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Old 26th October 2012, 17:17   #1
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Exclamation Major Automobile companies under Central Excise Scanner|Prices to go up??

In the last week of August this year, the Hon'ble Supreme Court's landmark decision in the decade old case of erstwhile Fiat & Premier Automobile joint venture to pay 400 Crores as Excise Duty brought to light the questionable practices that were followed by the auto industry.

More Info on: (Fiat India loses Rs 400 crore excise case in Supreme Court)


This exercise by the tax authorities triggered the panic button in the Auto Industry leading to an emergency meeting by SIAM to discuss the issue.

This is what the corporate honchos had to say on this:

Quote:
"We humbly accept the Supreme Court ruling. But the implication of this case could be significant. The ultimate motive of businessmen is to make money. It would seem unreasonable to continue making losses year after year. Companies do sell the product at a loss, to popularise the brand. These are acceptable principle of economics to do overall profit in the long run," Shekhar Viswanathan, chairman SIAM's taxation policy and deputy managing director, commercial of Toyota Kirloskar Ltd, said.

"However, there are situations where in the auto or any other industry will have to sell their product below cost price for instance during festive season, or when they have a huge unsold stock, or when there is sudden change in raw material prices of rupee-dollar equation, one can't always pass on the price increase to the customers," he explained.

SIAM has been advised to seek the following as a temporary relief:

Quote:
Until the judgment is overruled, the tax and legal experts have asked SIAM to seek relief under section 11 C for past and amendment of Section 4 to prevent duty demands in the future and the industry should also refer the case to the larger bench of Supreme Court on the matter.

Section 11 C notification basically directs the excise department not to levy excise duty in cases where is it genuinely difficult to determine the duty payable. In the given case, the industry body can thus push for incorporating such intangible/non-monetary considerations derived during the course of conducting business under Section 11 C.
Recently the central excise department has started handing out notices to major auto cos seeking their costing and other allied data.

http://www.moneycontrol.com/news/cnb...nd_773827.html

Tata Motors, M&M, Ashok Leyland, Ford & Fiat have so far received the notices. Interestingly, Maruti has so far not received any notice.

Maruti Chairman RC Bhargava on the Excise Notice

Quote:
Maruti is one of the companies who have not got a notice so far but sources indicate that even Maruti could be issued a notice soon on this matter. Bhargava said that Maruti has never underpriced their products.
Does this imply that there would be a hike in the prices what the end customers pay?
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Old 26th October 2012, 18:39   #2
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Default Re: Major Automobile companies under Central Excise Scanner|Prices to go up??

Most probably, the end users will not have any affect. In my opinion.

This notice says, that the government wants to know the individual cost thats being incurred by the companies. This would be applicable to only those parts which are imported [I guess]

If a company manufactures its cars and it has some 95% or localization, then they need to report the 5% import details and the cost incurred to the government. This is ideally done by the government to know whether any auto companies are evading tax or not.

Fiat has imported all the stuff. Sold the cars at cheaper price. however in their books, they have shown significant cost of those products. which do attact fine, as the government assumes that the company sells the products, makes profit and a share of that profit should be paid to the government as tax.

This process gives the government a better understanding on what/how are being imported and the corresponding cost associated with this transaction. This will help them in calculating the tax projects......

If there are other companies like Fiat, who are evading taxes because of some reason, then the prices ought to go up.
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Old 26th October 2012, 19:13   #3
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Default Re: Major Automobile companies under Central Excise Scanner|Prices to go up??

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Originally Posted by gemi_kk View Post
This notice says, that the government wants to know the individual cost thats being incurred by the companies. This would be applicable to only those parts which are imported [I guess]
The whole issue is about Excise duty valuation. Excise Duty is a levy on manufacture. Imports don't come under the purview of excise. They are governed by the Customs Law.

You may like to go thru' this link

Supreme Court's excise duty ruling throws automobile makers off gear

Quote:
If a company manufactures its cars and it has some 95% or localization, then they need to report the 5% import details and the cost incurred to the government. This is ideally done by the government to know whether any auto companies are evading tax or not.
If this had been their intention, the German Trio and other intl' brands importing CBU, SKD units would have been the first in the line to receive such a notice.

Last edited by Warwithwheels : 26th October 2012 at 19:16.
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Old 26th October 2012, 19:32   #4
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Default Re: Major Automobile companies under Central Excise Scanner|Prices to go up??

This decision goes against the principles of Excise Act.Cost of production has no bearing with assessable value when price is the sole consideration and the buyer and the seller are not related.Even if it is below cost.What are the purpose of all the Valuation Rules,then? This is judicial overreach.

I expect a review petition to be filed by FIAT.


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Old 26th October 2012, 19:54   #5
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Default Re: Major Automobile companies under Central Excise Scanner|Prices to go up??

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This is judicial overreach. I expect a review petition to be filed by FIAT.
Exactly!

But the Hon'ble Supreme court has made the following observation:

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This business intention of the company, to gain market share, was construed by the Court as an extra commercial consideration over and above the selling price of the cars in violation of the act and thus should be added back to the value of the goods for the purpose of payment of excise duty.
Source
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Old 26th October 2012, 20:19   #6
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Default Re: Major Automobile companies under Central Excise Scanner|Prices to go up??

@Warwithwheels

A discount issued to a customer can also be construed as so then,right?

Why else do you give a discount? It is basically to get more customers.Now this is a contentious decision which goes against so many established cases.There can always be two views.
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Old 27th October 2012, 08:37   #7
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Default Re: Major Automobile companies under Central Excise Scanner|Prices to go up??

