Basis of calculation of duty payable

After duty liability is established and after the product is correctly classified, the next question is ‘What is the Excise Duty payable ?’ If you refer to CETA, you will find that some rates are fixed on per Kg or per quintal basis, while some rates are based on ‘%’ basis. This percentage is the % of ‘Assessable Value’ of goods fixed as per section 4 of Central Excise Act.

Excise duty is payable on one of the following basis :

Specific Duty - It is the duty payable on the basis of certain unit like weight, length, volume, thickness etc. For example, duty on Cigarette is payable on the basis of length of the Cigarette, duty on sugar is based on per Kg basis etc. In such cases, calculation of duty payable is comparatively easy. In view of the simplicity, many goods were earlier covered under ‘specific duty’. However, the disadvantage is that even if selling price of the product increases, revenue earned by Government does not increase correspondingly. Frequent revisions of rates have to be done, which is a slow and time consuming process. Hence, now most of the goods are covered under ‘Ad valorem’ duty. Presently, specific rates have been announced for - (a) Cigarettes (length basis) (b) Matches (per 100 boxes / packs) (c) Sugar (per quintal basis) (d) Marble slabs and tiles (Square meter basis) (e) Colour TV when MRP is not marked on the package or when MRP is not the sole consideration (Based on screen size in cm). (f) Cement clinkers (per tonne basis) (g) Molasses resulting from extraction of sugar (Per ton basis)

Tariff value - In some cases, tariff value is fixed by Government from time to time. This is a “Notional Value” for purpose of calculating the duty payable. Once 'tariff value for a commodity is fixed, duty is payable as percentage of this 'tariff value' and not the Assessable Value fixed u/s 4. This is fixed u/s 3(2) of Central Excise Act. Government can fix different tariff values for different classes of goods or goods manufactured by different classes or sold to different classes of buyers.

When tariff value is prescribed under the law, that value will form the basis for assessment (and not any other value) – S Chakravorty v. CCE 2001(129) ELT 797 (CEGAT).

Value based on Retail Sale Price

Section 4A of CEA empowers Central Government to specify goods on which duty will be payable based on 'retail sale price'. The provisions are as follows - (a) The goods should be covered under provisions of Standards of Weights and Measures Act (b) Central Government can permit reasonable abatement (deductions) from the 'retail sale price'. While allowing such abatement, Central government shall take into account excise duty, sales tax and other taxes payable on the goods (c) If more than one 'retail sale price' is printed on the same packing, the maximum of such retail price will be considered (d) The 'retail sale price' should be the maximum price at which excisable goods in packaged forms are sold to ultimate consumer. It includes all taxes, freight, transport charges, commission payable to dealers and all charges towards advertisement, delivery, packing, forwarding charges etc. (e) Central Government has to issue a notification in Official gazette specifying the commodities for which the provision is applicable and the abatements permissible.

For example, Government had issued a notification No. 18/97-CE(NT) and 19/97-CE (NT) both dated 19.6.97 to the effect that excise duty on 'cosmetics and toilet preparations' will be payable on the basis of MRP printed on retail carton after allowing abatement of 50%. In such case, if MRP printed on carton is Rs 50 and if the duty on 'cosmetics & toilet preparations' is 20%, the duty @ 20% will be payable on Rs 25 (i.e. after allowing 50% abatement on MRP of Rs 50). Thus duty payable per pack will be Rs 5.00.

MRP provisions are overriding provisions – Section 4A(2) uses the words ‘notwithstanding section 4’. Hence, when section 4A is applicable, provisions of section 4 for determination of assessable value are not applicable. In Mona Electronics v. CCE (2001) 135 ELT 1293 (CEGAT), it was held that provisions of section 4A are mandatory and assessee has no choice to determine ‘value’ u/s 4.

CVD duty rate on imported goods when product covered under MRP -  If goods covered under MRP provisions are imported, CVD will be payable on basis of valuation u/s 4A i.e. on basis of MRP printed on carton.

Provision applicable only when product is statutorily covered both under Weights and Measures Act and notification issued under CEA - It has been clarified that provisions in respect of payment of duty on MRP are applicable only in cases where specific notification has been issued and manufacturer is statutorily required to put MRP under Weights & Measures Act. The provisions do not apply in cases where manufacturer voluntarily affixes MRP on the product - CBE&C circular No 411/44/98-CX dated 31-7-1998. It is further clarified that where provisions of Weights & Measures Act do not apply, duty is payable on basis of AV as per section 4 - Chandigarh Commissionerate TN 16-CE/99 dated 5-5-1999.

Provision applicable even if goods manufactured on job work basis - Normally, if assessee is engaged in manufacture on job work basis, he has to pay duty on material cost plus job charges. However, if a product covered under MRP provisions is manufactured on job work basis, duty will be payable as per provisions of section 4A, i.e. on basis of MRP less abatement and not on basis of material cost plus job work charges. This is because section 4A has overriding effect over section 4.

Provision when more than one retail price declared - MRP printed on package is required to be inclusive of taxes. Rate of taxes vary from State to State.  Hence, in some cases, a manufacturer may print different prices for different States. In some cases, manufacturer earmarks different packages for different areas and marks different prices for different areas.

If a package bears more than one retail sales price, maximum out of these will be deemed to be retail price for purpose of section 4A.   [Explanation 2(a) to section 4A]. If retail price declared on the package at the time of removal is subsequently altered to increase the price, such increased retail price will be retail price for purpose of section 4A.   [Explanation 2(c) to section 4A]. Where different retail sale prices are declared on different packages, each such retail price shall be the 'retail sale price' for purposes of valuation of excisable goods intended to be sold in area to which the retail price relates. [Explanation 2(c) to section 4A]. Thus, if different prices are printed on different packages, each such price will be 'retail price'.

If retail price not indicated or wrongly indicated at the time of removal - If retail price is not declared on the package at the time of removal, or retail price is declared which is not the retail price as required to be declared as per provisions of Central Excise Law or any other law, the goods are liable to confiscation. [section 4(4)(a)]. In such case, the ‘retail sale price’ will be ascertained in the prescribed manner and duty will be payable as per the retail price so determined.

What is 'retail sale price' – As per Weights and Measures Act, retail price indicated on the retail package should be inclusive of all taxes. However, in case of drugs, the retail price to be indicated is required to be exclusive of taxes. Section 4A provision can be made applicable in either case.

