Valuation – Transaction Value – Section 4 - Central Excise Practice Manual (OLD) - Central Excise

TRANSACTION VALUE - SECTION-4 As per section 4, excise duty is payable as a percentage of assessable value calculated on the basis of 'transaction value' on each removal of goods, if all the conditions mention below are fulfilled: 1. The goods should be sold at the time and place of removal i.e. at the factory gate, 2. Buyer and assessee should not be related, and 3. Price should be the sole consideration for the sale. 4. Each removal will be treated as a separate transaction and 'value' for each removal will be separately fixed. If any one of the above conditions is not fulfilled, the value has to be arrived at as provided in the Central Excise valuation (Determination of price of excisable goods) Rules 2000 u/s 4(1)(b) [as per valuation Rules]. I. CONDITION - I: Time and Place of Removal - Place of Removal means: - a) a factory or any other place or premises of production or manufacture of the excisable goods, b) a warehouse or any other place or premises where the excisable goods have been permitted to be kept without payment of duty, c) a depot, place of consignment agent, or any other place from where the excisable goods are to be sold after their clearance from the factory. If the goods are not sold at the time and place of removal assessable value of the excisable goods so removed will be calculated in accordance with the provisions of Valuation Rules [i.e. Rule 4 and Rule 5] discussed below and not in accordance with the transaction value. 1. Valuation when sale is not at the 'time of removal' - a) In such a case valuation will be based on the value of 'such goods' sold by the assessee at any other time nearest to the time of removal, subject to reasonable adjustment (i.e. valuation should be on the basis of value of identical goods cleared at or around the same time of removal of free samples) [Rule 4]. 'Identical goods' means goods of the same class or group, of same size and capacity and of the same manufacturer. This rule applies in the following cases: · Free samples distributed to customers, · Free samples distributed to its employees, · Free parts provided under warranty scheme. b) In case of new or improved products or new variety of products, valuation should be on the basis of cost of production plus 10%, as price of the similar goods may not be available. c) In case of physician's samples - they are in small packs and goods cleared for wholesale trade are in large packs, and hence they are not comparable. In such a case, cost construction method is appropriate. 2. Valuation when sale is at the place other than the 'place of removal' - a) In such cases assessable value shall be deemed to be the transaction value excluding the actual cost of transportation incurred from the place of removal upto the place of delivery [Rule 5]. But the cost of transportation from the factory to the place of removal shall be included. For e.g. in case of F.O.R. Delivery contract. b) In case where freight is averaged the cost of transportation is calculated in accordance with generally accepted principles of costing. 3. Valuation in case of sale at Depot/ Consignment agent: a) In such cases, 'place of removal' will be the depot or place of consignment agent and 'time of removal' shall be deemed to be the time at which the goods are cleared from factory, it is because, there is no 'sale' at the time of removal from factory. In such case, assessable value shall be the price prevailing at the depot as on the date of removal from the factory [Rule 7]. If after making sale to depot on payment of duty, prices increases, differential duty if any will not be payable if it is not shown in the invoice as duty recovered from the buyer. b) Any further cost incurred at the depot i.e. at the place of removal will not be included for the purpose of assessable value. For e.g. freight and insurance charges from depot to customer, cost of conversion, cost of any further processing, cost of cutting and packing done at depot will not be includible. c) Stock transfer/ branch transfer - if the buyer is known or identified before despatch of goods from the factory, it is a sale and not a stock transfer. In such case assessable value will be the price at the time and place of removal. II. CONDITION - II: Sale should not to the related persons: Definition of related person includes the following - · Inter-connected undertakings · Relatives · Buyer is a relative and a distributor of assessee, or a sub-distributor of such distributor · Assessee and buyer are so associated that they have interest, directly or indirectly, in the business of each other. 1. Inter connected undertakings: - inter-connected undertaking means two or more under-takings which are inter-connected with each other in any of a number of ways such as if one owns or controls the other, or where the undertakings are owned by firm, or if such firms have one or more common partners, etc. [25% of total controlling power in both undertakings is enough to establish inter-connection]. In such a case price charged by assessee to buyer will not be accepted as 'transaction value'. However, the provisions in respect of 'inter-connected undertakings' have been made almost ineffective in Valuation Rules. Now the 'inter-connected undertakings' will be treated as related person only: · If they are holding and subsidiary or · If they are related person under any other clause. 