Honda asked to pay Rs 164 crore by CBEC

Honda Motor Company's endeavour to garner market share in India by offering discounts on models such as the Brio and Jazz has run afoul of tax authorities. The Central Board of Excise & Customs(CBEC) has served a show-cause notice on the Japanese auto major demanding that it pay Rs 164 crore more as excise duty, on the grounds that the levy should have been paid on the cost of production of the cars, and not on their discounted sales price.

This follows the Supreme Court judgement in the Fiat case last year, where the apex court ruled that if a company sells products at a loss for a long period because of commercial considerations or under competitive pressures, then price is not the sole consideration and excise duty should be paid on manufacturing cost plus a 'reasonable' profit margin. Excise duty is an inland tax on the sale of goods produced domestically. It is paid by the manufacturer, but often passed on to the customer.

Carmakers have resorted to price cuts and discounts to entice customers and increase market share amid tough conditions. Car sales grew just 2.2% in 2011-12 and declined for the first time in a decade in 2012-13 as customers put off purchases in a slowing economy.

It's been a difficult few years for Honda in India because of the shift in demand from petrol to diesel cars as well as the disruption in supply of critical parts due to the 2011 tsunami in Japan, which delayed the launch of Brio and reduced the availability of Jazz. For a long time, Honda did not have a diesel car in its stable, though it has bridged the gap with the recent introduction of Amaze.

The company's market share in the country slipped to 2.07% in 2011-12 from 4.05% in 2007-08.

Honda was able to regain lost ground last year and ended 2012-13 with a 2.73% market share on the back of brisk sales of Brio. While its financial results for 2012-13 are not known yet, Honda's India unit registered a loss of Rs 604.50 crore as revenues dipped 8.5% from the year ago.

In 2011, Honda had, for some time, offered discounts of Rs 1.60-1.75 lakh on the Jazz in a bid to woo customers. Later, it cut prices of other models such as the Brio, which accounted for 43% of its total sales in 2012-13. These discounts have now caught the eye of excise authorities.

A Honda spokeswoman said the company was working closely with industry bodies that were liaising with the authorities concerned on the tax issue. "As you know, this is an industry issue," she said.

Carmakers have lobbied hard with the finance ministry to not raise duty demands on companies that have cut prices. The CII had, during its post-budget interaction, asked Finance Minister P Chidambaram to take into consideration the reasons for manufacturers selling goods at less than the cost of production. The excise department has set up a panel to look into the implications of the Fiat judgement. The panel has not submitted its recommendations yet.

The Honda excise notice is the latest in a growing list of tax demands that have been slapped by the government on multinationals in recent times. The government has issued notices to Shell and Vodafone for allegedly undervaluing shares while transferring them to associate companies. Nokia and Cadbury, meanwhile, have been charged with evading taxes. A tax demand has also been issued to Microsoft.

Also read: Honda Amaze : Special Coverage