Finmin may slow taxmans Fiat ride on discount selling

Written by Roudra Bhattacharya | New Delhi | Updated: Jun 26 2013, 10:34am hrs
The finance ministry is looking at ways to avoid any undue harassment to auto companies that have sold cars at a discounted rate, often below the manufacturing cost, resulting in less revenues for the government. Some cases are similar to that of Fiat, on which the Supreme Court had ruled last year.

Auto industry officials met with revenue secretary Sumit Bose on June 6, where they cited parts of the SC order, on the Fiat case, pointing out that the ruling had set limits on the larger and universal fallout of the verdict. Industry officials say the response of the finance ministry has been favourable.

Sumit Bose, revenue secretary, told FE: The auto industry perceives harassment on the basis of the Fiat case and it has said the audit should not be done on the basis of that order. The SC judgment is the law of the land, but we are looking at how undue harassment can be avoided. The matter is with the CBEC, which will decide if further guidance is to be given to the field officers. The finance ministrys tax research unit had also studied the issue and given its recommendations in May.

After last years SC order, tax authorities had sent notices to car makers including Honda, General Motors and Ford seeking cost data and how the companies arrived at the final selling price. Honda had then received a tax demand notice for R164 crore.

The ministry is expected to soon issue guidelines to field (excise) officers. The government understands the problem and wants an early resolution. The revenue secretary had wanted additional inputs from us at the meeting, which we have since submitted, an auto industry official present at the meeting told FE.

In presenting its case to the finance ministry, industry officials cited certain clauses in the SC ruling that it said had underlined the Fiat case only as an extraordinary example.

The SC had ordered Fiat to pay R400 crore for paying lower excise duties on cars sold below cost price for a period of five years in order to penetrate the market and compete with incumbents like Maruti Suzuki. The SC had said that the excise duty paid to the government has to be calculated on the real manufacturing costs, plus a nominal profit, and not on the sale price. Excise duty is an inland tax on the production (for sale) of a specific good and is paid by the manufacturer, but often passed on to the consumer.

The auto industry has argued that the ruling should not be applied universally to other companies are (Para 50), citing parts of the order. There could be instances where a manufacturer may sell his goods at a price less than the cost of manufacturing and manufacturing profit, when the company wants to switch over its business for any other manufacturing activity, it could also be where the manufacturer had goods which could not be sold within a reasonable time. These instances are not exhaustive but only illustrative.

The order also quoted a previous SC ruling (Para 66) preceding that of Fiat. Each case depends on its own facts and a close similarity between one case and another is not enough because either a single significant detail may alter the entire aspect. In deciding such cases, one should avoid the temptation to decide cases by matching the colour of one case against the colour of another. To decide, therefore, on which side of the line a case falls, the broad resemblance to another case is not at all decisive.

The SC judgment on the Fiat case is being viewed with anxiety since it may not only affect the auto industry, but other consumer industries as well which sometimes sell products at a discount as part of a sales offer, or just to build market share. The concern is over what method the excise department will use to look at transactional value, on the basis of which the excise duties will be calculated.