Ca Final Exam Capsule Practical Questions May 14

Exam Capsule
Indirect
Taxes
Volume 2
Topics Covered
Volume 1 - Case Laws
Volume 2 - Cenvat Credit
Excise Valuation
Custom Valuation
VAT
Amendments (Please bring RTP)
CONCEPTS IN CENVAT CREDIT
Duties for which credit is available Rule 3(1)
Central Excise Customs Service Tax
Basic Excise Duty
Note - Credit is not
available for the duty
paid on goods covered
under Notification No.
1/2011 and at entry
No. 67 and 128 of
notification No.
12/2012.
Additional Custom duty under
section 3(1) of the CTA
Note If a vessel is brought to India
for breaking than Credit is available
only for 85% of the duty.
Service Tax
Special Excise Duty Special Additional custom Duty
under section 3(5) of the CTA
(Note If the assessee is a service
provider, he cannot avail credit for
this duty)
Special Excise Duty on
Goods of Special
Importance
Special Excise Duty on
Textile and Textile
Articles
National Calamity
Contingency Duty
Addl. Excise duty u/s
157 of Finance Act 93
Addl. Excise Duty u/s
85 of Finance Act 95
Education cess Not allowed Education Cess
SHES Not allowed SHES
Notes-
1. The assessee can avail cenvat credit only when he is having possession of
the goods. (Rule 4)
2. Rule 9 provides that the assessee can avail cenvat credit only on the basis of
specified documents and documents should be in his possession. (Refer Rule
9 for details)
3. Credit can always be availed for the amount shown of duty/tax shown in the
document on the basis of which credit is being taken irrespective of the fact
that payment has not been made or only part payment is made or part
payment itself is made as full and final payment.
4. If the quantity of goods actually received is less than the quantity referred in
the documents then credit shall be availed for proportionately less amount
but where quantity is more than mentioned in the documents, credit cannot
availed for excess quantity.
Example 1
Quantity mentioned 1000 Liters and Duty Rs. 10,000
Quantity received 990 liters
Cenvat Credit shall be taken only for Rs. 9900/-
Example 2
Quantity mentioned 1000 Liters and Duty Rs. 10,000March 2014
Quantity received 1010 liters
Cenvat Credit shall be taken only for Rs. 10,000/-
5. Combined reading of Rule 4 and 9 provides that the credit cannot be availed
unless goods and documents, both are in possession of the assessee.
Therefore, where goods and documents are received by the assessee on
different dates then credit cannot availed earlier than later date.
Example
Date of purchase 20
th
January 2014
Date of receiving the goods 28
th
February 2014
Documents received on 3
rd
March 2014
In this case credit cannot be availed before 3
rd
March 2014
6. The assessee is required to maintain a CENVAT credit register. This register
is not considered as Books of Account and there is no prescribed format for
this register.
7. When assessee makes a credit entry in the register, it is referred as Credit
taken or availed and when a debit entry is made, it means credit is utilized
or reversed, as the case may be.
Question - M/s. RC imported some inputs and paid Basic Customs Duty Rs
5 lakhs, surcharge on customs duty Rs. 50,000 and CVD Rs 1 lakh.
Calculate the amount that he can claim as CENVAT credit. Would it make
any difference, if the assessee is not a manufacture, but a service provider?
Answer - M/s RC can take credit of Rs. 1,00,000 i.e. of additional duty of
customs (CVD). Rule 3(1) of CCR allows credit of additional duty of customs
imposed under section 3 of CTA. The credit of other two duties i.e. BCD and
surcharge on custom duty is not allowed.
It will not make any difference if the assessee is a service provider as credit of
additional duty of customs (CVD) can be availed both by manufacturers and the
service providers alike but credit of CVD u/s 3(5) will not available to a service
provider.
How CENVAT Credit can be used?
Rule 3(4)
Subject to these restrictions, CENVAT credit can be utilised for
a. Payment of excise duty and service tax
b. Reversal of credit on removal of capital goods and inputs under Rule 3(5),
3(5A), 3(5B) and 3(5C) of the CCR
c. Reversal of credit under 16 of CER
Credit can be utilised for discharging liability of central excise duty and service
tax but other than payment of interest and penalty. Custom duty cannot be paid
through credit.
Credit can be utilised only upto the extent it is actually available at the end of the
month or quarter for which duty is payable. (Credit availed in the current month
or quarter cannot be utilised for discharging earlier liability)
Credit for EC and SHES can be utilised for discharging respective liability and not
for any other purpose. However, EC and SHEC can be paid out of credit of EC and
SHEC respectively or out of other credits excluding credit of NCCR or in csh.
NCCD can be paid either through credit of NCCD or in cash and credit of NCCD
cannot be utilised for any other purpose.
Credit of SACD u/s 3(5) of CTA cannot be utilised for paying service tax.
Clean Energy Cess cannot be paid out of CENVAT credit.
Excess credit is allowed to be carried forward without any time limit but is not
refundable in cash except under Rule 5, 5A and 5B.
Question: Whether service tax credit availed on input service during the period 01.01.2013
to 04.01.13 can be utilized to pay service tax on the output service for the month/quarter
ending 31
st
December 2012 which is due for payment on 05.01.2013?
Answer: Cenvat Credit can be utilised only upto the extent it is actually available at the end of
the month or quarter for which duty is payable. (Credit availed in the current month or quarter
cannot be utilised for discharging earlier liability). Therefore, in the given case, credit availed on
input service during the month of January 2013 cannot utilized to pay service tax payable on the
output services for the month or quarter ending 31
st
March 2012.
Question: In case of arrears of duty related to a past period, demanded under section 11A
of the Central Excise Act, 1944, whether the manufacturer can utilize cenvat credit for
payment of such arrears, even if such credit accrued to him after the related period?
Answer: As per Cenvat Credit Rules, 2004 Cenvat Credit can be utilised only upto the extent it is
actually available at the end of the month or quarter for which duty is payable. (Credit availed in
the current month or quarter cannot be utilised for discharging earlier liability). This duty
represents amount of duty assessed by the assessee himself and paid under Rule 8 of the Central
Excise Rules, 2002. Amount of duty demanded under section 11A of the Central Excise Act, 1944
is not the same duty as payable under section 11A of the Central Excise Act, 1944. Therefore, the
manufacturer can utilize cenvat credit for payment of such arrears, even if such credit accrued to
him after the related period. (Circular No. 962/05/2012 CX Dt. 28.03.2012)
CENVAT credit on capital goods Rule 4(2) - 4(4)
Rule 2(a)"capital goods" means:-
(A) the following goods, namely:-
(i) all goods falling under Chapter 82, Chapter 84, Chapter 85, Chapter 90,
heading 6805, grinding wheels and the like, and parts thereof falling
under heading 6804 of the First Schedule to the Excise Tariff Act;
(ii) pollution control equipment;
(iii) components, spares and accessories of the goods specified at (i) and (ii);
(iv) moulds and dies, jigs and fixtures;
(v) refractories and refractory materials;
(vi) tubes and pipes and fittings thereof;
(vii) storage tank and
(viii) motor vehicles other than those falling under tariff headings 8702,
8703, 8704, 8711 and their chassis, but including dumpers and tippers
used-
(1) in the factory of the manufacturer of the final products, but does not include
any equipment or appliance used in an office; or
(1A) outside the factory of the manufacturer of the final products for generation of
electricity for captive use within the factory; or
(2) for providing output service;
(B) motor vehicle designed for transportation of goods including their chassis registered
in the name of the service provider, when used for-
(i) providing an output service of renting of such motor vehicle; or
(ii) transportation of inputs and capital goods used for providing an output
service; or
(iii) providing an output service of courier agency
(C) motor vehicle designed to carry passengers including their chassis, registered in the
name of the provider of service, when used for providing output service of-
(i) transportation of passengers; or
(ii) renting of such motor vehicle; or
(iii) imparting motor driving skills
(D) components, spares and accessories of motor vehicles which are capital goods for the
assesse.
