Boon to FMCG Segment

[Smitesh Desai]

Under excise law, assessable value would generally mean the apparent sales price applicable to an arm’s length transaction for delivery against payment. This phenomenon is also known as the transaction value. Excise duty is paid with reference to this value. This valuation method is prescribed under section 4. However, under section 4A, another method of valuation, namely MRP based valuation, is prevalent among FMCG segment. In such cases:

1. The government notifies products which should bear the MRP tag,
2. Manufacturers of such products should pay excise duty with reference to such tag price,
3. However, the government also announces (simultaneously) a rate of abatement, which will lead to reduction in assessable value and the applicable excise duty amount.

Cenvat Credit Rules, 2004 (a beneficial mechanism) provides that cenvat credit is available in respect of Input services availed, When used for:

1. Manufacture of final products,
2. Clearance of final products, upto the Place of Removal (area of concern), and
3. Providing output services.

The definition of Place of Removal, as stated in section 4, reads as follows:

“place of removal” means -

1. a factory or any other place or premises of production or manufacture of the excisable goods;
2. a warehouse or any other place or premises wherein the excisable goods have been permitted to be deposited without payment of duty;
3. a depot, premises of a consignment agent or any other place or premises from where the excisable goods are to be sold after their clearance from the factory;

from where such goods are removed;

According to the above definition, places beyond the factory gate are also included in the definition of Place of Removal. This phrase is important because cenvat credit is available upto this stage. This definition appears in section 4. But, section 4A does not contain this definition. Hence with reference to MRP based FMCG products, cenvat credit is available only for input services used upto the factory gate. This is the stance adopted in Ultratech Cement Limited v. CCE 2014 (3) TMI 159 - CESTAT NEW DELHI.

The history of section is worth examining, in order to express a holistic view on the subject.

1. Section 4A was introduced in 1997, for FMCG products. No statement was made by the government at that time.
2. In the 2002-03 budget speech, the honourable Finance Minister Yashwant Sinha stated: .....For Over the years, the Maximum Retail Price (MRP) based excise levy has proved to be an effective measure of simplification by reducing valuation disputes.
3. In 2006, CBEC issued a circular dated 2^nd February 2006, which stated:

......In view of the above, the undersigned is directed to state that, in case of depot sales of goods, the credit of service tax paid on the transportation of goods up to such depot would be eligible, irrespective of the fact, whether the goods were chargeable to excise duty at specific rates or ad valorem rates on the basis of valuation under section 4 or of the Central Excise Act.

4. In 2010, in LG Electronics case, the honourable Tribunal stated:

Thus, in this Circular, the Board has clarified that availment of Cenvat credit and valuation for payment of duty are two independent issues and that Cenvat credit of service tax on GTA service availed for transportation of the goods up to the place of removal would be available even if the duty on the finished goods has been and at specific rates or on the valuation with reference to retail sale price under Section 4A.

5. In the 2013-14 budget speech, the honourable Finance Minister P Chidabaram stated: To reduce valuation disputes, I propose to provide for MRP based assessment in respect of branded medicaments of Ayurveda, Unani, Siddha, Homeopathy and bio-chemic systems of medicine. There will be an abatement of 35 percent.
6. Until now, the government has always considered 4A as a dispute avoidance mechanism and simplification measure. Suddenly, the honourable Tribunal takes a U turn! Ultratech Cement Limited v. CCE 2014 (3) TMI 159 - CESTAT NEW DELHI.

The foresaid narration clearly establishes that “Place of Removal” as defined in section 4 (transaction value) also extends to section 4A (MRP based valuation) – yes, says industry; no, says bureaucracy. The recent amendment to Cenvat Credit Rules by addition of the following clause has put to rest this controversy. Here is the amendment:

The Cenvat Credit Rules, 2004

Rule 2

Clause (qa) inserted by Notification No. 21/2014-Central Excise (N.T.) wef 11/7/2014

“place of removal” means-

(i) a factory or any other place or premises of production or manufacture of the excisable goods;

(ii) a warehouse or any other place or premises wherein the excisable goods have been permitted to be deposited without payment of duty;

(iii) a depot, premises of a consignment agent or any other place or premises from where the excisable goods are to be sold after their clearance from the factory,

from where such goods are removed;

Wef 11/7/2014, by virtue of the definition of “place of removal” in the Cenvat Credit Rules, not just section 4 of the Central Excise Act, 1944, MRP based FMCG segment will be entitled to cenvat credit of input services without discrimination with transaction value products – upto the place of removal.