Circular No.983/7/2014-CX F.No.354/35/2011-TRU Government of India Ministry of Finance Department of Revenue Tax Research Unit ***** New Delhi, the 10 th July, 2014 To, Chief Commissioners of Central Excise (All), Chief Commissioners of Central Excise and Customs ( All), Director General, Directorate General of Central Ex cise Intelligence, Commissioners of Central Excise (All), Commissioners of Central Excise and Customs (All). Madam/Sir, Subject: Valuation of fertilizers for the purpose o f levy of excise duty – inclusion of subsidy component in the assessable value – Clarification – Regarding. In the Budget 2011-12, excise duty of 1% was impose d on chemical fertilizers falling under Chapter 31 of the Central Excise Tariff such as Urea, Di-ammonium Phosphate (DAP), Ammonium Sulphate, Single Super Phosphate (SSP), et c. and various grades of complex fertilizers. 2. Consequent upon the levy of excise duty @ 1% (wi thout CENVAT facility) on chemical fertilizers in the Budget 2011-12, the Department o f Revenue had clarified to the Department of Fertilizers that in the case of price-controlled fe rtilizers which are sold to distributors/wholesale dealers at MRP fixed by the Government at the time of their clearance from the factory the excise duty of 1% would be chargeable on the MRP an d not on the total cost of production. In the case of fertilizers not subject to price-contro l, the excise duty would be chargeable on their wholesale price representing the transaction value at the factory gate. 3. Trade and Industry Associations have represented that inspite of the clarification issued by the Department of Revenue to the Department of F ertilizers, the field formations have issued show cause notices to the fertilizer companies seek ing to levy excise duty on the subsidy component of price-controlled fertilizers in the li ght of the judgment of the Supreme Court in the case of CCE, Mumbai v/s/ M/s Fiat India Pvt. Limite d [2012-TIOL-58-SC-CX]. 4. The matter has been examined in the light of the facts in the case of M/s Fiat India (P) Ltd. vis-à-vis the facts in the case of fertilizers . The facts in the case of M/s Fiat India (P) Ltd were that the company had declared an assessable va lue for Uno model cars at a price which was substantially lower than the cost of manufacture, a nd the company continued to sell the cars at a loss making price for nearly five years. The compan y admitted that the purpose of doing so was to penetrate the market and to compete with the oth er manufacturers of similar cars. It was under these circumstances that the Hon’ble Supreme Court held that such sales could not be regarded as sales in the ordinary course of sale or trade, n or could the declared value be accepted as the normal price for sale of cars. As the main reason f or selling cars at a lower price than the manufacturing cost and profit was to penetrate the market, the apex court held that this would constitute extra-commercial consideration and not t he sole consideration. Since the price was not the sole consideration for sale of cars, the Court held that the Department was justified in invoking the provisions of Valuation Rules for the purpose of levy of excise duty. 4.1 In the case of fertilizers, the manufacturers a re mandated to sell the goods at the prices notified by the Government. In the case of urea, th e cost of production varies greatly from manufacturer to manufacturer depending upon the use of feedstock, technology and overheads. The Government reimburses the differential between the cost of production and the notified price to the manufacturers in the form of subsidy. As pe r the current policy, MRP of urea is controlled and fixed by the Government. In P&K fertilizer, how ever, the MRP is deregulated and companies are free to fix the MRP. They do so after taking into account the subsidy component which is fixed on the basis of nutrient content (i. e per kg subsidy is fixed by the Government for phosphate, potash, nitrogen and sulphur). Both in t he case of urea and P&K, fertilizer subsidy is given by the Government to benefit the farmers, as subsidy would reduce the MRP paid by farmers. 4.2 The fertilizer policy of the Government of Indi a is aimed at providing fertilizers to farmers at affordable prices for sustained agricult ural growth and to promote balanced nutrient application. The subsidy is not linked to the buyer and it cannot be said that the subsidy given by the Government to the manufacturer

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