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Valuation of Excisable Goods for the Purpose of Charging Excise Duty

Written by: Aashish Srivastava - 4th Year, National Law University, Jodhpur
Contract Law
Legal Service
  • Valuation of excisable goods is relevant in the context of goods, which are chargeable to ad valorem levies. The relevant provisions are:
    # Valuation under section 4 of the Central Excise Act, 1944 based on transaction value

    # Valuation based on Retail Sale Price (RSP) under section 4A of the Central Excise Act, 1944, which is applicable to excisable goods that are notified by the Central Govt. However, this does not apply tariff values fixed under section 3(2) of the Central Excise Act, 1944

    # Value under Section 4 of the Central Excise Act, 1944. The new Section 4 of Central Excise Act as substituted by section 94 of the Finance Act, 2000 (No. 10/2000) came into force from 1st day of July, 2000.

    For applicability of transaction value in a given case, for assessment purposes, the following requirements should be satisfied:
    1. The goods are sold by an assessee for delivery at the time and place of removal. The term ?place of removal? includes factory, warehouse, depot or premises of a consignment agent
    2. The assessee and the buyer of the goods is not related
    3. The price is the sole consideration for the sale. If any one of the above requirements is not satisfied, then the transaction value shall not be the assessable value and value in such case has to be arrived at under the valuation rules.

    # Transaction value includes receipts/recoveries or charges incurred or expenses provided for in connection with the manufacturing, marketing, selling of the excisable goods to be part of the price payable for the goods sold.

    It would be seen from the definition of transaction value that any amount which is paid or payable by the buyer to or on behalf of the assessee, on account of the factum or sale of goods, then such amount cannot be claimed to be not part of the transaction value. In other words, if, for example, an assessee recovers advertising charges or publicity charges from his buyers, either at the time of sale of goods or even subsequently, the assessee cannot claim that such charges are not includable in the transaction value. The law recognizes such payment to be part of the transaction value that is assessable value for those particular transactions.

    The term place of removal has been recently redefined to include depot, premises of consignment agent etc. If, therefore, the transaction value is with reference to delivery at the time and place or removal, such transaction value will be the assessable value.

    In those cases where any of the three requirements mentioned in para above is missing, the assessable value shall be determined on the basis of the valuation rules.

    The valuation rules are notified under section 4(1)(b) by notification No. 45/2000-CE (NT), dated 30.6.2000.

    Salient features of the new valuation rules

    If the assessee and the buyer are not related persons and the price is also not the sole consideration for sale but only the delivery of goods is made by the assessee at a place other than the factory/warehouse, then the assessable value shall be the transaction value without the addition of the cost of transportation from the factory/warehouse upto the place of delivery. However, exclusion of cost of transportation is allowed only if the assessee has shown them separately in the invoice and the exclusion is permissible only for the actual cost so charged from his buyers. If the assessee has a system of pricing and sale at uniform prices inclusive of equated freight for delivery at factory gate or elsewhere, no deductions for freight element will be permissible.

    If the goods are not sold at the factory gate or at the warehouse but they are transferred by the assessee to his depots or consignment agents or any other place for sale, the assessable value in such case for the goods cleared form factory/warehouse shall be the normal transaction value of such goods at the depot, etc. at or about the same time on which the goods as being valued are removed from the factory or warehouse. It may be pertinent to take note of the definition of normal transaction value as given in the valuation rules.

    As a measure of simplification, it has been decided to value goods which are captively consumed on cost construction method only as there have been disputes in adopting values of comparable goods. The assessable value of captively consumed goods will be taken at 115% of the cost of manufacture of goods even if identical or comparable goods are manufactured and sold by the same assessee. The concept of deemed profit for notional purposes has thus been done away with and a margin of 15% by way of profit etc, is prescribed in the rule itself for ease of assessment of goods used for captive consumption.

