The law relating to excise valuation in India has undergone a sea change due to the Supreme Court’s recent decision in the case

of Super Synotex (India) and its earlier decision in Fiat India (2012). The recently announced Union Budget has proposed certain amendments to the Excise Valuation Rules to lessen the impact of the decision in the Fiat case.

The Super Synotex case is discussed below.

Outline of the case

At issue was whether sales tax collected but not paid by an assessee, because of a sales tax incentive scheme introduced by the state government, should form part of the assessable value under section 4 of the Central Excise Act, 1944, for payment of central excise duty.

The facts as adumbrated in the judgment were that the assessee had collected the entire sales tax from its customers, however only 25% of the sales tax collected was paid to the state government while the balance was retained in accordance with the Rajasthan Sales Tax Incentive Scheme, 1989.

The central issue was whether such sales tax retained would form part of “assessable value” for the purposes of levy of excise duty under the law as it stood prior to 1 July 2000 (i.e. the era when “normal wholesale price” was notionally treated as assessable value) and also post 1 July 2000, when the “transaction value” regime became operative.

Taxes are largely excluded from the assessable value on which excise duty is to be paid. With respect to exclusion of sales tax, prior to 1 July 2000 the expression “sales tax, if any payable” was used in the relevant section 4(4)(d) (ii) of the act, while since 1 July 2000 the expression “sales tax, actually paid or actually payable” has been used in the definition of transaction value in section 4(3)(d) of the act.

The decision

With respect to the period prior to 1 July 2000, the Supreme Court held that such sales tax qualifies for exclusion from the assessable value, predominantly on the footing that incentive granted in the form of retention of sales tax (in lieu of cash incentive) is otherwise payable by an assessee, unlike an exemption scheme. The court also noted the similar position declared by the Central Board of Excise and Customs in its circular dated 12 March 1998.

For the latter period, the court observed that the amendment which brought in the “transaction value” model of valuation was, in its fundamental conception, obviously intended to consider solely the payments made on actual basis. Therefore the court held that unless sales tax is “actually paid” by an assessee, the benefit for exclusion cannot be conceded.

The court held that the amount paid or payable to the state government towards sales tax, value-added tax (VAT), etc., is excluded because it is not an amount paid to the manufacturer towards the price, but an amount paid or payable to the state government for the sale transaction, i.e. transfer of title from the manufacturer to a third party. Accordingly, only an amount paid to the state government can be excluded from the transaction value. What is not payable or to be paid as sales tax/VAT should not be collected from the third party/customer, but if it is collected and is not payable or paid, it is a part of the transaction value and should not be excluded from it.

Ramifications

The decision does not appear to have fully considered the significance of the phrase “actually payable” in the scheme of the law. Though the Supreme Court has acknowledged that for the period prior to 1 July 2000, tax retained under incentive schemes is actually payable, this aspect has not been considered in detail for the subsequent period. tax incentive schemes” – to sales tax/VAT incentives schemes which are in the nature of “deferral schemes”, “refund schemes”, etc. In this context, it is pertinent to note that the Supreme Court was not dealing with a single case but a batch of civil appeals. Though the facts set out in the judgment are restricted to a retention scheme, deferral schemes (where reduced payment of sales tax is made at net present value) were also at issue in the inter-connected appeals, which have been disposed of through this common order. The facts relating to those cases have not been set out or considered in great detail in the decision of the Supreme Court.

The decision has opened up a Pandora’s box and several companies which were/are enjoying the benefits of similar retention-related sales tax incentive schemes may now be visited with significant excise duty demands. The impact of the decision on other statelevel incentive schemes will also require examination and the last word has not been written in this chapter.

Disclaimer: This article was first published in the July/August 2014 issue of the India Business Law Journal magazine. It has been authored by Karthik Sundaram, who is an Associate Partner and Tejus Golchha, who is an Associate Manager at Economic Laws Practice (ELP), Advocates & Solicitors. They can be reached at karthiksundaram@elp-in.com or tejusgolchha@elp-in.com for any comment or query. The information provided in the article is intended for informational purposes only and does not constitute legal opinion or advice. The contents of this article/update are intended for informational purposes only and do not constitute legal opinion or advice. Readers are requested to seek formal legal advice prior to acting upon any of the information provided herein.

 

A significant issue of concern for industry is the applicability of this decision – rendered in the context of “retentionrelated sales