Basis of calculation of duty payable i.e. Valuation

Modes of calculation of excise duty Duty can be payable on basis of specific duty (based on weight, length, volume etc.), MRP based duty [section 4A], compounded levy, tariff value [section 3(2)], production capacity [section 3A] or on ad valorem basis [section 4].
MRP based valuation [section 4A]
Products covered under MRP provisions In case of about 110 products, duty is payable u/s 4A of Central on basis of MRP printed on the package, after allowing abatement at specified rates. MRP should be inclusive of all taxes and duties.
The provision applies only when product is package intended for retail sale and is specified in a notification issued u/s 4A.
MRP provisions are overriding MRP provisions u/s 4A are overriding provisions.
Assessable value when MRP not applicable Even in case of products covered u/s 4A, where MRP provisions are not applicable, valuation will be on basis of ‘value’ u/s 4 i.e. Assessable Value.
MRP provisions do not apply to free samples, package less than 10gm/10 ml, wholesale package or package above 25 Kg (50 Kg in some cases)
Deemed manufacture of products u/s 4A In case of goods covered under section 4A, packing or repacking and re-labelling is ‘deemed manufacture’.
Incorrect MRP Department can ascertain MRP if MRP not declared or incorrectly declared or obliterated. Penalty can be imposed [section 4A(4)(a) of Central Excise Act].
Basic requirement of Assessable Value [section 4]
Transaction value as assessable value When duty is payable on ad valorem basis, it is payable on assessable value as defined in section 4 of Central Excise Act.
‘Transaction Value’ is taken as Assessable Value only if goods are sold at the time and place of removal, buyer is unrelated and price is sole consideration [Section 4(1)(a) of Central Excise Act].
What is transaction value Transaction value is the price paid or payable for the goods at the time and place of removal, ‘by reason of, or in connection with sale’, inclusive of all expenses but excluding taxes [section 4(3)(d) of Central Excise Act].
Transaction value does not include duty of excise, sales tax and any other taxes on goods. Only taxes actually paid or payable are allowed as deduction.
Price to be taken as inclusive of excise duty If goods are cleared without payment of duty, the price is taken as ‘cum duty’ price and excise duty payable should be calculated by back calculations CCE v. Maruti Udyog 122 Taxman 105 = (2002) 3 SCC 547 = 141 ELT 3 (SC 3 member bench). If there is additional consideration, it will be added to invoice price and then duty payable is calculated by making back calculations [Explanation to section 4(1) of Central Excise Act]
Inclusions and exclusions in ‘transaction value’
By reason of or in connection with sale of such goods. Any amount charged is includible in assessable value if it is by reason of or in connection with sale of such goods.
Packing and design charges Duty is payable on packing charges and design charges related to manufacture.
Price escalation Duty is payable in case of price escalation after clearance, but not when price was final at the time of clearance. If there is price rise after clearance of goods from factory, differential excise duty and interest @ 13% is payable.
Trade discounts Trade discount is allowable as deduction from assessable value. Cash discount is allowable. Discount need not be uniform.
Notional interest on advances Notional interest on advances is includible only if there is evidence that it has depressed the selling price.
Warranty charges Compulsory charges for after sale service during warranty period are includible. After sale service charges which are optional are not includible.
PDI and after sales service Pre-delivery charges (PDI) and after sale service charges are not includible if these are incurred by dealer out of his commission.
Outward freight after ‘place of removal’ not includible in assessable value
Place of removal Transport charges upto place of removal are includible in assessable value.
Ownership transferring at factory gate If delivery is ex-works and property is transferred to buyer at factory gate, outward freight is not includible in assessable value as factory gate is the place of removal. This will be so even if transport is arranged by manufacturer and charged to buyer.
Contract FOR Even if contract is F.O.R. destination basis, there can be ‘sale’ at factory gate, since as per section 39 of Sale of Goods Act, delivery of goods to carrier is prima facie delivery to buyer. If contract is F.O.R. basis and sale takes place only when goods are delivered to buyer (i.e. property in goods passes to buyer at destination only), transport charges are includible in assessable value.
Profit on transport activity permissible If assessee himself provides transport services, reasonable profit on the transport activity should be permissible i.e. it is not includible in assessable value.
Equalised freight Equalised freight is also allowable as deduction, if there is ‘sale’ at factory gate.
Bought out goods and accessories when includible in assessable value
Price of essential bought out goods Price of Bought out goods supplied along with manufactured goods is includible, if these are essential parts of manufactured goods.