MRP inclusive of all taxes - Explanation 1 to section 4A(4) of Central Excise Act defines 'retail sale price' as the maximum price at which the excisable goods in packaged form may be sold to the ultimate consumer and includes all taxes local or otherwise, freight, transport charges, commission payable to dealers, and all charges towards advertisement, delivery, packing, forwarding and the like, as the case may be, and the price is the sole consideration for such sale. - - It may be noted that under Weights & Measures Act, 'Maximum Retail Price' (MRP) has to be printed on packaged commodity for retail sale. The 'MRP' has to be inclusive of all duties and taxes, including local taxes. In view of different rates of taxes in different States, a manufacturer can print different rates for sale in different States / areas. A retailer can sell the goods below MRP printed on the package.

Retail price exclusive of taxes – As per proviso to Explanation 1 to section 4A(4), if as per provisions of any other law, retail price excluding taxes (local or otherwise) is required to be declared on the package, such retail price will be the ‘retail price’ for purpose of section 4A. - - In case of scheduled drug or formulation covered under Drug Price Control Order (DPCO), price is required to be displayed as ‘Retail price not to exceed  .         .  local taxes extra’. In such cases, the retail price declared as per provisions of DPCO will be the ‘retail price’ for purpose of section 4A. [In case of non-scheduled formulations (i.e. on which there is no price control), price is required to be displayed as ‘Maximum Retail Price  .         .  inclusive of all taxes’].

Increase in retail price after clearance from factory - If retail price declared on the package at the time of removal is subsequently altered to increase the price, such increased retail price will be retail price for purpose of section 4A.   [Explanation 2(c) to section 4A]. It may be noted that the provision applies only when retail price is ‘increased’ after clearance. However, as per section 2(f)(ii), putting label of altered price will be ‘deemed manufacturer’ and hence excise duty will become payable. - - Really, as per rule 23 of Packaged Commodities Rules, alteration of MRP on the package is prohibited.

Deemed manufacture in case of goods covered under MRP provisions - In respect of goods specified in third schedule to Central Excise Act, any process which involves packing or repacking of such goods in a unit container or labelling or re-labelling of containers including the declaration or alteration of retail sale price on the container or adoption of any other treatment on the goods to render the product marketable to consumer will be ‘manufacture’. [section 2(f)(iii) effective from 14-5-2003].

The goods included in Third Schedule of Central Excise Act are same as those on which excise duty is payable u/s 4A, i.e. on basis of MRP printed on the package. Thus, in case of goods on which duty is payable on basis of MRP, if any of the process as specified (like labelling, re-labelling, repacking in unit container, alteration of MRP etc.), it will be ‘manufacture’ and duty will become payable. [This aspect has been discussed in earlier chapter].

Products covered under the scheme - So far, 98 articles have been covered under this scheme.

Ad valorem Duty

Fixing specific duty or tariff value is possible only for few selected items like Sugar, pan masala, consumer goods, Cigarette etc. Generally, it is not practicable to fix specific duty or tariff value for numerous products produced. Similarly, paying duty on the basis of MRP is possible only in respect of a few selected commodities. In other cases, Central Excise is payable on the basis of value. This is called “ad valorem duty”. The 'assessable value' is arrived at on the basis of Section 4 of the Central Excise Act and duty is payable on the basis of such value.

Assessable Value (AV) - Assessable Value (AV) is the ‘Value’ on which duty is payable as a percentage. Generally, by ‘Value’, we understand the price as mentioned in Bill or Invoice. However, for excise purposes, it is not possible to fully rely on such price as (a) Duty is payable even if goods are not sold (b) It is desirable to have uniform policy in fixing the AV (c) Chances of manipulation in such price should be minimum.

Basis of Assessable Value - As per new section 4 w.e.f. 1st July, 2000, excise duty is payable on basis of 'transaction value', if the goods are sold at the factory gate to an unrelated buyer when price is the sole consideration. If these requirements are not satisfied, valuation will be done as per Valuation Rules. - section 4(1)(b)

Earlier, Assessable Value was fixed, as per old section 4, on the basis of ‘Normal wholesale price to independent buyer/s at the factory gate, inclusive of packing cost, but exclusive of (a) all taxes and duties payable (b) Trade Discounts and (c) Cost of durable and returnable containers’.  However, the section has been replaced by entirely new section 4 w.e.f. 1-7-2000.

The basic provisions of new Section 4(1)(a) state that 'assessable value' when duty of excise is chargeable on excisable goods with reference to value will be 'transaction value' on each removal of goods, if following conditions are satisfied -

Cost of Manufacture not relevant - It may be noted that Central Excise Valuation can be below manufacturing Cost. If there is no allegation of flow-back of money from buyer to assessee, if price is the sole consideration and if dealings between assessee and buyer are at arm’s length, Assessable Value will be decided on basis of selling price, even if it is below manufacturing cost.

Full intrinsic value should be considered, ownership is irrelevant - In Burn Standard Co. Ltd. v. UOI - AIR 1991 SC 1784 = 60 ELT 671 (SC) = 35 ECR 289 = 1991(3) SCC 467, it was held that cost of material supplied free by buyer has to be added to arrive at full intrinsic value of goods. It was observed, ‘The fact that the petitioners are not the owners of the end-product are irrelevant. Taxable event is manufacture - not ownership’.

Time and Place of removal – Section 4(1)(a) states that transaction value shall be assessable value when goods are sold by assessee, for delivery at the time and place of removal.

Time of removal - As per section 4(3)(cc), in case of sale from depot/place of consignment agent, ‘time of removal’ shall be deemed to the time at which the goods are cleared from factory.

Place of removal - 'Place of removal' has been defined in section 4(3)(c). Since this concept is related to ‘outward freight’ this aspect has been discussed later.

Goods must be sold at the time and place of removal - Transaction Value is relevant for valuation only when goods are 'sold' at the time and place of removal.

State in which goods are removed is relevant for valuation - Goods are to be assessed at the time of removal from factory. Thus, the stage in which they are removed is highly relevant for valuation.

Essentials of valid sale - As per section 2(h) of CE Act, 'sale' and purchase' within their grammatical variations and cognate expressions, means any transfer of goods by one person to another in the ordinary course of trade or business for cash or deferred payment or other valuable consideration.

Note that ‘consideration’ can be paid by or to third party also. The definition does not say that consideration must be paid to the assessee himself.

Sale under Central Excise would include hire purchase and lease. When goods are given on hire purchase, there is transfer of possession for consideration but there is no transfer of property.

However, 'sale' will not include job work, stock transfer, branch transfer or free samples.

