Valuation (Central Excise) - Uniformity in the additions/deductions - Central Excise - 24/14/93

Valuation (Central Excise) - Uniformity in the additions/deductions Order No. 24/14/93 Dated 31-12-1993 Government of India Central Board of Excise Customs New Delhi Subject :Valuation - Uniformity in the additions/deductions. The trade has represented on the issue of lack of uniformity in the addition/deduction of certain items of expenses in arriving at the assessable value. 2. The Supreme Court of India decided vide their judgments, dated 9-5-1983 and 7-10-1983 [1983 (14) E.L.T. 1896 (S.C.); 1985 E.L.T. 869 (S.C.)] and their subsequent clarificatory judgments 14-11-1983/15-11-1983 [1984 (17) E.L.T. 329 (S.C.) in the case of UOI v. Bombay Tyres International Ltd. Others several aspects of the issue of valuation and prescribed guidelines for deciding several other aspects of valuation. 3. The Supreme Court of India's decision dated 21-12-1986 in the case of UOI v. MRF Ltd. was recalled by the Supreme Court vide their order, dated 7-5-1989. Meanwhile, CEGAT and High Courts have been giving decisions relying on the said decision, dated 2-12-1986 of the Supreme Court. 4. Lack of uniformity in valuation has brought in disparity in the pricing of the commodities by the assessees with consequent impact on sales and the market economy. 5. Pending a final decision of the Supreme Court in the said MRF case, it would be necessary and expedient in the interest of administration of taxing statute to ensure uniformity in assessment practice. 6. Now, therefore, in exercise of the powers conferred under Section 37B of the Central Excises and Salt Act, 1944 (1 of 1944) (henceforth referred to as the Act) and keeping in view, the ratio of decisions so far passed by the Court in conformity to the decisions referred to supra and keeping in view the fact that the MRF judgment has been recalled, the trade practice, statutory provisions under the Act, etc., the Central Board of Excise Customs hereby orders that the following issues of valuation shall henceforth be dealt with as follows : A. Issue : When excisable goods, for which comparable values are not available are cleared for captive consumption whether notional profit is to be added in terms of Rule 6(b) of Central Excise (Valuation) Rules, 1975 and if so, how to arrive at the notional value. 2. The following points are relevant :- (a) When the goods are captively consumed exclusively, the profit for such goods is obviously a notional concept. The profit is based in terms of the profit earned on the final products or on the basis of company's general profitability. (b) The profit for the above purpose is not available at the time of clearance of the goods and the profit for even the preceding year would be available only during the middle of the year. (c) Whether the profit to be taken is a gross profit or the net profit is also under dispute. (d) Whether any notional profit requires to be added in respect of loss-making units. Decision : 3. If the goods have not been actually sold then direct profit cannot be identified, the relevant rule stipulates inclusion of profit which the assessee could have normally earned on the sale of such goods. This profit is only a notional profit. For the purpose of assessment of goods captively consumed, value should be arrived at by adding previous year's gross profit, if any, of the assessee as per their audited balance sheets. B. Issue : Valuation of goods manufactured on job-work basis When the goods are manufactured on job-work basis the job worker undertakes manufacturing activities on the materials received from others and, in some cases, also uses some raw materials/component parts of his own. The job worker collects labour charges or job charges including cost of their materials, if any, used in the manufacture. In the matter of valuation of the goods so manufactured on job work basis, the following are, inter alia, relevant :- (a) The genuine job worker is the manufacturer; (b) The duty becomes payable at the time of removal from the premises of the job worker unless otherwise specifically permitted/ex empted; (c) The goods manufactured by the job worker are not sold by the job worker as he is not the owner of the goods; (d) The goods manufactured on job work basis may not be sold by the person who entrusted the job work; (e) The excise duty is independent of ownership of the goods and the assessable value should not be the processing charge alone but the intrinsic value of the goods. Decision : When the goods are manufactured on job work basis the assessable value of such goods has to be determined under Rule 7 of the Valuation Rules, 1975. In case value of comparable goods is known the same can be adopted for goods manufactured by the job worker. In other cases, the value shall be determined by adopting the cost construction method taking the landed cost of the raw material at the premises of the job worker (i.e. including the cost of the raw materials, freight, insurance, interest charges etc. involved) and the job charges (which include the profit margin) of the job worker. It is clarified that the selling expenses and the selling profit of the persons who entrusted the raw material shall not be taken into account for determination of the assessable value, though the same could be one of the factors for determination of assessable value. C. Issue : Whether the interest on delayed payments will affect the assessable value Section 4 of the Central Excises and Salt Act, 1944 inter alia provides that assessable value of the goods is the price at which such goods are ordinarily sold by the assessee to a buyer in the course of wholesale trade for delivery at the time and place of removal. Thus both factors viz., time and place of removal plays a vital role. The following have come to notice : - (i) in some cases interest charges are collected only from the buyers who effect payment beyond a stipulated time, (ii) in some cases interest charges collected are ultimately paid to the Bank and in such case it is cost of delayed payment, (iii) in some cases a penal interest (more than the normal bank interest) is being collected by the assessee and the differential interest amount is retained by