Chapter 11

Question 1 How would you arrive at the assessable value for the purposes of levy of excise duty from the following particulars-cum-duty selling price exclusive of sales-tax Rs. 10,000 - Rate of excise duty applicable to the product : 15% - Trade discount allowed - Rs. 1,200 - Freight Rs. 750. (ICSI Final Dec. 1989)

Answer 1 – Trade discount of Rs 1,200 and freight of Rs 750 are allowed as deductions. Hence, net price is Rs 8,050 [Rs 10,000 – 1,200 – 750]. Since the price is inclusive of excise duty of 15%, Excise Duty will be Rs (8050 x 15)/115 i.e. Rs 1,050 and Assessable Value is Rs 7,000 [8050-1050]. Check that 15% of Rs 7,000 is Rs 1,050.

Question 2 How would you arrive at the assessable value for the purpose of levy of excise duty from the following particulars : * Cum-duty selling price exclusive of sales tax Rs 20,000 * Rate of excise duty applicable to the product 15% * Trade discount allowed Rs. 2,400 * Freight Rs. 1,500 (ICSI Final December, 1998)

Answer 2 - Trade discount of Rs 2,400 and freight of Rs 1,500 are allowed as deductions. Hence, net price is Rs 16,100 [Rs 20,000 – 2,400 – 1,500]. Since the price is inclusive of excise duty of 15%, Excise Duty will be Rs (16,100 x 15)/115 i.e. Rs 2,100 and Assessable Value is Rs 14,000 [16,100-2,100]. Check that 15% of Rs 14,000 is Rs 2,100.

Question 3 - 1,500 pieces of a product ‘A’ were manufactured during 1997-98. Its list price (i.e. retail price) is Rs. 250 per piece, exclusive of taxes. The manufacturer offers 20% discount to wholesalers on the list price. During the year, 840 pieces were sold in wholesale, 510 pieces were sold in retail, 35 pieces were distributed as free samples. Balance quantity of 115 pieces was in stock at the end of the year. The rate of duty is 15%. What is the total duty paid during the year 97-98? Assume that the manufacture is not eligible for SSI concession.

Answer 3 – The total selling price is as follows –

Duty payable is 15% of Rs 3,02,500 i.e. Rs 45,375, plus education cess @ 2% i.e. Rs 907.50

Note – (a) Since 115 pieces were in stock at year end, no duty will be payable. Duty will be payable only when goods are cleared from factory. (b) In case of samples, as per rule 4 of Valuation Rules, value nearest to the time of removal, subject to reasonable adjustments is required to be taken. However, since prices are varying, value nearest to the time of removal may not be ascertainable and will not be acceptable for valuation as the prices are changing. In such case, recourse will be taken to rule 11 of Valuation Rules, i.e. best judgment assessment. We can take recourse to rule 7 and 9 where principle of ‘normal transaction value’ is accepted, when prices are varying. As per rule 2(b) of Valuation Rules, ‘normal transaction value’ means the transaction value at which the greatest aggregate quantity of goods are sold. Since greatest quantity of 840 pieces are sold at Rs 200, that will be ‘normal transaction value’, which can be taken for valuation of free samples.

Question 4 - A manufacturer has appointed brokers for obtaining orders from wholesalers. The brokers procure orders for which they get brokerage of 5% on selling price. Manufacturer sells goods to buyers at Rs. 250 per piece. The price is inclusive of sales tax and Central excise duty. Sales tax rate is 6% and excise duty rate is 20%. What is the AV, and what is duty payable per piece ?

Answer 4 – Assume that Assessable Value = X.

No deduction is available in respect of brokerage paid to third parties from Assessable Value/

Since Excise duty is 20% and Sales tax rate is 6%, price including excise will be 1.20 X. Sales tax @ 6% of 1.20 X is 0.072 X. Hence, price inclusive of sales tax and excise duty will be 1.272 X. [1.20 X + 0.072 X].

Question 5 - A manufacturer has to supply a machinery on following terms and conditions : (a) Price of machinery : 3,40,000 (net of taxes and duties) (b) Machinery erection expenses : 26,000 (c) Packing (normally done by him for all machinery) : 4,000 (d) Design and drawing charges relating to manufacture of machinery : 30,000 (Net of taxes and duties) (e) Central Sales Tax @ 4% (f) Central Excise Duty @ 20% (g) Cash discount of Rs. 5,000 will be offered if full payment is received before despatch of goods. (h) the machine will be supplied along with bought out accessories @ Rs. 8,500. The accessories were optional.

