Valuation of tobacco products for the purposes of payment of basic excise duty & NCCD levied as duty of excise post introduction of GST

[Pramod Kumar Rai]

1. Throughout India manufacturers of chewing tobacco are perturbed with the investigation carried out with respect to valuation of the products for charging basic excise duty as well as national calamity contingent duty (NCCD). It is the stand of the trade that valuation needs to be done under Section 4 of Central Excise Act 1944 based on their actual transaction value, whereas investigating agencies are insisting for payment of taxes based on retail sale price printed on the packet less 55% abatement allowed under Notification No. 49/2008-CE (NT) dated 24.12.2008 issued under section 4A the act.

The confusion created by non-responsive CBIC

2. In the GST regime, Retail Sale Price (RSP) or Maximum Retail Price (MRP) based valuation has not been adopted for any product. Today tobacco products are exigible to GST as well as excise duty. If Excise duty is charged on RSP based and GST is charged based on transaction value, that will create complexity for manufacturers of tobacco products as on the same invoice they will have to deal with two assessable value and that will be against the spirit of simplification of tax regime. Therefore, the transaction value based assessment under both the laws should be retained to ensure ease of doing business.

3. After introduction of GST, to have uniformity across the indirect taxes, compounded levy scheme for tobacco products under Central excise was discontinued and actual production based duty has been introduced. In the same fashion, government must discontinue RSP based taxation to add uniformity with respect to valuation for charging all indirect taxes based on the actual transaction value.

4. The Notification no. 49/2008-CE issued under section 4A of CEA 1944 specifies certain goods including chewing tobacco falling under First Schedule of Central Excise Tariff Act 1985 for RSP based assessment under Section 4A, as an exception to transaction value based assessment under Section 4.  Though notification 49/2008-CE was not rescinded after introduction of GST w.e.f. 1.7.2017,  entire Central Excise Tariff Act, 1985 (including First Schedule) was repealed in totality vide section 174 of the CGST Act, 2017.

5. Further, with Introduction of GST, CEA 1944 has been amended and a new fourth schedule has been inserted in CEA 1944 for continuing excise duty on tobacco and petroleum products. The duty of excise is now charged on chewing tobacco as it falls under Fourth Schedule of CEA 1944.

6. On account of repeal of CETA 1985 in totality, and BED being charged on goods of fourth schedule, even though 49/2008 issued under Section 4A is not rescinded, because it refers to first schedule of a repealed act,  it is argued that 49/2008 has been reduced to nullity, and thus valuation for BED/NCCD must be done based on transaction value under Section 4 of CEA 1944. However, on account of insertion of Section 38B in CEA Act 1944 this argument gets nullified.

SECTION 38B. Savings of references to Chapter, heading, sub-heading and tariff item in Central Excise Tariff Act, 1985. - Notwithstanding the repeal of the Central Excise Tariff Act, 1985 (5 of 1986) by sub-section (1) of section 174 of the Central Goods and Services Tax Act, 2017, any reference to the Chapter, heading, sub-heading or tariff item, as the case may be, in the First Schedule to the said Act or in any rules or regulations made thereunder, or in any notification, circular, order or instruction issued thereunder, shall mean a reference to the Chapter, heading, sub-heading or tariff item, as the case may be, in the Fourth Schedule.

7. In spite of saving of notification 49/2008 on account of insertion of section 38B in CEA 1944, duty cannot be collected by applying Notification No. 49/2008-CE (NT) because on account of unchanged abatement rate, today  49/2008 has become ultra vires Section 4A of CEA 1944.

8. The pre-GST 55% abatement under 49/2008 is unable to take care of 25.5% duties of Excise (0.5% BED and 25% NCCD) and 188% GST regime taxes (28% and 160% GST Compensation Cess). If government really intended to charge excise and NCCD with reference to RSP, then the abatement should have been revised.

9. It is also not out of place that Karnatka High Court vide order dated 13.7.2020 in WP 6122/2020 has stayed the very levy of BED and NCCD on tobacco products under a constitutional challenge and desirability of BED/NCCD when very high rates of GST compensation is levied.  Further in view of SC decision in the case of KUSUM INGOTS & ALLOYS LTD. VERSUS UNION OF INDIA [2004 (4) TMI 342 - SUPREME COURT], Para 22, this decision, even though it is an interim order has all India implication.

