A recent decision of the Apex court in the case of the Commissioner of Central Excise vs. Fiat India Pvt Ltd, on the valuation of goods for excise duty has caused concern in industry, especially the auto sector.
The dispute dates from 1996 to 2001. Fiat sold Uno cars through dealers at a price lower than its cost of production. Revenue authorities contended that the price was artificial and without basis, and intended just to capture the market and drive away competition. Hence they disputed the assessable value based on the normal price declared by the assessee.
The Supreme Court held that the consistent low prices charged by Fiat cannot be considered normal value for excise valuation, as it was a loss-making price. Therefore, ‘price’ cannot be the sole consideration for sale — market penetration constitutes extra commercial consideration.
The decision, though rendered under the old law, is relevant even today, as the ‘transaction value’ can be accepted for charging excise duty, provided price is the sole consideration for sale.
The general understanding and dictionary meaning of ‘consideration’ is a reasonable equivalent or other valuable benefit passed on by the transferor to the transferee. When ‘consideration’ is qualified by ‘sole’, it strengthens the consideration to make it sufficient and valuable with regard to the facts of the case.
The decision has a far-reaching impact on all manufacturers who are forced to sell products below cost due to various reasons. Given the economic conditions in which businesses operate, manufacturers at times find it difficult to push sales — price reduction would be the immediate choice available.
The real ‘price’ of a product is what the market fetches it; it need not always be fixed by the manufacturer. In some cases, this may be below the cost of production, as many companies sell products at marginal cost without recovering the fixed expenses. These are ‘normal prices’, as they are fixed by the market.
In the pharmaceutical sector, prices of essential drugs are regulated by the Government. For instance, products covered under Chapter 30 of the Central Excise Tariff are subject to maximum retail price (MRP) based levy under Section 4A of the Central Excise Act, while certain drugs are subject to market-based regulations. Considering the actual cost incurred for developing the drug, it may take at least five to eight years to recover the cost. The fact that the company is not able to recover the full cost does not make the price abnormal. This is true for any sector where R&D expense is high.
Industry now fears that revenue authorities may insist on substantiation of value in each and every invoice, and check independently whether it is below production cost. The Supreme Court decision, if implemented, would bring subjectivity back into the valuation process. This decision is a rude shock to the auto sector, which is grappling with pricing pressure due to stiff competition.
L. Sayee Mohan is Director, Deloitte Touche Tohmatsu India Pvt Ltd