You are informed that (a) The buyer made all payment before delivery. (b) The manufacturer incurred cost of Rs. 1,200 in loading the machinery in the truck in his factory. These are not charged separately to buyer. - - Find the ‘Assessable Value’ and the duty payable.

Answer 5 – Erection expenses are not includible in AV. Cash discount is allowable as deduction. Duty is not payable on optional bought out accessories supplied along with the machinery. The cost of Rs 1,200 is already included in the selling price of machinery (as it is not charged separately) and hence is not to be added again.

Hence, AV is Rs 3,69,000 [Rs 3,40,000 + 4,000 + 30,000 – 5,000]. Duty @ 20% will be Rs 73,800, plus education cess @ 2% i.e. Rs 1,476..

Question 6 - Find Assessable Value and duty payable - . - Maximum Retail Trade Price : Rs. 1,100/- per unit. - Sales-Tax, Surcharge, Octroi and other Local Taxes : 10% - Cash Discount : 2% - Trade Discount: 8% - Primary and Secondary packing cost included in the above MRP : Rs. 100 - Excise duty rate : 8% ad valorem. (ICWA Inter - December 1997)

Answer 6 – Cash discount Rs 22 (2% of Rs 1,100) and trade discount 88 [8% of Rs 1,100] are available as deduction. Packing cost is not allowable as deduction. Hence, price of excise purposes is Rs 990. [Rs 1,100 – 22 – 88]. - - Now, if X is the assessable value, excise duty is 0.08 X and price including Excise duty is 1.08 X. Sales tax and local taxes @ 10 % of 1.08 X will be 0.108 X. Thus, price inclusive of excise duty and sales tax will be 1.188 X.

Question 7 - A manufacturer has agreed to supply a machine on following terms: - (i) Price of the machine at Rs. 4,50,000.00 (Exclusive of taxes and duties) (ii) Packing for transportation of the machine Rs. 15,000.00, (iii) Transport charges of machinery Rs. 25,000.00, (iv) Development and tooling charges Rs. 40,000.00 (exclusive of taxes and duties), (v) C.S.T. @ 4% (vi) Octroi paid on machine supplied Rs. 2,000.00 (not recovered from party separately) (vii) Excise duty @ 15%, (viii) Interest will be charged @ 16% on delayed payment beyond 30 days, (ix) Special discount of Rs. 5,000.00 if advance of Rs. 2,00,000.00 is paid with order. Work out the excise duty liability based on following additional information - (i) Actual transportation cost is Rs. 26,000.00, (ii) Interest of Rs. 5,000.00 was charged as party has failed to make payment within 30 days, (iii) The buyer paid advance with the order. (ICWA Inter - June 1997)

Answer 7 – Packing charges (Rs 15,000) and development and tooling charges (Rs 40,000) are includible in Assessable Value.

Transport charges of final product are not includible in Assessable Value. In this case, transport charges charged were Rs 25,000 against actual charges incurred of Rs 26,000. Hence, question of its addition does not arise. This loss of Rs 1,000 cannot be allowed as deduction, as it is not in connection with sale, it is in connection with additional service of arranging transport for customer, provided to him. It may be noted that even if actual transport charges paid to transporter were less than Rs 25,000 which were charged to customer (say actual transport charges were Rs 24,000), the difference of Rs 1,000 was not required to be added as reasonable profits on other service activities are permissible. This is so if the sale was complete at factory gate itself and transport was arranged as additional service.

Octroi duty paid Rs 2,000 on final product is allowable as deduction. Special discount of Rs 5,000 is not allowable as deduction. The reason is that 'price' should be sole consideration'.

Interest on delayed payment is not includible in Assessable Value as it is not in ‘connection’ with sale, but it is in connection with delayed payment. Packing charges are includible in AV.

Hence, Assessable Value is Rs 5,03,000 [4,50,000 + 15,000 + 40,000 – 2,000]. Excise duty @ 15% will be Rs 75,450/-.

Question 8 - Having regard to provisions of section 4 of the Central Excise Act, 1944, compute the assessable value of excisable goods and the duty amount, given the following information - (i) cum-duty wholesale price (inclusive of sales tax Rs 3,000) - Rs 16,000 (ii) Normal secondary packing cost - Rs 1,000 (iii) Cost of special secondary packing - Rs 2,000 (iv) Cost of durable and returnable package - Rs 1,000 (v) Freight (outward) - Rs 750 (vi) Insurance on freight - Rs 300 (vii) Trade discount (as per normal practice) - Rs 900. (viii) The rate of central excise duty as per the central excise tariff is 15%. (ICWA - Final- June, 1998).

