To cut a long story short - excise duty not leviable on subsidy given to Fertilizers

Introduction:-

Providing the food grains at affordable prices to the public at large is the key policy of any government. Effective production of food grains is not possible without the fertilizers. A fertilizer is a chemical or natural substance added to soil or land to increase its fertility. Thus, to improve the quality as well as the quantity of agricultural produce, fertilizers are the key ingredients. Due to this, government has declared various policies for subsidizing the prices of fertilizers so that they are available to the farmers at affordable prices. However, these subsidies have become the point of dispute between the fertilizer manufacturers and the Central Excise department since announcement of budget 2011-12 when the excise duty was levied on the chemical fertilizers. Now after a wait of two years, Board has come up with a clarification on the issue. This article is about the history behind the dispute and clarification issued in this regard.

Backdrop:-

Excise duty levy @1% (without availing CENVAT benefit) was levied in the Budget 2011-12 [w.e.f. 1st March, 2011] on chemical fertilizers falling under Chapter 31 of the Central Excise Tariff such as Urea, Di-ammonium Phosphate (DAP), Ammonium Sulphate, Single Super Phosphate (SSP), etc. and various grades of complex fertilizers. The Department of Revenue had clarified to the Department of Fertilizers that:

a. In the case of price-controlled fertilizers which are sold to distributors/wholesale dealers at MRP fixed by the Government at the time of their clearance from the factory the excise duty of 1% would be chargeable on the MRP and not on the total cost of production and

b. In the case of fertilizers not subject to price-control, the excise duty would be chargeable on their wholesale price representing the transaction value at the factory gate.

It is worth noting here that the government fixes MRP of certain fertilizers falling in the category of price controlled fertilizers which are to be sold at the notified MRP only irrespective of the actual cost of production which is on much higher side. This is being done to provide the fertilizers at affordable prices to the farmers. In order to meet the gap of cost of production and MRP, the government allows the reimbursement which is known as subsidy. As per the current policy, MRP of urea is controlled and fixed by the Government. In P&K fertilizer, however, the MRP is deregulated and companies are free to fix the MRP. They do so after taking into account the subsidy component which is fixed on the basis of nutrient content (i.e per kg subsidy is fixed by the Government for phosphate, potash, nitrogen and sulphur). Both in the case of urea and P&K, fertilizer subsidy is given by the Government to benefit the farmers, as subsidy would reduce the selling price which is paid by farmers.  Moreover, the share of subsidy in delivered cost of urea would increase from 69% in 2012-13 to 81% in 2014-15. The share of maximum retail price (MRP), on the hand, would decline to 19% from 31%.

The issue:-

The fertilizer manufacturers were paying the excise duty on price controlled fertilizers by excluding the value of subsidy, i.e. on the MRP notified by the Government. The following illustration shows the manner of calculation of excise duty by the fertilizer manufacturers:-

The excise duty paid by the fertilizer manufacturers was calculated on the MRP declared by the Government. This was also at par with the above referred clarification issued by Department of Revenue to the Department of Fertilizers that in case of price controlled fertilizers, the excise duty will be levied on the MRP only irrespective of the fact that the cost of production is much higher than MRP. However, despite this fact, the Excise Department had started issuing the show cause notices to the fertilizer manufacturers proposing the levy of excise duty on the subsidy component. According to the department the value of subsidy was also includible in the assessable value of the fertilizers. These show cause notices were backed by the Supreme Court decision in the case of CCE, Mumbai v/s/ M/s Fiat India Pvt. Limited [2012-TIOL-58-SC-CX].

Supreme Court judgment in the case of M/s Fiat India Pvt. Ltd.:-

The facts in the case of M/s Fiat India (P) Ltd were that the company had declared assessable value for Uno model cars at a price which was substantially lower than the cost of manufacture, and the company continued to sell the cars at a loss making price for nearly five years. The company admitted that the purpose of doing so was to penetrate the market and to compete with the other manufacturers of similar cars. It was under these circumstances that the Hon’ble Supreme Court held that such sales could not be regarded as sales in the ordinary course of sale or trade, nor could the declared value be accepted as the normal price for sale of cars. As the main reason for selling cars at a lower price than the manufacturing cost and profit was to penetrate the market, the apex court held that this would constitute extra-commercial consideration and not the sole consideration. Since the price was not the sole consideration for sale of cars, the Court held that the Department was justified in invoking the provisions of Valuation Rules for the purpose of levy of excise duty.

By relying on this judgment, the departmental officials started to issue the show cause notices to the fertilizer manufacturers alleging that in view of the Supreme Court judgment, the excise duty paid on the MRP declared by them is not correct. It was alleged that the MRP is not the correct assessable value and subsidy is also includible in the same in view of above cited decision of Supreme Court. This penetrated the fertilizer industry since the amount of subsidy was much higher and levying the excise duty on the same would result into increased financial burden on the farmers since the incidence of excise duty is always passed on to the buyer. This was not the intention of the government. Resultantly, representations were made to the Board to clarify the matter. Now, the Board has come up with a clarification given vide circular no. 983/7/2014-CX dated 10-07-2014.

Circular no. 983/7/2014-CX dt. 10.7.2014:-

In this circular, it has been clarified by the Board that the subsidy is not includible in the assessable value of the fertilizers and the decision of M/s Fiat India Pvt. Ltd. is not applicable in this case. It has been clarified that the main aim of fertilizer policy of the Government of India is to provide fertilizers to farmers at affordable prices. The subsidy is not linked to the buyer and it cannot be said that the subsidy given by the Government to the manufacturer is part of the consideration flowing from the buyer to the manufacturer. Likewise, it cannot be said that fertilizer manufacturers have under-declared the value with a view to penetrating the market or competing with the other manufacturers of similar fertilizers as it was being done in the case of M/s Fiat India Pvt. Ltd. It has been clarified that in the Fiat India case, it was a conscious decision on the part of the manufacturer to sell the goods below the cost of production to penetrate the market and to compete with the other manufacturers of similar cars. However, this is not the case of fertilizer manufacturers. It has been clarified that the manufacturers of fertilizers do not gain any extra commercial advantage vis-a-vis other manufacturers because of the subsidy received from the Government. The subsidy paid by the Government to the manufacturer is in larger public interest and not for benefitting any individual manufacturer-seller and it is also not paid on behalf of any individual buyer or entity. In view of the above, it can be concluded that the subsidy component is not an additional consideration and hence, the MRP at which the fertilizer is sold to buyers by the manufacturers is the sole consideration for its sale. Even though the subsidy component has money value, it cannot be considered as an additional extra-commercial consideration flowing from the buyer to the seller.

While winding:-

The clarification issued by Board eventhough somewhat late, is a welcome step. It is one of the rarest circular which has analyzed the situation in a proper manner and has also given an appropriate clarification on the issue. This will cool down the burning issue of valuation of excise duty on the fertilizers, resulting into relief to the fertilizer industry. 

An article by:-

CA. Pradeep Jain

CA. Preeti Parihar

Hushen Ganodwala