Defusing the fiat tax feud
Executive Director - Tax & Regulatory Services, EY
Senior Tax Professional, EY
The Supreme Court passed the landmark judgment of FIAT India Private Limited (FIAT) in August 2012 which is perceived to have changed the conventional & well established understanding of the basis of levy of Excise Duty i.e., basis the sale price (referred to as Transaction value under Excise law) unless there is any additional (direct or indirect) consideration flowing from the buyer to the manufacturer.
The Apex Court held that where the manufactured goods are being sold below the cost price for an unduly long period for market penetration, the Transaction value cannot be accepted for levy of Excise duty. The Honble Court upheld the Departments contention that Excise duty should be levied on a value equivalent to cost of manufacture of vehicles plus a notional profit margin (attributable to market penetration).
The decision of the Supreme Court opened the doors for the Department to tap into a potential source of revenue, hitherto unexplored. The consequences were obvious. Notices were issued to companies directing them to provide details of cost of manufacture of goods and corresponding prices at which Excise duty was discharged.
The notices issued by the Department generally required the manufacturers to provide cost data for a period of preceding five years, raising fears that the Department may invoke the extended period of limitation (prescribed to be 5 years under Excise laws) to raise demand alleging under-valuation by the manufacturers. While the decision of the Apex Court could be applied across sectors, the focus of the Revenue remained on the auto sector.
All this while, uncertainty remained regarding implementation of the Supreme Court’s judgment by the Department.
After prolonged representations to the Ministry of Finance and much deliberation, the CBEC has recently issued a circular clarifying aspects pertaining to implementation of the Supreme Court’s decision (the Circular). The Circular should bring some relief to the auto industry which virtually faced a blanket scrutiny from the Excise field formations in view of an unrestricted and flawed understanding of the FIAT ratio and its application.
The Circular clarifies that the Transaction value should not be rejected merely because the goods are being cleared at a price which is lower than their cost of manufacture. The Circular refers to the FIAT judgment where the Supreme Court had specifically observed that where a company intends to change the line of business or where the goods could not be sold within reasonable time, the Transaction value should be accepted for levy of Excise duty even though the goods are sold below the cost of manufacture. However, the Circular does not go beyond the instances cited by the Apex Court in the judgment, even though the judgment itself states that such instances are only illustrative and not exhaustive.
The Circular puts onus upon the Commissioner to check applicability of the FIAT ratio to the facts of each case. It also lays down aspects which may be taken into consideration by the Commissioner in applying the FIAT ratio in specific fact situations. Such aspects include the percentage and period for which such loss is suffered, reasons for making sale at loss, whether such sales are contrary to standard business practices.
The discretion conferred upon the Commissioner could have been more effective had it been accompanied by more definite and binding guidelines rather than leaving it mostly to the Commissioners discretion. In absence of the same, only time can tell if such move indeed bring required degree of certainty.
Also, the Circular does not specify any mechanism to determine the reasonable percentage of profit which may be deemed to be acceptable for determining the assessable value.
Current investigations undertaken by the Department has indicated instances wherein it has considered arbitrary profit percentages to compute the minimal Transaction value, which are devoid of logical/ scientific reasoning. The apathy of Department has resulted in difficulties considering the current economic slowdown and state of auto industry in particular and the manufacturing industry at large.
The Circular has directed the Department not to invoke the period of limitation to issue notices where the same is being done solely on the basis of the decision in case of FIAT. This should put to rest the uncertainty around whether the Department would go back to raise demand for five years. However, at the same time it has been clarified that post the date of the Apex Courts decision i.e. 29 August 2012, declaring Transaction value as the assessable value in a case similar to that of FIAT would be considered as wilful misstatement, thereby enabling the Department to invoke extended period of limitation. This could lead to ambiguity whether to avoid any allegation of wilful evasion, every manufacturer selling goods at loss should inform the jurisdictional authorities regarding this fact in writing to avoid the allegation of wilful mistaken or suppression.
In the current harsh conditions, the industry expects certainty regarding the positions adopted by it. The FIAT judgment had created a sense of uncertainty amongst the manufacturers with respect to Excise valuation. The uncertainty remains (though in a lesser degree) even after issuance of the Circular. The best way to end the uncertainty would be to amend the law so as to unequivocally provide for valuation mechanism in case the goods are sold at a loss. Nonetheless, in absence of amendment in law, the Circular should help an aggrieved manufacturer to challenge any digression by the Department from clarifications provided in the Circular, considering that it is a well settled principle of law that circulars are binding on the Department.
To conclude, it may be said that the Circular is a step in the right direction but it is still to be seen how much relief it would actually bring to the industry at large in these harsh economic conditions.