Answer 8 – Secondary Packing cost of Rs 1,000 is includible. Cost of special secondary Rs 2,000 is includible if it is in connection with sales. In absence of specific information, it is assumed that it is in connection with sale and hence is addible. Sales tax of Rs 3,000 is allowable as deduction. Cost of durable and returnable packing is not includible. Transport charges and insurance are not includible. Trade discount of Rs 900 is allowable as deduction.

Hence, cum-duty price for excise purposes is Rs 15,100 [Rs 16,000 + 1,000 + 2,000 – 3,000 – 900]. If Assessable Value = X, duty @ 15% will be 0.15 X. Hence, total price, including excise duty is 1.15 X.

Now, 1.15 X = Rs 15,100. Hence, X, i.e. Assessable Value is = Rs 13,130.43. Excise duty @ 15% of Assessable Value will be Rs 1,969.57. Check that Rs 13,130.43 + Rs 1,969.57 is Rs 15,100.

Note - It is presumed that outward freight of Rs 750 and insurance has been charged over and above the the price on actual basis and hence not included. [Advise to students - In case of doubt, you should state the assumptions made, so that examiner is aware that you know the correct legal position]. 

Question 9 - Having regard to the provisions of Section 4 of the Central Excises Act, 1944, compute/derive the assessable value of excisable goods, for levy of duty of excise, given the following information : * Cum-duty wholesale price (including sales tax of Rs. 2,000) - Rs 15,000 * Normal secondary packing cost - Rs 1,000 * Cost of special secondary packing - Rs 1,500 * Cost of durable and returnable packing - Rs 1,500 * Freight - Rs 750 * Insurance on freight - Rs 200 * Trade discount (normal practice) - Rs 1,000 * Rate of C.E. duty as per C.E. Tariff - 15% Adv. State in the footnote to your answer, reasons for the admissibility or otherwise of the deductions. (CA Final - November 1996)

Answer 9 - Secondary Packing cost of Rs 1,000 is includible. Cost of special secondary Rs 1,500 is includible if it is in connection with sales. In absence of specific information, it is assumed that it is in connection with sale and hence is addible. Sales tax of Rs 2,000 is allowable as deduction. Cost of durable and returnable packing is not includible. Transport charges and insurance are not includible. Trade discount of Rs 1,000 is allowable as deduction.

From the question, it is not clear whether the packing cost, freight and insurance have been charged over and above Rs 14,500 or are included in them. Hence, it is assumed that these are charged over and above Rs 14,500. Hence, Rs 750 on account of freight and Rs 200 on account of insurance have not been deducted from Rs 14,500 in the calculations below.

Hence, cum-duty price for excise purposes is Rs 14,500 [Rs 15,000 + 1,000 + 1,500 – 2,000 – 1,000]. If Assessable Value = X, duty @ 15% will be 0.15 X. Hence, total price, including excise duty is 1.15 X.

Now, 1.15 X = Rs 14,500. Hence, X, i.e. Assessable Value is = Rs 12,608.70. Excise duty @ 15% of Assessable Value will be Rs 1,891.30. Check that Rs 12,608.70 + Rs 1,891.30 is Rs 14,500.

Note - It is presumed that outward freight of Rs 750 and insurance of Rs 200 have not been included in the cum-duty price of Rs 14,500 and hence not deducted from Rs 14,500. It is also assumed that the sale is on ex-factory basis. [Advise to students - In case of doubt, you should state the assumptions made, so that examiner is aware that you know the correct legal position].

Chapter 13

Question 1 - Product ‘P’ is sold by the Company at uniform price of Rs. 15,000 per Ton at various depots of Company in different States. The price is inclusive of excise duty. Local sales tax is charged extra. During the year, 3,000 Tons of ‘P’ were sold in Haryana, Delhi and Rajasthan as per following details:

The ‘freight charge’ is from factory to the depot. Excise duty rate is 10.00%. What is the ‘Value’ under section 4 of Central Excise and total excise duty payable?

Will there be any difference if the assessee makes direct sale from his factory to customers in different states at uniform CIF price of Rs 15,000 per ton.

