The amendment has become imperative in view of the Supreme Courts 2012 controversial Fiat judgment that affects manufacturers, particularly automakers, consumer durables firms, FMCG and chemicals sectors, who often sell goods below their cost price to garner a bigger market share or prune inventories, especially in a slowing market. The judgment in the case, CCE vs Fiat India (P) Ltd, has wide ramifications as it meant that manufacturers offering discounts to encourage sales still have to pay excise to the full extent of the price.
In this case, Fiat was importing car kits in completely knocked down and semi-knocked down conditions to manufacture the Uno model in India. It sold its Uno cars at prices that were below the cost of production to enable market penetration and cleared the cars on payment of excise duty at its sale price, which was much lower than the cost of production. However, the revenue authorities demanded duty at the production cost. While the sectoral tribunal ruled in favour of the car manufacturer on the grounds that there was no extra-commercial consideration or flow back of money from buyer to seller or sales to related parties, the Supreme Court, on appeal by the department, confirmed the excise duty demand of more than R400 crore on Fiat for selling the Uno cars below cost price.
The top court held that where products are sold at considerable losses for an unduly long time for the purpose of market penetration, the transaction value cannot be accepted for the purpose of levy of excise duty. Prior to the judgment, duty had to be charged on transaction value (the price actually paid or payable for the goods).
The apex court held that a consistent loss making price (below cost price) cannot be considered as the normal price since it does not reflect the full commercial cost of manufacturing and selling plus profits; there exists an element of artificial depression of the sale price to compete with other manufacturers; any unusual price charged constitutes an extra-commercial consideration, even if that consideration is to penetrate the market.
While the UPA government was quick to negate the Supreme Court judgment in the Vodafone tax case by making a retrospective amendment in the income-tax laws, it looked the other way when it came down to reversing the Fiat order. However, it brought in a Central Board of Excise and Customs (CBEC) circular in January this year clarifying that the Supreme Court decision will apply only in case a company sells its products below the manufacturing cost for a long time period to capture market share.
The circular also said that mere sale of goods below the manufacturing cost cannot be taken as the sole basis for rejecting the transaction value. In addition, it said that the judgment may not be applicable when a company wants to switch business or where a manufacturer has goods that could not be sold within a reasonable time.
However, the industry feels that there is still need to undo the judgment and correct the anomalies as manufacturers have to offer discounts to stay afloat and beat the slowdown.
Tax experts also feel that there is lack of clarity on what is the acceptable quantum of below cost. Also, what will constitute reasonable period for incurring losses before earning profit, besides other issues.
While the circular has tried to reduce the anxiety of the industry post-Fiat verdict, an amendment to the 1944 Act may still be a better alternative.
Not only this, even a liberal and simple tax regime would result in better revenues for the government. Now, it is for the new government to live up to its slogan acche din aane wale hain so that the manufacturing industry can also rejoice.