Excise duty on product development charges

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UMA SHANKER SHARDA (Querist)
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02 December 2009 A company has developed some product for its would be client and charged product development charges. At the time of develompent, neither the buyer is under obligation to buy the product from the company nor it can compel buyer to take certain quantity. Hence to safeguard the company's interest towards cost of development, it charge lum sum amount from buyer. After developing the product, the buyer places order to the company, but the price charged from buyer is no where related to the product develoment cost. There is no compulsion to the buyer that how much quantity he will purchase. Thus as per company's view, both the transaction are independent. Company is not charging excise on development charges. Excise department after giving reference to sec. 4(1)(a) of Central Excise Act, 1944 & Rule 6 of Central Excise Valuation (Detemination of price of Excisable goods) Rules 2000, raising a demand for excise duty on product development charges.
Would some one guide us to avoid this with the help of case law.

Thanks in Advance.

CS U S Sharda

ADITYA

ADITYA (Expert)
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06 December 2009
Before comming to your query, it is to be clarified by you about the exact nature of so-called "Product Development Charges" :-

(1) Is it cost of tools, dies etc ? or
(2) services for designing ? or
(3) some-thing eles

UMA SHANKER SHARDA

UMA SHANKER SHARDA (Querist)
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07 December 2009 It is not the cost of tools, dies, which are to be supplied to the prospective buyer, but to the some extent it includes cost of dies prepared inhouse to manufacture the final product, which interalia includes cost of material used for preparing dies, cost involved for designing and wages & salary. the item which has been prepared for production of end product will never be supplied to buyer. Take an example, One manufacturer receives an enquary to produce plastic cone. This requires a die and also involves designing of the same. The manufacturer charges a lump sum amount towards product development and the buyer is not under obligation to place an order. Hence to safeguard himself, the manufacturer charges "Product Development Charges" from buyer and this is totally a seprate contract and neither the manufacturer shall provide any thing in physical to buyer nor buyer will get any thing. Thus the manufctuer receives reimbursement of his own expenses to a great extent to minimise his cost incurred.

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Madhukar N Hiregange

Madhukar N Hiregange (Expert)
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09 December 2009 Products in the course of development are not excisabel goods since they cannot be dealt in bought and sold. Therefore the same may notbe leviable to CED. However the servic etax could be attracted under research and development.

UMA SHANKER SHARDA

UMA SHANKER SHARDA (Querist)
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09 December 2009 Is there any citation, if available, pls provide.

Thanks,

U S Sharda

SANJAY JAIN

SANJAY JAIN (Expert)
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15 December 2009 In the above transaction, demand of duty is likely not resistible because any amount payable in relation to sale of goods is part of assessable value.

For further query, feel free to write sanjayinfbd@yahoo.com (M-09350048731) or visit, HNO. 2489/8,Faridabad(Haryana).