MARCH 25, 2019

By Puneet Bansal, Managing Partner, M/s NITYA Tax Associates

WITH maturing commercial understanding between buyers and sellers, commercial contracts often undergo a retrospective price revision due to variety of reasons. The reasons range from change in raw material prices, unforeseen cost escalations etc. In such contracts, the factum of price revision is known at the time of entering into the contract, but the quantum of such revision gets known only in future. Such retrospective price changes raise important questions of taxability in the first place and related aspects such as interest etc.

In the pre-GST era, excise duty was leviable on 'transaction value' from July 1, 2000. The 'transaction value' was to be determined at the time and place of removal of manufactured goods. 'Transaction value' was defined as the price actually paid or payable, whether at the time of sale or any other time. Such a broad-based definition of 'transaction value' ensured that excise duty became applicable on price increase even when the price was increased post occurrence of original transaction.

While price increase was subject to excise duty, the controversy arose whether interest was payable on excise duty paid on price increase or not. The issue assumed significant importance considering principles of fairness and equity that the taxpayers were paying excise duty immediately when price increase was given to them.

Situation prior to GST:

Section 11AA (earlier Section 11AB) of the Central Excise Act, 1944 ('CEA, 1944') was the charging provision for interest on excise duty not levied or not paid or short-levied or short-paid or erroneously refunded. This provision provided that interest was payable from the first day of the month succeeding the month in which excise duty ought to have been paid till the date of payment.

In multiple cases¹, the Supreme Court held that the grant of price increase retrospectively indicates initial clearance of goods at lower value and excise duty was short paid. Hence, interest is payable on excise duty paid on supplementary invoices. To the contrary, in multiple cases², the Supreme Court held that retrospective price changes (increase or decrease) do not trigger any excise duty liability or refund.

In the case of Steel Authority of India v. CCE- 2015-TIOL-292-SC-CX, the Court held that the expression 'ought to have been paid' in the interest provision, needs to be interpreted in the light of valuation provisions covering price 'actually paid or payable (i.e. agreed to be paid)'. Hence, the expression 'ought to have been paid' would mean that point of time when price is agreed upon by seller and buyer. Therefore, goods cannot be said to be under-valued at the point of removal of goods as the seller is not certain to get price increase at that point of time. The right to receive increased price crystalizes at a future point of time and that too after the buyer agrees to the same. Thus, the duty cannot be said to be short-paid and the question of payment of interest does not arise. Considering the conflicting judgments on the issue, the Court - 2015-TIOL-292-SC-CX referred the matter to the Larger Bench of Supreme Court and which is pending decision as on date.

In the case of Steel Authority of India (supra), the Supreme Court has discussed correct legal position for non-applicability of interest on excise duty on supplementary invoices. Another argument to support this contention is that applicability of interest on supplementary invoices is at odds with the legal principle 'lex non cogit ad impossibilia' (In simple words, the law cannot compel a person to perform an impossible act). In the present context, this legal maxim is squarely applicable since it is not possible for a taxpayer to know at the time of removal of goods itself as to whether it will get any price increase in future or not. Consequently, if the taxpayer pays excise duty immediately on getting the price increase, the same should be a sufficient discharge of its statutory obligation and it should not trigger any interest liability.

Situation post GST:

GST laws have brought a sigh of relief for the taxpayers on this issue. In GST regime, there are distinct provisions for determination of value of supply as well as time of supply.

Under Section 15 of the Central Goods and Services Tax Act, 2017 ('CGST Act'), value of supply is the transaction value i.e. the price actually paid or payable for the supply. Thus, GST is payable on value of supply whether determined at the time when goods or services are supplied or later on.

Under GST regime, the trigger of interest liability is a function of 'time of supply' provisions which determine when tax is payable. Under Section 12 of the CGST Act, liability to pay tax on supply of goods arises on the date of issuance of tax invoice or the date of receipt of consideration, whichever is earlier. As per Explanation to Section 12, a supply shall be deemed to have been made only to the extent it is covered by the invoice or the payment. In case of price increase, supplementary invoice is issued at a future point of time when the buyer agrees for the same. Thus, liability to pay GST on price increase shall arise at the time of issuance of supplementary invoice only. Such clear provisions were absent in the pre-GST regime.

For example, if A sells goods to B and issues a tax invoice on January 1, 2019 for Rs. 100, GST shall be payable only on Rs. 100 in the month of January 2019 as the liability to pay GST arises to the extent of invoice amount (Explanation to Section 12 of the CGST Act). If, on March 1, 2019, B agrees to the increased price and A issues a supplementary invoice of Rs. 10, GST on such increased price shall become payable for the month of March 2019 only.

Conclusion:

In conclusion, interest on supplementary invoice was an issue mired with controversies in pre-GST regime and the Larger Bench of Supreme Court is yet to settle the same. In GST regime, the Government has made clearer laws insofar as this issue is concerned and interest is not payable on GST paid on supplementary invoices.

(The views expressed are strictly personal. Arun Futela, Associate provided inputs for the article.)

¹ CCE v. SKF India Limited - 2009-TIOL-82-SC-CX CCE v. International Auto Limited - 2010-TIOL-05-SC-CX

² Steel Authority of India v. CCE - 2015-TIOL-292-SC-CX CCE v. Hitkari Fibres Limited - 2015-TIOL-248-SC-CX