Buyer should not be known in stock transfer - It may be noted that 'stock transfer' or 'branch transfer' envisages dispatch of goods of standard size and specifications to the depots / branches. Goods should not be dispatched or identified for a particular buyer. If the buyer is identifiable before removal of goods from the factory (e.g. in case of tailor made goods), it is a sale and not a stock transfer, even if goods are dispatched to depot and sold from depot.

Price must be sole consideration - Price should be sole consideration of sale. Price is the consideration given for purchase of a thing.

Transaction Value as Assessable Value

New section 4(3)(d) defines ‘transaction value’ as 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 sale or at any other time, including, but not limited to, any amount charged for, or to make provision for, advertising or publicity, marketing and selling organization expenses, storage, outward handling, 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 paid or actually payable on such goods. Thus, following are main requirements of ‘transaction value’.

Amount payable by buyer to or on behalf of assessee - Any amount that the buyer is liable to pay to the assessee or to a third person on behalf of assessee is includible in ‘transaction value’.

Payment should be ‘By reason of or in connection with' - The payment by the buyer should be by reason of or in connection with sale of goods which are under assessment.

By reason of - As per Black’s Law Dictionary 1979 edition, ‘by reason of’ means ‘because of, by means, acts or instrumentality of’. As per Concise Oxford Dictionary, ‘reason’ means motive or cause. This indicates a cause and effect relationship.

In connection with - ‘Connect’ means ‘join’. ‘Connection’ means ‘act of connecting’ or ‘state of being connected’ - Concise Oxford Dictionary. As per Black’s Law Dictionary 1979 edition, ‘connection’ means the state of being connected or joined, union by junction, by an intervening substance or medium, by dependence or relation, or by order in a series. The term ‘in connection with’ has always received a strict interpretation from Court. - - The term ‘connected with’ means that connection must be direct and clear as between cause and effect and not remote and doubtful. ‘Connected with’ must be considered to imply a substantial or direct connection and not a fanciful or highly problematical connection. - Basudev v. Rex 1949 ALJ 397 = AIR 1949 All HC FB 513 - view confirmed in Rex v. Basudeva AIR 1950 FC 67 ( 5 member bench).

Connection is required - mere relation not enough - The legislature has used the terms ‘by reason of’ and ‘in connection with’ and not ‘in respect of’ or ‘in relation to’. Both these phrases viz. ‘by reason of’ and ‘in connection with’ have always received a strict construction. Thus, for inclusion in ‘transaction value’, there should be direct and immediate connection with the price paid / payable and the sale of goods. Mere ‘relation’ is not enough - ‘connection’ is required. A 'casual relation' is not enough, there should be 'cause and effect' type connection between the price paid / payable and the sale of goods.

Inclusions in Transaction Value

'Transaction Value' as defined in section 4(3)(d) states that any amount charged for (by assessee to buyer), or to make provision for (presumably by buyer), advertising or publicity, marketing and selling organisation expenses, storage, outward handling, servicing, warranty, commission or any other matter; is includible in 'transaction value'. However, the payment or provision will be includible only if (a) Buyer is liable to pay to assessee or on behalf of assessee and (b) It is by reason of or in connection with the sale.

Packing charges - New section 4 has made no specific provision for packing charges. Cost of normal packing will be covered, as in most cases, it is 'in connection with' or 'in respect of' sales.

Packing supplied by buyer should also be includible, just like cost of any other material supplied by buyer to seller is includible. CBE&C, vide its circular No. 643/34/2002-CX dated 1-7-2002, has clarified that cost of packing supplied by buyer should be added. In case of durable packing supplied by buyer, which can be used repeatedly, cost will have to be amortised over the life span of the packing material.

Department, vide its circular No. 354/81/2000-CE dated 30-6-2000 has confirmed that all packing charges, whether normal or special, will form part of the transaction value. Same view is reiterated in Chapter 3 Part III Para 2.5(vi) of CBE&C’s CE Manual, 2001 and CBE&C circular No. 643/34/2002-CX dated 1-7-2002.

Design and Engineering Charges - Design and Engineering Charges are essential for purpose of manufacture and hence have to be included in Assessable Value.

Consultancy charges relating to manufacturing - These were includible under old section 4 and should be includible in new section 4 as well, as such payment is 'by reason of sale'.

Compulsory after Sales Service / service in warranty period is includible - The heads 'servicing' and 'warranty' have been specifically included in definition of payments includible in 'transaction value'.

Manufacturers often give free after sale service during warranty period. Though these are called ‘free services’, cost of such services is already included in the price of product. Promise for provision of after sale service certainly increases its marketability, it is in connection with sale and its cost is includible.

Loading and handling charges within the factory - These are in by reason of sale and are includible. These were includible earlier also.

Price at the Time of Removal - Price relevant is ‘at the time of removal’. Thus, any subsequent increase or reduction in prices after goods are cleared from the factory is not relevant.

Question : Price of a machine was Rs. 3 lakhs on 28th September, 2002 when the machine was removed from the factory at Pune and sold to a buyer. The buyer refused to take delivery of the machine. In the meanwhile, the machinery manufacturer increased the price of machinery to Rs 3.30 lakhs w.e.f. 1st October, 2002. The machinery manufacturer then sold the machine to another buyer on 12th November, 2002 at increased price of Rs 3.30 lakhs. What is the excise duty payable. The excise duty rate is 15%. (The prices are exclusive of all taxes)

Answer : The price prevalent at the time of removal was Rs. 3 lakhs. Hence, duty payable is Rs. 45,000. The duty is payable on 28th September 2002 when the machine was removed from the factory after manufacture.

Additional consideration should be added to the price paid by buyer to assessee - The additional consideration flowing directly or indirectly from the buyer shall be added to the price actually paid to assessee. This will be cum-duty price. The cum-duty price, exclusive of sales tax and other applicable taxes, if any,  will be deemed to include the duty payable on such goods. – Explanation to section 4(1) [inserted w.e.f. 14-5-2003].

Thus, additional consideration will be added to the price paid by buyer to assessee. This will be treated as cum-duty price and assessable value will be worked back after allowing admissible deductions (i.e. by back calculations). – confirmed and clarified in CBEC DO letter No. 334/1/2003-TRU dated 28-2-2003 issued on Budget day to all Excise Commissioners.

Exclusions from Transaction Value

Section 4(3)(d) of Central Excise Act provides that 'transaction value' does not include amount of duty of excise, sales tax and other taxes, if any, actually paid or actually payable on such goods. Moreover, any other payment made by buyer to assessee will be includible only if it is by reason or sale or in connection with sale.

Deduction of Taxes from AV – Any tax which  is payable ‘in connection’ with sale, is includible in Assessable Value. However, definition of transaction value specifically provides that sales tax, Excise duty and other taxes payable on finished product are to be excluded for purpose of valuation. [This was allowable as deduction under old section  also, and earlier case law discussed below is fully relevant].

