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Whether the price declared below the cost of manufacture can be regarded as “Normal price” for chargeability of Excise duty.

Dear Professional Colleague,

We are sharing with you a recent judgment of the Honorable Supreme Court, New Delhi:-

Citation: AIT-2012-354-SC

Appellant (s): Commissioner of Central Excise, Mumbai

Respondent (s): M/s. Fiat India (P) Ltd. & Anr.                                

Issue:-

Whether the price declared by assessee for their cars which is below the cost of manufacture can be regarded as “normal price” for the purpose of excise duty in terms of Section 4(1) (a) of the Act?

Facts of the Case:-

The respondent assessees are the manufacturer of motor cars, i.e. Fiat Uno model cars. The assessees had filed several price declarations in terms of Rule 173C of the Central Excise Rules, 1944 declaring wholesale price of their cars for sale through whole sale depots during the period commencing from 27.05.1996 to 04.03.2001. The Revenue Authorities had prima facie found that the wholesale price declared by the assessees is much less than the cost of production and, therefore, the price so declared by them could not be treated as a normal price for the purpose of quantification of assessable value under Section 4(1)(a) of the Central Excise Act, 1944 (“the Act”) and for levy of excise duty as it would amount to short payment of duty. Further, it was found that the respondents were importing all the kits in CKD/SKD condition for manufacturing the cars and the cost of production of a single car was Rs. 3,98,585/- for manufacture from SKD condition and Rs. 3,80,883/- for manufacture from CKD condition against the assessable value of Rs. 1,85,400/-.

The assessees had submitted that they have declared assessable value or normal price in terms of Section 4(1)(a) of the Act. The assessees apart from others had also stated that the proper interpretation of Section 4(1) (a) of the Act would mean that the assessable value should be the normal price at which such goods are ordinarily sold in wholesale trade where price is the sole consideration; that they are not getting any additional consideration over and above the assessable value declared by them; that there is no flow back of money from the buyers and dealings between the assessees & their buyers are at arm’s length. Since the price declared by them is proper as per Section 4(1) (a) of the Act, the question of determining the assessable value as per Section 4(1)(b) read with Central Excise (Valuation) Rules, 1975 would not arise.

The assessees had further submitted that since they had launched new models of the cars which require import of the cars in kit-form (CKD and SKD); thereafter they were assembled and sold. This cost of imports, assembly and overheads lead to increase in overall cost of production of their cars. Further, they were facing intense competition from Maruti car manufacturers which required them to keep the price of their cars at a lower price. Therefore, they were forced to sell their cars at a loss in order to compete and attract buyers in the market. They further submitted that the assessable value declared by them should be accepted even if it is below manufacturing cost. The assessee submitted that 'normal price' is the selling price at which that particular assessee has sold the goods to all the buyers in the ordinary course of business.

The Revenue authorities were of the view that the assessees’ main consideration was to penetrate the market, therefore, the price at which they were selling the Cars in the market could not be considered to be a normal price as per Section 4 of the Central Excise Act, 1944. It was also observed that the cost of production of the Fiat UNO Cars is much higher than the price at which the assessees are selling them to the general public; that the price is artificial and arrived at without any basis just to capture the market and drive out the opponents from business. Further, it was noted that all costs incurred to make goods saleable/marketable should be taken into account for determining the assessable value and that the loss incurred by the assessees to penetrate the market should be borne by them and in the process Government should not lose revenue.

Held:-

The goods are sold below the manufacturing cost and manufacturing profit. Therefore, such sales may be disregarded as not being done in the ordinary course of sale or trade. Thus as the assessees are not fulfilling the conditions enumerated in Section 4(1)(a) of the Act and therefore, the valuation has to be done in accordance with Section 4(1)(b). 

The Hon’ble Supreme Court held that the taxable event for attracting excise duty is the manufacture of excisable goods. The charge of incidence of duty stands attracted as soon as taxable event takes place. Further, the sale or ownership of the end products is also not relevant for the purposes of taxable event under the central excise. Since excise is a duty on manufacture, duty is payable whether or not goods are sold. Duty is payable even when goods are used within the factory or goods are captively consumed within factory for further manufacture. Excise duty is payable even in case of free supply or given as replacement. Therefore, sale is not a necessary condition for charging excise duty.

It was construed from a plain reading of Section 4 of Central Excise Act, 1944 that the expression 'normal value' is, where excise duty is chargeable on any excisable goods with reference to value, such value shall be deemed to be the price at which such goods are ordinarily sold by the assessee to a buyer in the course of wholesale trade for delivery at the time and place of removal. And further, where the assessee and the buyer have no interest directly or indirectly in the business of each other and the price is the sole consideration for the sale. In other words, if price is the sole consideration for the sale of goods and if there is no other consideration except the price for the sale of goods, then only provisions of Section 4 (1)(a) of the Act can be applied.

The Hon’ble Supreme Court held that the price is not the normal price, is established from the following three circumstances which the assessees had admitted:

1. that the price of the cars was not based on the manufacturing cost and manufacturing profit, but have been fixed at a lower price to penetrate the market;

2. The normal price for their cars is higher; they are selling the cars at a lower price to compete with the other manufacturers of similar cars. This was a factor in depressing the sale price to an artificial level; and,

3. Lastly, the full commercial cost of manufacturing and selling the cars was not reflected in the lower price. Therefore, merely because the assessee has not sold the cars to the related person and the element of flow back directly from the buyer to the seller is not the allegation, the price at which the assessees had sold its goods to the whole sale trader cannot be accepted as 'normal price' for the sale of cars.

It was also held that since the assessee was charging a low price due to competition from others, the price charged could not be taken to be fair and reasonable, arrived at on purely commercial basis, as to be counted as the wholesale cash price for levying excise duty under Section 4(1)(a) of the Central Excise Act, 1944. Accordingly, it cannot be regarded as the price at which the goods are ordinarily sold to the buyers.


Further, the important requirement under Section 4(1)(a) is that the price must be the sole and only consideration for the sale. If the sale is influenced by considerations other than the price, then, Section 4(1)(a) will not apply. It was held that in the instant case, the main reason for the assessees to sell their cars at a lower price than the manufacturing cost and profit is to penetrate the market and this will constitute extra commercial consideration and not the sole consideration. Accordingly, Section 4(1)(a) will not be applicable.

Therefore, the Supreme Court upheld the appeal of the Revenue and decided the case in Revenue’s favour.

Bimal Jain

FCA, ACS, LLB, B.Com (Hons)

E-mail: bimaljain@hotmail.com

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