Question: Define the term Capital Goods within the meaning of the CENVAT Credit
Rules, 2004.
Availing the Credit Rule 4(2), 4(3) and 4(4)
A manufacturer/service provider can avail cenvat credit on capital goods provided the capital
goods are not going to be used exclusively for manufacture of exempted goods or providing
exempted services. It means full credit is allowed even where capital goods are used partly for
exempted goods/Services and partly for taxable services/dutiable goods.
A manufacturer can avail credit on capital goods only when goods have been received in the
factory.
If the capital goods relate to generation of electricity then credit is available even if goods are
not received in the factory.
In case of a service provide, it is sufficient that the goods are received by him at any place but
the receipt of such goods shall be supported through documentary evidence regarding place
and time of delivery of goods.
Credit can be availed only when goods as well as the documents on the basis of which credit
can be availed, both are available. Therefore, if these two are received on different dates, then
credit can be availed not before the later date.
During the first financial year in which capital goods are received
a. an assessee availing SSI exemption is entitled to avail full credit for all the duties
immediately
b. for any other assessee, credit is restricted to 50%. (0% to 50%)
Balance credit (50% to 100%) can be availed in any of the subsequent financial years
provided the goods are in possession of the assessee. However, certain capital goods, if
consumed within the factory or at the place of the job-worker are always deemed to be in
possession for the purpose of CENVAT credit.
It is also to be noted that the credit for Special Additional Custom Duty chargeable under
section 3(5) of the Custom Tariff Act is available to the extent of 100% during first year
itself.
Note If capital goods are removed during the first financial year in which those are
received than instead of 50%, the assessee is authorised to avail 100% CENVAT credit
during first financial year itself.
Credit on capital goods can be availed even if those are acquired on lease or hire-purchase
basis from a finance company. For availing credit, possession is more important than
ownership
In case of service provider, this will not be applicable for motor vehicles because, on motor
vehicles, a service provider can avail CENVAT credit only if the vehicle is registered in the
name of service provider.
Credit can be availed for that part of duty which has not been capitalized i.e.it is not
depreciated.
Assessee can avail cenvat credit even if he has not paid for capital goods or he has paid only
partly or he has made part payment as full payment.
Question:. India Cements Limited is engaged in the business of manufacturing cement.
For this purpose, limestone is excavated from a mine which is situated at a distance of
few kilometers from the plant where the cement is manufactured. The mine is connected
to the main plant through a ropeway. Explosive are used for blasting the mine to
excavate limestone. Can CENVAT credit be taken on such explosives?
Or
ABC Limited is a cement manufacturer. The company used ropeway system for bringing
crushed lime stone from the mines located 4-5 kilometers away from the factory. A part
of the ropeway system was installed in the factory.
ABC Limited availed cenvat credit on the ground that ropeway is used for transporting
raw material from the mines to the factory and cannot be considered as Material
Handling System within the factory premises. Examine with the help of decided case law,
whether the stand taken by the Department is correct.
Answer: The facts in the given case are similar to the case of Malabar Cements Limited
(2008) [Ker]. In this case, the High Court decided that the ropeway connecting the
factory with the mines is to be considered as a part of factory. Therefore, in the given
case, the assessee is entitled to avail cenvat credit on the parts used in ropeway system.
M/s Solid Cement Ltd is engaged in the manufacture of cement. Explosive are used for
blasting the mines in order to excavate limestone, which is used in the manufacture of
Cement/clinkers in the factory situated at some distance away from the mines. Cenvat
credit on explosives has been denied by the excise department of the ground that the
explosives are not used as inputs within the factory of production. You are required to
advise with reference to CENVAT Credit Rules 2004 whether the stand taken by the
department is correct.
Question: Tanco Products Ltd. was using plastic crates as a material handling device
within their factory premises. Such plastic crates were used for internal transportation
of 'the raw material from stores to the processing machine, semi-finished goods from
one machine to other machine and finished goods to their storage area. The appellant
contended that the plastic crates were eligible capital goods for the purposes of
CENVAT credit and alternatively as input. Department rejected the assessee's claim of
CENVAT credit in respect of the duty paid on such plastics crates. Explain with the
help of a decided case law, if any , whether the stand taken by the department is
sustainable in law.
Removal of capital goods on which credit has been availed
Removal as such Rule 3(5)
Where capital goods, on which CENVAT credit has been availed are removed as such
than the entire credit available on such goods shall be reversed immediately. However, if
the assessee has not availed full credit, he is authorised to avail balance credit before
making reversal.
This requirement will not be applicable where capital goods are removed for providing
service outside.
Question - H. Ltd. Purchased a Boring-Drilling machine at a cum duty price of Rs.
32,14,476. The Excise duty rate charged on the said machine was @ 16%. The
machine was purchased on depreciation @ 25% following Straight Line Method.
Using the said information answer the following question:
(i) What is the Excise duty paid on the machine?
(ii) What is the Cenvat credit allowable under Cenvat Rules?
(iii) What is the amount of cenvat credit reversible or duty payable at the time of
clearance of the said machinery, If removed as such?
Answer
Computation of duty, assessable value and CENVAT credit
Cum-duty Price 3214476
Excise Duty @ 16.48% (3212476 X 16.48 / 116.48) 454795
Assessable value 2759681
CENVAT Credit allowable during first Financial year 50% 227397
Balance credit allowable in any subsequent financial year 50% 227398
Credit Reversible 100% 454795
Working notes
1. As per Rule 4(2) of CCR, CENVAT credit is limited to the extent of 50% during the
financial year in which capital goods are received and balance can be availed in any of
the subsequent financial years , if the capital goods are in possession.
2. As per Rule 3(5), if capital goods are removed as such, 100% of the credit available
shall be reversed and as per Rule 4(2), in case of such reversal, the assessee is
authorised to avail balance credit also in the first financial year itself.
Removal after use - Rule 3(5A)
In case of removal of capital goods after partial use, the assessee is authorised to retain
prescribed amount of cenvat credit and balance credit shall be reversed.
For the purpose of this rule, capital goods have been divided into two categories i.e.
computer and peripheral and all other capital goods.
Percentage of Credit that can be retained by the assessee
Computer and peripherals Other capital goods
1
st
year for every three
months or part
10%
For every 3
months or part
thereof
2.5 % 2
nd
months or part
8%
3
rd
months or part
5%
4
th
and 5
th
year - for every
three months or part
1%
The period of three months is to be counted from the date on which credit is availed.