22. ….. An order passed on writ petition questioning the constitutionality of a Parliamentary Act whether interim or final keeping in view the provisions contained in Clause (2) of Article 226 of the Constitution of India, will have effect throughout the territory of India subject of course to the applicability of the Act.

Rationale for RSP based taxation under Section 4A

10. Commodities, which were prone to evasion by way of undervaluation were brought under RSP levy under Section 4A. But it should be noted that the levy was never on RSP, rather it was always on factory gate value of the product in sync with charging sections under Central Excise Act, 1944. The abatement from RSP was allowed in such a way that abated assessable value approximates the genuine transaction value at factory gate. RSP based assessment was resorted to with sole intention of curbing under invoicing by the manufacturers. It should be noted that Sub section (3) of Section 4A and explanation 1 with respect to retail sale price provides as under :

SECTION 4A. Valuation of excisable goods with reference to retail sale price. -

(3) The Central Government may, for the purpose of allowing any abatement under sub-section (2), take into account the amount of duty of excise, sales tax and other taxes, if any, payable on such goods.

Explanation 1. - For the purposes of this section, “retail sale price” means the maximum price at which the excisable goods in packaged form may be sold to the ultimate consumer and includes all taxes, local or otherwise, freight, transport charges, commission payable to dealers, and all charges towards advertisement, delivery, packing, forwarding and the like and the price is the sole consideration for such sale :

11. In the central excise regime, every manufacturer was in a position to fix the basic sale consideration of the product equal to the abated assessable value under Section 4A of the Act. When excise duty, NCCD, VAT etc. was loaded on the abated assessable value, it was significantly lower than the RSP of the product giving margin to distributors, dealers and retailors of the product. To summarise abated assessable value under Section 4A, was able to absorb all the central duties and state duties and distributors, dealers and retailers’ margin within the RSP.

In any case the current abatement of 55% makes Notification 49/2008 ultra vires Section 4A

12. The Central excise/NCCD is a tax to be charged only from manufacturers at factory gate value. There is no central excise/NCCD beyond factory gate transportation or towards distributors, dealers and retailers’ margin.

13. All the indirect taxes charged on sale/supply of goods over above the basic transaction value can be and should be legally recovered from buyers. Further as per Legal Metrology Act and rules made thereunder, a price which is higher than the declared RSP cannot be charged from anybody. Today if BED/NCCD is mechanically quantified under 49/2008 and if all taxes are loaded on transaction value, then price exceeds RSP. Thus, essentially one needs to allow abatement of all indirect taxes by simply recognising that RSP is a cum duty and cum distributors, dealers and retailers’ margin price.

Abatement on RSP = Duties of excise + NCCD + CGST/SGST/IGST + GST Compensation cess + a notional 10% margin towards beyond factory gate transportation and towards distributors, dealers and retailers’ margin

14. In the Pre-GST regime the excise, NCCD, various cess and VAT was clearly absorbed within RSP with 55% abatment granted on retail sale price of the product. In GST regime the total tax burden on chewing tobacco has been increased many folds. Today BED & NCCD put together is 25.5%, GST and GST compensation cess put together is 188% and thus the abatement of 55% under notification 49/2008 is not able to absorb these taxes that can be seen from the table below:-

Table 1: With 55% abatement on RSP final actual retail sale price exceeds RSP making 49/2008 arbitrary

Head	Row number	Applied on/Explanation	Absolute Value	Absolute Value	Absolute Value
Declared RSP	1		100	100	100
AV for excise/NCCD with 55% abatement under 49/2008	2	45% of 1	45.00	45.00	45.00
Excise duty/NCCD	3	25.5% of 2	11.48	11.48	11.48
Total sale price from factory gate excluding GST/GST cess	4	2+3	56.48	56.48	56.48
Margins in MRP for Distributors, dealers, retailors and beyond factory gate transportation etc.			10.00%	5.00%	0.00%
absolute value for Margins for Distributors, dealers, retailors and beyond factory gate transportation etc.	5		10.00	5.00	0.00
Retail level assessable value in GST regime	6	4+5 as margin of traders are also exigible to GST	66.48	61.48	56.48
GST	7	28% on 6	18.61	17.21	15.81
GST Cess	8	160% on 6	106.36	98.36	90.36
RSP after absorbing taxes	9	6+7+8	191.45	177.05	162.65
Excess from declared RSP	10		91.45	77.05	62.65

15. It should be noted that with current abatement rate all these taxes and distributor-dealer-retailer margin cannot be absorbed in the RSP if manufacturer fixes his basic factory gate consideration equal to abated AV under excise. Even with zero margin for for Distributors, dealers, retailors and beyond factory gate transportation etc. RSP after absorbing taxes exceeds by 62.65% of declared RSP.

