F.No. 354/81/2000-TRU , Dt. 30/06/2000

Subject: Central Excise –Section 4- Transaction Value- Regarding.

I am directed to say, that as you aware, section 4 of the Central Excise Act, as substituted by section 94 of the Finance Act, 2000( No. 10 of 20000), would come into force from the 1st day of July, 2000. For the sle of ready reference, the new section 4 is being reproduced below:

4(1) Where under this Act, the duty of excise is chargeable on any excisable goods with reference to their value, then, on each removal of the goods, such value shall.

a. in a case where the goods are sold by the assessee, for delivery at the time and place of the removal, the asessee and the buyer of the goods are not related and the price is the sold consideration for the sale, be the transaction value;

b. in any other case, including the case where the goods are not sold, be the value determined in such manner as may be prescribed.

2. The provisions of the section shall not apply in respect of any excisable goods for which a tariff value has been fixed under sub-section (2) of Sec.3.

a. "assessee" means the person who is liable to pay the duty of excise under this Act and includes his agent;

b. persons shall be deemed to be "related" if.

i. they are inter-connected undertakings;
ii. they are relatives;
iii. amongst them the buyer is a relative and distributor of the assessee, or a sub-distributor of such distributor.
Or
iv. they are so associated that they have interest, directly or indirectly, in the business of each other.

Explanation- in this clause. i. "inter-connected undertakings" shall have the meaning assigned to it in Clause(g) of section 2 of the Monopolies and Restrictive Trade Practices Act, 1969; and

ii. "relative" shall have the meaning assigned to it in Clause (41) of Section 2 of the Companies Act, 1956;

(c) "place of removal" means.

i. a factory or any other place or premises of production or manufacture of the excisable goods;

ii. a warehouse or any other place or premises wherein the excisable goods have been permitted to be deposited without payment of duty, from where such goods are removed;

(d) "transaction value" means the price actually paid or payable for the goods, when sold and includes in addition to the amount charged as price, any amount that the buyer is liable to pay to, or on behalf of, the assessee, by reason of, or in connection with the sale, whether payable at the time of the sale or at any other time, including, but not limited to, any amount charged for, or to make provisions for, advertising or publicity, marketing and selling organisation expenses storage, outward handing, servicing, warranty, commission or any other matter but does not include the amount of duty of excise, sales tax and other taxes, if any, actually payable on such goods;

2. As would be seen, for applicability of transaction value in a given case, for assessment purposes, the following requirements should be satisfied;

a. 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;

b. The assessee and the buyer of the goods are not related; and

c. The price is the sold consideration for the sale.

If any one of the above requirements is not satisfied, then the transaction value shall not be the assessable value and the value in such case has to be arrived at under the valuation rules, being notified as provided in sub-section 4(1) (b) above.

2. Obviously, where tariff value has been fixed or any goods, as per provisions of sub-section (2) of sec. 3, value under section 4 is not determinable and the tariff value will be the assessable value.

3. The definition of "transaction value" needs to be carefully taken not 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.

4. The new section 4 essentially seeks to accept different transaction value which may be charged by the assessee to different customers, for assessment purposes so along as these are based upon purely commercial practices rather than looking for a notionally determined value.

5. "Transaction Value" includes receipts/recoveries or charges incurred or expenses provided for in connection with the manufacturing, marketing, selling of the excisable goods to be not be part of the price payable for the goods sold. 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. It may also be noted that where the assessee charges an amount as price for his goods, the amount so charged and paid or payable for the goods will form the assessable value. If, however, in addition to the amount charged a price from the buyer, the assessee also 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 valuation and assessment purposes. Thus, if assessee splits up his pricing system and charges a price for the goods and separately charges for packaging, the packaging charges will also form part of assessable value as sit is charge in connection with production and sale of the goods recovered from the buyer. Again, if any assessee charges warranty charges for any goods in particular transaction, then the warranty charges shall be included in the transaction value for the goods and duty will be payable on this part value recovered from the buyer. This will be so even if such warranty charges do not already form part of the price charged by the assessee for such transaction. In other words, if the warranty charges are charged separately and not considered as "price" of goods by the assessee, then also warranty charges will be includable in the transaction value forming basis of valuation. 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.

