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Companies selling goods at a loss will no longer be asked to pay excise duty at the normal or undiscountedprice (production cost plus profit) if these sales aren't aimed at market penetration. On Wednesday, the finance ministry clarified the Supreme Court judgment in the Fiat case wouldn't be blindly applied to all cases in which goods were sold at prices lower than the cost of manufacturing those goods.
The clarification would provide a reprieve to companies selling goods below production costs in cases involving unsold inventory, a sudden rise in raw material costs, a rise in interest rates or a manufacturer exiting business. However, if the aim is to capture market share, tax will be levied at the normal price.
| LEGAL TUSSLE |
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TRIGGER In a case between Fiat and excise department in August 2012, the Supreme Court upheld levy of excise duty on manufacturing cost, which was higher than the selling price of model
WHAT IT MEANT If production cost of a product is Rs 100 but the company is selling at Rs 80, excise duty will be levied on the undiscounted price — Rs 100 plus profit of, say, Rs 10 — forcing the company to pay tax on Rs 110 instead of Rs 80 REPERCUSSION Field officers started sending show-cause notices to other auto companies seeking details of their cost structure and whether SC ruling could be applied in those cases to levy excise duty |
REACTION
The industry felt uncomfortable about sharing cost data for each product and argued duty at manufacturing cost would cause undue hardship as goods were already sold at loss
SOLUTION
Finance ministry says won’t amend the law, but provided safeguards so that it is not applied to cases where goods are sold below cost for reasons other than competition
"The Supreme Court has not ruled that transaction value can be rejected in all cases where the declared value is lower than the manufacturing cost and profit," the Central Board of Excise & Customs (CBEC) said in a circular on Wednesday, about a year after the apex court ruling in the Fiat case. Quoting the court ruling, CBEC said if a company wanted to switch business or had goods that couldn't be sold within a reasonable time, tax may be levied at the discounted price. It, however, added these examples weren't exhaustive and there could be more such cases.
"The circular clarifies in all cases, the Fiat decision cannot be invoked. Tax officers will have to see facts and circumstances of the case. But this is only softening the blow. Ultimately, the long-term solution to the problem is in amendment of the law," said Pratik Jain, partner, KPMG.
As far as the period of application of the Supreme Court verdict is concerned, tax commissioners can't consider a period beyond one and half years, if the sale was prior to the verdict (August 29, 2012). But for all subsequent cases, the tax authorities would have the right to ask for data of the last five years.
"For the period after the date of the judgment, if there is a sale in the circumstances similar to the case of Fiat and yet, the transaction value of goods is declared as the correct assessable value, such a declaration would amount to wilful mis-statement of the assessable value," CBEC said.
During a tax audit, aspects such as the percentage of loss at which the sale takes place, the period for which it prevails, reasons for sale at loss, whether it is contrary to the standard and accepted business practices and whether it is leading to erosion of capital of the company will be looked into by tax officers. Calculations of manufacturing cost will 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 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," CBEC said.
The Supreme Court had asked Fiat to pay excise duty of about Rs 400 crore on Fiat Uno models sold at a considerable loss between 1996 and 2001. Fiat was importing completely-knocked-down units of the Uno and selling those below the cost price.
The ruling had dealt a double blow to companies in sectors such as automobiles and consumer goods, some of which were selling products at losses to capture market share. After the decision, field authorities started asking assesses to furnish the cost data of various products for past years.