Answer 1 – In case of depot sale, duty is payable at the price ruling at depot. Thus, relevant price in all cases is Rs 15,000 per ton and no deduction is available in respect of freight charges paid for transport from factory to depot. Thus, total price is 3,000 tons x Rs 15,000 per ton i.e. Rs 45,00,000. The price is inclusive of duty @ 10%. Hence, excise duty will be (10 x 45,00,000)/110 i.e. Rs 4,09,091. Total ‘Value’ for excise purposes will be Rs 40,90,909. [45,00,000 – 4,09,091]. Check that 10% of Rs 40,90,909 is Rs 4,09,091.

If all production is sold from factory gate at CIF price of Rs 15,000 per ton, assessee can claim deduction of actual freight on equalised basis.

Question 2 - Cost of production of a product 'X' calculated as per CAS-4 standard is Rs 350 per piece. 500 pieces of a product were manufactured. 120 pieces were sold at Rs. 700 per piece to Industrial Consumers, 70 pieces were sold to a Central Government department @ Rs. 690 per piece; 210 pieces were sold to wholesalers at Rs. 720 per piece; 70 pieces were sold in retail @ Rs. 800 per piece and 20 pieces were given as free samples. Out of the 75 pieces sold to Government department, 25 pieces were rejected, which were subsequently sold to other customers @ Rs. 300 per piece, without bringing them in the factory. Balance pieces were in stock, out of which 25 pieces were so damaged that they became unsaleable. [Note that All the prices are exclusive of excise and sales tax]. The rate of duty on the product is 15%. What is total duty payable ? Advise Management about steps to be taken in respect of 25 pieces which have been damaged in storage.

Answer 2 – The total value is as follows –

The price is exclusive of excise duty and taxes. Hence, Assessable Value is Rs 3,53,900 and duty @ 15% will be Rs 53,085 plus education cess @ 2% Rs 1,061.70.

As regards 25 pieces damaged in storage, assessee should apply for remission of duty to Commissioner. After remission is granted, the damaged goods should be destroyed in presence of Excise Officer.

Notes – (a) Once goods are cleared from factory, no duty is payable even if subsequently goods are sold at higher price. (b) There is no provision for refund of duty if goods are rejected after they are cleared from factory. (c) In case of samples, as per rule 4 of Valuation Rules, value nearest to the time of removal, subject to reasonable adjustments is required to be taken. However, since prices are varying, value nearest to the time of removal may not be ascertainable and will not be acceptable for valuation as the prices are changing. In such case, recourse will be taken to rule 11 of Valuation Rules, i.e. best judgment assessment. We can take recourse to rule 7 and 9 where principle of ‘normal transaction value’ is accepted, when prices are varying. As per rule 2(b) of Valuation Rules, ‘normal transaction value’ means the transaction value at which the greatest aggregate quantity of goods are sold. Since greatest quantity of 210 pieces are sold at Rs 720, that will be ‘normal transaction value’, which can be taken for valuation of free samples.

Question 3 - A trader is owner of a brand name ‘J-17’. He supplies materials to a job-worker. The job worker manufactures goods with brand name ‘J-17’ and supplies the goods to the trader. Cost of inputs is Rs. 360 per piece, inclusive of transport cost upto the factory of job worker. Job worker charges Rs. 130 per piece to manufacture the product. The trader sells the goods in market at Rs. 630 per piece. The rate of duty is 10%. Find the Assessable Value. What is the duty payable per piece ?

Answer 3 – The duty is payable on material cost plus job charges. Hence, duty is payable on Rs 360 + Rs 130. Hence, Assessable Value is Rs 490 per piece.

Question 4 - A manufacturer manufactured some furniture within the factory for his own use. He purchased material of Rs. 27,500 for this purpose. Cost of the operations carried out by him, as certified by a Cost Accountant, as per CAS-4, is Rs. 12,200. The furniture is liable for duty @ 15%. The manufacturer generally earns profit of 18% on his total cost. Sales tax on furniture is 10%. Find the excise duty and sales tax payable.

Answer 4 – In case of captive consumption, duty is payable @ cost of production plus 10%. Cost of production is material cost plus processing cost i.e. Rs 39,700. [Rs 27,500 + Rs 12,200]. Add 10% i.e. Rs 3,970, as per valuation rule 8. Thus, Assessable Value will be Rs  43,670 [Rs 39,700 + Rs 3,970]. Hence, excise duty payable will be 15% of Rs 43,670 i.e. Rs 6,550.50 plus education cess @ 2% i.e. Rs Rs 131.01.

No sales tax is payable and goods are not sold.

Note – Even if assessee earns 18% profit, that cannot be considered for valuation of captive consumption.