Note: If amount of duty payable on transaction value is higher than the amount of
CENVAT credit reversible, as calculated above, then such higher amount of duty shall be
payable.
Removal of capital goods as Waste and Scrap Rule 3(5A)
If capital goods are removed as waste and scrap, then duty is payable on transaction
value.
Question 1: ABC Limited purchased a pollution control equipment for Rs.
15,14,240 which is inclusive of excise duty @ 16% plus education cess and
secondary and Higher Education Cess. The equipment was purchased on
01.09.2010 and disposed off as second hand equipment on 10.10.12 at a price of
Rs. 12,00,000. Rate of excise duty on the date of disposal is 12% + EC + SHEC.
You are required to compute the amount of cenvat credit available during the
financial year 2010-11 and during 2011-12.
What is the amount of duty payable or cenvat credit reversible at the time of
removal of those goods.
Answer:
2010-2011 2011-12
CENVAT credit
availed on 1.09.10
(50%)
1,07,120 Cenvat Credit
availed on
01.04.2011
1,07,120
Date of removal 10.10.2012 Date of removal 10.10.2012
Period since availing
the credit
2 years 1 month
and 10 days = 9
quarters
the credit
1 year 6 months
and 10 days = 7
quarters
Credit allowed to be
retained @ 2.5% for
every 3 months or
part (9 X 2.5 =22.5)
22.5% Credit allowed to be
retained @ 2.5% for
every 3 months or
part (7 X 2.5 =17.5)
17.5%
Amount of Cenvat
credit to be retained
24,102 Amount of Cenvat
18,746
Amount of cenvat
credit to be reversed
83,018 Amount of cenvat
88,374
Total reversals required as per rates
prescribed (83,018 + 88,374)
1,71,392
Amount of duty on Rs. 12,00,000 @
12.36%
1,48,320
Since amount of cenvat credit required to be reversed as per prescribed rates is more
than the amount of duty computed on transaction value @ 12%, higher of the two is
payable/reversible i.e. Rs. 1,71,392
Question 2:
H Ltd. purchased a Boring-brilling machine at a cum-duty price of Rs. 32,14,476.
The Excise duty rate charged on the said machine was @ 16% +EC+SHEC. The
machine was purchased on 01.04.2011 and disposed of on 30.09.2012 for a price
of Rs. 12 lakhs. The company was claiming depreciation @ 25% following Straight
Line Method. Using the said information, answer the following questions:
(i) what is the Excise duty paid on the machine?
(iii) What is the amount of Cenvat credit reversible or duty payable at the time of
clearance of the said machinery
Answer:
1. According to Rule 4(4), the assessee can either claim depreciation on the amount of
duty or CENVAT credit.
2. The assessee is always authorised to claim depreciation for the value of goods
excluding amount of duty for which CENVAT credit is claimed. This depreciation on
the value of goods does not affect right of the assessee to claim CENVAT credit for the
amount of duty paid on machine.
3. According to Rule 4(2), CENVAT credit on capital goods is limited to 50% during first
financial year in which goods are received and balance credit can be availed in any of
the subsequent financial years.
4. According to Rule 3(5A), if goods are removed after partial use, the assessee is
entitled to retain 2.5% of the total credit for every three months or part thereof and
balance credit shall be reversed.
Calculation of Excise duty, CENVAT credit and reversal
Cum duty price 32,14,476
Assessable Value 3214476 x 100/116.48 27,59,681
Excise duty including EC and SHEC 3% of duty 4,54,795
Availability of Cenvat credit
During first year -50% of Rs. 454795 2,27,398
During subsequent year remaining 50% Of Rs. 454795 2,27,397
Credit of EC available only on payment of EC
Cenvat credit reversible at the time of clearance
Cenvat Credit availed in year 11-12 Rs. 2,27,398
Less: 2.5% per quarter for 6 quarters-15% 34410 1,93,288
Cenvat Credit availed in year 12-13 2,27,397
Less : 2.5% per quarter for 2 quarters 11371 2,16,027
Total amount of CENVAT credit reversible / payable at the time of clearance 4,09,315
Question: Solidmec Limited purchased 25 computer systems, eligible for capital
goods under the Cenvat Credit Rules, 2004 on 01.07.2010 by paying a duty of Rs.
2400/- on each computer system. However, since these systems became outdated,
it sold 20 computer systems out of 25 on 30.06.2012 at a residual value of Rs.
2000 each. Determine the amount of cenvat credit required to be reversed during
the financial year 2012-13.
Answer: Since only 20 systems are disposed off by the assessee, the computation of
cenvat credit will be only in relation to those 20 systems.
2010-2011 2011-12
CENVAT credit
availed on 1.07.10
on 20 computer
systems (50%)
24,000 Cenvat Credit
availed on
01.04.2011 on 20
computer systems
(50%)
24,000
Date of removal 30.06.2012 Date of removal 30.06.2012
the credit
the credit
Credit allowed to be Credit allowed to be
retained @ 2.5% for
every 3 months or
part (9 X 2.5 =22.5)
retained @ 2.5% for
every 3 months or
part (7 X 2.5 =17.5)
Amount of Cenvat
Amount of Cenvat
Amount of cenvat
Amount of cenvat
Total reversals required as per rates
prescribed
Amount of duty on Rs. 12,00,000 @
12.36%
Problem for Practice
1. An assessee had procured machinery in April 2011 for Rs 10 lakhs by paying duty of
Rs 1,60,000. It was commissioned in June 2011. Assessee had availed 50% Cenvat
credit of Rs 80,000 in 20011-12, and Rs 80,000 (balance 50% credit) in 2012-13. He
sold the capital goods after use, on 10
th
April 2103 as second hand goods for Rs
3,00,000. How much excise duty or amount is payable while clearing the machinery?
2. Machinotech Ltd. purchased a lathe machine at a price of Rs. 1,00,000 on which 16%
Excise duty was paid and the company availed of the Cenvat credit on the said capital
goods. The lathe machine was purchased on 27-01-2010 and it was disposed of on 29-
04-2011. How much CENVAT credit and when it can be availed by the assessee. Is it
necessary to reverse the cenvat credit on disposal of the machine? If your answer is yes,
quantify the amount.
Goods written off in the books of account Rule 3(5B)
Where any capital goods are written off, partially or fully or a provisions is made for the
same, in the books of account prior to being put to use, then entire credit availed
thereon shall be reversed and if such goods are utilised again at any time in future, then
credit can be availed once again.
Sending out for repairs, maintenance etc. Rule 4(5)
If capital goods on which credit has been availed are required to be sent outside for
getting those repaired, it requires prior approval of AC/DC and the approval is given
subject to the condition that the goods shall be received back within 180 days otherwise
the assessee shall reverse the credit and he can avail the credit once again on goods
being received back.
Sending out for providing service
There is no provision to regulate the time within which capital goods sent outside for
providing service shall be received back.
