2009 (4) TMI 187 - AT - Central Excise

Valuation - Whether the notional interest accruable on the advances taken from the customers is to be added to the assessable value of the goods. - the interest is not part of the Transaction Value - there is no nexus between the advances taken and the prices charged there is no any evidence to suggest that the interest free advance has influenced the price and the price lower than the normal price has been charged by the respondents so revenue s appeal is dismissed - Yet, the explanation to the Rule 6 Central Excise (Valuation) Rules, 2000, confines itself to adding value of the materials supplied free by the buyer. It does not extend to including interest notionally saved by the manufacturer on such value. - Hence, it is clear that the Rule itself acknowledges the fact that the interest is not an additional consideration.

Summary

Issues Involved:
1. Whether the notional interest accruable on advances taken from customers should be added to the assessable value of goods.

Issue-Wise Detailed Analysis:

1. Notional Interest on Advances and Assessable Value:
The primary issue in this case is whether the notional interest accruable on advances taken from customers should be added to the assessable value of the goods manufactured by the respondents. The respondents manufacture tailor-made goods and take advance payments from customers as a security measure.

Revenue's Grounds for Appeal:
The Revenue's appeal is based on several grounds:
- Advances obviate the need for borrowings, resulting in pecuniary advantage to the respondents.
- Notional interest on advances is an additional consideration from the buyer to the respondents.
- Additional consideration is includible in the 'Transaction Value' without needing to establish a nexus between the advance and the price of the goods.
- Advances are taken from all customers, making price comparison and nexus examination impractical.
- Case laws prior to 1-7-2000 are not applicable post the introduction of the new valuation law.

Tribunal's Examination and Findings:
The Tribunal examined the position and found that the Revenue's suggestion that transaction value includes notional interest accruable on advances is incorrect. The definition of 'transaction value' does not support this claim. The interest is considered an additional consideration only if it lowers the price of the goods, as per Explanation 2 to Rule 6 of the Central Excise Valuation Rules, 2000.

Definition of Transaction Value:
The definition of 'transaction value' includes the price paid or payable for the goods and any amount the buyer is liable to pay to or on behalf of the assessee in connection with the sale. The notional interest does not fall under this definition as it is not an amount paid by the buyer to the respondents or on behalf of the respondents.

Legislative Intent and Financing Charges:
Initially, the definition of 'Transaction Value' in the Finance Bill, 2000 included amounts for financing, but these words were deleted, indicating that the legislature did not intend to include 'Financing Charges' in the assessable value. Therefore, notional interest on advances, even if considered as financing charges, is not includible in the transaction value.

Rule 6 of Central Excise Valuation Rules, 2000:
Rule 6 requires that any additional consideration should be added to the 'Transaction Value'. However, the explanation to Rule 6 confines itself to adding the value of materials supplied free by the buyer and does not extend to including interest notionally saved by the manufacturer.

Revenue's Consistent View:
The Revenue's circulars and trade notices have consistently clarified that the landed cost of materials supplied free to the manufacturer should be included in the assessable value, but not the interest on these materials.

Explanation 2 to Rule 6:
Inserted by notification 11/2003-C.E. (N.T.), dated 1-3-2003, Explanation 2 clarifies that notional interest on advances shall not be added to the value unless there is evidence that the advance influenced the price of the goods by lowering it or offering a special discount. The burden of proof lies on the Revenue.

Supreme Court and Tribunal Precedents:
The Hon'ble Supreme Court in CCE, Mumbai-III v. ISPL Industries Ltd. held that notional interest on advances cannot be added to the assessable value unless it is shown that the advance influenced the price. The Tribunal also dismissed similar appeals by the Revenue, relying on the Supreme Court judgment.

Misplaced Reliance on Uni Abex Alloy Products Ltd.:
The Revenue's reliance on the Tribunal decision in CCE, Mumbai-III v. Uni Abex Alloy Products Ltd. is misplaced as the respondents in that case admitted that the price was influenced by the interest on advances, which is not the case here.

Hero Honda Motors Ltd. Case:
The Tribunal's order in Hero Honda Motors Ltd. v. Commissioner, which held that deposits and interest thereon were not includible in the assessable value, remains effective unless set aside by the Supreme Court.

Conclusion:
The Tribunal held that the impugned order by the Commissioner (Appeals) is sustainable and dismissed the Revenue's appeal, finding it devoid of merits. The notional interest on advances is not to be added to the assessable value of the goods unless it is proven that the advance influenced the price.