Valuation – the FIAT way or puny way!

[P. Umanathan Narayanan]

Ever correcting Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 find one more amendment in this Budget. As many as a dozen amendments appeared in that many years, first being in 2003. The genesis of the latest amendment has its roots perceptibly in the notable Supreme Court decision in FIAT case {2012 (8) TMI 791 - SUPREME COURT}. Supreme Court had accepted the Department’s plea to reject the declared transaction value of cars sold at a substantially lower price than the cost of manufacture. In short it has directed to invoke the provisions of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 to assess Central Excise duty. The logic behind the judicial decision is that there is additional consideration, as postulated in rule 6 ibid, that is flowing from the buyer to the assessee. Hence, money value of such additional consideration could be added to the declared transaction value and so Department’s claims have been agreed upon.

FIAT had admitted before the apex court that the purpose of such pattern of sale was to achieve market penetration.

The moot question now is whether there is any money flow back as stipulated in the edict present in the referred activity of the assessee. As the veracity of the admittance by FIAT has not been challenged the reasons for selling their cars at lower price have to be deemed as accepted fact. In fact, it has been accepted both by the Department and Supreme Court.

So, market penetration is both the reason and result of FIAT explanation, which eventually may (or may not) result in target sale. Obviously, the resultant sale shall be at a price including profit to the manufacturing cost. It is highly improbable that FIAT shall be selling their cars in the newly found market at a price less than manufacturing cost. Such presumption has no subsistence and is beyond imagination even by a least sensical person or by an exceptional financial whiz. It is universally accepted axioms just as vivid as Euclidian theory that no commercial establishment intends charity through their commercial activities. Charity could be a possibility post commercial activities.

The newest amendment does not contemplate a circumstance where any money is flowing back to the assessee. If at all is there any, the situation shall suo moto be governed by the main clause of rule 6 which reads thus:

“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 circumstance 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.”

Here, the situation is where money value of the additional consideration flows back to the assessee from the buyer. The new version as appended to rule 6 is applicable where money value of additional consideration does not flow back. It reads thus:

“Provided that where price is not the sole consideration for sale of such excisable goods and they are sold by the assessee at a price less than manufacturing cost and profit, and no additional consideration is flowing directly or indirectly from the buyer to such assessee, the value of such goods shall be deemed to be the transaction value.”

We know from FIAT decision that market penetration is the additional consideration by the orders of the Court; and not otherwise! In other words, the targeted future sale in the ‘penetrated’ market, which is yet to exist, becomes additional consideration for disputed sale while such sale is a bygone act. The fundamentals of central excise valuation is based on the value at ‘the time and place’ of removal of sale. Here the ‘time’ is pushed far forward to an unknown and unsure future. It is assumptive, hypothetical and thus very precarious proposition! Such conjectures are alien to the Central Excise law hitherto!

In fact, in the event of achievement of new market there are two distinct possibilities: (i) the so called additional consideration, that is to say the expected future sale (ii) sale of cars at higher price including manufacturing cost and profit.

Considering the latter case first, FIAT shall, by all probability, be selling their cars at higher price and they eventually be paying central excise duty on the increased price. In other words, they shall be paying duty on higher price which includes the so-called ‘additional consideration’, however, by the provisions of section 4(1)(a) and not under the main clause of rule 6 ibid obviously.

Coming back to the former possibility, that is to say, the so called additional consideration, this writer feels it is quite an artifice. The edict provides for inclusion of the amount of money value of any additional consideration flowing directly or indirectly from the buyer to the assessee. The crucial condition is that the so called additional consideration should be flowing back to the assessee from the ‘buyer’. In the instant case, it never does happen. Nothing is flowing back to FIAT from ‘the buyer’ who purchased the car at lower price as was presumed – at least nothing of that sort has been brought forth by the investigators nor has been contemplated by the Court. I may emphasize here that even if market penetration is accepted as additional consideration, such additional consideration cannot be bracketed with the provisions of rule 6 ibid as was believed and assented by the Court for the simple reason that money value of such additional consideration is not flowing from the buyer to the assessee! In short, the episode is illusory and ornamented with postulations, fantasies and minimal facts.

