Clarification on Valuation of goods sold at a price below the cost of production
The Hon’ble Supreme Court has held on following issue in the case of Fiat India (P) Ltd. & Anr. (AIT-2012-354-SC):
Issue:
Whether the price declared by assessee for their cars which is below the cost of manufacture can be regarded as “normal price” for the purpose of excise duty in terms of Section 4(1) (a) of the Excise Act, 1944?
Background & Facts:
The respondent assessees are the manufacturer of motor cars, i.e. Fiat Uno model cars. The assessees had filed several price declarations in terms of Rule 173C of the Central Excise Rules, 1944 declaring wholesale price of their cars for sale through whole sale depots during the period commencing from 27.05.1996 to 04.03.2001. The Revenue Authorities had prima facie found that the wholesale price declared by the assessees is much less than the cost of production and, therefore, the price so declared by them could not be treated as a normal price for the purpose of quantification of assessable value under Section 4(1)(a) of the Central Excise Act, 1944 (“the Act”) and for levy of excise duty as it would amount to short payment of duty. Further, it was found that the respondents were importing all the kits in CKD/SKD condition for manufacturing the cars and the cost of production of a single car was Rs. 3,98,585/- for manufacture from SKD condition and Rs. 3,80,883/- for manufacture from CKD condition against the assessable value of Rs. 1,85,400/-.
Held:
The goods are sold below the manufacturing cost and manufacturing profit. Therefore, such sales may be disregarded as not being done in the ordinary course of sale or trade. Thus as the assessees are not fulfilling the conditions enumerated in Section 4(1)(a) of the Act and therefore, the valuation has to be done in accordance with Section 4(1)(b).
It was construed from a plain reading of Section 4 of the Act that the expression 'normal value' is, where excise duty is chargeable on any excisable goods with reference to value, such value shall be deemed to be the price at which such goods are ordinarily sold by the assessee to a buyer in the course of wholesale trade for delivery at the time and place of removal. And further, where the assessee and the buyer have no interest directly or indirectly in the business of each other and the price is the sole consideration for the sale. In other words, if price is the sole consideration for the sale of goods and if there is no other consideration except the price for the sale of goods, then provisions of Section 4 (1)(a) of the Act can be applied.
The Hon’ble Supreme Court held that the price is not the normal price, is established from the following three circumstances which the assessees had admitted:
- that the price of the cars was not based on the manufacturing cost and manufacturing profit, but have been fixed at a lower price to penetrate the market;
- The normal price for their cars is higher; they are selling the cars at a lower price to compete with the other manufacturers of similar cars. This was a factor in depressing the sale price to an artificial level; and,
- Lastly, the full commercial cost of manufacturing and selling the cars was not reflected in the lower price. Therefore, merely because the assessee has not sold the cars to the related person and the element of flow back directly from the buyer to the seller is not the allegation, the price at which the assessees had sold its goods to the whole sale trader cannot be accepted as 'normal price' for the sale of cars.
It was also held that since the assessee was charging a low price due to competition from others, the price charged could not be taken to be fair and reasonable, arrived at on purely commercial basis, as to be counted as the wholesale cash price for levying excise duty under Section 4(1)(a) of the Act. Accordingly, it cannot be regarded as the price at which the goods are ordinarily sold to the buyers.
Further, the important requirement under Section 4(1)(a) is that the price must be the sole and only consideration for the sale. If the sale is influenced by considerations other than the price, then, Section 4(1)(a) will not apply. It was held that in the instant case, the main reason for the assessees to sell their cars at a lower price than the manufacturing cost and profit is to penetrate the market and this will constitute extra commercial consideration and not the sole consideration. Accordingly, Section 4(1)(a) will not be applicable.
Therefore, the Supreme Court upheld the appeal of the Revenue and decided the case in Revenue’s favour.
Pursuant to this decision:
The field authorities are asking assessees to furnish cost data of various products for past years in the light of above judgment and Trade has represented the Board to provide clarification on applicability of Fiat judgment on following footing:
Post this judgment, the Department has adopted an aggressive approach by invoking provisions of cost plus profit as the basis for arriving at the value. Further, the Department is asking the assessees for costing data of past five years for the products sold at competitive prices to unrelated buyers and accordingly, issuing show cause notices in some cases. This has resulted in a chaos in the administration of Central Excise Valuation.
As can be seen from above, till the pronouncement of the above judgment, the understanding prevailing in the Government and the Industry was that unless there is a quantifiable additional consideration flowing from the buyer to seller, the sale price shall be accepted as the transaction value at which the goods are sold in ordinary course.
Therefore, a suitable amendment was suggested to be made under Section 4 of the Act to clarify the following:
- The transaction value shall not be rejected merely for the reason that it is less than the cost of production of such goods.
- Unless there is a commercial consideration flowing from the buyer to the seller, the price shall be considered as the sole consideration.
The Central Board of Excise & Customs has issued Circular No. 979/03/2014-CX dated January 15, 2014 explaining the above-mentioned Supreme Court judgment which is being attached herewith for your kind reference.
Hope the information will assist you in your Professional endeavors. In case of any query/ information, please do not hesitate to write back to us.
Bimal Jain
FCA, FCS, LLB, B.Com (Hons)
F-30/31/32, Pankaj Grand Plaza
1st Floor, Mayur Vihar, Phase–I,
Delhi – 110091 (India)
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