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Revenue Authorities Target Manufacturing Industry

The Supreme Court has dismissed the review petition filed by Fiat India Private Limited on the issue of valuation under the Central Excise Act 1944.

The Court, vide order dated 27 November 2012, observed that there was no reason to interfere with its original order dated 29 August 2012. Taxand India discovers the impact this will have on all corporations who have manufacturing operations in India.

The Court had upheld the judgment valuation by the Revenue Authorities on manufacturing cost plus profit basis, where the goods were sold at below manufacturing cost for market penetration, though no additional money consideration was received from the buyer. The Court had observed as follows:

  • Sale at a lower price to penetrate market will constitute extra-commercial consideration and not sole consideration
  • Price is not sole consideration where:
    • Sale is influenced by considerations other than price
    • Lower price fixed to penetrate market and to compete with other manufacturers
  • If an unusually low price is charged because of extra-commercial considerations, the price charged cannot be taken to be fair and reasonable, arrived at on purely commercial basis

Your Taxand contact for further queries is:
Gokul Chaudhri
T. +91 124 339 5040

Taxand's Take

This is a very important decision in the context of central excise valuation. Upholding the valuation on cost plus basis in a transaction value regime, without flow of additional consideration from the buyer, creates a major impact on industry. The Revenue Authorties have already issued notices to many manufacturing companies seeking details of production cost data. The dismissal of the review petition is likely to accelerate the proceedings against such companies. Corporations with manufacturing operations in India need to analyse the applicability of this decision to their specific facts, assess the risks involved and plan the mitigation steps in a proactive manner.

Taxand's Take Author