Fiat case: CBEC offers a band-aid solution
Tax Partner, EY
Senior tax professional, EY
The Supreme Court in the case of Fiat India dealt with facts wherein the cars were being sold by Fiat at a price substantially lower than the cost of manufacture, for a period of five years, in order to achieve market penetration.
In the above factual background, it was held by the Supreme Court that the tax authorities can reject the sale price and levy excise duty at manufacturing cost and profit.
The sale of cars at an abnormally lower price to penetrate the market was considered as extra-commercial consideration by the Supreme Court, even though there was no additional consideration of money value flowing, directly or indirectly, from the buyer to the seller.
While the Supreme Court's verdict is based on the specific facts of the case, the Revenue authorities in India tried to apply the principles laid down by the Supreme Court in the said decision at a generic level in all cases where the goods were sold at a loss.
This caused a major concern for all manufacturers as they were asked by the Revenue authorities to demonstrate in all cases that they were not selling goods at a loss and wherever they were selling goods at a loss, they were being asked to pay a differential excise duty.
Accordingly, clarification was sought in respect of certain issues including the applicability of the judgment for periods prior to the date of the judgment, cases wherein the ratio of the decision would apply and whether the transaction value will be rejected in all cases where it is lower than the manufacturing cost and profit.
In response to the above, the Central Board of Excise and Customs (CBEC) recently issued circular number 979/03/2014-CX, dated January 15, 2014, clarifying the following:
- Mere sale of goods below the manufacturing cost cannot be taken as the sole basis for rejecting the transaction value
- The circular quotes the Supreme Court wherein it has cited certain illustrations wherein the sale price lower than the cost of manufacture and profit would be accepted for assessing excise duty liability, like in the case of a company which intends to switch over its business or where the goods could not be sold within a reasonable time
- Due care must be taken at the level of the Commissioner to determine whether the facts of the case are similar to the Fiat India case
- Aspects such as the percentage of loss at which sale has taken place, the period for which such loss making price has prevailed, reasons for sale at such loss making price, etc., may be looked into by the field formation at the time of applying the principles of the Fiat India judgment during the course of audit
- The extended period of limitation may not be invoked by the Revenue authorities prior to the date of judgment in case of Fiat India, that is, before August 29, 2012.
The circular certainly provides some relief to the manufacturing industry (specially the automobile industry) as the cases prior to the date of the judgment would not be reopened by invoking the extended period of limitation and the judgment of Fiat India would not be applied blindly in all cases where goods are sold at a loss.
However, the manufacturing industry (especially automobile industry) is not completely out of the soup, as they still have an uphill task to demonstrate in all cases that they are not selling goods at a loss and secondly, wherever they are selling at a loss to demonstrate that their facts and commercial situation is distinct from that of Fiat.
The reason that the situation has not been completely resolved is that the CBEC in its administrative capacity while issuing a circular cannot overrule a Supreme Court judgment. The only way to provide a complete relief and solution to the manufacturing industry would have been to amend the law retrospectively to overcome the Supreme Court judgment.
There are instances galore where the government has done retrospectively amendments in law to overcome Supreme Court judgments (which were in favor of the assesse) to raise revenue, Vodafone instance being one of them.
It is difficult to understand why the government shied away from doing a retrospective amendment in law this time wherein it could have provided genuine relief to the manufacturing industry.
Needless to say, without an amendment of law the Revenue authorities may still try to generically apply the principles laid down in the Fiat India case in various scenarios, which in turn, is likely to keep the manufacturing companies in woes for the years to come causing undue pains, harassment, mental agony and litigation for the industry at large.