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Excise Valuation: Sales Tax – Incentive or Deterrence?

By Shivam Mehta and K. Prathiba

Valuation under Central Excise law has always been one of the areas of dispute and it has again been brought to the fore front of discussions with the recent decision of the Supreme Court in the case of Super Synotex (India) Ltd and Others. In this case, the issue of inclusion of a part of the sales tax amount collected and retained by the manufacturer as allowed under an incentive scheme launched by the State Government in arriving at the assessable value for payment of excise duty, came up before the Apex Court.

Valuation under Central Excise

Before we delve into the judgment and its impact, let us first have a bird’s eye view of the concept of valuation under Central Excise law. Value for the purpose of payment of excise duty is presently based on:

  • Transaction value under Section 4 of the Central Excise Act, 1944 [‘Excise Act’]: It is based on the price actually recovered for the goods involved in each transaction;
  • Retail sale price under Section 4A of the Excise Act: It is based on the retail sale price fixed for specified products irrespective of the actual price recovered from the respective customer; and
  • Tariff value under Section 3(2) of the Excise Act: It is based on specified tariff values notified by Central Government for specified products.
This discussion deals with the valuation based on transaction value of goods under Section 4 of the Excise Act. With effect from 1-7-2000, Section 4 of the Excise Act was amended to bring in the concept of valuation based on transaction value where transaction value (actual and not the normal price) was defined to not include the amount of duty of sales tax and other taxes, if any, actually paid or actually payable on such goods. Prior to 1-7-2000, valuation was based on wholesale price under Section 4 of the Excise Act and value did not include the amount of sales tax payable on such goods.

Broadly, the amendment made with effect from 1-7-2000 specifically introduced the phrase: ‘actually paid or payable’, in the definition to clarify that taxes such as sales tax will be allowed as a deduction only if the same was actually paid. Such was not the case prior to 1-7-2000 when sales tax payable was not included in the value irrespective of the quantum that was actually paid to the State Government as the same was based on the wholesale price of goods and not on individual transaction value for which the actual sales tax paid would not be determined. In either case (i.e. period prior to 1-7-2000 and with effect from 1-7-2000), the price is considered to be cum duty price i.e. cumulative of excise duty payable and excludes sales tax.

The case of Super Synotex (India) Ltd.

At this juncture, we may bring in the decision laid down by the Apex Court in the case of Commissioner of Central Excise, Jaipur-II v. Super Synotex (India) Ltd. and Others. In this case, the manufacturer was availing benefit under the Sales Tax New Incentive Scheme wherein it was entitled to retain 75% of the sales tax collected from its customers and pay only 25% of the sales tax collected to the Government. The period involved was both prior to and post 1-7-2000.

Period prior to 1-7-2000

For the period prior to 1-7-2000, the Apex Court held that the portion of sales tax retained by the manufacturer is not includible in the assessable value for the payment of excise duty relying upon a circular issued by Central Board of Excise & Customs (CBEC). The abovesaid circular was issued in respect of deduction of sales tax leviable by State Government, while determining the assessable value of the goods. The said circular addressed the cases of deferment of payment of sales tax for a particular period where sales tax is payable by the manufacturer after a particular period and cases of grant of incentive equivalent to sales tax payable by the units where the manufacturer collects the sales tax from the buyers and retains the same with him instead of paying it to the State Government. It was clarified that in such situations, sales tax is also considered payable by the manufacturer within the meaning of the erstwhile provision of the Excise Act. Therefore, sales tax was allowed to be deducted from the wholesale price for determination of assessable value for levy of Central Excise duty.

Period with effect from 1-7-2000

As regards the period post 1-7-2000, the Apex Court held that portion of sales tax retained by the manufacturer is not the sales tax which is actually paid by the manufacturer. Consequently, the manufacturer is only entitled to the benefit of the amount "actually paid" to the Department, i.e., 25% and the portion retained, i.e, 75% is includible in the transaction value for the payment of excise duty.

Impact of the decision

As a measure to promote specified areas and industries, it is a regular practice for State Governments to grant benefits to industries which are linked to sales tax payable by such industries. Such benefits could be by way of:
  • complete or partial exemptions
  • deferred payment of sales tax over a period of time which is more than the usual period stipulated for payment of sales tax
  • retention of sales tax collected from customers
  • refund of sales tax paid
  • subsidies
Exclusion of sales tax amount for computation of the value on which excise duty has to be paid has been a point of contention in all the above schemes, and has been addressed by the CBEC in the circular discussed above.