Credit on Inputs
Rule 2(k) input means
(i) all goods used in the factory by the manufacturer of the final product; or
(ii) any goods including accessories, cleared along with the final product, the value
of which is included in the value of the final product and goods used for
providing free warranty for final products; or
(iii) all goods used for generation of electricity or steam for captive use; or
(iv) all goods used for providing any output service; but excludes-
(A) light diesel oil, high speed diesel oil or motor spirit, commonly known as petrol;
(B) any goods used for -
(a) construction or execution of works contract of a building or a civil
structure or a part thereof; or
(b) laying of foundation or making of structures for support of capital goods,
except for the provision of service portion in the execution of a works contract or
construction service as listed under clause (b) of section 66E of the Act;
(C) capital goods except when used as parts or components in the manufacture of a
final product;
(D) motor vehicles;
(E) any goods, such as food items, goods used in a guesthouse, residential colony,
club or a recreation facility and clinical establishment, when such goods are used
primarily for personal use or consumption of any employee; and
(F) any goods which have no relationship whatsoever with the manufacture of a final
product.
Explanation. For the purpose of this clause, free warranty means a warranty
provided by the manufacturer, the value of which is included in the price of the final
product and is not charged separately from the customer;
Question: SC Ltd is a manufacturer of caustic soda, cement etc. It uses LSHS (Low
sulphur heavy stock) as fuel for generating electricity which in turn is captively
consumed for the manufacture of final products. It has been claimed CENVAT Credit on
the reasoning that this is used in relation to manufacture of final products and hence
this is input. However the department did not allow the credit as LSHS has been used to
generate electricity which is not excisable and hence cannot be considered as input used
as fuel.
State with reason whether the action taken by the department is covered by the CENVAT
Credit Rules 2004.
Availing credit on inputs Rule 4(1)
A manufacturer can avail full cenvat credit on inputs as soon
as goods are received by him in the factory. However, if the
inputs are related to generation of electricity then cenvat credit
is available even when such goods are received by the assessee
outside the factory.
Rule 8 of CCR Depending on nature of goods or shortage of
space in the factory, on such terms and conditions as the
Commissioner deems fit, he may authorise storage of inputs
outside the factory in a warehouse and to avail credit thereon
in the factory. The place where inputs are allowed to stored
outside the factory shall be treated as a factory for the purpose
of CENVAT credit.
A service provider can avail
full cenvat credit on inputs
as soon as inputs are
received by him at any place.
The receipt of inputs shall be
supported by documentary
evidence regarding time and
place of delivery of goods.
Cenvat credit shall be availed only for the quantity actually received.
(a) If the quantity actually received is more than the quantity referred in the documents on
the basis of which credit is to be availed then the credit is to be availed for the quantity
referred in the documents.
(b) If the quantity actually received is less than the quantity referred in the documents on the
basis of which credit is to be availed then the credit is to be availed for the quantity
actually received.
(c) If any quantity of input is stolen or pilfered or wasted before being put to use then cenvat
credit availed on such quantity shall be reversed.
A manufacturer/service provider can avail cenvat credit on inputs provided the inputs are not
going to be used exclusively for manufacture of exempted goods or providing exempted output
services.
Assessee can avail cenvat credit even if he has not paid for inputs goods or he has paid only
partly or he has made part payment as full payment.
Question: The assessee is engaged in the manufacture of various types of packaging
machines known as F & S machines. The machines are made to order according to the
specifications of individual customer and such machines, before dispatch, are to be tested
for customers satisfaction. On being satisfied by the customer, the makes entre in the
RG-1 register (DSA) declaring the machined is manufactured and ready for clearance. For
the proper testing, assessee procures flexible laminated plastic fill in roll form and poly
paper (termed as inputs) which are excisable, and were used for testing, turning and
adjusting carious parts of F & S Machine. Assessee filed a declaration and availed the
benefit of Cenvat Credit for the duty paid on the said inputs. Department contended that
the said material was used only for testing and as such, they cannot considered as inputs
for manufacturing final product. Further, the Department opined that testing takes place
only after manufacturing final product and any goods used in the process after
manufacturing cannot be treated as inputs under rule 2(k) of the Cenvat Credit Rules,
2004. Assessees contention is that the manufacturing process would be completed only
after the testing and as such inputs are used in or in relation to the manufacturing and
that the input need not be present in the final product and, therefore, they have a right to
claim the cenvat credit.
Answer:
Facts In the case of Flex Engg. Ltd. Vs. CCEx., 2012 (SC) the Assessee claimed credit for the
material used during testing of machine manufactured by it. Manufacture of machine is complete
only after testing.
Dispute Credit cannot be claimed for the material used during testing of machine because it is
used after manufacture.
Decision As per submissions by the assessee the court accepted that the machine is
marketable only after it has been tested and made fit as per customers requirement. It means
manufacture is not complete until testing. Therefore, material used during testing is eligible for
credit.
Question: Rokasa Limited was engaged in the manufacture of a pharmaceutical product
viz., Rovamox Pediatric Drops. Rokasa Limited contended that the plastic droppers
cupplied with the bottle containing the drops were inputs used in or in relation to
manufacture of the final product and so, claimed cenvat credit of the duty paid on the
Droppers. However, the Revenue argued that Cenvat credit was not admissible as these
droppers were kept separately in the cartons along with the sealed bottles of the pediatric
drops and were neither used in manufacture of the pediatric drops nor used in relation to
its manufacture. Briefly discuss whether the stand taken by the Department is correct or
not.
Answer: Facts in the given case are similar to the case of Okasa Limited, 2009 (Bom).
As per the directions given by the Controller of Drugs, such droppers are mandatory for the sale
of drugs. Therefore, such droppers will be treated as packing material.
As per the definition of the inputs, all the goods which are removed with the finished goods are
to be treated as inputs provided the value of such goods has been included in the value of
finished goods.
Keeping in mind, all the facts given in the question, it can be concluded the droppers are eligible
to be treated as inputs and, thus, the assessee is entitled to avail cenvat credit.
Question: Based on the following information, determine the CENVAT Credit available for
use in the current year under the CENVAT Credit Rules, 2004
Amount after each item indicates Central Excise duty paid at the time of Purchase of
goods. EC and SHEC is in addition to the amount of duty
(Rs.)
(a) Pollution control equipments - Rs 25,000
(b) Spares for pollution control equipments - Rs 5,000
(c) Equipments used in office - Rs 12,000
(d) Storage Tank - Rs 10,000
(e) Paints used for painting machinery used - Rs 6,000
(f) Packing material - Rs 4,000
(g) Lubricating oils - Rs 8,000
(h) High Speed diesel oil - Rs 7,000
Question: Discuss about the eligibility of CENVAT Credit in each of the following situations
(i) 1000 kgs of raw materials were purchased on which duty of Rs. 16,000 was paid.
Whilst in the production yard those goods were destroyed by accidental fire.
(ii) 1000 kgs of raw materials on which duty paid was Rs. 10,000 was used in
manufacture of a final product for which the duty payable is Rs. 8000
(iii) The original invoice for 1,000 units of inputs purchased were missing; however
duplicate for transport copy of invoice is available, which shows that duty of Rs.
10,000 had been paid on inputs
Question: ABC Co. Limited procured the following inputs during the month of January.
