excise investigation in auto sector - deloitte

Excise investigation in Auto SectorInsights and way forwardFebruary 2019

2Excise investigation in Auto Sector©2019 Deloitte Touche Tohmatsu India LLP

Presenters

Subject matter experts

Yashodhan Parande

Saloni Roy

Muralidharan Ramaratnam


Key issue


Key issue

• Recently investigations have been initiated by the Director General of Goods & Service Tax Intelligence (‘DGGI’) against various components manufacturers alleging under valuation under Central Excise

• The issue is -

“whether the value of drawings/ specifications provided free of cost by vehicle manufacturer to component manufacturers should be added to the transaction value of the components for levy of excise duty”


Background


Transaction overview

Note* - Excise duty paid on value of moulds/ dies does not include value of drawings/ specifications

Parent company / foreign collaborator

(outside India)

Vehicle manufacturer (in India)

Component manufacturer

Vehicle manufacturerComponent

manufacturerVehicle

manufacturer

Agreement for sharing patents, design, knowhow, copyrights, drawings, specifications

• Manufactures moulds/dies on the basis of drawings/ specifications

• Sells moulds/ dies of the components after payment of excise duty*

Provide drawings/ specifications at RFQ stage

Send the moulds/dies back on FOC basis

Sells the components after payment of excise duty

Payment of royalty (Lumpsum and running royalty)

1 2

3

45


Allegations

Value of the drawings to be added in the cost of moulds/dies (Rule 6 of Excise Valuation Rules)

01

The intention of vehicle and component manufacturer is to suppress the value of moulds/ dies/ components causing short payment of excise duty

02

Extended period of limitation stands invoked as the component manufacturer deliberately declared the incorrect assessable value

03

Value of the drawings will be determined based on both running and lumpsum royalty paid to foreign collaborator by vehicle manufacturer

04


Legal provisions


Legal provisions

How to determine the assessable value?

Valuation

When price is the sole consideration and buyer &

seller are unrelated

Transaction value as per Section 4 (1)(a) of the Central Excise Act,

1944

Other cases

Central Excise Valuation (Determination of Price of Excisable Goods) Rules,

2000 (‘the Valuation Rules’)


Legal provisions

What is transaction value under central excise laws?

Tra

nsaction v

alu

e

Price actually paid or payable for the goods, when sold

Any amount that the buyer is liable to pay to, or on behalf of, the assessee, by reason of, or in connection with the sale, whether payable at the time of the sale or at any other time

Including, but not limited to, any amount charged for advertising, publicity, marketing, selling, storage, outward handling, servicing, warranty, commission or any other matter

Does not include the amount of duty of excise, sales tax and other taxes, if any, actually paid or actually payable on such goods


Legal provisions

When price is not the sole consideration – Valuation rules

*Only relevant for subject matter. For detailed rules, refer the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000

Transaction value

Value of tools,

dies, moulds,

drawings, blue

prints, technical

maps and charts

and similar items

used in the

production of such

goods*

Assessable value

for levy of excise

duty


Judicial precedents


Judicial precedents

Basis of defence

Revenue Neutrality

Extend period of limitation

Inclusions in assessable

value

Methodology of

computation of demand


Judicial ground – Inclusions in assessable value*

*Inclusion or otherwise of the drawing and design charges in the assessable value will depend on the facts of each case

Commissioner v. Mysore Kirloskar Ltd.

(Supreme Court of India)

Value of drawing and designing

charges to be added in the assessable

value however, nexus of

considerations with the negotiated

price of the assessable goods under

clearance need to be established

Commissioner of Central Excise,

Jamshedpur v. Tata Motors

(Tribunal - Kolkata)

Value of design and drawing is

includible in transaction value


Judicial ground – Methodology of computation of demand

Bachmaan Inds. v. Commissioner of Central Excise, Delhi

(Tribunal - Chandigarh)

Royalty paid by customers to their foreign collaborators for using their goodwill in

connection with the marketing and sale of products is not includible in the assessable

value


Judicial ground – Revenue neutrality

Demand is not sustainable on account of revenue neutrality

Commissioner of C. EX.,

Pune v. Coca-cola India

Pvt. Ltd. (Supreme Court)

Commissioner Vs Anglo

French (Supreme Court)

Commissioner v. Indeos

ABS Ltd. (High Court -

Gujarat)


Judicial ground – Extended period of limitation

Larsen & Toubro Ltd. v.

Commissioner of Central

Excise, Chennai (Tribunal

Chennai)

Commissioner v. Motherson

Sumi Systems Ltd.

(Supreme Court)

Commissioner of Central

Excise, Jamshedpur v. Tata

Motors (Tribunal - Kolkata)

• No evidence of suppression of facts with intention to evade duty• If appellant had paid duty, CENVAT credit would have been availed by principal

manufacturer• Extended period of limitation not invocable.


Key points for consideration


Key points for consideration*

*In deciding this case on merits, facts of the transaction will play a crucial role

Prevalent trade practiceIs your product proprietary

or standard?

Is royalty paid by vehicle manufacturer to foreign collaborator the correct

base to determine the cost of the drawings?

Whether risk and reward of the design of components

remain with the components manufacturer?

Whether Department has raised any issue on such

transactions in past?

What is the scope of services under License/royalty agreements?

Does the component manufacturer get only broad specifications or

detailed drawings?


Way forward


Way forward

Review of contracts entered into between component manufacturer and vehicle manufacturer

Ascertain the facts of each case to find how critical is drawing with production process

Representations before the appropriate forum

Review methodology of computation of demand

Relook at the methodology in GST regime

Preparation of detailed replies with focus on facts

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excise investigation in auto sector - deloitte

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