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i.
ii.
iii.
iv.
Normal Price
At which goods are ordinarily sold
Buyer is not a related person &
Price is sole consideration.
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of Sec. 4(1)(a) of the Act and charged duty on the basis of actual cost of
production of Vehicles of the Company.
The finding of the Dept. is that
clearance of goods at a price lower than the cost to its customers is not an
ordinary sale, rather it is an extraordinary transaction which calls for
determining the assessable value based on actual cost of production.
After the issue of show cause notices, the Company having lost the case
before the first appellate authority carried the matter to Tribunal which
upheld the contentions of the Company. Being aggrieved by the order of
Tribunal, the Dept. filed Special Leave Petition before the Supreme Court
and argued that
i.
ii.
iii.
The price of the cars sold by the assessees do not reflect the true
value of goods and that sole reason for lowering the price by the
assessees below the manufacturing cost is just to penetrate into
the market and compete with other manufacturers
The valuation has to be done in accordance with Section 4(1)(b) of
the Act read with the 1975 Valuation Rules.
The Revenue is justified in computing the assessable value of the
goods for the purpose of levy of excise duty under Section 4(1)(b)
of the Act and the relevant rules since the price of the cars sold by
the assessees was not ascertainable.
The following arguments were put forth by the Companys Counsels which
did not find merit with Honble Supreme Court.
i.
ii.
iii.
iv.
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v.
ii.
The legislature has created a legal fiction which makes excise duty
leviable on the actual market value of the goods or the nearest
equivalent thereof.
iii.
iv.
When the price is not the sole consideration and there are some
additional considerations either in the form of cash, kind, services
or in any other way, then according to Rule 5 of the 1975
Valuation Rules, the equivalent value of that additional
consideration should be added to the price shown by the
assessee.
In simple words, the Apex Court has observed that when a product is sold at
much below its cost of production specially for a continuous period of 5
years or so, it cannot be considered as having been sold in the ordinary
circumstances; hence the price although being the sole consideration for
the given transaction has to be ignored and the real cost of making the
product has to be adopted for valuation purposes.
No doubt, the Court has observed extraordinary event of sale calls for
different treatment in the assessment of duty. However, what the Counsels
and the Court failed to observe is that in the reverse situation
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assuming that if a product is sold at super profit price to a customer or class
of customers at say 100% margin compared to 20-25% margin, will the duty
be still assessed on ordinary price be adopted as against the super profit
price charged on class of customers.
If the observation of the Apex Court has to be accepted, it amounts to paying
duty/taxes on the amount unrealized by the assessee-company. The same
Apex Court has in the case of K.P. Varghese Vs. Income-tax Officer reported
in 131 ITR 597 held that no tax shall be payable on unrealized capital gains.
It is a different matter that subsequently, the legislature brought a new
provision in the Income-tax Act, 1961 to overcome the said judgment.
It is interesting to note that the legislature has amended Section 4(1)(a) of
the Act effective 1st July 2000 thereby removing the word Ordinarily. It is
thus clear that the intention behind carrying out this amendment is to allow
the market to determine and fix the price on excisable goods and collect
duty on such prices. Even otherwise, it appears that by adding the word
Ordinarily at the time of its introduction, the legislature would never have
visualized a situation like that of the Company selling its products at below
the cost. The term Ordinarily should only be construed as the one in the
ordinary course of business and does not call for extraordinary
interpretation.
The Departmental representative has in the course of his argument
observed that as the price is not the sole consideration, there exists other
consideration in the given case i.e. penetration into Indian markets and that
the intention of such penetration is intertwined with higher revenue thru
higher sales volume. This again is grossly a misunderstood notion. Legally
speaking, the Departmental representative has failed to appreciate that in
terms of the provisions of the Act and the Rules framed thereunder, carrying
out the penetration into the Indian market cannot be considered as
additional consideration. This is simply due to the fact that if it were to
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