Determine the amount of cenvat credit available with necessary explanation for the
treatment of the various items
Items Duty paid
(a) Raw material 52,000
(b) Manufacturing machine 1,00,000
(c) Light diesel oil 40,000
(d) Greases 10,000
(e) Office Equipment 20,000
(f) Paints 5,000
Note: ABC CO. Limited is not eligible to avail exemption under notification No. 8/2003.
Answer:
Item Amount of
Credit
Reason
Raw Material 52,000 Being input, it is eligible for 100% Credit
Manufacturing machine 50,000 Being capital goods, Cenvat credit is limited to 50%
Light diesel oil - Excluded from the definition of inputs. Therefore, no
cenvat credit
Greases 10,000 Being input, it is eligible for 100% Credit
Office Equipment - Not treated as capital Goods. Therefore, no cenvat
credit
Paints 5,000 Assumed that used in relation to finished goods.
Therefore, treates as inputs
Question: XYZ Co. is engaged in manufacture of water pipes. From the following details for
the month of May compute the available cenvat credit under the Cenvat Credit Rules,
2004. Cenvat paid on the purchases as detailed below
Items Duty amounts
(a) Raw Material Rs. 22,000
(b) Water pipe making machine Rs. 18,000
(c) Spare parts of the above machine Rs. 7,500
(d) Grease and oil Rs. 2,800
(e) Office Equipment Rs. 20,000
(f) Diesel Rs. 12,000
(g) Pollution control Equipment Rs. 22,000
Answer: Since the question does not indicate that the assessee is availing SSI exemption under
Notification No. 8/2003, for the purpose of cenvat credit it is presumed that the assessee is not
availing this exemption.
Items Amount of Cenvat
Credit in Rs.
Reason
Raw Material 22,000 Raw material is an input and eligible for 100% cenvat
credit
Water pipe
making machine
9,000 Being capital goods, it is eligible for 50% cenvat credit
Spare parts 3,750 Being capital goods, it is eligible for 50% cenvat credit
Grease and Oil 2,800 Being inputs, it is eligible for 100% cenvat credit
Office
Equipment
- Office equipments are not regarded as capital goods.
Therefore, no cenvat credit.
Diesel - Diesel is excluded from the category of inputs.
Therefore, no cenvat credit.
Pollution Control
equipments
11,000 Being capital goods, it is eligible for 50% cenvat credit
in the first financial year
Total Credit 48,550
Question: Hero automobiles is engaged in the manufacture of motor cars. Compute the
amount of cenvat credit admissible from the following particulars where required
Goods purchased Duty paid at the time of purchase of goods
Raw Steel 5,00,000
Batteries 2,00,000
Cutting oil 70,000
Electric lamps for lighting manufacturing area 80,000
Answer: Assuming that the assessee is not availing SSI exemption under Notification No. 8/2003,
Article Amount of
cenvat credit
Reason
Raw Steel 5,00,000 Raw steel is an input and eligible for 100% cenvat
credit
Batteries 2,00,000 Batteries are the inputs for motor car manufacturer
and it is eligible for 100% cenvat credit
Cutting oil 70,000
Electric lamps 40,000 Being capital goods, it is eligible for 50% cenvat credit
in the first financial year
Total Credit 8,10,000
Question: R & Co. Limited have cleared their manufactured final product during April and
the duty payable is Rs. 2,40,000 + EC and SHEC. Given below are the details of the excise
duty paid by the assessee during the month at the time of purchase of goods:
Item Duty amount in Rs. (Excluding EC and
SHEC)
(i) On inputs (RM) 1,00,000 (invoice for excise duty of Rs.
20,000 was received on 4
th
May)
(ii) On input service 20,000
(iii) On welding electrodes used for repairs of
capital goods
5,000
(iv) Fuel (Excluding HSD/Petrol) 6,000
(v) Storage Tank 8,000
(vi) Tubes and Pipes used in factory 14,000
(vii) Air-conditioner for office of the factory
manager
12,000
Compute the amount of duty payable in cash.
Answer:
Duty Payable
Excise Duty Education Cess SHEC Total
2,40,000 4,800 2,400 2,47,200
Amount of cenvat credit
Item Credit
of ED
Credit
of EC
Credit
of
SHEC
Total Reason
(i) On inputs
(RM)
80,000 1,600 800 82,400 100% Cenvat credit is available on
inputs
(ii) On input
service
20,000 400 200 20,600 100% Cenvat credit is available on
input service
(iii) On welding
electrodes used
for repairs of
capital goods
inputs
(iv) Fuel
(Excluding
HSD/Petrol)
inputs
(v) Storage Tank 4,000 80 40 4,120 On capital goods, cenvat credit is
limited to 50% in the first Financial
Year
(vi) Tubes and
Pipes used in
factory
7,000 70 35 7,105 On capital goods, cenvat credit is
limited to 50% in the first Financial
Year
(vii) Air-
conditioner for
office of the
factory manager
- - - -
Since used in office, no cenvat credit
is allowed
Total Credit 1,25,555
Duty payable Rs. 2,47,200
Cenvat credit Rs. 1,25,555
Duty payable in cash Rs. 1,21,645
Removal of inputs on which credit has been availed
Removal as such Rule 3(5) - As Such means unused
Where inputs, on which cenvat credit has been availed are removed as such than the
entire credit available on such goods shall be reversed immediately.
Any such reversal is not required where inputs are required to be removed as such for
providing service related to guarantee/warrantee offered along with the goods and the
value of which is already included in the value of finished goods.
Goods written off in the books of account Rule 3(5B)
Where any inputs are written off in the books of account, partially or fully or even if a
provisions if made for the same, prior to being put to use, then entire credit availed
thereon shall be reversed and if such goods are utilised again at any time in future, then
credit can be availed once again.
Goods destroyed Rule 3(5C)
Where any of the finished goods are destroyed before removal and remission of duty is
allowed under Rule 21 of the Central Excise Rules, 2002, the assessee shall reverse the
credit taken for inputs used in manufacture of such goods.
Rule 21 of Central Excise Rules, 2002: Remission of duty
Where finished goods are destroyed or lost or those become non-marketable
otherwise, before removal from the factory due to any reason, then on an application
of the assessee, the Central Excise officer may allow remission (waiver) of duty on
such goods, within the limit prescribed.
Officer Amount of duty upto which remission can be allowed
by him
Superintendent Rs. 10,000
Asst./Dy. Commissioner Exceeding Rs. 10,000 but not exceeding Rs. 1,00,000
Jt. Commissioner Exceeding Rs. 1,00,000 but not exceeding Rs. 5,00,000
Commissioner Exceeding Rs. 5,00,000
Inputs sent for job work Rule 4(5) and 4(6)
Where any of the inputs or semi-finished goods are required to be sent outside for job-
work without reversal of credit or without payment of duty, as the case may be, the
assessee is authorized to remove the goods provided those are received back within 180
days failing which he shall reverse the credit and if goods are received back
subsequently, credit can be taken again.