There is still an indistinct possibility - hypothetical one. What if the assesse doesn’t achieve the expected or targeted sale even after the so-called market penetration and sells their cars at still a lower price? In such an eventuality the ‘market penetration’ surely ceases to be an additional consideration

In the backdrop of the above, an analysis of new amendment is inevitable. The amendment is by way of an adjunct proviso to rule 6 ibid structured as

In both the main clause of rule 6 ibid and the newly added proviso clause the context is ‘sale where price is not the sole consideration’. Deviation starts when ‘there is’ and ‘there is no’ additional consideration flowing back in the main clause and the newly added proviso clause respectively. In the former case, the additional consideration that is flowing back to the seller from the buyer forms part of transaction value. One has to stop here to ponder if the alternative of the main clause is also true. In other words, when we remove the term “the aggregate of such …. and the amount of money value of any additional consideration flowing directly or indirectly from the buyer to the assesse” it becomes “where the price is not the sole consideration for sale, the value of such goods shall be transaction value” which is same as the newly added proviso clause and emphatically contradictory to the provisions of section 4(1)(a).

While the amendment presumably emanates from the FIAT decision, this very amendment has ipso facto nothing to do with the circumstance of the dispute contemplated in that case in the minutest analysis. The reason is that this amendment is applicable only in a case where ‘price is not the sole consideration for sale of such excisable goods’. The term ‘consideration’, used in two places in the amendment as well as that in two places in the main edict, has the same meaning - A payment or reward (Oxford Dictionary) which is being adopted here, especially when this term is not defined in the excise law. So, when car is sold at a lower price than the manufacturing cost what was the ‘additional payment or reward’ flown from the buyer of the car to FIAT is not forthcoming. However, it has judicially been accepted that there is additional consideration in the market penetration. It is also not forthcoming if such additional consideration is flowing back from buyer to the assessee. Hence, the circumstance in FIAT case is not appearing in the present amendment.

Now, we have contradictions in the new edict which is the focus of this inscription. The amendment provides that ‘a price less than manufacturing cost and profit, and no additional consideration is flowing directly or indirectly from the buyer to such assessee, the value of such goods shall be deemed to be the transaction value’ even if price is not the sole consideration for sale of such excisable goods. This new provision factually contradicts with the main clause in as much as the additional consideration is not flowing back. In fact, the term ‘price is not the sole consideration’ indubitably implies that there is additional consideration. When additional consideration exists it has to be added to the declared value and the question of flowing back doesn’t become an impediment, because consideration means additional payment or reward and it suo motu goes back to the seller. If that is so, the intent of the starting clause of the amendment, that is to say, if price is not the sole consideration for sale, loses its purpose. In fact, it contradicts with the Act itself. Section 4(1)(a) reads thus: 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. The circumstances considered in section4(1)(a) and the newly added proviso to rule 6 have no difference at all except that in the Act, price is the sole consideration for sale whereas in the rule, the situation is that the price is not the sole consideration. In both cases the selling price shall be transaction value. Hence, the new provision is contradictory and it becomes ultra vires to the Act.

The amendment does not expressly envision ‘the circumstance’ where price is not the sole consideration for sale when there is no additional consideration is flowing back from buyer to seller. If it was the circumstance referred to in FIAT case, there too, price is the sole consideration. Nothing is forthcoming in the judgement that there was some other consideration for sale than the price. In fact, penetration of market is a mask or an aura around the ‘price’. If penetration of market is the additional consideration it is nothing but price in future sale. Any future sale shall be attracting excise duty and hence a possible future sale need not be considered now as additional consideration. In short, price is the sole consideration in FIAT case too and there cannot be any additional consideration as such and hence such findings become contradictory in itself.

Furthermore, the new amendment makes yet another incongruity. When the amendment decrees ‘if the price is not sole consideration’ it presupposes that there is additional consideration. So, by the word of the edict, there is additional consideration; however, price that is lower than manufacturing cost also shall be transaction value if such additional consideration is not flowing directly or indirectly from the buyer to such assesse. Hence, it contradicts with the main clause which warrants inclusion of money value of any additional consideration to the declared value so as to become transaction value while the amendment does not require the assessee to include any such additional consideration. Once again I accentuate that the term ‘flowing back’ is inconsequential so long consideration itself does mean flowing back of money!