1. Value under the Central Excise Act, 1944
1.1 Value of the excisable goods has to be necessarily determined when the rate of duty is on ad-valorem basis. Accordingly, under the Central Excise Act, 1944 the following values are relevant for assessment of duty. Transaction value is the most commonly adopted method.
(i) Transaction value under Section 4.
(ii) Value determined on basis of maximum Retail Sale Price as per Section 4A.
(iii) Tariff value under Section 3.
2. Transaction Value
2.1 Section 4 of the Central Excise Act, as substituted by section 94 of the Finance Act, 2000(No.10 of 2000),has come into force from the 1st day of July 2000. This section contains the provision for determining the Transaction value of the goods for purpose of assessment of duty.
2.2 For applicability of transaction value in a given case, for assessment purposes, certain essential requirements should be satisfied. If any one of the said requirement is not satisfied, then the transaction value shall not be the assessable value and value in such case has to be arrived at under the valuation rules notified for the purpose. The essential ingredients of a Transaction value are:
(i) The goods are sold by an assessee for delivery at the time of place of removal. The term "place of removal" has been defined basically to mean a factory or a warehouse;
(ii) The assessee and the buyer of the goods are not related; and
(iii) The price is the sole consideration for the sale.
2.3 The definition of "transaction value" needs to be carefully taken note of as there is fundamental departure from the erstwhile system of valuation that was essentially based on the concept of ‘Normal Wholesale Price’, even though sales were effected at varying prices to different buyers or class of buyers from factory gate or Depots etc. had to be determined.
2.4 The new section 4 essentially seeks to accept different transaction values which may be charged by the assessee to different customers, for assessment purposes so long as these are based upon purely commercial consideration where buyer and the seller have no relationship and price is the sole consideration for sale. Thus, it enables valuation of goods for excise purposes on value charged as per commercial practices rather than looking for a notionally determined value.
2.5 Transaction value would include any amount which is paid or payable by the buyer to or on behalf of the assessee, on account of the factum of sale of goods. In other words, if, for example, an assessee recovers advertising charges or publicity charges from his buyers, either at the time of sale of goods or even subsequently, the assessee cannot claim that such charges are not to be included in the transaction value. The law recognizes such payment to be part of the transaction value that is assessable value for those particular transactions. Certain other elements which are included in the Transaction value are, as follows:
(i) Receipts/recoveries or charges incurred or expenses provided for in connection with the manufacturing, marketing, selling of the excisable goods. In other words, whatever elements which enrich the value of the goods before their marketing and were held by Hon’ble Supreme court to be includible in "value" under the erstwhile section 4 would continue to form part of section 4 value even under new section 4 definition.
(ii) If in addition to the amount charged as price from the buyer, the assessee recovers any other amount by reason of sale or in connection with sale, then such amount shall also form part of the transaction value. For example if assessee splits up his pricing system and charges a price for the goods and separately charges for packaging or warranty, the packaging charges will also form part of assessable value as it is a charge in connection with production and sale of the goods recovered from the buyer. In this context, it may be clarified that it is immaterial whether the warranty is optional or mandatory. Since the value can be different for different transactions, wherever warranty charges are paid or payable to the assessee, in those transactions warranty charges shall form part of the assessable value. In those transactions where warranty charges are not recovered, the question of including warranty charges in transaction value does not arise.
(iii) Interest for delayed payments are a normal practice in industry. Interest under a financing arrangement entered between the assessee and the buyer relating to the purchase of excisable goods shall not be regarded as part of the assessable value provided that:
(a) the interest charges are clearly distinguished from the price actually paid or payable for the goods;
(b) the financing arrangement is made in writing; and
(c) where required, assessee demonstrates that such goods are actually sold at the price declared as the price actually paid or payable.
(iv) Discount of any type or description given on any normal price payable for any transaction will not form part of the transaction value for the goods, e.g. quantity discount for goods purchased or cash discount for the prompt payment etc. will therefore not form part of the transaction value. However, it is important to establish that the discount has actually been passed on to the buyer of the goods. The differential discounts extended as per commercial considerations on different transactions to unrelated buyers if extended can not be objected to and different actual prices paid or payable for various transactions are to be accepted. Where the assessee claims that the discount of any description for a transaction is not readily known but would be known only subsequently – as for example, year end discount – the assessment for such transactions may be made on a provisional basis. However, the assessee has to disclose the intention of allowing such discount to the department and make a request for provisional assessment.
(v) The definition of transaction value mentions that whatever amount is actually paid or actually payable to the Government or the relevant statutory authority by way of excise, sale tax and other taxes, such amount shall be excluded from the transaction value. In other words, if any excise duty or other tax is paid at a concessional rate for a particular transaction, the amount of excise duty or tax actually paid at the concessional rate shall only be allowed to be deducted from price.
(vi) As per commercial practice, the price for the goods charged, normally includes the cost of packing charges. However, at times separate charge may be billed for special packing, as per customer’s requirements. Whereas in the context of erstwhile section 4 certain disputes often arose whether certain packing in relation to particular goods is secondary or primary and whether its value is to be added for assessment purposes, under the new section 4, such issues are no longer relevant. Any charges recovered for packing are obviously charges recovered in relation to the sale of the goods under assessment and will form part of the transaction value of the goods. In short, it is immaterial whether packing is ordinary or special. Whatever amount is charged from the buyer for packing and if not already included by the assessee in the price payable for the goods will be included while determining the transaction value of the goods.