Under Rule 4(6), the AC/DC may give a special permission to the assessee to remove the
finished goods from the premises of the Job-worker. Any such permission is valid for the
financial year during which it is given
If permission is obtained under Rule 4(6), then condition of bringing back the goods
within 180 days, as given under Rule 4(5) will not be applicable.
Question - Briefly discuss with the reasons whether in the following case Cenvat
Credit is available to an assessee and, if yes to what extent?
An assessee purchased inputs weighing 1,000 Kgs. The duty paid on inputs was Rs.
10,000 but during transit, 500Kgs inputs were destroyed.
Answer Since the assessee has received only 500 Kgs inputs in the factory, he can
avail credit only to the extent of Rs. 5000 because as per rule 4(1) of CENVAT Credit
Rules, 2004 the CENVAT credit in respect of inputs may be taken immediately on receipt
of the inputs in the factory of the manufacturer or provider of output service.
Rule 2 of CCR, 2004 provides that any goods used in the factory where finished goods
are manufactured are eligible as inputs. Therefore, the goods which are not even
received in the factory cannot considered to be inputs.
Recovery of CENVAT credit
Vide notification No. 3/2013, an explanation has been inserted after Rule 3(5B) which states that
If the manufacturer of goods or the provider of output service fails to pay the amount payable
under sub-rules (5), (5A), and (5B), it shall be recovered, in the manner as provided in rule 14, for
recovery of CENVAT credit wrongly taken.1
1
Inserted vide Notification No. 3/2013-Central Excise (N.T.), Dated 1/03 2013.
Input Service
Rule 2(l) input service means any service, -
(i) used by a provider of output service for providing an output service; or
(ii) used by a manufacturer, whether directly or indirectly, in or in relation to
the manufacture of final products and clearance of final products upto the
place of removal,
and includes services used in relation to modernisation, renovation or repairs of a
factory, premises of provider of output service or an office relating to such factory or
premises, advertisement or sales promotion, market research, storage upto the place of
removal, procurement of inputs, accounting, auditing, financing, recruitment and
quality control, coaching and training, computer networking, credit rating, share
registry, security, business exhibition, legal services, inward transportation of inputs or
capital goods and outward transportation upto the place of removal; but excludes,-
(A) service portion in the execution of a works contract and construction services
including service listed under clause (b) of section 66E of the Finance Act (hereinafter
referred as specified services) in so far as they are used for -
(a) construction or execution of works contract of a thereof; or building or a
civil structure or a part
(b) laying of foundation or making of structures for support of capital goods,
except for the provision of one or more of the specified services; or
(B) services provided by way of renting of a motor vehicle, in so far as they relate
to a motor vehicle which is not a capital goods; or
(BA) service of general insurance business, servicing, repair and maintenance ,
in so far as they relate to a motor vehicle which is not a capital goods, except when
used by -
(a) a manufacturer of a motor vehicle in respect of a motor vehicle
manufactured by such person ; or
(b) an insurance company in respect of a motor vehicle insured or
reinsured by such person; or
(C) such as those provided in relation to outdoor catering, beauty treatment,
health services, cosmetic and plastic surgery, membership of a club, health and
fitness centre, life insurance, health insurance and travel benefits extended to
employees on vacation such as Leave or Home Travel Concession, when such services
are used primarily for personal use or consumption of any employee;
Availing CENVAT credit on input services Rule 4(7)
The CENVAT credit in respect of input service shall be allowed, on or after the day on
which the invoice, bill or, as the case may be, challan referred to in rule 9 is received:
Provided that in case of an input service where the service tax is paid on reverse charge
by the recipient of the service, the CENVAT credit in respect of such input service shall
be allowed on or after the day on which payment is made of the value of input service
and the service tax paid or payable as indicated in invoice, bill or, as the case may be,
challan referred to in rule 9:
Provided further that in case the payment of the value of input service and the service
tax paid or payable as indicated in the invoice, bill or, as the case may be, challan
referred to in rule 9, is not made within three months of the date of the invoice, bill or,
as the case may be, challan, the manufacturer or the service provider who has taken
credit on such input service, shall pay an amount equal to the CENVAT credit availed on
such input service and in case the said payment is made, the manufacturer or output
service provider, as the case may be, shall be entitled to take the credit of the amount
equivalent to the CENVAT credit paid earlier subject to the other provisions of these
rules:
Provided also that if any payment or part thereof, made towards an input service is
refunded or a credit note is received by the manufacturer or the service provider who has
taken credit on such input service, he shall pay an amount equal to the CENVAT credit
availed in respect of the amount so refunded or credited:
Provided also that CENVAT credit in respect of an invoice, bill or, as the case may be,
challan referred to in rule 9, issued before the 1
st
day of April, 2011 shall be allowed, on
or after the day on which payment is made of the value of input service and the service
tax paid or payable as indicated in invoice, bill or, as the case may be, challan referred to
in rule 9.
Explanation I.- The amount mentioned in this sub-rule, unless specified otherwise,
shall be paid by the manufacturer of goods or the provider of output service by debiting
the CENVAT credit or otherwise on or before the 5th day of the following month except
for the month of March, when such payment shall be made on or before the 31st day of
the month of March.
Explanation II. - If the manufacturer of goods or the provider of output service fails to
pay the amount payable under this sub-rule, it shall be recovered, in the manner as
provided in rule 14, for recovery of CENVAT credit wrongly taken.
Explanation III.- In case of a manufacturer who avails the exemption under a
notification based on the value of clearances in a financial year and a service provider
who is an individual or proprietary firm or partnership firm, the expressions, following
month and month of March occurring in sub-rule (7) shall be read respectively as
following quarter and quarter ending with the month of March.
Question: M/s Ojha Cements Limited (OCL) was engaged in the business of
manufacturing and selling of cement and had been duly paying the excise duty in
respect of cement produced by it. OCL supplied cement to its customers "FOR
destination" and bore the freight up to the door steps of the customer i.e. the
destination point. The assessee (OCL) had taken the CENVAT credit of the service tax
paid on the aforementioned freight by it. The Department contended that the payment of
service tax on the freight incurred by the assessee was not input service as per rule 2(l)
of the CENVAT Credit Rules, 2004 and hence the CENVAT credit was not admissible on
it under the said rules. Explain whether the stand taken by Department is tenable in
law.
Question: Answer with reference to the CENVAT Credit Rules 2004 whether a
manufacturer of excisable goods who has paid Service tax on freight can himself take
credit of Service Tax paid , if such transportation service in relation to the manufacture
and clearance of his final products?
CENVAT credit on goods procured from 100% EOU or a unit in STP/HTP
etc. Rule 3(7)
The CENVAT credit in respect of inputs and capital goods cleared from an
export-oriented undertaking or by a unit in Electronic Hardware Technology Park
or in a Software Technology Park, as the case may be, on which such
undertaking or unit has paid -
(A) excise duty leviable under section 3 of the Excise Act (Excise duty shall be
the aggregate of Additional Custom Duty under section 3(1) of the Custom Tariff
Act and Special Additional custom Duty under section 3(5) of the Custom Tariff
Act)
(B) the Education Cess leviable under section 91 read with section 93 of the
Finance (No. 2) Act, 2004 and
(C) the Secondary and Higher Education Cess leviable under section 136 read
with section 138 of the Finance Act, 2007, on the excise duty referred to in (A)
Explanation.- Where the provisions of any other rule or notification provide for
grant of whole or part exemption on condition of non-availability of credit of duty
paid on any input or capital goods, or of service tax paid on input service, the
provisions of such other rule or notification shall prevail over the provisions of
these rules.