6. It would be seen from the definition of "transaction value" that 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, then such amount cannot be claimed to be not part of the transaction value. In other words, if, for example, an assessee recovers advertising charges or publicity from his buyers, either at the time of sale of goods or even subsequently, the asessee cannot claim that such charges are not includable in the transaction value. The law recognises such payment to be part of the transaction value that is assessable value for those particular transactions.

7. As regards interest for delayed payments it is normal practice in industry to allow the buyers some credit period for which no interest is charges. That is to say, the assessee allows the buyers some time( normally 30, which could be less or even more depending upon industry) to make the payment for the goods supplied. Interest is charged by him from the buyer only if the payments are made beyond this period. A question has been raised whether such interest on receivables ( for delayed payments ) should form part of the transaction value or not. As per the existing practice under section 4 such amount of interest is not included in "value". Also, similar is the practice followed in this regard on the Customs side, where duties are collected on transaction value basis, and the importers are given certain "free" period for payment or to pay up interest for delayed payments. As the intention is not to disturb the existing trade practice in this regard, charges for interest under a financing arrangements 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 arrangements is made in writing; and

2. where required, assessee demonstrates that such goods are actually sold at the price declared as the price actually paid or payable.

3. As regards discounts, the definition of transaction value does not make any direct reference. In fact, it is not needed by virtue of the fact that the duty is chargeable on the net price paid or payable. Thus if in any transaction a discount is allowed on declared price of any goods and actually passed on the buyer of goods as per common practice, the question of including the amount of discount in the transaction value does not arise. Discount of any type or description given on any normal price payable for any transaction will, therefore, not form part of the transaction value for the goods, eg.. quantity discount for goods purchased or cash discount for the prompt payment etc., will therefore not form part of the transaction value. What is important is that it must be established that the discount of a given transaction 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 or various transactions are to be accepted for working assessable value. Where the assessee claims that the discount of any description for 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.

10. As regards exclusion of taxes while working out assessable value, the definition of transaction value itself 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 amounts 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. The words" actually paid" have, therefore, been used to the definition of transaction value to reflect the legislative intention as explained above.

11. The words " actually payable" in the context of the amount of duty of excise, sales tax and other taxes would normally come into play only in those situations where the amount of excise, sales tax or other taxes is not paid at the time of transaction but paid subsequently, for example, sales tax payable under a deferment scheme.

12. It may be pertinent to note that new section 4 does not make any specific reference to packing charges. This does not mean that charges relating to packing will not form part of asessable value. 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 section4, 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 for assessment to duty.

13. It is felt that 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- valuation should not pose any problem as the transaction price wil generally be the assessasble 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. Such elements have been held to be includable in the assesssable value under erstwhile section 4 by various court pronouncements, notably, the Supreme Court’s judgement in MRF case. Now 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.

14. 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.

15. 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 valuation rulers.

16. The valuation rules are notified under section 4(I)(b) by Notification No. 45/2000-CE(NT), dated 30/6/2000.

17. Salient features of the new valuation rules are mentioned below.

18. If the asessee and the buyer are not related persons and the price is also the sole consideration for sale but only 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 up to 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 buyer. 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.

19. 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" as given in the valuation rules. What it basically means is the transaction value at which the greatest aggregate quantity of goods from 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 sale at or about the same time, the normal transaction value for sale to independent buyer 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 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.

2. By way of illustration if an assessee transfers a consignment of paper to his depot from Delhi to Agra on 5.7.2000, and that variety and quality of paper is normally being sold at the Agra depot on 5.7.2000 at transaction value of Rs. 15,000 per tone to unrelated buyers, where price is the sole consideration for sale, the consignment cleared firm the factory at Delhi on 5.7.2000 shall be assessed to duty on the basis of Rs. 15,0000 per tone as the assessable value. If assuming that on 5.7.2000 there were no sales of that variety from Agra depot but the sales were effected on 1.7.2000, then the normal transaction value on 1.7.2000 from the Agra depot to unrelated buyers, where price is the sole consideration shall be the basis of assessment.