Price of parts not fitted at time of removal Since goods are to be assessed in the condition in which cleared from factory, value of components not fitted is not required to be added in assessable value, even if they are essential
Price of accessories not includible Price of accessories and optional bought out items is not includible in Assessable Value
Accessory means an object not essential in itself but adding to beauty, convenience or effectiveness of something else.
Valuation rules
Transaction value not acceptable If transaction value is not acceptable, valuation is required to be done as per Valuation Rules [Section 4(1)(b) of Central Excise Act and Valuation Rule 3]
Value of similar goods Valuation can be done on value of ‘such’ goods (i.e. goods of same class of same manufacturer) [Rule 4]
Transport upto place of removal Cost of transport upto ‘place of removal’ is includible in assessable value but not beyond that [Rule 5]
Money value of other consideration includible If price is not sole consideration, money value of other consideration should be added e.g. cost of material, patterns, dies, designs etc. supplied by buyer is required to be added to Assessable Value [rule 6]. Value of patterns, dies etc. should be added on pro-rata basis.
Captive consumption In case of captive consumption, duty is payable on basis of cost of production plus 10%. Cost of Production should be calculated on basis of CAS-4 [Rule 8]
Job work In case of job work, duty is payable by job worker. Valuation is done on the basis of price at which raw material supplier (Principal Manufacturer) sales the manufactured final product in market [Rule 10A]. If goods are covered under MRP valuation provisions, duty is payable on MRP basis.
Valuation in case of sale from depot/branch
Depot price at the time of removal In case of depot sale, duty is payable on basis of depot price prevailing at the time of removal of final product from the factory [Rule 7].
Subsequent sale price not relevant Price at which the goods are actually sold subsequently is not relevant. Differential duty is not payable even if goods are sold later at higher price from depot. Similarly, refund is not available if prices are goods are subsequently actually sold at lower price.
Transport charges after depot Transport charges upto depot and depot expenses are not allowable as deduction (These are already included in depot price). Transport charges from depot onwards are not includible in assessable value.
Value addition done at depot Any value addition done at depot is not includible in assessable value, if activity is not ‘manufacture’ (the reason is that goods are to be assessed in the condition in which they are removed from factory).
Deemed manufacture in case of MRP In case of products covered under MRP provisions, if packing in retail pack and labelling of MRP is done at depot/place of consignment agent, it will be ‘deemed manufacture’ and excise duty will be payable.
Valuation when sale through ‘related person’
Price to unrelated buyer relevant If goods are sold through related person, value for purpose of excise will be the price at which the related buyer sales goods to unrelated buyer.
Inter connected undertaking An inter-connected undertaking will be treated as ‘related person’ for excise valuation only if there is holding subsidiary relationship [Inter-connected undertaking means 25% common control]
Holding and subsidiary A holding and subsidiary are ‘related persons’,
Rate legal entities A mere distributor is not a related person.
A company or firm is a separate legal entity and cannot be a ‘related person’ of other company or firm.
Piercing corporate veil Even if the buyer does not fall within the definition of ‘related person’, sale price to him can be rejected by piercing the corporate veil. His selling price can be considered if it is found, by piercing corporate veil, that the transaction is not at arms length i.e. price is not the sole consideration.
Valuation in case of entire sale through related person If goods are sold solely through related person (except in case of inter connected undertaking, unless there is holding subsidiary relationship), valuation will be ‘normal transaction value’ at which the related buyer sales to unrelated buyer [rules 9 and 10 of Valuation Rules]
Supply of goods to related person for captive consumption If goods are supplied to related person for captive consumption, valuation will be on basis of cost of production plus 10%.
Partial sale through related person If sale is partly to related person and partly to unrelated person, valuation shall be done on ‘reasonable basis’ by residual method under rule 11.
If related person is only one of the buyers and substantial sales are made to unrelated persons at same price, that price can be considered for valuation in respect of sale to related person also.
Other provisions relating to valuation
Residuary rule of valuation If valuation is not possible under any of aforesaid rules, valuation will be on basis of ‘best judgment’ assessment, i.e. value shall be determined using reasonable means consistent with the principles and general provisions of Valuation rules and section 4(1) of section 4 of the Act [Rule 11]
Duty based on production capacity Section 3A of CEA provides for payment of duty on basis of production capacity, without any reference to actual production. Production capacity will be determined as per Rules. Pan masala and gutkha are covered under these provisions.
Compounded levy scheme Compounded levy scheme under rule 15 of Central Excise rules, provides for payment of duty on basis of production capacity. It is an optional scheme. The scheme is presently applicable to stainless steel pattas/patties and Aluminium circles. These articles are not eligible for SSI exemption.
Tariff value [section 3(2) of Central Excise Act] 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.