them, (iv) the period for which interest is to be charged will not be known at the time of clearance and will only be known on the date of actual receipt of the money by the assessee, (v) in many cases 45 days or such minimum credit period is generally given and interest element, if any, is not envisaged and collected separately. Decision : Within the general credit period, the price is the same whether it is paid on the day of delivery or on any day within 45 days or such general credit period from the date of delivery. The interest will be included in the assessable value. In cases where payment is made payable after the general credit period is over such payment will not form part of the assessable value. Amounts collected in excess of the normal bank interest for the credit period, should be treated as additional consideration and will form part of the assessable value. D. Issue : Interest on receivables The interest on receivables is incurred on account of time lag between the time the payment is made and the delivery of goods. Decision : The interest on receivables is not separately identified and collected from the buyers. The interest element, if any, is built into the price of the goods itself. It is more in the form of a general credit period given to the buyers. The price is the same when payment is made on any day within the general credit period from the date of delivery. The interest will form part of the assessable value. E. Issue : Deduction of "sales tax payable" from cum-duty price Though sales tax are leviable at tariff rates, they are payable at "effective rates" taking into account exemption notifications. In addition, there are instances of exemption for giving credit or deduction of duty by way of set-off of the duty paid on the inputs. Under Section 4(4)(d)(ii) of the Central Excise Act, the assessable value does not include "the amount of _______ sales tax _____ payable on such goods." The question for consideration is whether the amount of sales tax payable, after excluding the amount of set off, or whether the gross amount of sales tax payable is to be deducted from the cum-duty-price for arriving at the assessable value. Decision : The effective rates of sales tax (without taking into account set-off available in respect of taxes paid on inputs) is the amount deductible in determining the assessable value for the purpose of excise duty. F. Discounts I. Issue : TAC/Warranty discount relates to the claims of the customers on account of any defect on goods already sold and assessed to duty. Price of the new supplies get reduced by the amount refundable to customers on account of the defect on goods already sold. Decision : Though TAC/Warranty discount may be established by practice or capable of being decided, it is in the nature of a benefit given to the customers by way of compensation for the loss suffered by them in the previous sale. As it is not in accordance with the normal practice of the wholesale trade at the time of removal of goods in respect of which the claim is made, the discount is not admissible to be deducted for the purpose of arriving at the assessable value. II. Issue : Prompt payment discount is given if the bill is cleared/paid within a specified, number of days from the date of invoice. Decision : When such prompt payment discount is allowed in respect of all varieties of products cleared by an assessee, the same is permitted to be deducted for the purpose of arriving at the assessable value. However, such prompt payment discount, if allowed in respect of only certain variety of products, the same is not admissible. III. Issue : Year ending discount in respect of certain varieties of goods when the payments are actually received within a specified number of days from the date of invoice, a bonus at the end of the year is given on the basis of declaration received dealer-wise, the allowance of such discount is not known at the time of or prior to the removal of goods. The collections are made at the end of the year and the bonus at the specified rate is granted only to a particular class of dealers. It is not in the nature of discount but in the nature of bonus or an incentive much after the invoice is raised and the removal of the goods is complete. Decision : Such an year-ending discount, is not deductible for the purpose of arriving at the assessable value. IV. Issue : Campaign discount is in the form of bonus for invoices during a particular period on specified varieties payable on invoices for which payments were received within the specified number of days. The allowance of the discount is not known at or prior to the removal of the goods. The quantum is ascertained at the point of removal. The discount is not on the wholesale cash price of the articles sold but is based on the total sales effected of a particular variety of goods. Decision : Such campaign discount is to form part of the assessable value as it is for promotion of sale of the particular variety of goods in question. V. Issue : Regional Discount/Town Commission : Different discounts are being offered, in some cases, to dealers belonging to different regions, towns treating such dealers from a particular region, town as class of buyers. These discounts are being described by names such as regional discounts, town commission etc. Decision : Wholesale dealers cannot be considered as belonging to different classes simply because they are located in different towns or cities or regions. Such discounts are not permissible to be deducted to arrive at the assessable value for excise purposes. VI. Issue : Special Discounts : There are instances for claiming special discounts which are negotiated by the representatives of the company with the dealers dependent on the target fixed for the dealers. Such discounts are offered for specific periods and for specific regions. Decision : These type of discounts which are not known at or prior to the time of removal and are often given for specific regions or specific periods are not deductible for the purpose of arriving at the assessable value. Board further directs that a copy of this order be sent to all Collectors who shall inform the trade and all other officers employed in execution or the provisions of the Act.