21. 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 as margin of 15% by way of profit etc., is prescribed in the rule itself for ease of assessment of goods used for captive consumption. Thus, the formula for determining value is simple. If the cost of production based upon general principles of costing of a commodity is Rs. 10,000 per unit, the assessable value of the goods shall be Rs. 11,500 per unit.

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 following 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 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.

23. Where goods are sold through related persons, the transaction value is not applicable. However, there is some change in the definition of ‘related persons’ vis-à-vis the old definition. It includes "inter-connected undertakings" as defined in the Monopolies and Restrictive Trade Practices Act, 1969. The definition of interconnected undertaking in the said Act reads as follows:

"Inter-connected undertakings" means two or more undertaking which are inter-connected with each other in any of the following manner, namely:-

i. if one owns of controls the other,

ii. where the undertakings are owned by firm, if such firms have one or more common partners.

iii. Where the undertakings are owned by bodies corporate,

a. if one body corporate manages the other body corporate, or

b. if one body corporate is a subsidiary of the other body corporate, or

c. if the bodies corporate are under the same management, or

d. if one body corporate exercise control over the other body corporate in any other manner;

i. where one undertaking is owned by a body corporate and the other is owned by a firm, if one or more partners of the firms,

a. hold, directly or indirectly, not less than fifty per cent of the shares, whether preference or equity, of the body corporate, or

b. exercise control, directly or indirectly, whether as director or otherwise, over the body corporate.

i. if one is owned by a body corporate and the other is owned by firm having bodies corporate as its partners, if such bodies are under the same management.

ii. If the undertakings are owned or controlled by the same person or (by the same group).

iii. If one is connected with the other either directly or through any number of undertakings within the meaning of one or more foregoing sub-clauses.

Explanation I. For the purpose of this Act, (two bodies corporate), shall be deemed to be under the same management,-

i. if one such body corporate exercise control over the other or both are under the control of the same group or any of the constituents of the same group.

ii. if the managing director or manager of one such body corporate is the managing director or manager of the other; of

iii. if one such body corporate holds not less than (one fourth) of the equity shares in the other or controls the composition of not less than (one fourth) of the total membership of the Board of Directors of the other; or

iv. if one or more directors of one such body corporate constitute, or at any time within a period of six months immediately proceeding the day when the question arises as to whether such bodies corporate are under the same management, constituted(whether independently or together with relatives of such directors or the employees of the first mentioned body corporate)one fourth of the directors of the other; or

v. if the same individuals belonging to a group, while holding(whether by themselves or together with their relatives) not less than (one-fourth) of the equity shares in one such body corporate also hold (whether by themselves or together with their relatives) not less than (one-court) of the equity shares in the other; or

vi. if the (same body corporate or bodies corporate belonging to a group, holding, whether independently or along with its or their subsidiary or subsidiaries, not less than one-fourth of the equity shares) on one body corporate, also hold not less than (one-fourth ) of the equity shares in the other, or.

vii. If not less than (one-fourth) of the total voting power(in relation to ) each of the two bodies corporate is exercised or controlled by the same individual (whether independently or together with his relatives) or the same body corporate (whether independently or together with its subsidiaries);

viii. If not less than (one-fourth) of the total voting power (in relation to ) each of the two bodies corporate is exercised or controlled by the same individuals belonging to a group or by the same bodies corporate belonging to a group, or jointly by such individual or individuals and one ore more of such bodies corporate; or

ix. If the directors of the one such body corporate are accustomed to act in accordance with the directions or instructions of one or more of the directors of the other, or if the directors of both the bodies corporate are accustomed to act in accordance with the directors or instructions of an individual, whether belonging to a group or not.

Explanation II- If a group exercises control over a body corporate, that body corporate and every other body corporate, which is a constituent of or controlled by, the group shall be deemed to be under the same management.

