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RECENT DECISION OF SUPREME COURT IN COMMISSIONER OF CENTRAL EXCISE,

MUMBAI Vs. FIAT INDIA PVT. LTD. & OTHERS.

Recently the Supreme Court has delivered an extraordinary judgment in the


case of Commissioner of Central Excise, Mumbai Vs. Fiat India Pvt. Ltd. &
Another. Before going into the analysis of the case, let us first understand
the facts of the case.
The Respondent is a Company engaged in the business of manufacture &
sale of various automotive vehicles. During the period under dispute
(1996), it has introduced a new model of a vehicle called UNO. This
vehicle consists of imported engines and other parts besides indigenised
components. The Company has deliberately sold this Uno car to the
customers during 1996-2001 at much lower price than its actual costs. The
obvious reason was to get the new product penetrated into Indian markets
and capture as much share in the market as possible.
It is the contention of the Central Excise Dept. that the price adopted by the
Company is not an ordinary one at which a businessman will sell his
product. It is an extraordinary price sold to the customers deliberately to
get into Indian market. In other words, the Dept. has argued that the
assessable value on the basis of which the Company has paid the excise
duty does not reflect the true cost of production plus the operating margins.
Before dwelling on the merits of the Dept.s arguments, let us understand
what the charging section of the Central Excise Act, 1944 ( Hereafter
referred as Act ) says about the price for payment of excise duty.
"4. Valuation of excisable goods for purposes of charging of duty of excise (1) Where under this Act, the duty of excise is chargeable on any excisable
goods with reference to value, such value shall, subject to the other
provisions of this section be deemed to be - (a) the normal price thereof,
that is to say, the price at which such goods are ordinarily sold by the
assessee to a buyer in the course of wholesale trade for delivery at the time
and place of removal, where the buyer is not a related person and the price
is the sole consideration for the sale.
A careful reading of the above Section will reveal the following ingredients
for the purposes of levy of excise duty on any goods:

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i.
ii.
iii.
iv.

Normal Price
At which goods are ordinarily sold
Buyer is not a related person &
Price is sole consideration.

The payment of excise duty is based on the Price which is an economic


value assigned by a seller for selling his products to the customers. In order
to determine this value, the legislature has created a legal fiction to equate
the value of the goods to the price which is actually obtained by the
assessee, when such goods are sold in the market, or the nearest
equivalent thereof.
Secondly, the legislature at the relevant point of time ( 1996) used the
expression Ordinarily sold which indicates that there is no room for
applicability of the provisions of Sec. 4(1)(a) of the Act in extraordinary
circumstances.
Similarly, the said provisions of the Act are applicable only where buyer and
seller are related persons. Likewise, in order to adopt the pricing under this
provision, it should be ensured that Price charged on customers be the
sole consideration for the purposes of payment of excise duty.
In the ordinary circumstances, a manufacturer of excise goods is required to
discharge his duty liability with reference to the price which he charges on
his customers at the time of its removal from the factory. In the given facts
of the case, the cost of production of UNO Vehicles of the Company is much
higher than the price realized by the Company from its customers. This
fact has also been corroborated by the Dept.-appointed Cost Accountant
who has been directed to conduct special audit under Section 14-A of the
Act. Therefore, there is no dispute between the Company and the Dept.
that the selling price based on which duty was paid is lower than the cost of
production of the Vehicles; hence the Dept. wanted to ignore the provisions

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of Sec. 4(1)(a) of the Act and charged duty on the basis of actual cost of
production of Vehicles of the Company.
The finding of the Dept. is that
clearance of goods at a price lower than the cost to its customers is not an
ordinary sale, rather it is an extraordinary transaction which calls for
determining the assessable value based on actual cost of production.
After the issue of show cause notices, the Company having lost the case
before the first appellate authority carried the matter to Tribunal which
upheld the contentions of the Company. Being aggrieved by the order of
Tribunal, the Dept. filed Special Leave Petition before the Supreme Court
and argued that
i.

ii.
iii.

The price of the cars sold by the assessees do not reflect the true
value of goods and that sole reason for lowering the price by the
assessees below the manufacturing cost is just to penetrate into
the market and compete with other manufacturers
The valuation has to be done in accordance with Section 4(1)(b) of
the Act read with the 1975 Valuation Rules.
The Revenue is justified in computing the assessable value of the
goods for the purpose of levy of excise duty under Section 4(1)(b)
of the Act and the relevant rules since the price of the cars sold by
the assessees was not ascertainable.

The following arguments were put forth by the Companys Counsels which
did not find merit with Honble Supreme Court.
i.

ii.

iii.

iv.

The assessable value has to be gathered from the normal price


and not from cost of manufacture which is irrelevant when normal
price is ascertainable.
Once the normal price at which the goods are sold is available, the
Revenue cannot reject the normal price merely because it is less
than the cost of production,
If wholesale price under Section 4(1)(a) is not ascertainable, the
assessing authority can go to the nearest equivalent to determine
assessable value for the purpose of levy of excise duty
There is no additional consideration flowing from buyer to seller
and whole transaction is bonafide

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v.

