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Excise valuation principles - the litigation continues
Analysis of amendments
Per Rule 8 of the existing Valuation Rules, in the case of in-house consumption of manufactured goods, valuation is done on the basis of cost of production plus 10%. However, in a situation where the production is partly used for in-house consumption (ie as intermediate products) and is partly sold, the applicability of Rule 8 had been a matter of debate. The taxpayers took a view that Rule 8 is not applicable to cases where the entire quantity of goods is not consumed in-house.
The amended Rule 8 prescribes that where the excisable goods are used by the manufacturer wholly or partly for in-house consumption in the manufacturing of other goods, the valuation of goods meant for in‑house consumption must be completed at 110% of the cost of production.
Similarly, as per Rules 9 and 10 of the Valuation Rules (prior to amendment), if the goods were sold entirely to related persons, then the sale price of such goods from the related person to an independent buyer was considered for excise valuation. Again, the taxpayers contested the applicability of Rule 9 and 10 where entire sales were not made to related persons. The amended Rules 9 and 10 provide that in the case that the taxpayer sells the goods even partly to related persons or inter-connected undertakings, Rule 9 and 10 would apply to such goods.
Impact on MNCs
The above-mentioned amendment to Rule 8 will push up excise duty liability for manufacturers who consume their products in-house as well as sell their products at lower than cost plus 10% to unrelated buyers. The duty will now need to be paid on 110% of the cost of production rather than the reduced price at which goods are actually sold to unrelated buyers. Since in most cases excise duty paid on intermediate products is availed as an input credit, the amendment vis-à-vis Rule 8 may generally be revenue neutral. However, it would increase excise duty liability where taxable intermediate goods are further used in manufacturing of exempt goods, or for manufacturing in excise free zones like Uttaranchal, etc.
Similarly, the amendment in Rules 9 and 10 will also push up excise duty liability for manufacturers who partly sell their products to related undertakings, who then further sell such goods at a higher sale price to independent buyers.
It is interesting to note that prior to the amendments, the courts have consistently upheld the inapplicability of Rule 8 in the case of partial in-house consumption or Rules 9/10 in the case of partial related party sales. The decisions in this context have been based on two key arguments, summarised below:
- No legal basis for applicability of Rule 8 or Rule 9/10 in the case of partial in-house consumption or partial related party sales
- The Valuation Rules are to be read sequentially and, thus, Rule 4 (which provides for assessable value to be the value of similar goods sold at the nearest point of time), has precedence over Rule 8 or Rule 9/10 in such scenarios
The amendment effectively nullifies argument 1 as stated above.
Interestingly, argument 2 mentioned above has not been dealt with by the amendment. In order to deal with this, the government has issued Circular No. 975/09/2013-CX dated 25 November 2013 which states that the Valuation Rules need not be followed sequentially. In this regard, the Circular relies upon paragraph 70 of the Supreme Court judgment in the case of Commissioner of Central Excise, Mumbai vs Fiat India Pvt. Ltd. [2012 (283) E.L.T. 161 (S.C.)] (‘Fiat Judgment’).
It is pertinent to point out that paragraph 70 of the Fiat Judgment dealt with the Excise Valuation Rules of 1975 (ie the old Valuation Rules) and not the Valuation Rules of 2000.
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In view of the above, the possibility of taxpayers still relying upon argument 2 to mitigate the impact of the amendment cannot be ruled out. Taxpayers may also contend that valuation under Rule 4 in the case of partial in-house consumption / partial related party sale is consistent with the fundamental scheme of Central Excise valuation under Section 4 of the Central Excise Act (which attempts to adopt the sale price of goods from the manufacturer to independent buyers as the taxable base for payment of excise duty). Thus, like most key amendments in tax laws, this amendment is also likely to spawn more litigation.
Separately, it is worth mentioning that these amendments have been brought at a time when there is tremendous upheaval in the manufacturing industry due to the Fiat Judgment (supra) which has sought to levy tax on the cost of production plus notional profit in the case of sales made at a loss. Since the amendment to Rule 9/10 mandates the valuation of goods sold (whether wholly or partly) to a related undertaking at the sale price by such related undertaking to an independent buyer, it is safe to infer that the Fiat Judgment (ie valuation of goods at cost plus notional profit) will not apply in the case of sales made to related parties. This will hold even if such related parties are further selling the goods to independent buyers at a loss.
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