If any excise duty or other tax is paid (payable ?) at concessional rate for a particular transaction, the amount of excise duty or tax actually paid at concessional rate shall only be allowed to be deducted from price. - Chapter 3 Part III Para 2.5(v) of CBE&C’s CE Manual, 2001.

Equalised deduction not permissible – Since each clearance is a separate transaction for assessment, tax deduction on basis of average taxes paid is not permissible. CBE&C, vide its circular No. 643/34/2002-CX dated 1-7-2002, has also stated that taxes are deductible only on actual basis and not on average basis.

Formula for calculation of AV - In GOI v. MRF Ltd. - 1995 (77) ELT 433 (SC) = JT 1995(4) SC 512 = 1995 (58) ECR 385 (SC) = 1995 AIR SCW 2654 = (1995) 3 SCALE 299 = (1995) 4 SCC 349 (SC 3 member bench), it was held that Assessable Value = (Cum Duty price - Permissible Deductions) / (1 + rate of duty)

Trade Discounts - Trade discounts are allowable as deduction for valuation purposes. Trade discount means discount usually expressed as a percentage deduction given to wholesale buyers. Since quantum of trade discount is not payable by buyer to seller, it will not form part of 'transaction value'. Note that 'commission to agent' will not be allowed as deduction, while trade discount given to buyer is not a 'commission'. It will not be added for purpose of Central Excise Valuation.

It is clear that 'transaction value' is only after deducting the trade discount as 'transaction value' means price actually paid or payable for goods. Thus, 'trade discount' is allowable as deduction. It can also include cash discount, turnover discount or any other discount. There is no condition or provision that such discount should be known at the time of removal of goods from factory. Definition of 'transaction value' vide section 4(3)(d) makes clear that payment by buyer to assessee can be at the time of sale or at any other time. (i.e. it may be either before or after the sale).

Cash discount permissible - Department has confirmed that cash discount is allowable as deduction, if actually passed on to buyer, if transaction is on principal to principal basis. CBE&C circular No. 643/34/2002-CX dated 1-7-2002 .

Any trade discount permissible - The trade discount need not be uniform. Trade discount may be called by different names like cash discount, quality discount, turnover discount, etc. Such discount will be allowed on actual basis.

Discount can be given at any time - There is no provision that discount should be known or given at the time of removal of goods. Definition of 'Transaction Value' makes it clear that any amount the buyer is liable to pay to assessee at the time of sale or at any other time is includible in 'Assessable Value'. Such 'any other time' can be either before the sale or after the sale. Thus, year end discount or turnover discount given on basis of turnover achieved during a prescribed period should be allowable as deduction.

Department's clarification - Department, vide its circular No. 354/81/2000-TRU dated 30-6-2000 that and has clarified as follows - The duty is chargeable on the net price paid or payable and discount of any description actually given will not be includible in transaction value. Thus if in any transaction a discount is allowed on declared price of any goods and actually passed on to 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,  e.g. quantity discount for goods purchased or cash discount for the prompt payment etc.  will, therefore, not form part of the transaction value for the goods. Differential discount is also permissible. Where the assessee claims that the discount of any description for a transaction is not readily known but would be known only subsequently e.g. 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. Same view is reiterated in Chapter 3 Part III Para 2.5(iv) of CBE&C’s CE Manual, 2001.

Commission to Selling Agents not allowed as deduction - ‘Commission’ means a percentage paid to the agent from the profits of goods sold or business obtained - Concise Oxford Dictionary.  Sometimes, goods are sold directly to a buyer and overriding commission is paid to selling agents/commission agents. Sometimes (particularly in international transactions), buyer is asked to make payment of commission directly to the agent. Such commission is not deductible from 'transaction value'. If it is paid separately by buyer, it is clearly includible, as obviously, it is paid by buyer on behalf of seller.

Outward handling, freight and transit insurance charges – As per section 4(1)(a), ‘transaction value is considered as ‘value’ if goods are ‘sold’ at ‘place of removal’.

Place of removal - 'Place of removal' means - (i) a factory or any other place or premises of production or manufacture of the excisable goods from where such goods are removed or (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  or (iii) A depot, premises of a consignment agent or any other place or premises from where excisable goods are to be sold after their clearance from factory. [section 4(3)(c)].

Thus – (i) If excisable goods are removed for sale from factory of manufacture or place of production, that will be 'place of removal'. (ii) If goods are cleared for sale from warehouse where goods were allowed to be kept without payment of duty, that will be the 'place of removal'. (iii) If goods are cleared from factory to depot or branch or place of consignment agent, then such depot/branch/place of consignment agent will be ‘place of removal’.

Department has clarified that if any value addition is done by assessee by processing the goods after removal from factory, cost of such processing is not to be added in Assessable Value, if such process does not amount to ‘manufacture’ – CBE&C circular No. 138/08/2000-CX.4 dated 3.1.2001.

Depot sale - In case goods are sold from depot/place of consignment agent, goods will have to be valued on the basis of price prevailing at the depot, but on the date of removal from factory of manufacture.

Sale at factory gate - If the contract is for delivery at the factory gate, sale is complete at the factory gate itself, as the transporter gets ‘possession’ of goods on behalf of buyer as the transporter will be ‘agent’ of buyer. The buyer will be incurring the expenditure on transport and insurance charges. However, the expenditure will be on his own and not 'on behalf of the assessee' as required vide definition of 'transaction value' u/s 4(3)(d). Moreover, the payment is not 'in connection' with sale or 'by reason of' sale as the sale is completed at the factory gate itself. The payment made by buyer will be on his own and 'by reason of' or 'in connection with' outward handling charges.

Delivery and sale at other place - It is possible that contract is ex-destination or FOR destination and assessee is under obligation to deliver the goods to destination. In such case, there is no ‘sale’ at factory gate and hence, valuation cannot be done on basis of transaction value.

As per explanation 2 to rule 5 of Central Excise Valuation Rules, if goods are sold at a place other than the place of removal (factory gate is normally considered as place of removal), cost of transportation from place of removal upto place of delivery of such goods will not be includible.

Equalised freight – Some times, manufactures fix uniform all India price of the goods. The actual cost of transport will obviously vary from place to place. In such case, though the invoice shows the uniform price, deduction will be available on the basis of average freight i.e. equalized freight.

