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SC's FIAT Ruling Impacts Services As Well

Published on Wed, Apr 17,2013 | 11:24, Updated at Fri, Apr 26 at 13:01Source : 

By: Anjlika Chopra, Director, Deloitte Touche Tohmatsu India

The Apex Court has held that, the main reason for Fiat India Pvt Ltd. (‘Fiat’) to sell their cars at a price, lower than the manufacturing cost and profit (in other words, at a loss) was to penetrate the market.  Such loss has been construed as constituting extra commercial consideration and accordingly, as not being the sole consideration for the sale of cars.  Accordingly, the   view taken is that, the valuation, for excise purposes, should be determined on the basis of the cost of production, wherever the goods are sold at a loss for gaining market advantages at a later date. 

The ramifications of this dictum are being experienced by corporates, not only in the automobile or other manufacturing sectors but also with respect to the services sectors.  It is a common practice for a manufacturer or a service provider, on account of business exigencies, to sell goods or provide services at a price, lower than the actual cost.  However, when a manufacturer or a service provider delivers  certain goods or services at a price, lower than the cost, this strategy is aimed at gaining certain advantages by way of market share at a later date, which may or may not materialize.  The question is whether such future contingency should be factored into the valuation for purpose of duty in present terms.  While the immediate impact of this ruling is being felt by the manufacturers, yet, on account of the valuation principles, prevalent under the service tax laws, the service providers, too, could get impacted. 

Be that as it may, in the light of the Supreme Court judgment, there appears to be a requirement that should be mandated for the revenue authorities to approach such matters with an objective mindset, applying the settled and accepted principles for cost accounting and not arbitrarily passing orders or issuing demand notices.

From a legislative standpoint, admitted loss to a manufacturer (seller) can never be assumed to be a consideration flowing into the hands of such seller.  The very identification that, there is loss, would ipso facto declare, in unequivocal terms that, the seller has not received any consideration; no additional consideration could be assumed in such a context.  Only a gain can be a consideration.  A loss would only indicate that, the assumed flow is from the seller to the buyer. 

Additionally, there are certain factual perspectives, which deserve consideration.  For instance, the question that arises is, whether the principle enunciated by the Supreme Court should be applicable for sales effected at the introductory stage or even for sales, where corporates have been incurring losses for a long duration.  Again, the concept of duration would be subjective.  In other words, while a principle has been laid down, every case should be evaluated, keeping in view the peculiar facts or circumstances as well as the prevalent legal provisions or judicial pronouncements.

In the Union Budget 2013, various trade bodies expected a change in the law, since, this ruling is being viewed as a barrier to the introduction of new technology and to foreign direct investments in the manufacturing as well as the services sectors.  However, the field has been left open and there is an expectation that, in the ‘non legislative’ clarifications, there would be guidelines forthcoming in this regard from the Hon’ble Minister on the floor of the Parliament, during the reply to the debate on the Union Budget 2013.


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