If price is not the sole consideration then any additional


consideration that flow from the buyer to assessee would have to
be quantified in terms of money and not otherwise.

The Supreme Court has opined that


i.

In the context of Section 4(1)(a) of the Act, the word 'ordinarily' by


no stretch of imagination, can include extra-ordinary or unusual.

ii.

The legislature has created a legal fiction which makes excise duty
leviable on the actual market value of the goods or the nearest
equivalent thereof.

iii.

The value to be adopted for the purpose of assessment to duty is


not the price at which the manufacturer actually sells the goods at
his sale depots or the price at which goods are sold by the dealers
to the customers, but a fictional price contemplated by section
4(1)(a) of the Act.

iv.

When the price is not the sole consideration and there are some
additional considerations either in the form of cash, kind, services
or in any other way, then according to Rule 5 of the 1975
Valuation Rules, the equivalent value of that additional
consideration should be added to the price shown by the
assessee.

In simple words, the Apex Court has observed that when a product is sold at
much below its cost of production specially for a continuous period of 5
years or so, it cannot be considered as having been sold in the ordinary
circumstances; hence the price although being the sole consideration for
the given transaction has to be ignored and the real cost of making the
product has to be adopted for valuation purposes.
No doubt, the Court has observed extraordinary event of sale calls for
different treatment in the assessment of duty. However, what the Counsels
and the Court failed to observe is that in the reverse situation

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assuming that if a product is sold at super profit price to a customer or class
of customers at say 100% margin compared to 20-25% margin, will the duty
be still assessed on ordinary price be adopted as against the super profit
price charged on class of customers.
If the observation of the Apex Court has to be accepted, it amounts to paying
duty/taxes on the amount unrealized by the assessee-company. The same
Apex Court has in the case of K.P. Varghese Vs. Income-tax Officer reported
in 131 ITR 597 held that no tax shall be payable on unrealized capital gains.
It is a different matter that subsequently, the legislature brought a new
provision in the Income-tax Act, 1961 to overcome the said judgment.
It is interesting to note that the legislature has amended Section 4(1)(a) of
the Act effective 1st July 2000 thereby removing the word Ordinarily. It is
thus clear that the intention behind carrying out this amendment is to allow
the market to determine and fix the price on excisable goods and collect
duty on such prices. Even otherwise, it appears that by adding the word
Ordinarily at the time of its introduction, the legislature would never have
visualized a situation like that of the Company selling its products at below
the cost. The term Ordinarily should only be construed as the one in the
ordinary course of business and does not call for extraordinary
interpretation.
The Departmental representative has in the course of his argument
observed that as the price is not the sole consideration, there exists other
consideration in the given case i.e. penetration into Indian markets and that
the intention of such penetration is intertwined with higher revenue thru
higher sales volume. This again is grossly a misunderstood notion. Legally
speaking, the Departmental representative has failed to appreciate that in
terms of the provisions of the Act and the Rules framed thereunder, carrying
out the penetration into the Indian market cannot be considered as
additional consideration. This is simply due to the fact that if it were to

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constitute extra consideration, then there must be a flow of such


consideration from buyer to seller in order to bring it for the purposes of
levying excise duty.
Further in the process of delivering the judgment, the Apex Court has failed
to appreciate the essence of a Circular No.215/49/96-Cx., dated
27.05.1996,issued by the Central Board of Excise & Customs ( CBEC ).
According to this Circular, if the price is not the sole consideration as is
alleged in the instant case, the additional consideration which according to
the Dept. has to be added to assessable value must be quantified in
monetary terms. However, the Circular further adds that if the Dept. cannot
determine the additional flow of consideration from buyer to seller, the Rule
7 of Central Excise Rules, governing the determination of assessable value
cannot be invoked.
Pricing a product is purely a commercial decision which a businessman
takes considering various variables. If any law intrudes into the domain of
pricing, it would unsettle the whole conduct of business.
No prudent
businessman would like to incur losses artificially by keeping his selling
price at below the cost. If he does it, he may be doing it with a long-term
vision of getting a foothold in the market. Today he may be selling his
products below the cost; however once he gains prominence in the market,
he is expected to increase the price and edge toward dominating the
market. Thus, the lower price or higher price charged on customers would
get evened out over a period of time. Therefore, the legislature should
similarly see a long-term goal of garnering revenue along-with the growth of
business rather than indulging in artificial levy of duty or taxes on unrealized
income.
Before this judgment of Apex Court opens up Pandoras Box, it is expected
that the Ministry of Finance understands the business ramification of this
judgment and act accordingly. Otherwise, if the judgment were to be
allowed into the Statute books, there would not be any penetration of
foreign goods into Indian market. Therefore, it is sincerely appealed that the
Union of India wakes up to this anomaly and set right the whole issue
without delay.

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