Notional Interest on security deposit/advances - The manufacturer may often ask for advance/deposit from buyers. The purpose may be to ensure security of payment from buyers and/or to get working capital. Such deposit may be with or without interest. Such advance is 'in relation to sale'. If the advance obtained is without interest or with lower quantum of interest, there will be benefit to the buyer by way of reduction in his cost. The 'connection' between the selling price and reduced cost by way of reduction in interest cost is only 'indirect'. Thus, 'notional interest' on advances may not be includible if relation between advance and selling price is only casual. There is 'relation' but no 'connection'. 'Cause and effect' relationship is absent.

However, if there is evidence that selling price has been lowered due to receipt of advance / deposit, then price is not the 'sole consideration of sale', as required u/s 4(1)(a). In such case, there is 'cause and effect' relationship. There is 'connection' between advance received and the price charged. In such cases, notional interest on advance should be includible.

Explanation 2 to rule 6 of Valuation Rules (inserted w.e.f. 1-3-2003) provides that notional interest on advances is includible in assessable value only if there is evidence with Central Excise Officer that such advance has influenced the fixation of prices by way of charging lower price or by offering a special discount to the buyer who has made the advance deposit.  Thus, when the price is same to all buyers whether they have paid advance to seller, notional interest is not includible in assessable value. - - As per Illustration 2 to Explanation 2, even in cases where there is only one buyer from whom advance has been obtained and comparable price to other buyer is not available, notional interest is includible only if there is evidence with Central Excise Officer that such advance has resulted in lowering the prices. - - In other words, burden of proof that price has been lowered or special discount has been offered on account of receipt of advance from buyer, is on the department.

Installation and Erection Expenses - Installation and erection expenses are incurred after the goods are removed from the factory. There may be an independent contract for erection or even a composite contract. In the opinion of author, erection and commissioning charges should not be includible. [However, now 8% service tax is being imposed vide Finance Act 2003, on erection and commissioning charges].

Clarification by CBE&C – The Board has clarified as follows – (a) If final product is not excisable, question of including erection and commissioning charges does not arise. (b) If a machine is cleared from a factory on payment of appropriate duty and later taken to premises of the buyer for installation/erection and commissioning into an immovable property, no further duty will be payable (c) If parts/components are brought to site and the machine is erected/installed and commissioned, if the product (generator as per Board circular) is excisable commodity, cost of erection, installation and commissioning would be included in assessable value. In other words, if the expenditure on erection, installation and commissioning has been incurred to bring into existence any excisable goods, these charges would be included. If these costs are incurred to bring into existence some immovable property, they will not be included in the assessable value of such resultant property. -CBE&C circular No. 643/34/2002-CX dated 1-7-2002 . [The clarification indeed confirms many of  the views expressed above].

Interest on Receivables - The manufacturer may recover interest from buyer, if he does not make payment as per agreed terms. Such interest should not be includible.

Departmental clarification - Department has confirmed that delayed payment charges will not be includible, if shown or indicated separately in invoice and charged over and above the sale price. – CBE&C circular No. 643/34/2002-CX dated 1-7-2002. Departmental circular No. 354/81/2000-TRU dated 30-6-2000 has clarified that interest on delayed payment 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. Same view is reiterated in Chapter 3 Part III Para 2.5(iii) of CBE&C’s CE Manual, 2001.

Bank charges for collection of sale proceeds - The principle discussed above will apply in respect of bank charges for collection of sale proceeds and these should not be includible.

Some areas where no case law under new section 4

New section 4 of Central Excise Act is radically different from old section 4. Thus, most of case law in respect of earlier section 4 has become redundant and all settled law has been unsettled. In some cases, principles of earlier section can be applied, but in many cases, disputes seem inevitable.

Some areas where presently there is neither case law nor any specific provisions in new provisions are discussed below.  Author’s view in respect of each head are also given. These areas will get settled through case law in due course.

Advertisement and sale promotion Expenses incurred by buyer - Manufacturer incurs advertisement expenditure. These are obviously built in the cost for determining his selling price. In addition, often dealers also advertise the product at their own cost.

Definition of 'transaction value' includes charges for 'advertisement, publicity and marketing expenses'. However, these are includible only if buyer is liable to pay the amount to assessee or on behalf of assessee. Thus, advertisement and Sales promotion expenses incurred by dealer/distributor, if done on his own, are not to be included, if transaction between buyer and seller is on principal to principal basis. This is because the buyer is not incurring these expenses 'on behalf of the assessee'.

Training charges to customer - Training charges to customer will be includible if they are in connection with sale or by reason of sale. If the transaction of providing training to employees of customer is an independent transaction, it may be 'in relation to sale', but not 'in connection with sale'

Inspection charges / addition testing charges paid by buyer - Assessee carries out his own inspection and its cost is obviously included in his selling price. However, sometimes, customer carries out additional inspection either himself or through another inspection agency. Some times, expenses of such additional inspection / testing are borne by assessee while, in other case, the expenses may be borne by the buyer himself. This inspection is in addition to normal inspection and quality checks of the manufacturer himself. Following points need consideration.

Subsidy / Rebate obtained by assessee - A general subsidy / rebate is obviously not be includible as it has no connection with individual clearances of goods.

Profit earned on post removal activity - Profit earned on post removal activity is not to be added unless there is any deliberate attempt to divert a part of the genuine price and show it as other charges - ratio of Empire Industries Ltd. v. CCE 1997(95) ELT 653 (CEGAT). In Baroda Electric Meters Ltd. v. CCE 1997(94) ELT 13 (SC 3 member), it was held that profit earned by manufacturer on transportation cannot be included in Assessable Value. - followed in S R Jhunjhunwala v. CCE 1999(114) ELT 890 (CEGAT) - also in Sri Kaliswari Fireworks v. CCE 1998(98) ELT 93 (CEGAT) in respect of insurance charges.

Manufacture under brand name of others - Some Companies get the goods manufactured from others and sell them under their brand name (e.g. Batas get chappals manufactured from small units, Bajaj Electricals get their electrical products manufactured from other units, Philips/Crompton and others get many products manufactured under their brand name). In such cases, selling price of Bajaj or Bata will naturally be higher than the purchase price. Normally, the buyer will get the goods manufactured as per his specifications and will inspect the final product to ensure that quality is maintained. Even then, the buyer, who is a brand name owner, is not the actual manufacturer.

Naturally, the brand name owner sales the goods at higher rates. Even then, 'value' for purpose of excise will be based on the price at which the manufacturer sales the goods to brand name owner. The actual manufacturer and brand name owner cannot be termed as 'related person' as long as relations between them are on 'principal to principal' basis and price is the sole consideration.