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Originally Posted by Ascari View Post
@Warwithwheels

A discount issued to a customer can also be construed as so then,right?

Why else do you give a discount? It is basically to get more customers.Now this is a contentious decision which goes against so many established cases.There can always be two views.
Now that's ridiculous. The ministry in its desperate attempt to see some big numbers on its tax target charts is going overboard to tax even intangible benefits as flow backs to the manufacturer. If this could be the scenario, it will throw the product life cycle of many industries out of gear both at entry and exit stages.

This decision if rigorously implemented by the department, will not only affect the Auto industry, but also other industries where similar practices are prevalent.

The oil companies are also likely to face the heat because they follow a similar mechanism wherein there is a real tangible flow back of consideration from the Govt. in the form of bonds to compensate the loss on sale of oil products at subsidized rates.

Last edited by Warwithwheels : 27th October 2012 at 08:38.
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Old 27th October 2012, 11:46   #8
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Default Re: Major Automobile companies under Central Excise Scanner|Prices to go up??

If some manufacturer was paying the duty on the selling price (ex. factory price) instead of the cost price (where SP>CP) I wonder if govt would agree to a decreased tax amount based on the cost price or whether they would have a different clause to deal with that situation?

Of late, we've seen Jazz,City,Polo,Vento etc slash the prices by unbelievably huge margins to get the cars moving off the shelf but I dont see either Honda or VW in the list mentioned. Sometimes, companies lower the car price to get custmers and make up for the loss by overpricing the spare parts which these customers would have to buy.

Article says Tata Motors, M&M, Ashok Leyland, Ford & Fiat have so far received the notices. Of this, I'm curious about the parts that the first 3 manufacturers imports.
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Old 27th October 2012, 14:01   #9
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Default Re: Major Automobile companies under Central Excise Scanner|Prices to go up??

If product is sold at a discounted price , the excise duty is payable at the regular selling price and not on the discounted price..

Excise duty is a tax on manufacturing and not on sale (which is sales tax). For easy administration ED is paid when the good leaves the factory. ED is charged on the assessable value which may not be the selling price but the onus on proving the assessable value lies with the manufacturer. So many take the easier way of using the sale price. But the problem arises when discounts are offered. The correct way is to pay duty on the regular price / assessable value (which can't change in line the sale price).

In case of imports, companies take credit on CVD and offset it against ED payable on the finished product. Now if you claim CVD on a CKD at value of say Rs 5.0 lacs and sell the car at say Rs.3.0 lacs, govt has every right to question your assessable value.
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Old 27th October 2012, 15:19   #10
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Default Re: Major Automobile companies under Central Excise Scanner|Prices to go up??

@raju

In this case the discount was issued by the manufacturer.If my knowledge serves me right as per valuation rules discounts are allowed in calculation of assessable value.

Coming to your second point there is nothing in the valuation rules which prevents you from having a lower assessable value if you take higher cost for purpose of CVD.This is a loophole in law.The point being judiciary should interpret the rules as they are and not try to favor the revenue.If ED has a problem it should bring in an amendment to negate the loophole in law.
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Old 27th October 2012, 19:08   #11
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Default Re: Major Automobile companies under Central Excise Scanner|Prices to go up??

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Originally Posted by Ascari View Post
A discount issued to a customer can also be construed as so then,right?
Could you please clarify this fundamental aspect of ED

Major Automobile companies under Central Excise Scanner|Prices to go up??-ed.png

As far as my understanding on ED goes, most of the discount deals happen only at the second level of the supply chain i.e from the dealer to the end customer.

In that case how right is the department in factoring in the discount component to the end customer by the dealer as flow back to the manufacturer?

Last edited by Warwithwheels : 27th October 2012 at 19:13.
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Old 27th October 2012, 20:40   #12
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Default Re: Major Automobile companies under Central Excise Scanner|Prices to go up??

@warwithwheels ED is charged at the time of removal.Discount is allowed for sales by manufacturer.The discount provided by dealer has no relevance to excise duty valuation.

Last edited by Ascari : 27th October 2012 at 20:51.
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Old 28th October 2012, 19:25   #13
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Default Re: Major Automobile companies under Central Excise Scanner|Prices to go up??

The assessable value is the the cost of manufacture. The onus is on the manufacturer is correctly assess the cost. if your input cost is X and if you say say 0.5X is the cost of manufacture, then you are bound to be questioned and the onus is on you to provide a satisfactory reply.

It is not a question of judicial over reach, since the order is not from some PIL. The case would have been fought through various levels ( there is a strong dispute redressal system in the dept) before coming up to SC and Fiat has clearly failed to prove its case.

Law does have some loop holes which help some to go against the spirit of the law and the courts have to step in for the correct interpretation. I would not say the courts rule in favour of Govt. The vodafone case in an example
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Old 28th October 2012, 19:56   #14
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Default Re: Major Automobile companies under Central Excise Scanner|Prices to go up??

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Originally Posted by raju2512 View Post
The assessable value is the the cost of manufacture.
That's totally incorrect.

There are many methods of valuation in Central Excise. The following two methods of valuation are widely prevalent tho':

One, products that fall under the MRP category for which valuation would be based on MRP (minus) Abatement.

Two, based on Transaction value, provided the three conditions attached to it are satisfied.

If the three conditions are not satisfied, you will need to look at the detailed valuation rules to arrive at the Assessable Value of the transaction.

However, Cost of manufacturer has no bearing on the Assessable Value. Valuation mechanism in excise is a much deeper and wider concept than it appears to be. Understanding it in entirety requires through knowledge of various legislation and well decided judicial pronouncements.

Last edited by Warwithwheels : 28th October 2012 at 19:59.
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