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Valuation under Central Excise

Valuation of excisable goods under Central Excise is one area wherein there has been a
lot of litigation between department and assessee regarding inclusion or exclusion of
various expenses for determining the normal price. However disputes were reduced to a
considerable extent after the Supreme Court judgment in the case of Bombay Tyre
International Ltd in 1983 & subsequently in the case of MRF Ltd in 1995. Still some gray
areas remained, so the Finance Act, 2000 in order to address the problem of the industry
regarding valuation replaced the old section 4 of The Central Excise Act, 1944. Moreover
old Central Excise (valuation) Rules, 1975 were suppressed by new Central Excise
Valuation (Determination of Price of Excisable Goods) Rules,2000 by Central
Government in exercise of power conferred by section 37 of Central Excise Act, 1944
vide Notification No. 45/2000-C.E.(N.T.), dated 30-6-2000. Both these new section 4 and
new valuation rules came into force on and from the 1st day of July,2000.
A lot has already been written about the changes and industry is well aware of the
changes. This article makes an attempt to discuss the fresh doubts which has arisen
because of changes in the section 4 & the valuation rules. It incorporates the views of the
Ministry of Finance on the interpretation of the changes vide its circular no. M.F. ( D.R.)
F. No. 354/81/2000 – TRU, dated 30-6-2000. However the aforesaid circular cannot
partakes the character of the law and both the department & assessee is entitled to take a
different view on the interpretation of changes if they so desire. The various issues which
have arisen because of changes are discussed below:-

1) Transaction value – A doubt was expressed about the applicability of the ratio of
the celebrated Supreme Court judgments regarding inclusion / exclusion of
various expenses in arriving at the assessable value because of replacement of
‘normal price’ with the ‘transaction value’. However it has been clarified vide
aforesaid ministerial circular that 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.
2) Discounts – Earlier section 4 expressly excluded trade discounts( such discount
not being refundable on any account whatsoever) allowed in accordance with the
normal practice of the wholesale trade at the time of removal in respect of such
goods sold or contracted for sale. However definition of ‘Transaction Value’ under
new section does not expressly allows such exclusion. However as per ministerial
circular it is not needed by virtue of the fact that duty is chargeable on the net
price paid or payable.
Another doubt in this respect is regarding the allowance of deduction of discount
not readily known to the assessee at the time of transaction. To claim such
deduction from the assessable value the assessee should disclose the intention of
allowing such discount to the department and apply for provisional assessment in
respect of such transactions.
3) Packing charges – New section 4 also does not specifically include packing
charges as part of assessable value. However the packing charges whether special
or ordinary will continue to form part of assessable value.
Another issue worth discussion is whether durable & returnable packing allowed
as deduction under old section 4 will be continue to be so under the new
provisions as well. There has been no clarification from the department or
ministry in this respect. However in the opinion of the author it should not be
included in the assessable value.
4) Related Person – The definition of “Related Person” has been widened to include
“inter-connected undertakings” as defined in MRTP Act,1969. However as per
rule 10 of new Central Excise Valuation ( Determination of Price of Excisable
Goods) Rules, 2000 even if the assessee & buyer are inter-connected undertakings
valuation will be made on the basis of transaction value unless they are related
person under the old definition.
5) Interest on delayed payments – A doubt has been expressed by the industry
about the inclusion or exclusion of interest, paid by the buyer for delayed payment
beyond credit period, in the assessable value. However it has been clarified that
such interest will not form part of 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.
6) Transportation Charges - As per rule 5 of new valuation rules if the excisable
goods are sold for delivery at a place other than the place of removal, then actual
cost of transportation from the place of removal to the place of delivery should be
excluded from the assessable value. However as the definition of “Place of
Removal” was changed in the new valuation rules to exclude depot, premises of a
consignment agent or any other place or premises from where excisable goods are
to be sold after their clearance from the factory, so a doubt arose about the
exclusion of transportation cost from the factory gate or warehouse to the depot,
premises of a consignment agent or any other place. However it has been clarified
that such cost will be excluded on similar lines of sales being effected from
factory gate or warehouse.
Further it has been provided in the rule 5 of the new valuation rules that such
transportation cost will be excluded only if it is charged to the buyer in addition to
the price of the goods and shown separately in the invoice for such excisable
goods. However the actual transportation cost may not be known to the assessee
at the point of delivery. In such cases the assessee may go for provisional
assessment in respect of such transaction .
7) Valuation of captively consumed goods – As per earlier valuation rules if the
excisable goods were not to be sold but were consumed by assessee himself or on
his behalf in the production or manufacture of other articles, then the valuation
was to be done on the basis of the value of comparable goods produced or
manufactured by the assessee or by any other assessee after making such
adjustments to the value as may appear reasonable to proper officer. But if the
valuation could not be determined on aforesaid principles then value was to be
determined after making addition of normal profit to the cost of production. A
CBEC circular no. 258/92/96 – CX, dated 30-10-96 was issued to clarify the
doubts regarding addition of profit.
However new valuation new rules apparently simplified the valuation provisions
in case of captive consumption by providing for addition of fifteen percent to the
cost of production. It means there is an assumption of fifteen percent profit to be
earned by all the manufacturer which is harsh on manufacturers who are earning
less profit then fifteen percent or are incurring losses.

8) Transit Insurance Transit insurance charges from place of removal to the place
of delivery may be incurred by the assessee which may be subsequently recovered
from the buyer. It is doubtable whether it will be allowed as deduction on the
similar lines of transportation charges. Though there is no departmental
clarification in this respect but it should be allowed as deduction as these charges
does not enrich the value of the product.
9) Erection / commissioning charges recovered from the buyer The erection and
commissioning charges is normally recovered by the assessee in case of
installation of plant and machinery at the customers site. A doubt has been
expressed whether the above charges will form part of assessable value. In the
opinion of the author these charges should be excluded from the assessable value
as these charges are for work purely civil in nature.