Instructions on when notional interest on advances should be included in the assessable value. For such inclusion it has to be shown that the price charged has a nexus with the deposit - Central Excise - 404/37/98

Circular No. 404/37/98-CX dated 22/6/1998 Subject: Central Excise - Valuation - Liability of duty on notional interest on advance deposits taken by manufacturers The issue regarding inclusion of notional interest on advance deposits in the assessable value of excisable goods has been re- examined by the Board in view of several references received from the field formations and the trade seeking clarifications. 2. In this connection. Board reiterates the Law Ministry's opinion dated 28.9.84 as circulated under F.No.2/2/86-CX.I dated 20.10.86 holding that: It will be for the Department to establish that such additional consideration has a nexus with the sale price of the excisable goods. The Department should also be in a position to determine the amount of the money value of such additional consideration. If there is no such nexus or if the Department is not in a position to determine the money value of the additional consideration, the provisions of Rule 5 of the Central Excise (Valuation) Rules, 1975 would not be applicable.3. Supreme Court pronounced its judgement on 10.1.95 in case of Metal Box India Ltd. vs. CCE, Madras [1995 (75) ELT 449 (SC)] and held that had Ponds (1) Ltd. not given the advance; the appellants would have been required to borrow this amount from outside like banks and would have required to pay large amounts of interest which naturally would have got reflected in the purchase price to be charged from the buyers as it would form a part of the cost of production which would be passed on to the customers. To that separate price charged from Ponds (1) Ltd. the extent of benefit obtained by the assessee on interest-free loan was required to be reloaded by hiking the price charged from Ponds to that extent. The Division Bench of Madras High Court, in tile judgement delivered on 6.3.95 in case of UOI vs. Lakshmi Machine Works Ltd. 11995 (77) ELT 799 (Mad)], observed that it is necessary to point out the extent of benefit obtained by the assessee on the interest-free loan and to that extent only, the price has to be reloaded for the purpose of determining the assessable value. 4. When the matter was again consulted with the Law Ministry in view of the above two judgements, the Law Ministry, on 19.4.96, reiterated the views already expressed by them under their earlier note dated 28.9.84. 5. Now the Supreme Court has delivered another judgement on 8.1.98 in case of M/s VST Industries Ltd. vs. CCE Hyderabad [1998 (97) ELT 395 (SC)] holding inter cilia: There is nothing on record to show that the receipt of the deposit from some of the dealers could possibly influence the fixation of the sale price even with regard to those sales which are made at the factory gate against cash and not on credit. Had there been a difference in the selling price where for example special discount was given to the dealer who had given a deposit then it may have been possible to say that there were two different markets and two different prices and that lesser price was being charged for an extraneous consideration and, in such a case the notional or actual interest could be added ...... There is nothing to show that there was any special consideration which was shown to the dealers who had given the security deposit. Nor has it been shown by reference to any documents or data that because of the receipt of such deposit the price charged from all the buyers was reduced..... There was no justification for disregarding the uniform wholesale price which was being charged from all the dealers and adding the element of notional interest of the security deposit to the said price.(emphasis added)6. Taking into consideration Law Ministry's opinion and both the above said judgements of Supreme Court, Board clarifies that: (i) The notional interest on advances deposited by the wholesale buyers would be included for the purpose of determination of assessable value if the deposit influences the fixation of sale price either by way of charging a less price from or by offering a special discount to the buyer who has given the deposit. (ii) If two different price exist, one for the wholesale buyer who has deposited the advance and the other for the wholesale buyer who has not deposited the advance, they would form two different classes of buyers and two different assessable values can be arrived at. For the wholesale buyer depositing the advance, the notional interest on advance deposit should be added for the purpose of determination of the assessable value. (iii) If there is no difference in the selling price for both categories of the wholesale buyers and there is also no proof that on account of advance deposits taken from some buyers, the price charged from all buyers has been reduced, then element of notional interest on advance deposits cannot be added. (iv) If the interest earned / saved on such advance deposits is credited to the buyer calculated at a rate lower than the normal bank rate, the difference in both interest rates should be equivalent to the extent of benefit derived by the manufacturer. The money value of the extent of benefit should be quantified and added for the purpose of determination of the assessable value. 7. This supersedes the Board's Circular No. 215/49/96 (F.No. 6/1/91-CX.I) dated 27.5.96. F.No. 6/10/98-CX.I