1. Tax Law Alert Dec, 2012
THE IMPACT OF THE FIAT EXCISE VALUATION CASE ON THE MANUFACTURING INDUSTRY.
(Excise duty is to be computed on the basis of manufacturing cost plus notional profits when
goods are sold at a price below the cost of production)

2. EXECUTIVE SUMMARY
The Supreme Court has dismissed the review petition filed by Fiat India Private
Limited on the issue of valuation under the Central Excise Act 1944. The Court,
vide order dated 27 November 2012, observed that there was no reason to
interfere with its original order dated 29 August 2012. The ruling will have a
tremendous impact on all corporations who have manufacturing operations in
India.
The Court had upheld the judgment valuation by the revenue authorities on
manufacturing cost plus profit basis, where the goods were sold at below
manufacturing cost for market penetration, though no additional money
consideration was received from the buyer. The Court had observed as follows:
• Sale at a lower price to penetrate market will constitute extra-commercial
consideration and not sole consideration.
• Price is not sole consideration where:
o Sale is influenced by considerations other than price
o Lower price fixed to penetrate market and to compete with other
manufacturers.
• If an unusually low price is charged because of extra-commercial
considerations, the price charged cannot be taken to be fair and
reasonable, arrived at on purely commercial basis.
We in this report analyze the main ruling and predict its impact on the
manufacturing industry.
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3. commercial considerations. Hence, transaction value
Introduction has been a fundamental departure from the concept
of assessable value, as it enabled valuation of goods
for payment of excise duty on the basis of
The Supreme Court has dismissed the review
commercial considerations, rather than a notionally
petition filed by Fiat India Private Limited on the
derived value even when sales were actually made at
issue of valuation under the Central Excise Act 1944.
different prices to different buyers.
The Court, vide order dated 27 November 2012,
observed that there was no reason to interfere with
its original order dated 29 August 2012. The The Case: Basic Facts
dismissal of the review petition may introduce
greater uncertainty in excise valuation and cause
The Supreme Court analyzed the above principles in
Indian manufacturers to suffer. Ever since the
a valuation dispute involving Fiat India, where the
concept of ad-valorem duties was introduced in the
company sold its Uno branded cars at a price lower
excise laws, requiring payment of excise duty at a
than the cost of production, and paid excise duty on
specified percentage of value of goods, excise
the basis of such price. Fiat, being a recent entrant
valuation has assumed great significance and has
to the Indian market, did so to achieve a better
often been a bone of contention between the tax
market share and build up its brand value in India.
authorities and taxpayers.
The tax authorities rejected the price declared by Fiat
Initially, excise duty was payable on the assessable and demanded payment of excise duty on a value
value, which referred to the price at which goods including the cost of production along with
were ordinarily sold in the course of wholesale trade reasonable profits. It is interesting to note that the
between unrelated buyers and sellers where the price period of this dispute related not only to the era
formed the sole consideration for sale (also referred when the concept of assessable value was in force,
to as normal wholesale price). but also the period in which transaction value was
introduced.
However, the rules governing valuation underwent
significant amendments in July 2000, and the Key Arguments
concept of transaction value was introduced. This
Revenue
allowed the taxpayer to charge differential prices to
different customers, so long as such customers were  The revenue was of the view that the price of cars
unrelated and the price was based purely on sold by fiat does not reflect the true value of the
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4. goods and the sole reason for lowering the price principles laid down by the Supreme Court may
below the manufacturing cost is just to penetrate the seem largely consistent with the views prevalent
market. Therefore such price cannot be treated as during the assessable value era, they have far-
normal price. reaching consequences in the present situation,
where excise duty is paid on the transaction value.
 Hence the revenue was justified in computing the Since the introduction of transaction value, industry
assessable value under the Central Excise Valuation believes that the price charged to an unrelated buyer
Rules by taking into account the manufacturing cost is accepted as the value on which excise duty needs
plus notional profits. to be paid, so long as no other consideration is
involved.
 Fiat
Implications
 Fiat was not getting any additional consideration
over and above the assessable value declared by
them and hence the assessable value should be There is an apprehension that this judgment may
taken as the normal price in which the cars were usher in an element of greater subjectivity in excise
ordinarily sold. valuation, as it imparts greater power to the tax
authorities to question the veracity of the prices
 When normal price is available then recourse to any declared by manufacturers.
other mode of valuation is incorrect.
If media reports are to be believed, tax authorities
have already issued notices to some major auto
Analysis of the Ruling
manufacturers requesting details pertaining to cost
of production for the previous few years, to ascertain
The court upheld the contention of the tax if the transaction value declared by them is less than
authorities on grounds that the sale price, which the cost price.
resulted in a loss to Fiat for a prolonged period of five
years, could not represent the normal wholesale The ruling will affect not just the auto industry, but
price of the cars. The court also said the price all manufacturers engaged in sale of goods on
charged by Fiat could not be taken as the sole transaction value basis, although goods charged to
consideration for such sales since the same was excise duty on the basis of their retail sale price will
based on extra-commercial considerations of remain unaffected. The risk may be far greater in
achieving a greater market penetration. While the situations where differential prices are charged by
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5. the manufacturer to different buyers for the same  Further, if the notional price is to be adopted for
product, which is a regular phenomenon in valuation purposes, how would profit bench-
industries such as petroleum, chemicals and marks be arrived at?
pharmaceuticals. Further, the industry fears that  Are these going to be company-specific, industry-
transactions which involve introductory or trade specific or again a notional figure?
discounts, distress sales and stock clearances may
come under the scrutiny of the tax authorities Concluding remarks
following this judgment. If implemented strictly, the
decision may throw open several issues for the
taxpayers and tax authorities to resolve. At this point, it may not be possible to answer these
questions. However, it seems quite likely that we may
Some thought witness an increase in the litigation on some of the
 Does this judgment render the concept of above aspects.
transaction value redundant? The decision could also enable the tax authorities to
 If not, how does one convince the tax authorities subject import prices to similar scrutiny given that
that the transaction did not involve any extra- excise duty forms a component of import duties in
commercial considerations and the price, as India and the valuation principles in the customs
declared by the manufacturer, should be accepted laws are quite similar to those of excise laws.
as transaction value?
 Does this also mean that each invoice needs to be India is moving towards a unified goods and service
accompanied with the cost sheet? tax regime, which presupposes payment of a single
 This is practically impossible since retrieving the tax on each transaction. Against this backdrop, one
cost records and cost data may be a big problem wonders whether the excise duties should not be
for the manufacturers, especially at the time of levied on the sale price itself as is the case with sales
clearance of the goods and payment of duty. tax.
 A possible solution could be resorting to
provisional assessment, but this too has its own Industry is hoping for suitable clarifications from the
pitfalls as it would escalate cost of tax law-makers on some of the above aspects. Until they
administration and perpetuate uncertainty in tax arrive, the industry may have to live with an
computations given the delays and long pendency uncertain regime and the possibility of greater
of such assessments. friction with tax authorities.
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