Valuation and Declaration under Rule 173C

The valuation of the excisable goods is done in accordance with either of the two provisions enshrined in the Central Excise law. These provisions are

1. Valuation under section 4 of the Central Excise Act, 1944 based on normal price which would be applicable to all cases, where maximum retail price based valuation is not notified by the Central Govt., or where Tariff values have not been fixed for the articles under section 3(2) of the Central Excise Tariff Act, 1985;

2. Valuation based on maximum retail price (MRP) under section 4A of the Central Excise Act, 1944, which would be applicable to those excisable goods that are notified by the Central Govt.;

Definition:- Section 4 levies duty on the normal price which has following ingredients:-

1. The price should be one at which the goods are ordinarily sold by the assessee;
2. The sale should be in the course of wholesale trade;
3. The sale should be at the time and place of removal;
4. The buyer should not be a related person; and
5. The price should be the sole consideration of sale.

This assessable value is, however, subject to four exceptions, which are set out in the proviso to section 4 (1)(a). These exceptions are

First exception If the goods are sold at different whole sale prices to different classes of buyers, each such wholesale price is deemed to be an assessable value.

Second exception If the goods are sold at different wholesale prices for different places of removal, each such price is deemed to be the assessable value.

Thus an assessee can have more than one assessable value in respect of the same goods.

Third exception If the goods are sold in the course of wholesale trade at a price fixed by law, such fixed price is taken as the assessable value. For example the Drugs Price (Control) Order fixes the wholesale price at which schedule drugs can be sold. In such cases, the price fixed under the Drugs Price (Control) Order is taken as assessable value.

Fourth exception If the assessee arranges to sell the goods in the course of wholesale trade only through a related person, the price at which the goods are sold by such related person is taken as the normal price or the assessable value. This proviso is obviously intended to prevent avoidance of Excise duty by an assessee who can arrange to sell the goods in wholesale to a person at a lower price and thus pay lesser amount of duty.

Only following items can be deducted from the wholesale price

1. Cost of packing, provided it is durable in nature and returnable to the assessee. Secondary packing necessary for making the goods marketable is includible in the assessable value. However, if any special packing is provided by the assessee at the instance of the wholesale buyer, which is generally not provided as a feature of wholesale trade, the cost of such packing shall be deducted from the wholesale cash price. The burden of proof that a packing is a special secondary packing, is on the assessee.
2. Cost of transportation (including cost of insurance) from place of removal to the place or places of delivery. If the freight is averaged, the average freight is deductible;
3. Excise duty, sales tax and other taxes. The quantum of excise duty is to be determined as per explanation to section 4(4)(d)(ii).
4. Trade discount allowable in accordance with the normal practice of wholesale trade. Such trade discount should not be refundable on any account, however.

No deduction is permissible in respect of post manufacturing expenses, like marketing, selling and advertisement expenses.

Related person has been defined under section 4(4)(c) of the Central Excise Act, 1944. The definition is both exhaustive and inclusive. According to the first part of definition, which is exhaustive, "a person who is so associated with the assessee that they have interest, directly or indirectly in the business of each other" is a related person of the assessee. According to the second part related person includes holding company, subsidiary company, a relative and a distributor, a sub-distributor. The term holding company, subsidiary company and relative have the same meaning as in Companies Act, 1956. A person will be a related person of another if there exists mutuality of business interest. This interest refers to the interest in general between the business of two parties and does not refer to the interest which is created by sale of goods. The interest may be pecuniary or of such nature as would have the effect of promoting the business of each other. The quality and degree of interest which each has in the business of other may be different, the interest of one in the business of other may be direct, while the interest of the latter in the business of the former may be indirect. This would make no difference so long each has got some interest, direct or indirect in the business of the other.

If the related person does not sell the goods, but captively utilises them, the proper officer can determine the assessable value. Section 4(1) contains inherent powers to determine the true value of the excisable goods after taking into account any concession shown to a favoured buyer as account of extra commercial consideration and the provisions of Rule 6(b) of the Central Excise (Valuation) Rules, 1975.

In this situation the value has to be deducted from the retail price of the goods in the manner specified in Rule 6(a) of the Central Excise (Valuation) Rules, 1975 i.e. a reasonable amount will have to be reduced from the retail price to arrive at the price at which the assessee would have sold the goods in the course of whole sale trade to a buyer other than the related person.

If the processing results in the manufactured product, the assessable value will not be processing charges alone but the intrinsic value of the processed product which is the wholesale price at which it is sold for the first time in the wholesale market.

Illustration If the cost of raw material is Rs.50/- and the job conversion charges including job worker’s profit is Rs.100/- the assessable value of the goods will be Rs.150/- as this is the value at which the goods leave the factory and enter the main stream.

