Central Excise - Determination of assessable value - When additional consideration is received by the manufacturers - Rule 5 of Central Excise (Valuation) Rules, 1975 - Forwarding of Attorney General's opinion - Central Excise - 6/89-CX.1

Central Excise - Determination of assessable value - When additional consideration is received by the manufacturers - Rule 5 of Central Excise (Valuation) Rules, 1975 - Forwarding of Attorney General's opinion Circular No. 6/89-CX.1 Dated 23-6-1989 [From F. No. 15C/33/86-CX.1] Government of India Ministry of Finance (Department of Revenue) Central Board of Excise Customs, New Delhi Subject : Central Excise - Determination of assessable value - When additional consideration is received by the manufacturers - Rule 5 of Central Excise (Valuation) Rules, 1975 - Forwarding of Attorney General's opinion In continuation of Board's Circular No. 10/88-CX.1 (issued from F. No. 15C/33/86-CX.1), dated 21-3-1988, I am directed to enclose a copy of the opinion, dated 6-5-1989 given by the Attorney General of India on the subject mentioned above for compliance and necessary action by all field formations. 2. In respect of show cause notices/demands already issued which require to be revised/modified in view of the said opinion of the Attorney General of India, suitable action may be taken immediately. 3. Please acknowledge receipt of this circular. OPINION Ref : Interpretation of Rule 5 of the Central Excise (Valuation Rules), 1975. I have perused the Statement of Case prepared by Dr. V.K. Agrawal. The said statement of case may be read as part of this opinion for the purpose of facts. 2. According to the Statement of Case it has been discovered as a matter of fact by the Department that in the case under reference the price was not the sole consideration for the sale and some additional consideration flowed to the Manufacturer/Assessee, M/s. ITC. According to the Statement of Case this is a case to which rule 5 is attracted. The question is as to under rule 5, how the said money value of additional consideration should be added for computation of duty to the price declared by the manufacturer. Rule 5 of the Central Excise (Valuation) Rules, 1975 is as follows :- "Where the excisable goods are sold in the circumstances specified in clause (a) of sub-section (1) of section 4 of the Act except that the price is not the sole consideration, the value of such goods shall be based on the aggregate of such price and the amount of the money value of any additional consideration flowing directly or indirectly from the buyer to the assessee". In the present case it is clear from the Statement of case that in addition to the cum duty price declared by the Assessee there flows an additional consideration from the buyer to the Assessee either directly or indirectly and the said additional consideration has a money value. In such a situation how is the price to be ascertained for the purpose of levy of duty ? The stand of the manufacturer that in such a situation, to the cum-duty price should be added the money value of the additional consideration would not be correct on a proper interpretation of rule 5. Rule 5 prescribes that where excisable goods are sold in the circumstances specified in section 4(1) (a) except that such price is not the sole consideration, the value of such goods would be based on the aggregate of such price and the amount of money value of any additional consideration flowing from the buyer to the manufacturer. Rule 5 prescribes the method of determination of the value of such goods. It makes the amount of money value of additional consideration a part of "value of such goods". The additional consideration therefore cannot become part of the cum-duty price but becomes part of "value of such goods". The circumstance that the Manufacturer collected from the buyer the cum-duty price plus an additional consideration does not make the aggregate of what the manufacturer collected namely the cum-duty price and the money of the additional consideration as assessable value. If that were the situation a manufacturer can escape duty by not collecting from the buyer the entire duty payable on the real price of the goods sold by him. The assessable value of the goods is the cum duty price minus the duty plus the additional consideration. The manufacturer ought to have collected from the buyer the cum-duty price (by which I mean the cum duty without value of additional consideration) plus the value of the additional consideration and the duty on the said additional consideration. The language of the rule is significant. It says the value of such goods shall be based on the aggregate of such price and the amount of the money value of additional consideration. The words "value of such goods" here do not mean the cum-duty price. The value of such goods here means the value of the goods without duty plus the value of the additional consideration. 3. Once the concept of the duty is borne in mind the position will be clear. I will explain it from one illustration furnished to me. Supposing the manufacturer declared the assessable value of the goods as Rs. 6.90. The duty thereon is Rs. 31.60. The declared cum-duty price becomes Rs. 38.50. Suppose the additional consideration is Rs. 9.24. It will not be correct to add it to Rs. 38.50 to make it a total of cum-duty price of Rs. 47.74 and by working it backwards to determine the duty at Rs. 37.51 and the assessable value at Rs. 10.23. On the other hand how it has to be worked out is to take the assessable value at Rs. 6.90 and the value of the additional consideration as Rs. 9.24 and when both are added assessable value will come to Rs. 16.14. Excise duty on this is Rs. 45.45 and the total cum-duty price will come to Rs. 61.59. My view is that the second calculation is the correct one. This flows clearly from the language of rule 5. This is for the reason that when the manufacturer declared only part of the price and did not declare the other part of the price which represents the money value of additional consideration, the cum-duty price as originally determined represents only the assessable value as declared by the manufacturer plus the duty thereon and not the value of the goods representing the additional consideration and the duty thereon. When the additional consideration is taken into consideration, the duty element thereon has also to enter the cum-duty price. If this were not the interpretation, in every situation a manufacturer who conceals a part of the consideration and when that consideration is discovered, would get the benefit of treating that consideration as a part of cum-duty price and when that consideration is not found out would have benefited to the extent of that portion of the duty element therein by not paying the said duty to the Government. The manufacturer in the illustration given to me has realised from the customer Rs. 47.74. He has declared only Rs. 38.50. If in the difference namely Rs. 9.24 is also included the duty element, the manufacturer should have disclosed Rs. 47.74 as the cum-duty price. In such an event the duty would have been calculated backward as done by the manufacturer and the assessable value would have been arrived at Rs. 10.23 and the duty at Rs. 37.51. On the other hand the manufacturer declared only Rs. 38.50 as the cum-duty price which means the remaining amount of Rs. 9.25 would have been collected by the manufacturer as price payable to himself without including the duty therein, because if the manufacturer has treated this amount as including the duty, corresponding duty on this amount should also have been paid. Therefore it is clear that the amount of additional consideration should not be treated as including also the duty element thereon. Hence it is my view that the second method of calculation referred to by me earlier has to be adopted and the total cum-duty price will have to be arrived at Rs. 61.59. Rule 5 contains three concepts - value, price and additional consideration. 4. The question posed for my opinion is : Query (1) : Where the price is not the sole consideration for the sale of excisable goods and there is additional consideration flowing directly or indirectly from the buyer to assessee, whether the money value of such additional consideration should be added to the price declared by the assessee or be treated as an element forming part of the assessable value of such goods within the meaning of rule 5 of the 1975 rules? Answer : My answer to the query is as follows : Where the price is not the sole consideration for the sale of excisable goods and there is additional consideration flowing di rectly or indirectly from the buyers, the money value of such ad ditional consideration should be treated as element forming part of the assessable value of such goods and cannot merely be added to the cum-duty price for working backwards the duty. Sd/ (K. Parasaran) Attorney General of India . New Delhi May 6, 1989 .