The Supreme Court judgment in the TVS Motor case should bring clarity on the issue of pre-delivery inspection (PDI) and free after-sales service (ASS) forming part of the ‘transaction value’ for levy of excise duty.
The valuation of goods for levy of duty has always been a contentious subject under Indian central excise laws. One of the issues that has hovered upon manufacturers—particularly in the automobile and consumer durables industry—for a long time is whether expenses incurred by a dealer of goods for pre-delivery inspection (PDI) and free after-sales service (ASS) form part of the ‘transaction value’ for levy of excise duty payable on manufacture of such goods or not? There has been constant difference of opinion between the revenue department and the industry on the matter. According to the industry position, the proposition to include PDI and ASS costs incurred by a dealer in excise valuation by the original equipment manufacturers (OEMs) is contrary to the scheme of excise valuation.
The industry has remained firm on its stance of non-inclusion of PDI and ASS costs in transaction value on the grounds that (1) dealers incur these costs in their independent capacity and not on behalf of manufacturers; and (2) excise duty is payable on the sale price charged by a manufacturer from a dealer at the time of removal of goods from the factory and not on subsequent sale of goods by dealers to consumers. The revenue authorities’ stand on this issue—besides lacking legal merit—also poses the OEMs into an operational impossibility of tracking the dealers’ PSI and ASS costs per unit. In the absence of such tracking, there remains added exposure of the department challenging shortfall/delay in duty payments with consequent interest and penal consequences. Amidst such a scenario, the recent decision of the Supreme Court—in the case of TVS Motor Company Limited—brings a sign of relief for the OEMs.
History of contretemps
The Supreme Court, in the 1997 case of Philips India Limited, held that free ASS expenses are not to not form part of the transaction value. The Central Board of Excise and Customs (CBEC), however, was quick to clarify—vide the circular dated November 19, 1997—that the Philips judgment was not applicable to motor vehicles. The circular was later withdrawn by the CBEC, following the Supreme Court decision in Mahindra & Mahindra (and a few other cases) concluding to the contrary. Soon after, Section 4 of the Central Excise Act, 1944, was amended with effect from July 1, 2000, introducing the concept of transaction value and the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000, for the first time. The new valuation rules provided for adding to the transaction value, the money value of any additional consideration flowing directly or indirectly from the buyer to the assessee. The CBEC, based on the amended provisions, clarified vide the circular dated July 1, 2002, that PDI and ASS charges would be included in transaction value post July 1, 2000.
The larger bench of the Custom Excise & Service Tax Appellate Tribunal (CESTAT)—in the year 2010—in the case of Maruti Suzuki held that PDI and ASS charges should form part of transaction value on the grounds that any amount collected by a dealer from a buyer, towards such charges, would constitute a payment by the buyer to the dealer on behalf of the assessee. The larger bench reasoned that the term ‘transaction value’ does not mandate direct flow-back of consideration to the assessee. In fact, the discharge of the assessee’s obligation/liability by the end-buyer constituted indirect consideration for the assessee.
Interestingly, the Bombay High Court—in its 2012 decision in case of Tata Motors Limited—without expressing the view regarding correctness of the Maruti Suzuki Tribunal Larger Bench ruling held that PDI and ASS charges are not includible in excise valuation. It rendered the 2002 circular void on the following premise:
w PDI and free ASS charges can be included in transaction value only when they are charged by the assessee from the buyer (if a dealer incurs such expenses without any reference to the manufacturer of goods then such expense charges cannot be included in transaction value);
w Such expenses cannot be linked with advertisement and publicity expenses;
w Reference to Rule 6 is unfounded because in this case the assessee and the buyer are not related and the price is the sole consideration.
Despite the High Court order in the Tata Motors case, the department has continued to raise dispute regarding the inclusion of PSI and ASS costs incurred by dealers in excise valuation by the OEMs.
With TVS Motor’s ruling, what’s in the box?
The recent judgment of the Supreme Court in the case of TVS Motor should lay the dispute to rest. The Supreme Court observed that the decisions rendered by it in cases pertaining to the period before July 1, 2000, were still applicable as there was no material distinction in old and new provision in this regard. The Supreme Court has held that PDI and ASS charges will not form part of transaction value. Since this decision overrules the Maruti Suzuki Larger Bench ruling, the department’s case on inclusion of PSI and ASS charges on the OEMs would fall flat even in cases where such charges are recovered by the dealer from the buyer.
While the pending litigation matters will need to go through the regular course of appeal, the TVS Motor ruling certainly raises hopes that the department would stop issuing show-cause notices to the OEMs on this issue, going forward. In addition, the department’s own ever-changing stance on the matter makes out a strong case for the taxpayers to defend extended period of limitation if invoked in audits/investigations and also insisting on dropping of penalties in the pending matters at the initial stages only.
The current government’s business-friendly demeanour is keeping the industry optimistic that the upcoming Budget session will not bring in any legislative changes to get around the Supreme Court ruling. Instead, India Inc now expects the government to issue specific clarification fortifying that the ruling settles the law of the land and directing the enforcement agencies to dispose of the pending disputes in line with the ruling.
(With inputs from Poonam Harjani and Dhiraj Agarwal)
The author is leader, Indirect Tax, BMR & Associates LLP