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TMI Blog2006 (9) TMI 94X X X X Extracts X X X X X X X X Extracts X X X X ..... ted in its earlier circular No.643 dated 1/7/2000. 3. The main argument of the petitioners is that the physicians samples cleared from the factory are not sold but are supplied freely to the medical practitioners and, therefore, the valuation of physicians free samples have to be made by applying the method applicable to the goods which are not sold. It is contended that for more than three decades, the revenue has been valuing the physicians samples by applying the method applicable to goods which are used for captive consumption as per the judicial decisions rendered to that effect. Even after the 2000 Rules were framed, the Board had issued a circular No.643 dated 1/7/2002 directing that the valuation of physicians free samples should be made by applying the method applicable to the goods cleared for captive consumption. Therefore, the impugned circular No.813 dated 25/4/2005 which seeks to value the free samples by applying Rule 4 (applicable to goods that are sold) instead of Rule 8 (applicable to goods that are not sold) is contrary to the judicial decisions holding the field for more than three decades and, hence the said circular No.813 dated 25/4/2005 is liable to be struc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the assessee but are used or consumed by him or on his behalf in the production or manufacture of other articles, the value shall be based - (i) on the value of the comparable goods produced or manufactured by the assessee or by any other assessee: Provided that in determining the value under this sub-clause, the proper officer shall make such adjustments as appear to him reasonable, taking into consideration all relevant factors and, in particular, the difference, if any, in the material characteristics of the goods to be assessed of the comparable goods. (ii) if the value cannot be determined under sub - clause (i), on the cost of production or manufacture including profits, if any, which the assessee would have normally earned on the sale of such goods; (c) xxx xxx xxx Rule-7. If the value of excisable goods cannot be determined under the rules, the proper officer shall determine the value of such goods according the best of his judgment, and for this purpose he may have regard, among other things, to one or more of the methods provided for in the foregoing rules. 8. The Excise Act has been amended substantially with effect from 1/7/2000 ( amended Act for short). Under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asonable. Rule 8. Where the excisable goods are not sold by the assessee but are used for consumption by him or on his behalf in the production or manufacture of other articles, the value shall be [one hundred and ten per cent] of the cost of production or manufacture of such goods. Rule 11. If the value of any excisable goods cannot be determined under the foregoing rules, the value shall be determined using reasonable means consistent with the principles and the general provisions of these rules and sub-section (1) of section 4 of the Act. 10. Since 2000 Rules do not contain a specific Rule for valuing the physicians free samples, the Board by its circular No.643 dated 1/7/2002 directed that the valuation of the physicians free samples be done under the rule 11 with the spirit of rule 8 of the 2000 rules. The relevant portion of the circular No. 643 dated 1/7/2002 is reproduced herein below:- Sl. No. Points of doubt Clarification 13. How will valuation of samples be done which are distributed free, as part of marketing strategy, or as gifts or donations? Since the goods are not sold Section 4 (1)(a) will not apply and recourse will have to be taken to the Valuation Rules. No spec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, because of the change in the concept of valuation of excisable goods from deemed value to the transaction value. The submission is that in view of the concept of valuation based on 'deemed value' contained in section 4 of the old Act, it was provided in Rule 6 (b) of 1975 Rules that the captively consumed goods could be valued by applying the method applicable to the comparable goods produced or manufactured by the assessee. Once the concept of valuing the goods based on the deemed value was given up and the concept of transaction value was introduced from 1/7/2000, the question of applying the method applicable to comparable goods did not arise and therefore, the Central Government in Rule 8 of 2000 Rules provided that the valuation of captively consumed goods be made by the only method based on the cost of production. Therefore, there is no reason to deviate from the prevailing practice of valuing the physicians free samples under the rule applicable to captively consumed goods. (d) Relying upon the decisions in the case of Sun Pharmaceutical Industries v. Commissioner of Central Excise reported in 2005 (183) E.L.T. 42 Tri.) (Tri.), Commissioner of Central Excise v. Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 96(ix) of the Drugs Cosmetics Rules, 1995, every drug intended for distribution to the medical practitioners as a free sample is required to contain a label on the container with the words physician's sample Not to be Sold . Under the Drugs (Price Control) Order, 1995 issued under the Essential Commodities Act, 1955 the cost of physicians sample is added to the price fixed for the drugs which are to be sold. As per the Accounting Standards (AS-2) issued by the Institute of Chartered Accountants of India, the value of the physicians free samples is to be determined based on the cost of production for purposes of valuing the inventory and when such samples are distributed free, the Accounting Standards prescribe that they be treated as part of expenses towards sale of goods. Therefore, on introduction of the concept of valuation based on the transaction value, it is not open to the revenue to apply Rule 4 which is applicable to the goods that are sold for valuing the physicians samples which are admittedly not sold. In this connection reliance is placed on the decisions of the Apex Court in the case Collector v. Dai Ichi Karkaria Ltd. reported in (1999) 112 E.L.T. 353 (S.C.) and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cisable goods and being the final product, the physicians free samples cannot be considered on par with the goods which are captively consumed in the production or manufacture of final product. 16. Mr.Rana further submitted that Rule 4 of 2000 Rules is the proper rule applicable for valuation of physicians free samples because usage of the term 'physicians sample' itself implies that these samples are representative of the whole i.e. 'such goods' sold commercially. The purpose of physicians samples is to promote the goods which are introduced in the market or being introduced in the market. Therefore, the physicians samples and the goods sold in the market are same, they are liable to be valued under Rule 4 of 2000 Rules. Rule 8 applies to goods captively consumed in the manufacture of final products. Since the physicians samples are final products, Rule 8 cannot be applied to physicians free samples. The circular No.643 dated 1/7/2002 issued by the Board to the effect that the physicians free samples be valued by applying the spirit of Rule 8, was erroneous and, therefore, the mistake has been rectified by the Board by issuing the impugned circular No.813 dated 25/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on in respect of goods sold and delivered at a place other than the place of removal or where the price is not the sole consideration for sale or where the excisable goods are sold after their clearance from the place of removal or where the goods are sold through a related person or sold through an inter connected undertaking. Rule 8 provides for the method of valuation in respect of goods that are not sold but are cleared for use and consumption in the production or manufacture of other articles. Rule 11 provides that if the value of any excisable goods cannot be determined under the above rules, then the value shall be determined by using reasonable means consistent with the principles and general provisions of 2000 Rules and section 4 (1) of the Act. 23. In the present case, it is admitted by counsel on both sides that Rule 5,6,7,9 10 of 2000 Rules are not applicable to the physicians free samples because rule 5,6,7,9 10 apply to cases where the goods are sold whereas physicians samples are not sold. Therefore, the question is, which of the remaining Rule 4, 8 11 of the 2000 Rules would be applicable for the valuation of physicians free samples. 24. In our opinion, the physicia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r or identical to physicians samples are also sold and delivered at the time and place of removal. By the very nature, the physicians samples have to be strictly identical to the goods which are cleared on sale in the wholesale trade. In fact, by distributing physicians samples freely, the assessee represents to the physicians that the product same physical and chemical properties, composition, potency, etc. Thus, the physicians samples cleared for free distribution are liable to be valued under Rule 4 on the basis of the value of such goods sold and delivered at any other time nearest to the time and place or removal of the physicians samples. 28. The argument that Rule 4 applies only to goods sold but not delivered to the buyer at the time and place of removal cannot be accepted because, Rule 4 is a general rule and does not contain any words which warrant such restricted meaning. The fact that Rule 4 permits adjustments in the value on account of the difference in the dates of delivery of such goods, if any, it cannot be inferred that Rule 4 is restricted to goods sold but not delivered at the time and place of removal. By use of the words if necessary in Rule 4, it is made clea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sold and, therefore, Rule 11 with the spirit of Rule 8 have to be applied to the physicians samples cannot be accepted because Rule 8 applies to cases where the goods are not sold but are consumed captively in the manufacture of other articles. In the cases of physicians samples, the clearances are not for captive consumption and moreover, goods similar or identical to physicians samples are sold in the market. Therefore, the question of applying the spirit of Rule 8 does not arise at all. 31. The fact that the Board had issued a Circular No.643 dated 1/7/2002 directing that the physicians samples be valued under Rule 8 does not mean that the revenue cannot withdraw that circular even if it is found to be was erroneous and issue a circular which is in consonance with the Act and the Rules made thereunder. 32. The argument of the petitioners that the physicians samples are distinct from the goods sold in the market is without any merit. As noted earlier, the physicians free samples must be similar or identical to the goods that are sold in the wholesale trade. If the physicians samples are not similar or identical to the goods that are sold in the wholesale trade, then the conseque ..... X X X X Extracts X X X X X X X X Extracts X X X X
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