Freebies with Goods will Now Come at a Cost

After-Sales Service Charges To Be Included In Cost Of Goods

THE freebies such as extended warranty and free maintenance and service thrown in with cars and consumer durables will now be included in the costs of goods and taxed appropriately, pushing their prices higher.
The apex indirect taxes body, the Central Board for Excise and Customs, has said after-sales service and pre-delivery inspection charges are to be included in the assessable value, the value on which excise duty is levied.
"This could push up cost of products if companies do not absorb it themselves, "said R Muralidharan, executive director, PwC, adding that the move unsettles the principles of taxation in excise duty and is bound to increase litigation. The move unsettles the transaction value principle-based excise duty regime prevalent in the country and is bound to be challenged in the apex court.
Mr Muralidharan said taking the logic forward, the excise department can then include even the expense of advertising carried out by a dealer on behalf of the manufacturer.
Dealers of most automobile and durable manufacturers offer many services or benefits to customers on behalf of the producers, the cost of which is usually included in the dealer margin. But the excise department says that these activities are manufacturer's prerogative and their costs should be added to his price on which excise duty ought to be paid.
The indirect taxes body had been deliberating the move for a while but had put it on hold due to pending cases involving Maruti Udyog in the Customs, Excise & Service Tax Appellate Tribunal (CESTAT). The tribunal recently decided the case in favour of the department and upheld that after-sales service and pre-delivery inspection should be included in the value of the car and excise duty be levied on it.
With the CESTAT backing, the apex indirect taxes body has asked its field formations to get on the issues, implying that manufacturers are bound to face heat on this count.
When contacted a Maruti spokesperson declined to comment saying that it would not be appropriate to comment as the matter is sub-judice.
Many companies offer extended warranty on their products at a fraction of cost than what the cost would be if priced at arms-length principle. These are usually offered through the dealers. Same is the case with free services. While some companies offer up to four free services, others do not offer even one.

Economic Times, New Delhi, 03-11-2010