If the manufacturer of product manufactures goods with 'MRP' printed on the goods at the time of removal and if goods are covered under section 4A, duty will be payable on basis of MRP printed on the product, as section 4A has overriding effect over other provisions in respect of valuation. However, if the goods are cleared in bulk, without printing 'MRP', the goods will not be covered under section 4A i.e. MRP provisions and duty will be payable on basis of section 4, i.e. 'transaction value'.

Valuation Rules to determine Assessable Value

Section 4(1)(b) of the Central Excise Act states that if Assessable Value’ cannot be determined u/s 4(1)(a), it shall be determined in such manner as may be prescribed by rules. Under these powers, Central Excise Valuation (Determination of Price of Excisable Goods) Rules 2000 have been made effective from 1-7-2000. These rules are discussed below.

Value nearest to time of removal if goods not sold - If goods are not sold at the time of removal, then value will be based on the value of such goods sold by assessee at any other time nearest to the time of removal, subject to reasonable adjustments. [Rule 4]. This rule applies when price at the time of removal is not available as the goods are not sold by the assessee at the time of removal. Thus, this rule should apply in case of removal of free samples or supply under warranty claims. In case of removal of samples or free replacement under warranty claims, duty will be payable on price of identical goods sold by assessee near about the time of removal of the samples.

This rule should not apply in respect of depot transfer or branch transfer or in case of sale to ‘related person’ as specific provisions have been made. This provision should also not apply for ‘job work’ as indeed in case of ‘job work’ there is no ‘sale’ of goods.

In case of free parts supplied during warranty period, excise duty is payable on the parts but not on labour cost involved in fitting such free parts. [case law discussed in this chapter at another place].

Valuation of samples – CBE&C has clarified that in case of samples distributed free, valuation should be done on basis of rule 11 along with rule 8 i.e. cost of production plus 15%. [In the opinion of author, rule 8 applies to captive consumption. In case of free samples, rule 4 seems to be more appropriate, i.e. value of similar goods cleared at or around the same. Of course, the difference in many cases may be negligible and not worth fighting. In some cases (like pharmaceutical samples), it is reported that it is, in fact, advantageous to assessee to value samples on the basis of cost of production plus 15%].

Goods sold at different place - Some times, goods may be sold at place other than the place of removal e.g. in case of FOR delivery contract. In such cases, actual cost of transportation from place of removal upto place of delivery of the excisable goods will be allowable as deduction. Cost of transportation can be either on actual basis or on equalized basis. [rule 5]. - . – This aspect has already been discussed earlier.

Provision when price is not the sole consideration - If price is not the sole consideration for sale, the ‘Assessable Value’ will be the price charged by assessee, plus money value of the additional consideration received. The buyer may supply any of the following directly or indirectly, free or at reduced cost.

(i) Materials, components, parts and similar items

(ii) Tools, dies, moulds, drawings, blue prints, technical maps and charts and similar items used

(iii) Material consumed, including packaging materials

(iv) Engineering, development, art work, design work and plans and sketches undertaken elsewhere than in the factory of production and necessary for the production of the goods

In such cases, value of such additional consideration will be added to the price charged by assessee to arrive at the ‘transaction value’. [Rule 6].

Valuation in case of job work - Some times, the buyer (trader) supplies raw materials and manufacturing operations are carried out by Job worker/processor as per requirements of buyer/trader and the material is returned to buyer after job work/processing. (Note : The term Job Work is used in Engineering Industry while the term processing is used in Chemical/Textile industry). Since excise is a duty on ‘such goods’, it is immaterial who has supplied the raw material.

No specific provision has been made in case of job work. Strictly speaking, there is no ‘sale’ in case of job work and rule 6 should not apply. Even rule 4 or rule 5 cannot apply as goods are not sold by assessee in case of job work.

In Ujagar Prints v. UOI - 1989 (38) ELT 535 (SC) = 1989 (21) ECR 1 (SC) = 42 Taxman 151 (SC) = AIR 1989 SC 516 = (1989) 74 STC 401 (SC) = (1989) 3 SCC 488 = 1988(2) SCALE 1115 = 179 ITR 317 (SC 5 member bench), [further clarified in 1989(39) ELT 493 = 21 ECR 1 = AIR 1989 SC 972 = 1989(3) SCC 531 = 1989(1) SCALE 195] - followed in Pawan Biscuits v. CCE 2000(5) SCALE 263 = 2000 AIR SCW 2690 = AIR 2000 SC 2565 = 120 ELT 24 (SC), it was held that the ‘Assessable Value’ will be equal to cost of the raw material plus value of job work done plus manufacturing profits. It is necessary to include processor’s (job worker’s) expenses and profit, but not the trader’s profit, who gets the goods manufactured. It is necessary to include processor’s (job worker’s) expenses and profit, but not the trader’s profit, who gets the goods manufactured - explained same way in CCE v. Pharmasia Ltd. - (1996) 13 RLT 1 = 63 ECR 380 (CEGAT).

Though these judgments are under old section 4, CBE&C has clarified that valuation under new section 4 will be done on the same principle as laid down in Ujagar Prints, i.e. on basis of cost of raw material plus job charges. Assessable Value will not include profit or expenses (like advertisement, publicity, overheads) incurred by buyer, who is supplier of raw material. Valuation will be done on basis of rule 11 read with rule 6 – CBE&C circular No. 619/10/2002-CX dated 19-2-2002 – view reiterated in CBE&C circular No. 643/34/2002-CX dated 1-7-2002 .

In a further circular No. 65/2002 dated 30-9-2002 issued by Commissioner of CE, Mumbai-IV, it has been clarified that question of adding any further amount towards profit (of 15%) does not arise. If there is shrinkage of gray fabrics, value of raw material will be suitably enhanced on basis of ‘shrinkage factor’.

Thus, raw material supplied by the buyer will be considered as ‘additional consideration’ and will be added to job charges, as provided in Rule 6.

Job worker is responsible for payment of correct duty – In CCE v. Bhilwara Processors 2002(146) ELT 455 (CEGAT 3 member bench), it was held that job worker cannot escape liability to pay duty on correct valuation of goods. Revenue is not bound by the value of inputs declared by the raw material supplier, if found to be mis-declared.

Duty payable on MRP basis if product covered under MRP provisions - Normally, if assessee is engaged in manufacture on job work basis, he has to pay duty on material cost plus job charges. However, if a product covered under MRP provisions is manufactured on job work basis, duty will be payable as per provisions of section 4A, i.e. on basis of MRP less abatement and not on basis of material cost plus job work charges, as section 4A overrides provisions of section 4.