Note BCD is 50% exempt in case of removal of goods by Notification No. 1005 EOU to
DTA [Notification NO. 23/2003]
Question: Based on the following particulars determine the amount for which cenvat credit
will be available when goods are removed by 100% EOU to DTA.
Assessable value Rs. 20.00 lacs, Rate of Basic Custom Duty 10%, Additional custom duty
@ 15%, Spl ACD @ 4%
Answer: Computation of amount of cenvat credit
Amount Cenvat Credit
Assessable Value 20,00,000
BCD @ 5% 1,00,000 Not available
ACD @ 16% 3,36,000 Available
EC on ACD 6,720 Available
SHEC on ACD 3,360 Available
Total amount of cenvat Credit 3,46,080
Question: From the following determine the amount for which cenvat credit will be
available if the goods are manufactured in 100% EOUu and brought to DTA for being used
in manufacture of dutiable goods
No. of units 1,000
Assessable value Rs. 750/- per unit
Rate of Basic Custom Duty 12%
Rate of ACD 15%
Amount Cenvat Credit
Assessable Value (1000 X 750) 7,50,000
BCD @ 6% 45,000 Not available
ACD @ 16% 1,27,200 Available
EC on ACD 2,544 Available
SHEC on ACD 1,272 Available
Total amount of cenvat Credit 1,31,016
Availability of CENVAT credit under various situations
Situation Solution
a. The inputs are procured from a
registered First stage dealer under the
cover of invoice in which amount of
duty shown is Rs. 13,200/-. The
Invoice was marked ORIGINAL FOR
BUYER.
As per Rule 9, CENVAT credit can be
availed on the basis of invoice issued
by registered First Stage Dealer, for
the amount of duty shown therein. In
the given case Cenvat credit is
available for Rs. 13,200.
b. Machinery falling under chapter
heading 84 received along with invoice
marked DUPLICATE FOR TRANSPORT
indicating the amount of duty Rs.
7,600. [assume that the amount shown
includes EC as well as SHEC]
According to Rule 2(a) Machinery
falling under chapter 84 are the
Capital Goods. As per Rule 4(2), CC
on capital goods can be availed upto
50% of the amount of duty during the
first Financial year in which goods
are received and balance can be
availed in any of the subsequent
financial years. Therefore, in the
given case amount of credit during
the first financial year cannot exceed
Rs. 3,800 (50%) and balance can be
availed in any subsequent financial
year.
c. Some inputs were directly sent on 1st
of the month for job work to the factory
of job worker, from place of the input
supplier, without bringing them in
factory. As per the invoice of supplier of
inputs, duty paid on inputs was Rs.
5,000. Out of these inputs, 80% were
received in the factory on 14th of the
month, after carrying out job work.
According to Rule 4(1), CENVAT
credit on inputs can be received only
when inputs are received in the
factory, for the quantity actually
received. In the given case, the
assessee can avail the credit for Rs.
4000 (80%) when inputs are received
in the factory along with documents,
referred under rule 9, showing
amount of duty.
d. Some spare parts of machinery falling
under chapter 84 received with invoice
indicating amount of duty Rs. 1,600/-.
The Invoice was marked DUPLICATE
According to Rule 2(a), spare parts of
Machinery falling under chapter 84
are the Capital Goods. As per Rule
4(2), CC on capital goods can be
FOR TRANSPORT. availed upto 50% of the amount of
duty during the first Financial year in
which goods are received and balance
can be availed in any of the
subsequent financial years.
Therefore, in the given case amount
of credit during the first financial year
cannot exceed Rs. 800 (50%) and
balance can be availed in any
subsequent financial year.
e. Some Inputs received under the cover
of invoice indicating amount of duty
Rs. 4,500/-. The Invoice was marked
DUPLICATE FOR TRANSPORT and it
did not contain time of removal from
the factory.
According to Rule 9(2) of the CCR, if
there is any defect in invoice, Cenvat
credit can be availed only with
permission of AC/DC.
In the given case, failure to mention
time of removal on the invoice is a
defect. Therefore, CC cannot be
availed except with the prior approval
of AC/DC.
If such approval is obtained then CC
will be available for Rs. 4500/-
f. Assessee received some inputs are the
cover of an invoice. The invoice is not
in the name of assessee.
According to Rule 9(1), CENVAT
credit can be availed on the basis of
certain specified documents. The
rule does not require that the invoice
should be in the name of the
assessee. Therefore, assessee can
avail the CC on the basis of invoice
even though it is not in his name
provided goods are in his possession.
g. An consignment of imported inputs
was received vide Bill of Entry showing
payment of following duties BCD - Rs.
1,000, CVD - Rs. 1,760, Special CVD
Rs. 515 and applicable EC+SHEC.
According to Rule 3(1) of CCR, CC is
not available for BCD but it is
available for --
1. CVD - Rs. 1,760
2. Spl CVD Rs. 515
h. A consignment of 1,000 Kg of inputs
was received. The excise duty paid was
per invoice was Rs. 10,000. While the
inputs were being unloaded, 50 Kgs
were damaged and it was found that
these were not usable.
According to Rule 2(k), Inputs are the
goods which are used in the factory.
If the material is received but it
cannot be used, then it cannot
termed as Input and CC cannot
availed on unusable material.
In the given case, 50 Kgs of inputs
are not usable. Therefore, credit can
be availed for 950 Kgs only i.e. Rs.
9,500.
i. Some inputs were received along with
photo copy of the Invoice. The original
or duplicate copy of Invoice was not
traceable.
Cenvat credit cannot be taken on
basis of photo copy. If assessee can
procure triplicate copy (available with
supplier), then he can avail Cenvat
credit.
j. 500 pieces of inputs were received.
duty paid on these goods was Rs.
2,500. These were issued to
production. While on production line, a
fire broke out and 200 pieces of inputs
lying on shop floor were destroyed.
CENVAT credit is available for all the
inputs used in the factory even if
those are destroyed during the
process of manufacture. In the given
case reversal of credit is not required
for inputs destroyed during the
process of manufacture.
k. 1000 litres of inputs were received on
which duty paid was Rs. 10,000. Out of
these, 950 litres of final products were
manufactured. 50 litres of inputs were
lost during the process of manufacture
Same as above
l. Some inputs were received on which
duty paid was Rs. 20,000. Assessee
used 60% of the inputs but balance
40% could not be used due to change
in design. He made provision for
obsolete goods written off in his books
of account. However, the inputs were
still in his store room.
According to rule 3(5B) if inputs are
written off in the books of account or
a provision is made to write off, before
inputs are put to use, then the CC
availed on the inputs shall be
reversed.
Therefore, in the given case, the
assessee is required to reverse Rs.
8,000 (40% of the total credit on
inputs).
