CHAPTER 3

ASSESSMENT, CLASSIFICATION, VALUATION, PROVISIONAL ASSESSMENT,
MANNER OF DUTY PAYMENT, ACCOUNT CURRENT, SCRUTINY

Part III

Valuation
I. Value under the Central Excise Act, 1944

1.1 Value of the excisable goods has to be necessarily determined when the rate ofduty is on ad-valorem basis. Accordingly, under the Central Excise Act, 1944 thefollowing values are relevant for assessment of duty. Transaction value is the mostcommonly adopted method.

(i) Transaction value under Section 4.

(ii) Value determined on basis of maximum Retail Sale Price as per Section4A.

(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 FinanceAct, 2000(No.10 of 2000),has come into force from the 1st day of July 2000. This sectioncontains the provision for determining the Transaction value of the goods for purpose ofassessment 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 isnot satisfied, then the transaction value shall not be the assessable value and value insuch case has to be arrived at under the valuation rules notified for the purpose. Theessential ingredients of a Transaction value are:

(i) The goods are sold by an assessee for delivery at the time of place ofremoval. The term "place of removal" has been defined basically to meana 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 isfundamental departure from the erstwhile system of valuation that was essentially basedon the concept of ‘Normal Wholesale Price’, even though sales were effected at varyingprices to different buyers or class of buyers from factory gate or Depots etc. had to bedetermined.

2.4 The new section 4 essentially seeks to accept different transaction values whichmay be charged by the assessee to different customers, for assessment purposes so longas these are based upon purely commercial consideration where buyer and the sellerhave no relationship and price is the sole consideration for sale. Thus, it enables valuationof goods for excise purposes on value charged as per commercial practices rather thanlooking for a notionally determined value.

2.5 Transaction value would include any amount which is paid or payable by thebuyer to or on behalf of the assessee, on account of the factum of sale of goods. Inother words, if, for example, an assessee recovers advertising charges or publicitycharges from his buyers, either at the time of sale of goods or even subsequently, theassessee 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 assessablevalue for those particular transactions. Certain other elements which are included in theTransaction value are, as follows:

(i) Receipts/recoveries or charges incurred or expenses provided for inconnection with the manufacturing, marketing, selling of the excisablegoods. In other words, whatever elements which enrich the value of thegoods before their marketing and were held by Hon’ble Supreme court to be includible in "value" under the erstwhile section 4 would continue toform 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 assesseerecovers any other amount by reason of sale or in connection with sale,then such amount shall also form part of the transaction value. Forexample if assessee splits up his pricing system and charges a price forthe goods and separately charges for packaging or warranty, thepackaging charges will also form part of assessable value as it is a chargein connection with production and sale of the goods recovered from thebuyer. In this context, it may be clarified that it is immaterial whether thewarranty is optional or mandatory. Since the value can be different fordifferent transactions, wherever warranty charges are paid or payable tothe assessee, in those transactions warranty charges shall form part of theassessable value. In those transactions where warranty charges are notrecovered, the question of including warranty charges in transactionvalue does not arise.

(iii) Interest for delayed payments are a normal practice in industry. Interestunder a financing arrangement entered between the assessee and thebuyer relating to the purchase of excisable goods shall not be regardedas part of the assessable value provided that:

(a) the interest charges are clearly distinguished from the priceactually paid or payable for the goods;

(b) the financing arrangement is made in writing; and

(c) where required, assessee demonstrates that such goods areactually sold at the price declared as the price actually paid orpayable.

(iv) Discount of any type or description given on any normal price payable forany transaction will not form part of the transaction value for the goods,e.g. quantity discount for goods purchased or cash discount for theprompt payment etc. will therefore not form part of the transaction value.However, it is important to establish that the discount has actually beenpassed on to the buyer of the goods. The differential discounts extendedas per commercial considerations on different transactions to unrelatedbuyers if extended can not be objected to and different actual pricespaid or payable for various transactions are to be accepted. Where theassessee claims that the discount of any description for a transaction isnot readily known but would be known only subsequently – as forexample, year end discount – the assessment for such transactions maybe made on a provisional basis. However, the assessee has to disclose theintention of allowing such discount to the department and make arequest for provisional assessment.

(v) The definition of transaction value mentions that whatever amount isactually paid or actually payable to the Government or the relevantstatutory authority by way of excise, sale tax and other taxes, suchamount shall be excluded from the transaction value. In other words, ifany excise duty or other tax is paid at a concessional rate for a particulartransaction, the amount of excise duty or tax actually paid at theconcessional rate shall only be allowed to be deducted from price.

(vi) As per commercial practice, the price for the goods charged, normallyincludes 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 chargesrecovered for packing are obviously charges recovered in relation to thesale of the goods under assessment and will form part of the transactionvalue of the goods. In short, it is immaterial whether packing is ordinary orspecial. Whatever amount is charged from the buyer for packing and ifnot already included by the assessee in the price payable for the goodswill be included while determining the transaction value of the goods.