2. Relatives: - relative means persons related as per section 6 of the companies act, 1956. The following are relatives: · Members of a HUF; · Husband and wife; · Relations as specified in schedule 1-A as follows: SCHEDULE IA See Section 6 (c) List of Relatives 1. Father 15. Daughter's son 2. Mother (including step-mother) 16. Daughter's son's wife 3. Sons (including step-son) 17. Daughter's daughter 4. Son's wife 18. Daughter's daughter's husband 5. Daughter (including step-daughter) 19. Brother (including step-brother) 6. Father's father 20. Brother's wife 7. Father's mother 21. Sister (including step sister) 8. Mother's mother 22. Sister's husband 9. Mother's father 10. Son's son 11. Son's son's wife 12. Son's daughter 13. Son's daughter's husband 14. Daughter's husband Other cases are as follows: · If the company is mere sham or hoak i.e. if persons behind manufacturer and buyer are same the authorities will lift the veil of a company and look at the persons behind them. · If there is mutuality of interest such as both functioning as a single unit. · Since company has identity which is independent of its members, buyer and seller will not be treated as relatives, if some of the directors of the distributor company and that of manufacturer company, or if partners of buyer are directors in the manufacturer limited company. 3. Distributor: - the words 'distributor' does not refer to any distributor but the distributor who is 'relative of the assessee' within the meaning of companies act, 1956. Distributor is one who acts as agent of manufacturer for purpose of distribution of goods, i.e. there is 'Principal Agent' relationship between them. Thus if the relations between manufacturer and buyer are on 'Principal to Principal' basis and if the distributor buys the goods outright (i.e. does not return back), he will not be treated as distributor, and hence they are treated as relatives. 4. Mutuality of business interest: - buyer and seller will be treated as related person if they (both) have interest, directly or indirectly, in the business of each other and not only one had interest in other's business (i.e. there should be a two-way flow). · The interest has to be financial or managerial interest. · The interest should be a 'right in profit' of each other. If the transaction and price are purely on commercial terms buyer and seller will not be treated as related persons. For e.g. if the buyer has 25% shareholding in seller but seller has no shareholding in buyer, they are not 'related persons', even if entire production is sold to the buyer, and technology and know-how was provided by the buyer. If the sale is exclusively ( means entire production) through related person, the assessable value of the excisable goods so removed from the factory will be calculated in accordance with the provisions of Valuation Rules [i.e. Rule 9 and Rule 10] as discussed below and not in accordance with the transaction value. 1.Valuation of goods sold through related person other than inter-connected undertaking - In such case assessable value will be the 'normal transaction value' of such related person to the unrelated (or ultimate) buyer, prevailing at the time of removal from the factory of assessee and not the price at which such goods are sold later by related person. 2. Valuation of goods sold through inter-connected undertakings - In such case, assessable value is the price (i.e. normal transaction value) charged by buyer to an unrelated person but only if the entire sale is through inter-connected undertaking and the buyer is a holding or subsidiary of assessee. But mere fact that they are holding or subsidiary does not make them related person, their must exist mutuality of interest between them. 3. Valuation of goods sold to related person for captive consumption - Where the related person (i.e. buyer) does not sell the goods received from the assessee (i.e. manufacturer) to other unrelated buyer and use in captive consumption, in such case valuation will be done on the basis of Rule 8 i.e. cost of production plus 10%. 4. Valuation of goods sold partly to the 'related person' and partly to 'independent buyer' - a) In such cases provisions of Rule 11, also called residual method, will apply, which states that if value cannot be determined under any of the foregoing rules, assessable value will be calculated using reasonable means consistent with the principles and general provisions of section 4 and Valuation Rules. For eg. (i).If substantial sale is made to the independent buyer and only minor sale to the related buyer and the same price is charged, in such case, that price will form basis of valuation (ii).If price charged to the related buyer is higher than the price charged to the unrelated buyer, the higher price will form the basis of valuation. b)Above mentioned Rule 9 and Rule 10 will not going to apply because they states that they can be applied only in the cases where assessee sales goods exclusively to or through related person. CONDITION-III: Price must be the sole consideration: - For calculating the transaction value 'price' should be the sole/single consideration of sale. If the 'price' is not the sole consideration, the assessable value of the excisable goods so removed from the factory will be calculated in accordance with the provisions of Valuation Rules [i.e. Rule 6] as discussed below and not in accordance with the transaction value. 1. In such case, assessable value of excisable goods shall be deemed to be the price charged by the assessee, plus the amount of money value of any additional consideration flowing directly or indirectly from the buyer to the assessee. In the following cases Rule 6 will going to apply - a) Buyer supplies some material to be used in manufacture of product and manufacturer charges lower price for the goods. b) If the purchaser agrees to pay advance along with order and manufacturer agrees to sell goods at lower price. c) If buyer agrees to incur some advertisement expenditure of the goods manufactured by the manufacturer and manufacturer agrees to give extra discount over normal price. d) Advance-license (owned by the buyer), surrendered in favour of seller is an additional consideration as this reduces the selling price of the goods. Thus cost of material supplied free or extra discount or concessions offered should be added back in the price charged by the assessee. 2. Price of additional consideration will be the price at which the buyer gets the material and not the market price. Also if cost of material supplied is not charged separately, it means that its cost is included in the selling price of final product. 