2.6 Where the assessee includes all their costs incurred in relation to manufacture and marketing while fixing price payable for the goods and bills and collects an all inclusive price –as happens in most cases where sales are to independent customers on commercial consideration - the transaction price will generally be the assessable value. Nevertheless, there could be situations where the amount charged by an assessee does not reflect the true intrinsic value of goods marketed and total value split up into various elements like special packing charges, warranty charges, service charges etc. These cases would require to be scrutinised carefully to ensure that duty is paid on correct value. The definition of "transaction value" makes it clear that all the elements of cost which the assessee incurred till the sale/marketing as aforesaid, continue to be included in the assessable value even under new section 4.
2.7 The term "place of removal" has been defined in the same manner as was defined in the erstwhile section 4 prior to its amendment in 1996. If, therefore, the transaction value is with reference to delivery at the time and place of removal, such transaction value will be the assessable value.
3. Valuation Rules
3.1 In those cases where any of the three requirements mentioned in para 2 above is missing, the assessable value shall be determined on the basis of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2001 notified under Section 4(1)(b) by notification No. 45/2000-CE (NT), dated 30.6.2000.
3.2 Salient features of the new valuation rules are mentioned below:
(i) If the assessee and the buyer are not related persons and the price is also the sole consideration for sale but only the delivery of goods is made by the assessee at a place other than the factory/warehouse, then the assessable value shall be the "transaction value" without the addition of the cost of transportation from the factory/warehouse upto the place of delivery. However, exclusion of cost of transportation is allowed only if the assessee has shown them separately in the invoice and the exclusion is permissible only for the actual cost so charged from his buyers. If the assessee has a system of pricing and sale at uniform prices inclusive of equated freight for delivery at factory gate or elsewhere, no deductions for freight element will be permissible.
(ii) If the goods are not sold at the factory gate or at the warehouse but they are transferred by the assessee to his depots or consignment agents or any other place for sale, the assessable value in such case for the goods cleared from factory/warehouse shall be the normal transaction value of such goods at the depot, etc. at or about the same time on which the goods as being valued are removed from the factory or warehouse. It may be pertinent to take note of the definition of "normal transaction value" as given in the valuation rules. What it basically means is the transaction value at which the greatest aggregate quantity of goods from the depots etc. are sold at or about the time of removal of the goods being from the factory/warehouse. If, however, the identical goods are not sold by the assessee from depot/consignment agent’s place on the date of removal from the factory/warehouse, the nearest date on which such goods were sold or would be sold shall be taken into account. In either case if there are series of sales at or about the same time, the normal transaction value for sale to independent buyers will have to be determined and taken as basis for valuation of goods at the time of removal from factory/warehouse. It follows from the Valuation Rules that in such categories of cases also if the price charges is with reference to delivery at a place other than the depot, etc. then the actual cost of transportation will not be taken to be a part of the transaction value and exclusion of such cost allowed on similar lines as discussed earlier, when sales are effected from factory gate/warehouse.
(iii) As a measure of simplification, it has been decided to value goods which are captively consumed on cost construction method only as there have been disputes in adopting values of comparable goods. The assessable value of captively consumed goods will be taken at 115% of the cost of manufacture of goods even if identical or comparable goods are manufactured and sold by the same assessee. The concept of deemed profit for notional purposes has thus been done away with and a margin of 15% by way of profit etc. is prescribed in the rule itself for ease of assessment of goods used for captive consumption.
(iv) In the case where price is not the sole consideration for the sale, but the other requirements of clause (a) of sub-section (1) of section 4 of the Central Excise Act are satisfied, the value shall be determined in accordance with the provisions of rule 6 of the valuation rules. This provides for adding, to the transaction value the money value of any additional consideration flowing directly or indirectly from the buyer to the assessee. Such additional consideration would include the money value of goods and services provided free or at reduced cost by or on behalf of the buyer to the assessee. An Explanation has been added in the new rule only to remove any doubts with respect to its scope.
(v) Where goods are sold through related persons, the transaction value is not applicable. The definition of related persons includes "inter-connected undertakings" as defined in the Monopolies and Restrictive Trade Practices Act, 1969. The definition of inter-connected undertaking in the said Act is comprehensive and includes 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. A provision has been made in the Valuation Rules that even if the assessee and the buyer are ‘inter-connected undertakings’, the transaction value will be "rejected" only when they are "related" in the following manner:
(a) They are relatives.
(b) The buyer is a relative and a distributor of the assessee, or sub-distributor of such distributor.
(c) They have a direct or indirect interest in the business of each other.
In other cases, they will not be considered related. "Transaction value" could then form the basis of valuation provided other two conditions, namely, price is for delivery at the time and place of removal and the price is the sole consideration for sale are satisfied. If any of the two aforesaid conditions are not satisfied then, quite obviously, value in such cases will be determined under the relevant rule.
4. Valuation of Petroleum Products
4.1 The practice being followed is to assess the price administered petroleum products like motor spirit, HSD, SKO (domestic) and LPG to duty on the ex-storage sale prices that are fixed by the Oil Coordination Committee (OCC) from time to time. The assessable value is the same irrespective of whether the administered petroleum products are sold at the refineries or through the marketing companies.
5. Tariff Value
5.1 For certain items the Government may fix a tariff value as per provisions of Section 3(3) of the Central Excise Act, 1944. In such cases the assessment of duty shall be on the basis of the tariff value.
6. Value on basis of Maximum Retail Sales Price
6.1 The value is based on maximum retail sale price in terms of Section 4A of the Central Excise Act, 1944. This is applicable to notified commodities. The notification issued in this regard indicates the extent of abatement to be allowed for arriving at the assessable value for determination of amount of duty.