Circular No. 215/49/96-CX dated 27/5/96

Subject:- Central Excise - Valuation - Liability of duty on the interest accruing out of security deposits/advances deposits taken by manufacturing units

I am directed to refer to the correspondence resting with Board"s Telex dated 13.3.91 issued from F. No. 6/1/91-CX. 1.

2. The matter regarding inclusion of notional interest on advances/deposits in the assessable value of excisable goods has been rexamined in the light of the decision of the Supreme Court in the case of Metal Box India Ltd. v. CCE Madras (1995 (75) ELT 49 (SC) and the Madras High Court decision in the case of UOI & Others - v. Lakshmi Machines Works Ltd. (1996 (62) ECR 265 (Mad)).

3. In the said Metal Box India Ltd. case, the Hon"ble. Supreme Court had observed that the 50% discount from normal price given by the assessee (Metal Box India Ltd.) to M/s Ponds India Ltd. was linked to the large amounts of interest free advances made by M/s Pond"s India Ltd. The Hon"ble Supreme Court rejected the separate discounted price for the metal containers supplied to M/s Pond"s India Ltd. as a normal price u/s 4(l)(a) of the Act and held that the benefit obtained by the assessee on the interest free loan was required to be reloaded by hiking the price charged to that extent. The Division Bench of High Court at Madras in the aforesaid case of UOI & Others - v. Lakshmi Machines Works Ltd. based itself on the aforesaid judgement of the Supreme Court in the Metal Box India Ltd. case and held that the Department must show the extent of benefit obtained by the assessee on the interest free loan obtained by him and to that extent only the price has to be loaded for the purpose of determining the assessable value.

4. The Ministry of Law has once again been consulted in the matter. In their latest advice the Ministry of Law have reiterated their earlier advice of 1984 wherein they had held that if there is no nexus between the security deposit/advance made by the wholesale buyer and the sale price of the excisable goods or if the Department is not in a position to determine the money value of the additional consideration, the provisions Act Rule 5 of Central Excise (Valuation) Rules, 1975 would not be applicable.

Hence, normally, where the same price is charged from buyers who have given the deposit and from those who have not given the deposit and/or where the advance is purely a security deposit and the interest earned by such deposit is credited to the buyer, the notional interest on such advance cannot be added to the price. In other cases, the notional interest on deposits and advances may have to be loaded on to the assessable value of excisable goods where there is evidence that the advance on security deposit has conferred a direct on indirect pecuniary advantage on the assessee as contemplated by the Supreme Court in the case of M/s Metal Box India Ltd. As value under Section-4 of the Central Excise and Salt Act, 1944 is a notional value, i.e., a deemed value which may or may not correspond to the actual value, the purpose for which the advance is received is not relevant. What is to be ascertained, is the extent of the benefit, if any, derived by the assessee out of such advance or deposit, as laid down in the above judgments.

5. For determination of the extent of the benefit, if any, derived by the assessee as a result of receipt of the advance, the assessing officer should make use of the provisions of Section 14A of the Central Excise & Salt Act, 1944, with the approval of the Chief Commissioner of the Zone. The cost accountant will take into consideration the facts of the case and principles of costing/banking for arriving at the benefit if any derived by the assessee out of such advance/deposit.

6. Board"s Circular No. 18/90-CX. I (F. No. 6/1/90 dated 13.3.90) stands withdrawn.

7. All pending cases may be decided expeditiously.

Sd/-
(S.C. Bhatia)
Under Secretary to the Govt. of India

F. No. 6/1/91-CX. I

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