Doubt : Excise on Free samples

This query is : Resolved

Devendra (Querist)
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13 February 2011 What is the Excise duty element on free samples on whose finished products excise duty is payable on M.R.P? If yes, what is the accounting treatment? If no, why?

Ram Avtar Singh

Ram Avtar Singh (Expert)
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13 February 2011 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.

1. 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.

2. 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, if these are charged separately in invoice on actual basis. [rule 5]. - . - In short, if transport charges are collected separately in the Invoice on actual basis, these will be allowed as deduction.

3. 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

4. Sale at depot / consignment agent - 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]
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.
At times, there are wide fluctuations in prices and depot prices may change frequently. This eventuality is indeed not envisaged in 'stock transfer' as 'stock transfer' or 'branch transfer' is envisaged only of standard products with fixed ex-depot prices. However, fluctuations in prices at depot is a practical reality. In such cases, assessee may resort to assessment on provisional basis.

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.

5. Buyer should not be known in stock transfer- It may be noted that 'stock transfer' or 'branch transfer' envisages despatch of goods of standard size and specifications to the depots / branches. Goods should not be despatched or identified for a particular buyer. If the buyer is known or identified before despatch of goods from the factory, it is a sale and not a stock transfer. In short, stock transfer of tailor made goods is a bogus stock transfer. (shown just to save sales tax).

6. Valuation in case of captive consumption - In case of captive consumption, valuation shall be done on basis of cost of production plus 15%. (Rule 8 of Valuation Rules). Captive consumption means goods are not sold but consumed within the factory.
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]
The simplified provision has been probably made as in most of the cases, the buyer will be able get Cenvat credit of duty paid on inputs and there is hardly any incentive to avoid any payment of duty.
Normally, certificate from Cost / Chartered Accountant in respect of cost of production should be obtained. As per normal costing principles, 'cost of production' should include production overheads and proportionate share of administrative overheads. However, since the term used is 'cost of production', sales overheads should not be considered. As per department's earlier circular No. 258/92-96-CX dated 30-10-1996, cost of production of goods should be determined so as to include cost of material, labour cost and overheads including administrative cost, advertising expenses, depreciation, interest etc. Board had advised that CA certificate and profit and loss statement should be scrutinised carefully and should not be accepted blindly or automatically. Other instructions in the circular regarding calculation of profit margin have now become redundant. [In the opinion of author, advertisement costs in relation to selling expenses should not form part of 'cost of production'].
Material Cost should be exclusive of duty paid on inputs and cost of as material handling of inputs should be included in view of case law discussed above.

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.

7. Goods sold solely through related person - If goods are sold solely through a 'related person', price at which such related person makes onward sale to an independent buyer will be the 'Assessable Value'. Definition of 'related person' as contained in section 4(3)(b) covered 'inter connected undertakings' as defined under MRTP Act. This would have affected many assessees. However, the definition has been made almost ineffective in Valuation Rules. Provisions in respect of sale to related buyer are covered in rules 9 and 10 of Central Excise Valuation Rules, 2000. For sake of convenience, these are discussed under 'Related Person' and hence are not discussed here.

8. 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]

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