2.6 Where the assessee includes all their costs incurred in relation to manufactureand marketing while fixing price payable for the goods and bills and collects an allinclusive price –as happens in most cases where sales are to independent customers oncommercial consideration - the transaction price will generally be the assessable value.Nevertheless, there could be situations where the amount charged by an assessee doesnot reflect the true intrinsic value of goods marketed and total value split up into variouselements like special packing charges, warranty charges, service charges etc. Thesecases would require to be scrutinised carefully to ensure that duty is paid on correctvalue. The definition of "transaction value" makes it clear that all the elements of costwhich the assessee incurred till the sale/marketing as aforesaid, continue to be includedin the assessable value even under new section 4.

2.7 The term "place of removal" has been defined in the same manner as wasdefined in the erstwhile section 4 prior to its amendment in 1996. If, therefore, thetransaction value is with reference to delivery at the time and place of removal, suchtransaction 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 ismissing, the assessable value shall be determined on the basis of the Central ExciseValuation (Determination of Price of Excisable Goods) Rules, 2001 notified under Section4(1)(b) by Ntf. 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 alsothe sole consideration for sale but only the delivery of goods is made bythe assessee at a place other than the factory/warehouse, then theassessable value shall be the "transaction value" without the addition ofthe cost of transportation from the factory/warehouse upto the place ofdelivery. However, exclusion of cost of transportation is allowed only if theassessee has shown them separately in the invoice and the exclusion ispermissible only for the actual cost so charged from his buyers. If theassessee has a system of pricing and sale at uniform prices inclusive ofequated freight for delivery at factory gate or elsewhere, no deductionsfor freight element will be permissible.

(ii) If the goods are not sold at the factory gate or at the warehouse but theyare transferred by the assessee to his depots or consignment agents or any other place for sale, the assessable value in such case for the goodscleared from factory/warehouse shall be the normal transaction value ofsuch goods at the depot, etc. at or about the same time on which thegoods as being valued are removed from the factory or warehouse. Itmay be pertinent to take note of the definition of "normal transactionvalue" as given in the valuation rules. What it basically means is thetransaction value at which the greatest aggregate quantity of goodsfrom the depots etc. are sold at or about the time of removal of thegoods being from the factory/warehouse. If, however, the identical goodsare not sold by the assessee from depot/consignment agent’s place onthe date of removal from the factory/warehouse, the nearest date onwhich 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, thenormal transaction value for sale to independent buyers will have to bedetermined and taken as basis for valuation of goods at the time ofremoval from factory/warehouse. It follows from the Valuation Rules thatin such categories of cases also if the price charges is with reference todelivery at a place other than the depot, etc. then the actual cost oftransportation will not be taken to be a part of the transaction value andexclusion of such cost allowed on similar lines as discussed earlier, whensales are effected from factory gate/warehouse.

(iii) As a measure of simplification, it has been decided to value goods whichare captively consumed on cost construction method only as there havebeen disputes in adopting values of comparable goods. The assessablevalue of captively consumed goods will be taken at 115% of the cost ofmanufacture of goods even if identical or comparable goods aremanufactured and sold by the same assessee. The concept of deemedprofit for notional purposes has thus been done away with and a marginof 15% by way of profit etc. is prescribed in the rule itself for ease ofassessment of goods used for captive consumption.

(iv) In the case where price is not the sole consideration for the sale, but theother requirements of clause (a) of sub-section (1) of section 4 of theCentral Excise Act are satisfied, the value shall be determined inaccordance with the provisions of rule 6 of the valuation rules. Thisprovides for adding, to the transaction value the money value of anyadditional consideration flowing directly or indirectly from the buyer to theassessee. Such additional consideration would include the money valueof goods and services provided free or at reduced cost by or on behalf ofthe buyer to the assessee. An Explanation has been added in the new ruleonly to remove any doubts with respect to its scope.

(v) Where goods are sold through related persons, the transaction value isnot applicable. The definition of related persons includes "inter-connectedundertakings" as defined in the Monopolies and Restrictive Trade PracticesAct, 1969. The definition of inter-connected undertaking in the said Act iscomprehensive and includes two or more under-takings which are inter-connectedwith each other in any of a number of ways such as if oneowns 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 hasbeen made in the Valuation Rules that even if the assessee and the buyerare ‘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-distributorof 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 theprice is the sole consideration for sale are satisfied. If any of the twoaforesaid conditions are not satisfied then, quite obviously, value in suchcases will be determined under the relevant rule.

4. Valuation of Petroleum Products

4.1 The practice being followed is to assess the price administered petroleumproducts like motor spirit, HSD, SKO (domestic) and LPG to duty on the ex-storage saleprices that are fixed by the Oil Coordination Committee (OCC) from time to time. Theassessable value is the same irrespective of whether the administered petroleumproducts 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 ofSection 3(3) of the Central Excise Act, 1944. In such cases the assessment of duty shall beon 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 theCentral Excise Act, 1944. This is applicable to notified commodities. The notificationissued in this regard indicates the extent of abatement to be allowed for arriving at theassessable value for determination of amount of duty.

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