16. All the taxes and Distributors, dealers, retailors and beyond factory gate transportation etc. can be absorbed in RSP, with current abatement of 55% if and only if the factory gate transaction value is kept at less than one third of abated assessable value as can be seen from below table.

Table 2: With 55% abatement on RSP final actual retail sale price can absorb taxes if factory gate transaction value is kept at less than one third of Excise AV

Head	Row number	Applied on/Explanation	Absolute Value	Absolute Value	Absolute Value
RSP	1		100	100	100
AV for excise/NCCD with 55% abatemnt under 49/2008	2	45% of 1	45.00	45.00	45.00
Factory gate basic consideration	2A		13.25	18.25	23.25
Factory gate basic consideration as a % of Excise AV	2B		29.44%	40.56%	51.67%
Excise duty/NCCD	3	25.5% of 2	11.48	11.48	11.48
Total sale price from factory gate excluding GST/GST cess	4	2A+3	24.73	29.73	34.73
Margins in MRP for Distributors, dealers, retailors and beyond factory gate transportation etc.			10.00%	5.00%	0.00%
absolute value for Margins for Distributors, dealers, retailors and beyond factory gate transportation etc.	5		10.00	5.00	0.00
Retail level assessable value in GST regime	6	4+5 as margin of traders are also exigible to GST	34.73	34.73	34.73
GST	7	28% on 6	9.72	9.72	9.72
GST Cess	8	160% on 6	55.56	55.56	55.56
RSP	9	6+7+8	100.00	100.00	100.00

17. It should be noted that excise is a tax on the value of goods which prevails at factory gate and thus abated assessable value must approximates the transaction value at factory gate. Once it becomes clear that notification No. 49/2008 attempts to charge tax on a value which can’t prevail (there is no possibility) at factory gate at all that will make the notification arbitrary and ultra vires section 4A. If an attempt is made to charge tax on a value which can’t be charged by manufacturer at his factory gate from the buyer, in that case notification no. 49/2008 becomes draconian, arbitrary and violative of section 3, 4 & 4A of the Act.

Therefore, the abatement of 55% needs to be changed to at least 80% to save Notification 49/2008 and to make it compatible with Section 4A allowing even a token 10% margin on MRP for Distributors, dealers, retailors and beyond factory gate transportation etc.

18. Precisely for reasons explained above, if at all CBIC plans to charge BED and NCCD under section 4A of the act, then it must revise the rate of abatement from 55% to at least 80% to save Notification 49/2008 and to make it compatible with Section 4A allowing a notional 10% margin on MRP to absorb all the taxes and distributor-dealer-retailer margin with retrospective effect from 1.07.2017 as shown in below table.

Table 3: Calculation of required abatement on RSP to arrive at factory gate sale price

Head	Row number	Applied on/Explanation	Absolute Value	Absolute Value	Absolute Value
RSP	1		100	100	100
Rate of abatement under 49/2008			80.30%	76.35%	72.40%
abated AV for excise/NCCD	2		19.70	23.65	27.60
Excise duty/NCCD	3	25.5% of 2	5.02	6.03	7.04
Total sale price from factory gate excluding GST/GST cess	4	2+3	24.72	29.68	34.64
Margins in MRP for Distributors, dealers, retailors and beyond factory gate transportation etc.			10.00%	5.00%	0.00%
absolute value for Margins for Distributors, dealers, retailors and beyond factory gate transportation etc.	5		10.00	5.00	0.00
Retail level assessable value in GST regime	6	4+5 as margin of traders are also exigible to GST	34.72	34.68	34.64
GST	7	28% on 6	9.72	9.71	9.70
GST Cess	8	160% on 6	55.56	55.49	55.42
RSP	9	6+7+8	100.00	100.00	100.00

Pramod Kumar Rai

Advocate

Athena Law Associates