2022 (8) TMI 279 - HC - VAT and Sales Tax

Valuation - includability or otherwise of the value of the free-of- cost components in the cost price of the product in the context of levy of Value Added Tax (VAT) - Whether the Department was right in equating sales tax to excise duty? - HELD THAT - Admittedly, learned counsel for the petitioner had not supplied the methodology of pricing except to furnish an illustration. Such illustration is inconclusive and inadequate for the purposes of arriving at the proper turnover and to substantiate its case that the pricing is based only upon the cost of the materials procured by the petitioner. Normally, the cost price of a product would take into account the purchase cost of inputs, direct and indirect costs of manufacture and the profit margin. Unless the petitioner supplies the break-up of the sale consideration, the officer would not be in a position to determine the pricing methodology and it is for the petitioner to satisfy the officer that the ultimate price fixed by it does not take into account the value of the free-of-cost components. While it is entitled to exclude the value of the components supplied free by Daimler, the facts in relation to pricing have to be placed before the officer to establish that the product has not been undervalued when compared with the market price of similar products. The impugned orders of assessment are set aside - Petition disposed off.

Summary

Issues:
Challenging assessments under Tamil Nadu Value Added Tax Act, 2006 for 2012-2013 to 2015-2016.

Analysis:
The petitioner, a contractor, entered into an agreement with Daimler for supplying axles and receiving components for manufacturing axles. The agreement included provisions for free-of-cost supply of components by Daimler to the petitioner. The dispute arose regarding the inclusion of the value of these free-of-cost components in the cost price for VAT levy.

The assessing authority proposed to include the value of free-of-cost components in the turnover, considering it as undervaluation of the product cost. The petitioner did not provide a detailed breakdown of the cost related to the free components, presenting only an illustrative valuation mechanism. The authority estimated the value at 50% and added it to the assessable value for VAT calculation.

The petitioner relied on a Supreme Court judgment regarding the inclusion of certain costs in the sale price for excise duty purposes. The court differentiated between excise duty and sales tax methodologies for consideration calculation. The government advocate cited a Full Bench decision related to VAT liability in works contracts involving the valuation of materials supplied by the government.

The court concluded that the issue concerned the methodology for determining the cost price of the product. It emphasized the need for the petitioner to provide a comprehensive pricing methodology breakdown to justify excluding the value of free components. The court set aside the assessment orders for reassessment based on proper documentation and directed the petitioner to appear before the respondent with necessary materials for assessment redo.

In summary, the court directed the petitioner to substantiate its pricing methodology to exclude the value of free components, ensuring proper valuation and assessment for VAT purposes. The case highlighted the importance of providing detailed cost breakdowns to support pricing decisions in tax assessments.