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Posted by Khurana Khurana & Associates LLP Chartered Accountants in Tax Planning & Compliance.
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Review of Applicable Tax Law in the matter of FIAT VS EXCISE DEPARTMENT

CA. Varun Khurana

A Supreme Blow – Reference to The Economic Times |New Delhi |Monday | 22 October 2012


  1. The Ruling – Fiat and Premier must pay about Rs. 311Cr and Rs. 49Cr, respectively, in excise duty for Fiat Unos sold below cost between 1996 and 2001.
  2. The Reasoning – SC found Fiat’s strategy to sell below cost was resulting in extra commercial consideration, and hence was not a normal price.
  3. The Outcome – Any company right from a soap manufacturer to a carmaker can be charged by the excise authority, even if they sell products below manufacturing cost.

Our Analogy:-

i.            The Outcome of the case is dependent on the involvement of the extra commercial consideration in addition the transaction value.

ii.            The mere fact a company sells products below manufacturing cost does not mean that the excise duty needs to be paid on the normal value. Since subsection 1 of section 4 clearly defines the transaction value as the value where the buyer is not related and the price is the sole consideration of the sale.

Reference http://www.cbec.gov.in/excise/cx-rules-valuation2000.htm and http://www.cbec.gov.in/excise/cx-act/cx-act-ch2.htm

Subsection 1 of Section 4 of the Act on Valuation of excisable goods for purpose of charging of duty of excise provides where the duty of excise is chargeable on any excisable goods with reference to their value, then on each removal of the goods the value shall be

  1. in case where the goods are sold by the assessee, for delivery at the time and place of the removal, the assessee and the buyer of the goods are not related and the price is the sole consideration for the sale, be the transaction value.
  2. In any other case, including the case where the goods are not sold, be the value determined in the manner as may be prescribed.

Subsection 2 of section 4 stated that the provisions of the section shall not apply in respect of any excisable goods for which a tariff value has been fixed in sub section2 of section3.

It is also clarified that the price cum duty of the excisable goods sold by the assessee shall be the price actually paid to him for the goods sold and the money value of the additional consideration with the sale of such goods and such price cum duty, excluding sales tax and other taxes, if any, actually paid , shall be deemed to include the duty payable on such goods.

Subsection 3 (b) of section 4 state a person is deemed to be related if:-

i.            They are inter-connected undertakings

ii.            They are relatives

iii.            Amongst them the buyer is a relative and a distributor of the assessee, or a sub-distributor of such distributor.

iv.            They are so associated that they have interest, directly or indirectly, in the business of each other.

Subsection 3(d) of section 4 defines transaction value as the price actually paid or payable for the goods, when sold, and includes in addition to the amount charged as price, any amount that the buyer is liable to pay to, or on behalf of, the assessee, by reason of, or in connection with the sale, whether payable at the time of the sale or at any other time, including, but not limited to, any amount charged for, or to make provision for, advertising or publicity, marketing, commission or any other matter; but does not include the amount of duty of excise, sales tax and other taxes, if any, actually paid or payable on such goods.

Rule 6 of the Chapter II on Determination of Value of Central Excise Valuation (determination of Price of Excisable Goods) Rules, 2000 states where the excisable goods are sold in the circumstances specified in clause a of sub section 1 of section 4 of the Act except the circumstances where the price is not the sole consideration for sale, the value of such goods shall be deemed to be the aggregate of such transaction value and the amount of money value of any additional consideration flowing directly or indirectly from the buyer to the assessee.

Explanation 1 to Rule 6 clarifies that the value, apportioned as appropriate, of the following goods and services, whether supplied directly or indirectly by the buyer free of charge or at reduced cost for use in connection with the production and sale of such goods, to the extent that such value has not been included in the price actually paid or payable, shall be treated to be the amount of money value of additional consideration flowing directly or indirectly from the buyer to the assessee in relation to sale of the goods being valued and aggregated accordingly, namely:-

i.            Value of material, components, part and similar items relatable to such goods;

ii.            Value of tools, dies, mould drawings, blue prints, technical maps and charts and similar items used in the production of such goods;

iii.            Value of material consumed, including packaging materials, in the production of such goods;

iv.            Value of engineering, development, art work, design work and plans and sketches undertaken elsewhere than in the factory of production and necessary for the production of such goods.

Explanation 2 to Rule 6 clarifies where an assessee receives any advance payment from the buyer against delivery of any excisable goods, no notional interest on such advance shall be added to the value unless the Central Excise Officer has evidence to the effect that the advance received has influenced the fixation of the price of the goods by way of charging a lesser price from or by offering a special discount to the buyer who has made the advance deposit.