3. Any cost incurred in respect of raw material such as handling charges, freight, insurance, interest charges etc. shall be includible. But duty paid on such raw material and profit margin of the supplier of raw material shall be excluded. Valuations in other cases are as follows: 1.Valuation in case of job-work - there is no sale when the buyer sends the material free of cost to work upon it and in turn the manufacturer get the work done from job worker. In such case, till 31-3-2007, assessable value was to be calculated as the cost of raw material supplied by the buyer plus job charges. However, with effect from 1-4-2007 the provisions of valuation of goods manufactured by the job worker has been changed and Rule 10A has been inserted to the valuation rules. Accordingly: (i) where the goods are sold by the principal manufacturer for delivery at the time of removal of goods from the factory of job-worker, where the principal manufacturer and the buyer of the goods are not related and the price is the sole consideration for the sale, the value of the excisable goods shall be the transaction value of the said goods sold by the principal manufacturer; (ii) in a case where the goods are not sold by the principal manufacturer at the time of removal of goods from the factory of the job -worker, but are transferred to some other place from where the said goods are to be sold after their clearance from the factory of job-worker and where the principal manufacturer and buyer of the goods are not related and the price is the sole consideration for the sale, the value of the excisable goods shall be the normal transaction value of such goods sold from such other place at or about the same time and, where such goods are not sold at or about the same time, at the time nearest to the time of removal of said goods from the factory of job-worker; (iii) in a case not covered under clause (i) or (ii), the provisions of foregoing rules,wherever applicable, shall mutatis mutandis apply for determination of the value of the excisable goods: Provided that the cost of transportation, if any, from the premises, wherefrom the goods are sold, to the place of delivery shall not be included in the value of excisable goods. Explanation.- For the purposes of this rule, job-worker means a person engaged in the manufacture or production of goods on behalf of a principal manufacturer, from any inputs or goods supplied by the said principal manufacturer or by any other person authorised by him. 2. Valuation in case of captive consumption - where the goods manufactured are used by the assessee himself, in such case valuation shall be done on the basis of cost of production plus 10% [Rule 8]. Treatment of Bought out items: Articles which are not manufactured by the assessee but are supplied along with the goods manufactured by the assessee are called bought out items as they are brought from outside the factory or from the buyer. For e.g. ribbon bought out for typewriter manufactured by the assessee. Value of essential bought out items, fitted to the main article at the time of removal should be includible in assessable value for the purpose of determining the transaction value, because this satisfy the three conditions of the transaction value mentioned above as - 1. Goods should be assessed in the stage in which they are removed. 2. Payment for such item is 'in connection with' the sale and the main article cannot work without this bought out part. 3.Value of essential part or component should be added even if it is supplied by the buyer. The reason is that if such part is supplied by buyer, 'price' is not 'sole consideration'. Thus, the additional consideration, i.e. value of parts supplied by buyer should be includible. Cases 1. Bought out items (i.e. items brought from outside) fixed to the goods manufactured by the assessee and form its part at the time of clearance, its value has to be added for valuation purposes. For e.g. value of battery supplied with UPS is includible in assessable value of UPS as UPS cannot work without battery. The reason is that goods are to be assessed in the stage in which they are cleared from the factory of production. 2. Value of essential bought out items is to be added, even if buyer issues separate purchase order and separate invoice is raised. 3. Cost of bought out items, which form integral part of the goods, has to be added. Thus cost of bought out items, however essential, cannot be added to assessable value if they are not integral part of the main item. 4. Cost of bought out items directly supplied to buyer's place without bringing them in the factory (or from manufactures separate trading premises) cannot be included in assessable value. For e.g. value of battery supplied directly at the buyer's place without bringing them to the factory will not be includible in the assessable value of UPS manufactured by the assessee. 5. Bought out goods supplied with own goods by the manufacturer- may be as assembly or as a kit no duty should be leviable as there is no manufacturing activity. For e.g. assessee manufactured bolts, he then purchased nuts and washers and supplied assembled bolt and nuts. It was held that this is not manufacture and assessee has to pay duty only on bolt which is manufactured by him. 6. Cost of 'Consumables' and 'Optional' bought items should not be included as supply of such bought items may be 'in relation' to sale but not 'in connection with' or 'by reason of' sale and they are purely trading activity. For e.g. Spare/extra part supplied along with equipment. 7. Value of Accessories (which adds comfort, beauty, convenience etc) supplied with the main article will not be includible in the assessable value of manufactured product. For e.g. value of software will not be included in the value of the computer (i.e. hardware) even if it is pre-loaded in the computer. It is held that computer is complete without the software, though it cannot function without the software.