If the ratio of the above decision of the Apex Court is made applicable to other similar incentive schemes launched by the State Governments, in that the principle of allowing only the exclusion of sales tax amount actually paid, the same may now create complications. Here, it is pertinent to note that such incentive schemes linked to sales tax are extended to various industries or areas which the State Government intends to promote. Schemes such as deferment, retention of sales tax, etc., are only the methods for extending the benefit as they can be easily managed and accounted for. Alternatively, the State Government can collect the entire sales tax and thereafter, give it to the same industries as subsidies, grants etc. However, such a methodology can be cumbersome for both the government as well as the industries. It is for this reason that governments of various states adopt incentive schemes such as deferment, retention, etc. Accordingly, retention of sales tax is the same as receiving grants from the State Government except that it involves few more steps but the essence, intent and objective remain the same.

The view taken in the above said decision appears to have ignored this aspect of the incentive schemes while holding that sales tax retained is sales tax not actually paid, and will therefore not be deductible from the assessable value under the present law. Relying on the above decision, the Department may extend it to all types of incentive schemes extended by State Governments where the amount of sales tax paid to the government is less than the amount collected from consumers. However, the terms and conditions of each scheme will have to be individually examined before applying the above decision in order to determine whether the amount of sales tax collected can be said to be actually paid or not.

Schemes providing for refund of sales tax

Accordingly, a question may arise as to whether the same will also be extended to a sales tax incentive scheme where sales tax first paid to the State Government is later refunded in specified situations. For instance, refund of Earned Input Tax Credit is allowed under Uttar Pradesh VAT laws subject to conditions. Applying the above decision, the department may raise a demand in such cases of refund stating that though sales tax was initially paid, the same was refunded and thus, has been nullified to bring it to a position of non-payment of sales tax.

Schemes providing for deferment of sales tax

Similarly, what will be the impact of the judgment in situations where initially sales tax amount is not paid but retained, and payment is deferred to a later period, such as in the Incentive Deferment Schemes provided in the States of Gujarat and Rajasthan?

Alternatively, a doubt may be raised as to whether a notional interest on sales tax amount initially retained under the deferment scheme, should be considered as additional consideration and be added to the assessable value for the purpose of payment of excise duty. It is pertinent to note that two circulars (one relating to the pre- amendment period and to the other post amendment period) have addressed the above issue clarifying that neither the deferred amount of sales tax nor the interest thereon will be included in the value for payment of excise duty. However, in view of the fact that yet again the courts have applied a benevolent circular in a restricted sense and held that circulars are not binding on the Courts, there is a doubt as to whether or not the Courts will take cognizance of such circulars in future as well.

Withdrawal of incentive

Extending the discussion further, it is worth noting that a similar view may also be taken in respect of cases where sales tax incentives which were earlier extended, are later withdrawn due to non-fulfillment of conditions. This could be a double blow for the manufacturer who may have to contest the dispute of denial of sales tax benefit as well as a fresh dispute under excise law regarding exclusion of sales tax amount for the purpose determining the value of excisable goods.

Taxes other than sales tax

Further, the said decision also poses a threat to all cases of taxes other than sales tax, wherein the same is not credited to the government account but collected from the customers by way of any scheme extended by the government.

Non-applicability on other modes of valuation

It is also relevant to note that the said decision shall not apply to the goods which are subject to valuation under Central Excise law based on retail sale price or tariff value where there is no question of specific deduction of sales tax paid or payable. This is for the reason that although the abatement rates and retail sale price do take into account the taxes paid on the goods, there is no provision for specific inclusion or exclusion.

Future course of action

In view of the said decision of the Apex Court, the Department is obviously bound to raise demands in all cases where there is retention of tax or a deferment of sales tax or any other tax due to any reason whatsoever. Recourse now available is limited to a few options such as amendment of the definition of the term transaction value or review of the said decision.

[ The authors are, respectively, Principal Associate and Senior Associate, Tax Practice, Lakshmikumaran & Sridharan, New Delhi ]
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