Valuation of Free Samples of MRP Products under Central Excise

[Kameshwar Tiwari]

The CBEC vide it’s Circular No. 915/05/2010-CX dated 19.02.2010

Clarifies the issue on Clarification regarding valuation of free samples of the products

Covered under MRP based assessment

Attention of field formations is invited to Board’s circular No. 813/10/2005-CX dated 25.4.2005 issued from F.No. 6/39/2000- CX1 wherein it was clarified that in the case of free samples, the value should be determined under Rule 4 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000.

2. A larger bench of CESTAT in the case of Blue Cross Laboratories Vs CCE, Mumbai 2006 (8) TMI 220 - CESTAT, MUMBAI has also held that physician samples are to be assessed under rule 4 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000. Further, the aforesaid circular of 2005 has also been upheld by the Hon’ble High Court of Mumbai in the case of Indian Drugs Manufacturer’s Association Vs. UOI, reported at 2006 (9) TMI 94 - HIGH COURT, BOMBAY

3. Subsequently, CESTAT in its majority decision in the case of M/s Cadila Pharmaceuticals Ltd. Vs Commissioner of Central Excise Ahmedabad II, reported at 2008 (9) TMI 98 - CESTAT AHEMDABAD , has held that even after the pharmaceutical products have been notified for MRP assessment under Section 4A of the Central Excise Act, the assessment of free physician samples of these products , is appropriately required to be done under Rule 4 of the valuation rules by taking into consideration the deemed value under Section 4A(1) notwithstanding the non availability of normal price under Section 4(1)(a) of the Act, ibid. Accordingly, the value for payment of excise duty for physician sample would be the value determined under Section 4A for the similar goods (subject to adjustment for size & pack etc.)

4. The aforesaid decision of CESTAT would, mutatis mutandis, be applicable in respect of free samples of other products which are under MRP assessment. Accordingly, it is clarified that valuation of Samples which are distributed free as part of marketing strategy, or as gifts or donations, shall be determined, in terms of Board’s circular No. 813/10/2005-CX dated 25.4.2005 and the aforesaid decisions of CESTAT, as explained in foregoing paras 2 & 3, whether the final products are assessed under MRP based assessment or otherwise.

But the issue is still unresolved that in which manner the valuation of Free samples of Products covered under MRP( other than pharma products )  should be done. CBEC clarifies this issue in the above circular in para 4 that valuation of Samples which are distributed free as part of marketing strategy, or as gifts or donations, shall be determined, in terms of Board’s circular No. 813/10/2005-CX dated 25.4.2005 and the aforesaid decisions of CESTAT, as explained in foregoing paras 2 & 3, whether the final products are assessed under MRP based assessment or otherwise.

Board’s circular No. 813/10/2005-CX dated 25.4.2005 also clarify that in case of free samples the value should be determined under Rule 4 of Central Excise Valuation (Determination of Price of Excisable Goods) Rules 2000.

Rule 4 . The value of excisable goods shall be based on the value of such goods sold by the assessee for delivery at any other time nearest to the time of the removal of goods under assessment, subject, if necessary , to such adjustment on account of the difference in the dates of delivery of such goods and of the excisable goods under assessment, as many    

It is also clear from  CBEC’s  Manual 2010-11 vide its supplementary instruction on page No. 6.33  it is clear that Since the goods are not sold section 4(1) (a) will not apply and recourse will have to taken to the Valuation Rules. No specific rule covers such a contingency. Except Rule 8 all the other rules cover contengicies where sale is involved in some form or the other. Therefore, the residuary Rule 11 will have to be adopted along with the spirit of rule 8. In other words, the assessable value would be 110 percent of the cost of production or manufacture of the Goods.  

As The Free samples are not sold and are not intent for retail sale the valuation of these samples should done under Rule 11 with the spirit of Rule 8. In other words when the goods are not intent for retail sale the valuation of free samples should be done under section 4.