise valuation rules changed over time, from ‘normal price’ to ‘transaction value’. However, during both phases, a condition to adopting the normal price (or the transaction value, post 2000) was that the price was the sole consideration for the sale. Therefore, where price was not the sole consideration for the sale, various valuation methodologies would become applicable.
On the above facts, Supreme Court held that whether with reference to the new rules or the erstwhile system of valuation, sale of cars below the cost of production for a continuous period of five years could not be considered as usual business transaction at normal price. Therefore, the Supreme Court held that the assessing authorities were correct in rejecting the transaction value as this was not the sole consideration and since they are not able to derive the correct value by applying the specific rules there is nothing to debar them from resorting to best judgment valuation for which they have relied upon cost accountant’s report.
A key aspect of the reasoning behind concluding that price was not the sole consideration for the sale was that the Supreme Court took heed of the manufacturer’s plea that they were selling below cost in order to maintain or increase their market share. Therefore, the Supreme Court concluded that this constituted an additional factor of consideration. This decision dramatically expands the concept of consideration as it has been understood and applied so far. When the condition that ‘price is the sole consideration’ has been tested earlier, it has been in the context that there is no other thing of monetary value flowing from the buyer or anyone else to the manufacturer. This decision seems to consider any other advantage or benefit that is derived by a business to be a consideration for the sale.
In this case, the non-cash consideration was the fact that Fiat India was able to maintain and protect market share. In a similar way, almost every business transaction will have some benefit that accrues to the manufacturer in addition to the price of the goods. It could be market share, it could be enhancement of reputation, dominance over competition – it could be almost anything.
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Even the narrowest interpretation of this decision is quite alarming. The narrowest interpretation is that all new product launches (which are typically priced at a level that would be profitable when volumes pick up) should be valued at full cost plus rather than the transaction value.
If the decision is given an interpretation that every advantage accruing to a business must be valued and excise duty charged on such value, then the impact of this decision is limited only by the imagination and ingenuity of the authorities.
(Supported by Tajinder Singh) The author is leader (indirect tax practice), PwC India Email: pwctls.nd@in.pwc.com