Explanation-III- If two or more bodies corporate under the same management hold, in the aggregate, not less than (one-fourth) equity share in any other body corporate, such other body corporate shall be deemed to be under the same management as the first mentioned bodies corporate.

Explanation- IV- In determining whether or not two or more bodies corporate are under the same management, the shares held by (financial institutions) in such bodies corporate shall not be taken into account.

Illustration

Undertaking N is inter-connected with undertaking A and undertaking C is inter-connected with undertaking B, Undertaking C is inter-connected with undertaking A; if undertaking D is inter-connected with undertaking C, undertaking D will be inter-connected with undertaking B and consequently with undertaking A; and so on.

12.Thus the term inter-connected undertakings covers large categories of legal entities/undertakings to whom goods are sold by the assesses which may be held as ‘related person’ under the new definition. It may be noted, that under the erstwhile provisions under section 4, except for the specifically named categories, namely holding company, subsidiary company, a relative and distributor of the assessee and any sub-distributor of such distributor, buyer was held to be related to selling assessee only if they were so associated that they have interest directly or indirectly in the business of each other. In contrast no such general condition/restriction applies for inter-connected undertakings to be "related" under new section 4. However, a provision has been made in the new valuation rules that even if the assessees and the buyer are inter-connected undertakings, the transaction value will be "rejected" only when they are "related" in the sense of any of clause (ii), (iii) or (iv) of sub-section 4(3) (b) or the buyer is a holding company or a subsidiary company of the assessee. In other words, while dealing with transactions between inter-connected undertakings, if the relationship as described in clauses (ii), (iii) or (iv) does not exist and the buyer is also not a holding company or a subsidiary company, then for assessment purposes, 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.

13. In essence, notwithstanding the change in definition of "related" person in the new section 4, for practical applications, its scope has been restricted and but for small variation it would not be much different from that covered under the old section 4 definition. The Commissioner may, however examine carefully whether any other situation described in the definition of inter-connected undertakings need to be excluded for satisfying the qualification of mutuality of interest. The actual revenue potential in such situations may be estimated and a report sent in due course.

14. The Application of new section 4 and the valuation rules made thereunder to petroleum products may how be mentioned. Under the provisions of the existing section 4 and rules made thereunder, 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 Co-ordination 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. It would be seen that but for the normal value being replaced by transaction value or normal transaction value(in case goods are sold at a point other than the place of removal), there is no essential difference in the scheme of valuation of petroleum products as it exists should not make any material difference in assessable value of these products. However, this aspect may be examined by the Commissioners and it may be ensured by the Commissioners that no disruption is caused in the movement of these petroleum products. In case, as a result of examination of provisions of new section 4 and rules made thereunder, it is felt that the assessable value would get increased for the price administered petroleum products, provisional assessment may be resorted to at the current level of assessable value and a detailed reference may be made to the Board for further examination. The reference may be made as early as possible bringing out clearly the issue involved and the views of the Commissioner thereon.

15. As may be seen, the new Valuation Rules have essentially adopted the scheme and features of the Valuation Rules, 1975 with certain differences as explained above. Their practical application should hopefully not lead to much difficulty and experience of implementing Valuation Rules, 1975 should prove useful in enforcement of new valuation rules.

16. I am also directed to request the Chief Commissioners and Commissioners to take special steps for careful monitoring of their implementation and ensure that the switch over to new changes is effected smoothly. For any doubts and difficulty or suggestions the Chief Commissioners/Commissioners are requested to kindly refer the matter to Board, without delay with a copy to JS(TRU).

17. In the end, I am to emphasize that necessary instructions may kindly be issued to the officers in the field to provide guidelines and clarifications to the trade and industry in case of doubts or difficulties.

18. A detailed report on different aspects of the working of the new scheme, including the impact on the revenue, may be sent by the Commissioners to the Bard within three months, with a copy to JKS(TRU).

(Pl. refer Cir. No. 692/08/2003-CX, Dt. 13/02/2003)

(Pl. refer Cir. No. 643/34/2002-CX, Dt. 01/07/2002)

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