Supreme Court's excise duty ruling throws automobile makers off gear
October, 22nd 2012
Makers of consumer goods looking to capture market share by pricing their products below cost may find their options limited by a recent Supreme Court judgement that allows the excise department to collect tax at the 'normal price' of the product, based on cost of production, even if the selling price is lower.
The judgment, which was delivered last month but whose ramifications are now becoming clear, directed Fiat and its erstwhile partner Premier Automobiles to cough up a total of Rs 360 crore for Fiat Uno vehicles that were sold below cost from 1996 to 2001.
The outcome of the order could potentially impact a range of sectors, from consumer goods to pharmaceutical and even the oil marketing companies besides automobiles.
Essentially, experts say, companies seeking to price below cost as a business strategy may no longer be able to do so. Further, companies may find it difficult to sell goods at a discount to clear unsold stocks if the excise department is aggressive in going after companies in the wake of the judgment. Also, the tax authorities may seek detailed information on the cost structure of their products.
Following this order, an emboldened excise department has sent out notices to 10-15 automotive companies, largely from Pune region, asking them to explain cost structure of its products.
Meanwhile, Premier Ltd has filed a review petition before the apex court and Fiat too will file for review petition shortly.
This judgment marks a significant departure from the way industry understands the transaction value based taxation system, say experts.
"This judgment has ramification which goes beyond the cases where goods are sold below cost," said Sachin Menon, partner - Indirect Taxes, KPMG, "Even the existing law allows discounts, known at the time of clearance of goods, as a deduction from the assessable value of the goods that are taxed for the purpose of excise. Now, even these can be questioned on the basis of the intangible mileage achieved by the seller in the market place. The Fiat judgment thus has an impact of unsettling the legal positions that is being followed by the trade, industry and the department over the past few decades," Menon added.
The Genesis of the conundrum
The Supreme Court ruled in favour of excise authority, as it found that Fiat's strategy to penetrate the market by selling below cost was resulting in an extra commercial consideration, and hence the price at which the product was being sold was not a normal price, as per section 4 of Excise Act prior to 2000.
As per the existing laws, the extra consideration needs to flow from the buyer to the seller, but after this ruling, any kind of consideration flowing to the seller from any source, can be taxed,