Sale at depot / consignment agent – Section 4(3)(c)(iii) [amended w.e.f. 14-5-2003] provides that in case of sale at depot/consignment agent, the depot/place of consignment agent will be the ‘place of removal’. As per section 4(3)(cc), in case of sale from depot/place of consignment agent, ‘time of removal’ shall be deemed to the time at which the goods are cleared from factory. - - In other words, in case of sale from depot/place of consignment agent, duty will be payable on the price prevailing at the depot as on date of removal from factory. Price at which such goods are subsequently sold from the depot is not relevant for purpose of excise valuation.

When goods are sold through depot, there is no ‘sale’ at the time of removal from factory. In such cases, price prevailing at depot (but at the time of removal from factory) shall be the basis of Assessable Value. The value should be ‘normal transaction value’ of such goods sold from the depot at the time of removal or at the nearest time of removal from factory. [rule 7 of Valuation Rules].

For example, 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 tonne to unrelated buyers, where price is the sole consideration for sale, the consignment cleared from the factory at Delhi on 5.7.2000 shall be assessed to duty on the basis of Rs. 15,000 per tonne 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. [Illustration given in the departmental circular dated 30-6-2000].

In short, price ruling at the depot, but at the time of removal from the factory will be relevant. It does not matter if subsequently the goods are actually sold from depot at higher or lower price.

Meaning of 'normal transaction value' - As per Valuation Rule 2(b), “normal transaction value” means the transaction value at which the greatest aggregate quantity of goods are sold. The term 'greatest aggregate quantity' is used in rule 7 of Customs Valuation Rules. This rule states that while considering selling price of imported goods in India, unit price at which greatest aggregate quantity of identical or similar goods are sold to unrelated persons in India should be the basis. e.g. if 65 units are sold @ Rs. 100, 55 units are sold @ Rs. 95 and 80 units are sold @ Rs. 90; then greatest aggregate quantity is 80 which is sold @ Rs. 90 per unit, which will be the basis for valuation. This principle should apply in deciding 'normal transaction value' under rule 2(b) also.

Freight and insurance from depot onwards is not includible – In Prabhat Zarda v. CCE 2002(146) ELT 497 (SC), it was held that freight and insurance from depot to the customer is not includible. [The Counsel of Assessee agreed that freight and insurance from factory to depot is includible in Assessable Value and hence SC did not decide the issue].

Valuation in case of captive consumption - In case of captive consumption, valuation shall be done on basis of cost of production plus 10% (Rule 8 of Valuation Rules). Captive consumption means goods are not sold but consumed within the factory.

CBE&C, vide its circular No. 643/34/2002-CX dated 1-7-2002, has clarified that if same goods are partly sold by assessee and partly consumed captively, goods sold have to be assessed on basis of transaction value and goods captively consumed should be assessed on basis of rule 8. The reason is, as per new section 4, transaction value has to be determined separately for each removal.

In case goods are supplied to a ‘related person’ but consumed by the related person and not sold, valuation will be done on the basis of cost of production plus 15%. [Proviso to rule 9]. - - CBE&C, vide its circular No. 643/34/2002-CX dated 1-7-2002, has clarified that this proviso applies when goods are transferred to a sister unit or another unit of the same factory for captive consumption in their factory.

The simplified provision has been probably made as in most of the cases, the buyer will be able to get Cenvat credit of duty paid on inputs and there is hardly any incentive to avoid any payment of duty.

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.

Principles of cost analysis – Institute of Cost and Works Accountants of India (ICWAI) has issued Cost Accounting Standard CAS-4 titled ‘Cost of Production for Captive Consumption’. The standard deals with determination of cost of production for captive consumption. CBE&C, vide circular No. 692/8/2003 dated 13-2-2003, has clarified that in case of captive consumption, cost calculation should be as per CAS-4 standard only.

Best judgment Assessment - If assessment is not possible under any of the foregoing rules, assessment will be done by ‘best judgment’. If the value of any excisable goods cannot be determined under the foregoing rules, the value shall be determined using reasonable means consistent with the principles and general provisions of these rules and sub-section (1) of section 4 of the Act. [Rule 11]

Bought out goods / spare parts supplied along with own manufactured goods

Often some articles are supplied along with the goods, which are bought out, i.e. not manufactured by the assessee. These bought out components broadly fall in following categories -

Following need consideration - (a) Excise is a duty on manufacture. Duty should not be levied on an activity which is not manufacturing activity, unless it is incidental or ancillary to main manufacturing process. (b) There is no levy on 'trading activity'. (c) Goods are to be assessed in the stage in which they are cleared from the factory of production. (d) Any payment by buyer to assessee 'in connection with' or 'in respect of' sale is includible, while payment which is only 'in relation to' the sale is not includible. (e) Principles of classification or Cenvat are not directly relevant for valuation u/s 4.

Value of essential bought out items - Value of essential bought out items, fitted to the main article at the time of removal should be includible in assessable value, as (a) Goods should be assessed in the stage in which they are removed. (b) Payment for such item is 'in connection with' the sale and the main article cannot work without this bought out part. (c) Value of essential part or component should be added even if it is supplied by buyer. The reason is that if such part is supplied by buyer, 'price' is not 'sole consideration'. Thus, the additional consideration, i.e. value of parts supplied by buyer should be includible, as per rule 6 of Central Excise Valuation Rules, 2000.

Value of optional bought out items - Some times, some bought out items are supplied on optional basis. These are not essential parts of the main article. Value of these should not be includible as - (a) It is a purely trading activity. Even reasonable profit of sale of such items should be permissible. (b) Supply of such bought out item may be 'in relation' to sale but not 'in connection' with sale or 'by reason' of sale. The sale of main article is independent of sale of optional bought out items.

Profit earned on such bought item should not be includible in Assessable Value of manufactured product, in view of Triveni Engineering v. CCE 2000(122) ELT 386 (CEGAT).

Case of computer software – where bought out item required for main article but considered as an independent article - Some times, manufacturer supplies some bought out items as a composite contract. This bought out item is necessary for functioning of main article, but has a different identity of its own. e.g. software supplied duly loaded on computer. Here, the hardware (computer) cannot function without software, but still 'software' is not part of 'hardware'.  It has been held that cost of software is not includible in value of software even if loaded at the time of delivery from factory.

Bought-out goods supplied with manufactured equipment, but no manufacturing activity - Some times, manufacturer supplies some bought out parts with his own manufactured parts - may be as assembly or as a set. However, there is no manufacturing activity. In such case, duty should not be leviable.