    Thus, the formula for determining value is simple. If the cost of production based upon general principles of costing of a commodity is Rs. 10,000 per unit, the assessable value of the goods shall be Rs. 11,500 per unit.In the case where price is not the sole consideration for the sale, but the other requirements of clause (a) of sub-section (1) of section 4 of the Central Excise Act are satisfied, the value shall be determined in accordance with the provisions of rule 6 of the valuation rules. This provides for adding, to the transaction value the money value of any additional consideration flowing directly or indirectly from the buyer to the assessee. Such additional consideration would include the money value of goods and services provided free or at reduced cost by or on behalf of the buyer to the assessee. An Explanation has been added in the new rule only to remove any doubts with respect to its scope.

    Valuation of Goods For The Purpose of Excise Duty

    1. Where the rates of duty are on ad valorem basis, assessable value of the final Goods are unfit for consumption or for marketing has to be found out before the amount of duty leviable thereon is determined and paid.
    2. Though the value of goods is required to be declared in assessee's invoice, the invoice value is not necessarily the acceptable value under section 4.
    3. The most authoritative exposition of section 4 is contained in the case of Union of India vs. Bombay Tyres International Ltd. . In this case, the Hon'ble Supreme Court had drawn the line at the factory gate up to which all costs incurred to make the Goods complete and marketable had to be included in the price. Costs incurred beyond the factory gate were not includable. Warranty service and advertisement costs are, however an exception to this rule because they make the goods marketable at the factory gate.

    1. If the goods are sold at different wholesale prices to different classes of buyers, each such wholesale price is deemed to be an assessable value. Thus excisable goods can have more than one assessable value, with regard to class of buyer.
    2. If the goods are sold at different wholesale prices at different places of removal, each such wholesale price is deemed to be an assessable value.
    3. If the goods are sold in the course of wholesale trade for delivery at the time and place of removal at a price fixed under any law for the time being in force, or at a price being maximum, fixed under any such law, then such price or maximum price so fixed shall be deemed to be the normal price; viz., assessable value.
    4. If the assessee arranges to sale goods in the course of wholesale trade only through a related person, the price at which goods are sold by such related person is taken as assessable value.

    Valuation of goods sold at buyer's destination: In the case of M/s. Escorts JCB Limited , the Tribunal, while interpreting the scope of the term place of removal under section 4(4)(b)(iii) of the Central Excise Act, 1944, held that where the property in goods passes from the seller to the buyer only after the goods reached the destination of the buyers, the goods are assessable to duty with reference to value at buyer's destination since the seller continues to be the owner of the goods during transit period.

    Non-adoption of price fixed by the Government:

     In the case of M/s. Soyabean & Vanaspathi Industries, the Tribunal while interpreting the provisions of section 4(1)(a)(ii) held that the maximum price fixed under the law shall be deemed to be the normal price and in such a case the argument that the goods were actually sold at a price lower than the controlled price will have no relevance in view of the clear provisions of the Law.

    Valuation of goods sold through depots:

     The Tribunal in the case of Colgate Palmolive India Limited held that where there is no ex-factory sale and entire production is transferred to depots, assessable value is to be determined on the basis of depot sale price.

    Inadmissible deduction allowed from assessable value:

    Freight charges/transportation charges- The Supreme Court in the case of M/s. Bombay Tyre International , held that expenses incurred on account of the several factors which have contributed to the value of the product upto the date of sale, which apparently would be the date of delivery, are liable to be included in the assessable value of the product.

    Discount- As per section 4(4)(d)(ii) of the Central Excise Act, 1944, value in relation to any excisable goods does not include trade discount allowed in accordance with the normal practice of the wholesale trade provided that such discount is not refundable on any account whatsoever. Additional consideration not included in the assessable value: As per the provisions of section 4(1)(a) of the Central Excise Act, 1944, read with rule 5 of the Central Excise (Valuation) Rules, 1975, where the price charged for the excisable goods sold in wholesale trade is not the sole consideration for the sale, the assessable value of such goods shall be determined based on the aggregate of the price and money value of additional consideration flowing directly or indirectly from the buyer to the assessee. In the case of Bombay Tyre International , the Supreme Court held that the value of the article for the purpose of levy of excise duty shall include all costs and expenses which have given the article its marketability.

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