The value of the raw material supplied by the customer would form a part of the assessable value. The fact that manufacturer does not pay for the raw material, is immaterial. The matter stands concluded by the judgement of the Supreme Court in the case of Burn Standard Co. Ltd. Vs. UOI – (1991) 36 ECC-1(SC). In this case the assessee manufactured wagons for Railways. The latter supplied wheel sets and certain other items free of cost. The price charged for the vehicle did not include the value of the items supplied free of cost. The Supreme Court held that free supply items like wheel sets etc. form part of the complete wagon and would lose their identity. It hardly matters as to how and in what manner the components of wagons were procured by the manufacturer. The assessee would be liable to pay duty on the normal price of the wagon.

The effect of price escalation subsequent to the removal of goods, on the assessable value.

The excess amount realised under an escalation clause would form part of the assessable value and thus attract Central Excise duty.

If the goods are removed on payment of duty, based on declared price, subsequent reduction of price for whatever reason, including Govt. interference, would not create a claim for refund of Central Excise duty paid on the quantum of price reduced.

The determination of assessable value when the goods are sold only in retail.

Even if the goods are not sold in wholesale and wholesale price thereof is not available, the assessable value is to be determined for charging Central Excise duty. The assessable value in such cases is determined in accordance with the provisions of the Central Excise (Valuation) Rules, 1975. The rules provide for arriving at the assessable value by reducing the retail price by such amount as is necessary and reasonable in the opinion of the proper officer. The quantum of deduction is to be determined after considering the nature of excisable goods, trade practice in that commodity and other relevant factors.

Assessable value of goods captively consumed.

The assessable value of goods captively consumed is determined according to Rule 6(b) of the Central Excise (Valuation) Rules, 1975. The Rule provides for determining the value on the basis of the value of the comparable goods sold by the assessee or any other person. In case the value of comparable goods is not available, the value is based on the cost of production or manufacture including profits, if any, which the assessee would have normally earned on the sale of such goods. This profit is only a notional profit. The gross profit of the previous years, as per audited balance sheets, is added to the cost of production.

Within the general credit period, the price is same whether it is paid on the date of delivery or on any day within such general credit period. The interest will be included in the assessable value.

In cases where interest is made payable after the general credit period is over, such interest will not form a part of the assessable value.

Illustration. Assessee charges Rs.100/- per unit for his goods, if the payment is made within 45 days. Rs.100/- per unit will of course include the interest component pertaining to the general credit period of 45 days. Even if the payment is made at the time of delivery Rs.100/- would be the assessable value, irrespective of the possible inclusion of interest element in the price. If the assessee charges Rs.102/- per unit after 45 days and Rs.2/- per unit is identifiable as being relatable to time lag in payment, this amount of Rs.2/- per unit will not form a part of the assessable value.

Interest on advance deposits is includible in the assessable value only if there is a nexus between the advance deposit and the sale price. The ratio decidendi of the Metal Box case – 1995 (75) ELT 449(SC) requires, before adding notional interest, establishment of the facts that the interest free advance reflected favoured or special treatment and that advances had the effect of pegging down the wholesale price.

Where a manufacturer is the owner of the brand name, the price including the value of the brand name, at which he sells the goods in the course of wholesale trade, would constitute the normal price. But where the goods are manufactured by somebody else and then sold to a dealer who owns the brand name, the value of the brand name cannot be added for computing the assessable value for the brand name owner cannot be treated as manufacturer and the price at which the brand name owner sells the goods cannot be taken as assessable value.

If royalty is paid to another person regularly for using the patented know how, such a sum has direct nexus with the goods manufactured. Such royalty would be included in the assessable value.

The costs towards drawing, designing and technical specifications are clearly elements of machinery costs and are to be included in the assessable value. However, the cost towards project report, plant layout, civil works and training are in the nature of services and are not includible in the assessable value.

Technical knowhow fee paid to the foreign collaborator is includible in the assessable value as it enhances the marketability of the product on account of improved quality.

Where the manufacturer bears the cost towards inspection and testing of goods prior to their removal, such costs are included in the assessable value. The inspection and testing charges incurred subsequent to the clearance of the goods are also to be included in the assessable value if they form part of agreement for sale of goods.

If the amounts recovered from the customers is in excess of expenditure actually incurred on permissible deductions, the excess amount will form part of the assessable value.

Amount charged and recovered from customers by separate bills will be considered as gross receipts or cum duty price and duty payable is to be calculated after working out the assessable value from the gross receipts.

Handling cost incurred before the clearance of the goods from the place of removal is includible in the assessable value.

The retention charges/rentals and charges incurred for maintenance and service of durable and returnable containers are not to be included in the assessable value. As the cost of durable packing does not form a part of assessable value, there cannot be any rationale for inclusion of rental charges incurred in respect thereof.

If the assessee replaces certain parts while repairing a manufactured product, he is liable to pay duty only on value of spare parts manufactured and used in the said manufactured product.

