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Regarding valuation of fertilizers for the purpose of levy of excise duty inclusion of subsidy component in the assessable value
July, 16th 2014
                                                                        Circular No.983/7/2014-CX
                                      Government of India
                                       Ministry of Finance
                                     Department of Revenue
                                       Tax Research Unit
                                                                     New Delhi, the 10th July, 2014


Chief Commissioners of Central Excise (All),
Chief Commissioners of Central Excise and Customs (All),
Director General, Directorate General of Central Excise Intelligence,
Commissioners of Central Excise (All),
Commissioners of Central Excise and Customs (All).


Subject: Valuation of fertilizers for the purpose of levy of excise duty ­ inclusion of subsidy
component in the assessable value ­ Clarification ­ Regarding.

         In the Budget 2011-12, excise duty of 1% was imposed on chemical fertilizers falling
under Chapter 31 of the Central Excise Tariff such as Urea, Di-ammonium Phosphate (DAP),
Ammonium Sulphate, Single Super Phosphate (SSP), etc. and various grades of complex

2.       Consequent upon the levy of excise duty @ 1% (without CENVAT facility) on chemical
fertilizers in the Budget 2011-12, the Department of Revenue had clarified to the Department of
Fertilizers that in the case of price-controlled fertilizers which are sold to distributors/wholesale
dealers at MRP fixed by the Government at the time of their clearance from the factory the
excise duty of 1% would be chargeable on the MRP and not on the total cost of production. In
the case of fertilizers not subject to price-control, the excise duty would be chargeable on their
wholesale price representing the transaction value at the factory gate.

3.      Trade and Industry Associations have represented that inspite of the clarification issued
by the Department of Revenue to the Department of Fertilizers, the field formations have issued
show cause notices to the fertilizer companies seeking to levy excise duty on the subsidy
component of price-controlled fertilizers in the light of the judgment of the Supreme Court in the
case of CCE, Mumbai v/s/ M/s Fiat India Pvt. Limited [2012-TIOL-58-SC-CX].

4.      The matter has been examined in the light of the facts in the case of M/s Fiat India (P)
Ltd. vis-à-vis the facts in the case of fertilizers. The facts in the case of M/s Fiat India (P) Ltd
were that the company had declared an assessable value for Uno model cars at a price which was
substantially lower than the cost of manufacture, and the company continued to sell the cars at a
loss making price for nearly five years. The company admitted that the purpose of doing so was
to penetrate the market and to compete with the other manufacturers of similar cars. It was under
these circumstances that the Hon'ble Supreme Court held that such sales could not be regarded
as sales in the ordinary course of sale or trade, nor could the declared value be accepted as the
normal price for sale of cars. As the main reason for selling cars at a lower price than the
manufacturing cost and profit was to penetrate the market, the apex court held that this would
constitute extra-commercial consideration and not the sole consideration. Since the price was not
the sole consideration for sale of cars, the Court held that the Department was justified in
invoking the provisions of Valuation Rules for the purpose of levy of excise duty.

4.1     In the case of fertilizers, the manufacturers are mandated to sell the goods at the prices
notified by the Government. In the case of urea, the cost of production varies greatly from
manufacturer to manufacturer depending upon the use of feedstock, technology and overheads.
The Government reimburses the differential between the cost of production and the notified price
to the manufacturers in the form of subsidy. As per the current policy, MRP of urea is controlled
and fixed by the Government. In P&K fertilizer, however, the MRP is deregulated and
companies are free to fix the MRP. They do so after taking into account the subsidy component
which is fixed on the basis of nutrient content (i.e per kg subsidy is fixed by the Government for
phosphate, potash, nitrogen and sulphur). Both in the case of urea and P&K, fertilizer subsidy is
given by the Government to benefit the farmers, as subsidy would reduce the MRP paid by

4.2      The fertilizer policy of the Government of India is aimed at providing fertilizers to
farmers at affordable prices for sustained agricultural growth and to promote balanced nutrient
application. The subsidy is not linked to the buyer and it cannot be said that the subsidy given by
the Government to the manufacturer is part of the consideration flowing from the buyer to the
manufacturer. Likewise, it cannot be said that fertilizer manufacturers have under-declared the
value with a view to penetrating the market or competing with the other manufacturers of similar

4.3     In the Fiat India case, it was a conscious decision on the part of the manufacturer to sell
the goods below the cost of production to penetrate the market and to compete with the other
manufacturers of similar cars. While dealing with the word `consideration', the Supreme Court
has observed that `consideration' means a reasonable equivalent or other valuable benefit passed
on by the promisor to the promisee or by the transferor to the transferee and it is for the Excise
authorities to show that the price charged to the buyer is a concessional or specially low price or
a price charged to show favour or gain in return extra-commercial advantage.

4.4      From the above, it is clear that the facts at hand are clearly distinguishable from the facts
and circumstances of the Fiat India case. The manufacturers of fertilizers do not gain any extra
commercial advantage vis-a-vis other manufacturers because of the subsidy received from the
Government. The subsidy paid by the Government to the manufacturer is in larger public interest
and not for benefitting any individual manufacturer-seller and it is also not paid on behalf of any
individual buyer or entity. In view of the above, it can be concluded that the subsidy component
is not an additional consideration and hence, the MRP at which the fertilizer is sold to buyers by
the manufacturers is the sole consideration for its sale. Even though the subsidy component has
money value, it cannot be considered as an additional extra-commercial consideration flowing
from the buyer to the seller.

4.5      The Hon'ble Supreme Court, in the Fiat India case referred to above, has cautioned
against drawing general conclusions and inferences, quoting the truism stated by Lord Halsbury
that "a case is only an authority for what it actually decides and not for what may seem to follow
logically from it". After examination of the issue as to whether the declared transaction value can
be rejected in all cases where the transaction value is lower than the manufacturing cost and
profit, the Ministry has clarified vide Circular No. 979/03/2014-CX dated 15th January, 2014
that mere sale of goods below the manufacturing cost and profit cannot be taken as the sole basis
for rejecting the transaction value. The Supreme Court, in the Fiat India case, has not ruled that
the subsidy component provided by the Government would tantamount to consideration flowing
from the buyer to the seller and therefore, should be included in the assessable value an excisable
good in terms of the extant Valuation Rules.

5.     It is, therefore, clarified that in respect of fertilizers for which subsidy is provided by the
Government, the excise duty will be chargeable on the MRP and not on the subsidy component
provided by the Government.

6.     Trade Notice/Public Notice may be issued to the field formations and taxpayers.

7.      Difficulties faced, if any, in implementation of this Circular may be brought to the notice
of the Board.

                                                                                     (P.K. Mohanty)
                                                                              Joint Secretary (TRU)
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