The Hindu Business Line : Parts not spared

Budget 2006 added to the Third Schedule of the Central Excise Act the 100th item (but is yet to be notified though passed in the Finance Act, 2006 — Section 66[b]). It covers parts, components and assemblies of automobiles falling under any heading of the Central Excise Tariff. There also a proposal to notify the Motor Vehicle parts under Section 4A of the Central Excise Act — Valuation based on Retail Selling Price (RSP) or MRP. Inserted effective May 14, 1997, it also fixed and notified the percentage of abatement from MRP to arrive the assessable value.

Serial No 100 of the Third Schedule has two-fold effect:

Deeming fiction of manufacture under Section 2(f); this Section of the Central Excise Act was amended to include Clause iii that created a legal fiction by giving a broad sweep to the term "manufacture".

Valuation based on MRP.

Unlike other industries, motor vehicle parts have a peculiar system of sourcing and distribution which can be broadly categorised under four heads:

OE components, used in the assembly of motor vehicle;

OE spare parts sold to and by the vehicle manufacturer;

Replacement parts sold by the parts manufacturers (not by the vehicle manufacturers); and

Exports.

Before July 1, 2000, (the date on which new Transaction Value provisions were incorporated under the Central Excise Act) the assessable value was the normal selling price. Motor Vehicle Parts had three different assessable values, when sold for OE, OE spares and replacement market, and each was statutorily recognised as a different class of buyer.

Having noticed the huge gap between the ultimate spare part price and the assessable value, presumably the Legislature thought it fit to increase the collection by listing motor vehicle parts under the Third Schedule and also simultaneously notifying them under Section 4A of the Act.

New calculation

For better appreciation, assume the basic price of a component for OE, OE spares and replacement market to be Rs 100, Rs 120 and Rs 180 respectively (net of taxes). Though the OE spare is purchased at Rs 120, and sold to the replacement trade at Rs 180, the manufacturer paid duty only on Rs 120. But post the changes made by the Finance Act, 2006, the billing price would be Rs 120 and the assessable value Rs 180 (less abatement) if the product bears the MRP label. On the other hand, if the OE manufacturer buys the part at Rs 120 without the MRP label and thereafter affixes one, this activity would amount to manufacture, warranting Excise Duty payment on a pure trading activity, in view of the fiction created by Section 2(f)(iii).

Under excise net

Vehicle manufacturers usually maintain a godown outside factory premises as a `Parts Division', not under the Excise control. But now this division would also come under the Excise net. Thus, each and every part has to be studied with reference to its packing, repacking, labelling, etc., to decide the question of manufacture and consequential MRP levy under Section 4A.

In view of the innumerable parts involved in a vehicle, there will be confusion in the implementation. The CBEC must call for meetings with the Society of Indian Automobile Manufacturers and the Automobile Component Manufacturers Association to clarify all the problems the units may encounter in the implementation of the new MRP levy.

(The author is a Chennai-based advocate.)

V. BALASUBRAMANIAN

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