Maintenance charges (being optional and distinct from warranty obligations), and sight service charges recovered for rendering special services are not includible in the assessable value. But if the price is marked up to cover servicing costs, prima facie such amount would form a part of the assessable value.

After sales service expenses for the warranty period are a part of the assessable value. But the expenditure incurred for after sale servicing under taken by the assessee after the expiry of the warranty period is not includible in the assessable value.

There is a distinction between the component and the accessory. A thing is a part or a component of the other only if the other is incomplete without it. A thing is an accessory of the other if the thing is not essential for the other, but only acts to its convenience or effectiveness. The cost of accessory supplied by the buyer as a package of sale of the manufactured goods will be included in the assessable value if Modvat credit is taken in respect of the accessories.

Discounts known at or prior to the removal of the goods are allowable if the discounts are actually given. Trade discounts not given uniformly can be rejected considering the circumstances of transaction.

There is no reason to suppose that a trade discount is always in the form of money. A quantity discount is an accepted form of trade discount and is allowable on goods sold in wholesale, is deductible like cash discount.

Turnover discount given depending upon the purchases made by each dealer is an admissible discount.

Prompt payment discount is a trade discount and allowable as deduction.

Free samples of medicines given to the physician constitute an admissible discount.

TAC/Warranty discount is in the nature of benefit given to the customers by way of compensation for loss suffered by them on the previous sale. As it is not in accordance with the normal practice of the wholesale trade at the time of removal of goods in respect whereof the claim is made, the discount is inadmissible.

Year end discount or Campaign discount are in the nature of bonus or incentive given much after the removal of goods is complete and are, therefore, not deductible.

The assessable value is computed from the wholesale price by using the equation :

Assessable value = Wholesale price – Permissible deduction
                                                     1 + rate of duty
                                                               100

An assessee is required to file price declaration with the Superintendent of Central Excise having jurisdiction over his factory in a prescribed form in the following cases:-

1. where the assessee sells goods to or through related persons;
2. where the assessee uses such goods captively for manufacture and production of other goods;
3. where the assessee removes such goods for free distribution;
4. where the assessee removes such goods in any other manner which does not involve sale;
5. where the assessee removes goods of the same kind and quality from his factories located in the jurisdiction of different Commissioners of Central Excise or Assistant Commissioner of Central Excise

The declarations are to be filed in triplicate at the beginning of each financial year and thereafter as and when there is a change in the value or marketing pattern.

In case the value declared by the assessee is not found to be correct, the divisional Assistant Commissioner may cause necessary enquiry to be conducted as contemplated in Rule 173C(3) of the Central Excise Rules, 1944.

Please check whether:-

• the declaration has been filed in the correct proforma in required number of copies;
• declaration date has been mentioned on the proforma;
• description of goods, heading, sub-heading, ECC code no. has been mentioned;
• the declaration contains the prices in respect of goods of each description and the excise duty, other taxes, discounts and all such deductions and addition made by the assessee to arrive at the assessable value;
• appropriate mention has been made in case of sales to – an independent wholesaler or a related person or own depots or branches;
• a certificate to the effect that the price declared represents sole consideration and there is no additional consideration flowing directly from such sales, has been given in the declaration;
• the status of related person/depot/consignment agent and his relation with assesee has been mentioned and the copies of such agreements or contracts have been enclosed.

Provisional Assessment

What is provisional assessment.

Where the assessee is unable to determine the value of excisable goods in terms of section 4 of the Central Excise Act, 1944 on account of non availability of any document or any information or where the assessee is unable to determine the correct classification of goods while filing classification declaration under Rule 173B, the said assesee may request the jurisdictional Assistant Commissioner in writing for permitting provisional assessment to duty. The Assistant Commissioner after causing such enquiry as he deems fit may direct that the duty leviable on such goods shall be assessed provisionally at such value or rate as may be indicated by him. This value or rate may not necessarily be the same as mentioned by the assessee. The provisional assessment is subject to the execution of bond in proper form by the assessee, with such surety or such sufficient security or under such conditions as the Assistant Commissioner may deem fit. The security amount is taken as 25% of the bond amount. The bond binds the assessee for payment of difference between amount of duty as provisionally assessed and as finally assessed.

All the excisable goods covered under such request by the assessee are deemed to be cleared on provisional assessment till the date when the direction of the Assistant Commissioner is issued and communicated to the assessee.

Where the Assistant Commissioner is satisfied that the self assessment made by the assessee is not in order, he may direct the assessee to resort to provisional assessment.

Finalisation of provisional assessment.

As per provisions of Rule 9B(6), the Provisional Assessment is to be fianalised by the Assistant Commissioner after causing the necessary enquiries. The Assistant Commissioner is to issue a speaking order for finalisation of assessment and demand of differential duty, if any, after observing the principles of natural justice. In case the assessee is aggrieved by the order, he may appeal to the Commissioner (Appeals)