MRP-based valuation does not apply to bulk industrial sales

Our company is based outside India. We recently set up a paint manufacturing unit in India and sell our products in the retail market. We understand that we are required to adopt MRP-based valuation for the payment of excise duty on our products. However, very often we get orders from industrial buyers, who buy our products in bulk. We were informed that the duty computation on MRP is not applicable in the case of industrial sales. Please advise.

MRP-based valuation for levy of excise duty is governed by Section 4A of the Central Excise Act, 1944. The primary requirement for attracting MRP-based valuation of goods is that the goods should be notified under Section 4A of the Excise Act and on which the retail sale price should be declared under the Standards of Weights & Measures Act (SWMA). The requirement to declare the retail price on goods is governed by the provisions of SWMA and the Standards of Weights & Measures (Packaged Commodities) Rules, 1977 (PCR) and is applicable on products intended for retail sale

Under the PCR, certain exemptions have been made. One is that 'any product specially packed for exclusive use of any industry as raw material shall or for the purpose of servicing any industry' would not be considered as product intended for retail sale.

Therefore, the sale of bulk products to any industrial consumer that is not intended for retail sale should be outside the purview of the PCR and, hence, should not attract MRP-based valuation.

Ours is a newly set up company constructing a manufacturing facility. We pay service tax to our vendors on various services in connection with the construction. Can we take credit for the service tax paid?

As per Cenvat Credit Rules, the primary condition for availing of credit is that the service for which the credit is sought should qualify as an 'input service'. The definition of input service includes services used by the manufacturer in relation to setting up, modernisation, renovation or repairs of a factory. Therefore, you may avail of Cenvat credit for the service tax paid on 'input services' used for setting up the factory.

However, we would like to highlight that in Circular No 98/1/2008-ST dated January 4, 2008, the CBEC has clarified that Cenvat credit of input services (such as 'commercial or industrial construction service' and 'works contract service') used in the construction of immovable property cannot be availed of. The reasoning given is that those services are in the nature of input services towards the creation of an immovable property, which is subject to neither central excise duty nor service tax. Though the circular was issued in the context of construction of an immovable property that is rented out, the authorities could extend this principle for restricting Cenvat credit of services used for construction of factories also.

In our view, the circular seeks to lay down a provision that is clearly contradictory to the law as enumerated in the credit rules. In the presence of a clear law on the subject matter, a contrary provision (by way of a circular) would clearly be inapplicable. However, the view expressed in the circular does create a dispute and may entail litigation.

We understand that service tax exemption has been provided to advance payment received prior to July 1, 2010 for rendering services that are taxable post-July 1, 2010, even if the service is rendered after that date. However, the clarification issued in this regard states that where payments are collected by agents prior to July 1, 2010 but not transferred to the service provider before July 1, 2010, the same would not be exempt from service tax. Is my understanding correct?

Your understanding is correct.

In our view, the clarification seeks to narrow the scope of the exemption notification. It is a settled principle of law that any payment received by the agent in his capacity as an agent of the principal would be considered to be a payment made to the principal even if the agent makes the payment to the principal later on. The service tax liability of the principal should arise when the payment is received by his agent.

As a corollary, the exemption on payments received by a principal should equally apply to payments received by the agent of the principal. Hence, advance payments received by an agent, but not remitted to the principal prior to July 1, 2010, should not attract service tax.

We would like to highlight that the above view could be litigative since the authorities would follow the instructions of the circular and try to collect service tax on all advance payments received by the agent, but not remitted the principal prior to July 1, 2010.

The replies do not constitute professional advice. Neither E&Y nor FE is liable for any action taken on the basis of these replies