Value of bought out consumables supplied with main Article - A 'consumable' is not 'essential part' of main article, even if the main article cannot function without such consumable. Value of such consumables should not be includible. The reasoning would be same for non-inclusion of optional bought out articles.

Cost of bought out Accessories supplied with main article - If the aforesaid principles are valid, value of bought out accessories supplied along with main article should not be includible.

Profit earned on such bought accessory will not be includible in Assessable Value of manufactured product, in view of Triveni Engineering v. CCE 2000(122) ELT 386 (CEGAT).

Sale to a ‘Related Person’

Transaction Value' can be accepted as 'Assessable Value' when buyer is not related to buyer. As per section 4(3)(b), persons shall be deemed to be 'related' if - (i) They are inter-connected undertakings (ii) They are relatives (iii) Amongst them, buyer is a relative and a distributor of 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.

The definition of 'related person' includes 'inter connected undertaking'. Only 25% control is enough to make to buyer and assessee as inter connected undertakings. This would have affected many assessees. However, the provisions in respect of  'inter connected undertaking' have been made almost ineffective in valuation rules. Now, the 'inter connected undertakings' will be treated as 'related person' only if they are holding and subsidiary or they are 'related person' under any other clause. In other cases, they will not be treated as ‘related person'. If they are not treated as related person, price charged by assessee to buyer will be accepted as 'transaction value'.

Thus, for all practical purposes, previous definition of 'related person' continues, which was any way totally ineffective.

Inter Connected Undertakings - Buyer and seller are 'related' if they are inter-connected undertakings, as per section 2(g) of Monopolies and Restrictive Trade Practices Act, 1969 (MRTP). - Explanation (i) to section 4(3)(b) of Central Excise Act.

As explained above, provisions in respect of 'inter connected undertaking' as 'related person' have been made almost ineffective in the Valuation Rules, 2000.

Interconnected undertaking - Section 2(g) of MRTP Act gives definition of interconnected undertaking. It is possible to have inter-connection between two Companies, two firms, a Company and a firm, a Company and a trust, etc. Just 25% common control is sufficient to call two units ‘inter connected undertakings’.

Interest in business of 'each other' - As per section 4(3)(b)(iv), buyer and seller are 'related' if they are associated that they have interest, directly or indirectly, in the business of each other. It is not enough if only buyer has interest in seller or seller has interest in buyer. Both must have interest, directly or indirectly, in each other - Atic Industries Ltd. v. UOI (1984) 3 SCR 930 = 1984 (17) ELT 323 (SC) = AIR 1984 SC 1495 = (1984) 3 SCC 575. If buyer holds shares of manufacturer assessee, but the assessee does not hold shares in the buyer company, there is no mutual interest. - CCE v. Kersons Mfg Co. of India Ltd. 1998(100) ELT 194 (CEGAT) * Beacon Neyrpic v. CCE 2001(133) ELT 590 (CEGAT).

Relative and a distributor of Assessee  - Hon Supreme Court, in Bombay Tyre International  v. UOI (1984) 1 SCR 347 = 1983 (14) ELT 1896 = (1984) 1 SCC 467 = AIR 1984 SC 420 = 1983 ECR 1627D = 1984 (2) ECC 102 (SC) = (1986) 59 Comp Cas 460 - (Para 44 of order) held that all distributors are not to be treated as ‘relatives’. The term ‘relative and distributor’ should be ‘read down’ and understood to mean as ‘distributor who is a Relative’ of assessee. In commercial parlance, Distributor is one who acts as agent of manufacturer for purpose of distribution of goods. The distinction between distributor, dealer or agent is not clear cut and often these words are inter-changeably used. Generally, distributor is not a buyer of goods from manufacturer on his own account. Distributor has more obligations towards principal and a specified territory may be assigned to him. However, if the relations between manufacturer and buyer are on ‘Principal to Principal’ basis and if the buyer buys the goods outright, he cannot be treated as Distributor.

Definition of 'relative' is as per Companies Act - The term ‘Relative’ carries the same meaning as in Companies Act. [Explanation (ii) to section 4(3)(b) of Central Excise Act]. As per Companies Act, relative means (a) Members of HUF (Hindu Undivided Family) (b) Husband and Wife (c) Any of the 22 relations defined in the Act (like Father, Mother, Son, Son’s wife, Daughter, Father’s Father, Son’s Son etc.). It is clear that only an individual can be a relative of other. If the manufacturer or distributor is a Company or a partnership firm, it cannot be a relative as naturally a Company or partnership firm cannot be wife, husband, etc. of somebody else !

Valuation when sale is through related person - If sale is made through ‘related person’, price relevant for valuation will be ‘normal transaction value’ at which the related buyer sales to unrelated buyer.

As per Valuation Rule 2(b), “normal transaction value” means the transaction value at which the greatest aggregate quantity of goods are sold. The term 'greatest aggregate quantity' is used in Rule 7 of Customs Valuation Rules. This rule states that while considering selling price of imported goods in India, unit price at which greatest aggregate quantity of identical or similar goods are sold to unrelated persons in India should be the basis. e.g. if 65 units are sold @ Rs. 100, 55 units are sold @ Rs. 95 and 80 units are sold @ Rs. 90; then greatest aggregate quantity is 80 which is sold @ Rs. 90 per unit, which will be the basis for valuation. This principle should apply in deciding 'normal transaction value' under rule 2(b) also.

Goods sold exclusively through ‘related person’ other than ‘'inter-connected undertaking'’ - As explained above, definition of ‘related person’ has four sub-clauses i.e. (i) Inter-connected undertaking (ii) Relatives (iii) Relative and Distributor or (iv) Interest in each other. If goods are sold by assessee exclusively to or through ‘related person’ as defined in clause (ii), (iii) or (iv) above (i.e. except ‘inter connected undertaking'), relevant price will be ‘normal transaction value’ of the related person to unrelated buyer. The ‘normal transaction value’ shall be considered as on date of removal from the factory. Thus, the actual price at which such goods are sold later by related person will not be relevant. The price of related person ruling at the time of removal from factory of assessee will be relevant.

Goods sold only through inter-connected undertakings - If goods are sold only through inter connected undertaking, as per rule 10, the provision applies only when sale is to ‘inter connected undertaking’ which is a holding or a subsidiary, or it is ‘related person’ under other provisions of section 4(3)(b). In other cases, it is treated as sale to unrelated person.

Thus, even if buyer and assessee are ‘inter connected undertaking’, price charged by assessee to buyer will be the ‘transaction value’ if (a) the buyer is not a holding or subsidiary of assessee or (b) if it is not related as per sub-clause (ii), (iii) or (iv) above.