The rule further provides that if such
inputs are used again then assessee
can avail CC again.
m. Cenvat credit of Rs. 10,000 was taken
on some inputs. These were never used
and later sold as scrap for Rs. 15,000.
Excise duty payable on scrap is
16.48%.
In this case, the assessee will have to
reverse Cenvat credit of Rs. 10,000.
[Rule 3(5)]
Practical Problems on CENVAT Credit
Note: In many question education cess has and SHEC has not been mentioned. You
should assume that EC and SHEC is also paid in addition to the amount of duty.
Problem No 1
An assessee was availing SSI exemption from 1-4-2012. He crossed turnover Rs. 150
lakhs on 15-11- 2012 and started payment of excise duty. He had received machinery on
10-11-2012 one which excise duty paid was Rs. 3,20,000. He intends to avail Cenvat
credit of this duty. Can he do so?
Solution
According to Rule 4(2), an assessee availing SSI exemption is entitled to availed 100%
CENVAT credit on capital goods during the financial year in which those goods are
received. CENVAT credit is available on capital goods irrespective of the fact that the
assessee is availing SSI exemption. This credit can be used by the assessee only after his
exemption limit is exhausted.
In the given case, Capital goods are received during exemption period. Therefore, the
assessee can avail 100% CENVAT credit during the same financial year.
Problem No 2
(1) The assessee received 500 pieces of inputs on which duty of Rs. 2500/- has been
paid. While on production line, a fire broke out and 200 pieces of inputs lying on the
shop floor were destroyed.
(2) 1000 litres of oil, an input, was received on which duty of Rs. 18,000 has been paid.
60 liters of oil has been lost during the process of manufacture.
Discuss availability of CENVAT credit in both of these cases.
Solution
(1) Material destroyed before being used does not qualify to be input. Therefore, CENVAT
credit availed on 500 units destroyed due to file shall be reversed/paid back by the
assessee.
(2) All the material used in the factory is said to be input. 60 liters of oil lost during the
process of manufacture is said to have been used. Therefore, CENVAT credit is
admissible for entire 1000 liters.
Problem No. 3
Examine the validity of the following statements:
(i) Purchased a plant for Rs. 1,16,480 cum-duty price. Excise duty rate 16.48%
on 12.12.2011 and received the plant into the factory on 5.4.2012. Cenvat
allowed will be only Rs. 8,240 for the year ended on 3 1.3.2012.
(ii) An assessee purchased inputs weighting 400 tons. The duty paid on inputs
was Rs. 40,000. During transit, 20 tons of the inputs were destroyed. The
destroyed quantity of inputs does not qualify to be inputs within the meaning
of Cenvat Credit Rules, 2004.
Answer
(1) As per Rule 4(2), CC on capital goods can be availed on being received in the factory
and not on the date of purchase. In the given case, the goods are purchased on
12.12.2011 but those are received on 05.02.2012. Therefore credit cannot be availed
before 5.04.2012. In other words, no CENVAT credit is admissible during the financial
year 2011-12.
During financial year 2012-13 also CENVAT credit is limited to 50% i.e. Rs. 8240 and
balance credit can be availed during any of the subsequent financial years.
(2) The statement is correct. It is to be noted that the material destroyed before being put
to use in the factory does not qualify to be input and, thus, CC is not admissible on the
quantity so lost.
Problem No 4
A manufacturer procures certain inputs for Rs. 1,00,000 and duty Rs. 16,000
+EC+SHEC. As soon as he receives the inputs, he availed CENVAT credit.
Since he does not require these inputs any more, he sells those for Rs. 1,30,000 (lump
sum). Examine the amount of duty payable by the assessee if
(a) On the date of clearance, duty rate on inputs was 20%
(b) On the date of clearance, duty rate on inputs was 10%.
Solution:
According to Rule 3(5) of the CENVAT Credit when inputs are removed as such, the
assessee is required to reverse or pay back the amount of CENVAT credit taken by the
assessee. Therefore, in the given case, the assessee need not pay any duty but he shall
reverse the CENVAT credit taken by him on inputs.
It is to be noted that while making reversal, change in value as well as in rate of duty
becomes immaterial.
It is also relevant to note that the reversal is required to be made immediately on
removal of goods. In case of reversal facility of making payment of duty on monthly or
quarterly basis does not apply.
Similar sum for practice
An assessee had procured some inputs in May 2012 for Rs. 20 lakhs and paid duty of
Rs. 3,20,000 ( @ 16%) plus education cess of Rs. 6,400. He was unable to use the inputs
in view of change in market conditions. He sold the inputs in March 2013 for Rs.
16,00,000. How much duty or amount is payable while clearing the inputs?
Problem No. 5
M/s ALM imported some inputs and paid Basic Customs duty Rs. 5 lakhs, surcharge on
customs duty Rs. 50,000 and ACD Rs. 1 lakh. Calculate the amount that he can claim
as Cenvat credit. Would it make any difference, if the assessee is not a manufacturer,
but a service provider (CA Final May 2006)
Answer
As per Rule 3(1) of the Cenvat Credit Rules, 2004, CENVAT credit is not available for
Basic Custom Duty as well as for any Surcharge thereon. It is available only for
Additional Custom duty paid under section 3(1) of the Custom Tariff Act.
A service provider can avail credit only if the imported goods are used by him as input
for providing output service.
Problem No. 6
Based on the following information, determine the CENVAT Credit available for use in
the current year under the CENVAT Credit Rules, 2004
[Amount after each item indicates Central Excise duty paid at the time of Purchase of
goods. EC and SHEC is in addition to the amount of duty]
(Rs.)
(a) Pollution control equipments - Rs 25,000
(b) Spares for pollution control equipments - Rs 5,000
(c) Equipments used in office - Rs 12,000
(d) Storage Tank - Rs 10,000
(e) Paints used for painting machinery used - Rs 6,000
(f) Packing material - Rs 4,000
(g) Lubricating oils - Rs 8,000
(h) High Speed diesel oil - Rs 7,000
Answer:
Particulars
of
goods
Nature
of
Goods
Duty
paid
Education
Cess
Cenvat
Credit
Eligible in
Current year
Reason Remarks
Pollution
Control
Equipments
Capital
goods
25000 750 12500 375
CENVAT credit is limited to
50%
Spares for
Pollution
control
Equipment
Capital
goods
5000 150 2500 75
50%
Equipment
used in
office
Not a
Capital
goods
12000 360 Nil Nil
Credit is not available for the
goods used in office.
Storage
Tank
Capital
goods
10000 300 5000 150
50%
Paints used
for painting
Machinery
Inputs 6000 180 6000 180
100% Credit is available on
Inputs
Packing
Material
Inputs 4000 120 4000 120
Inputs
Lubricating
Oils
Inputs 8000 240 8000 240
Inputs
High speed
diesel
Not a
Input
7000 210 nil No CENVAT Credit.
Total Credit available in Current year 38000 1140
Problem No. 7
Discuss about the eligibility of CENVAT Credit in each of the following situations
(ii) 1000 kgs of raw materials were purchased on which duty of Rs. 16,000 was paid.
Whilst in the production yard those goods were destroyed by accidental fire.
(iii) 1000 kgs of raw materials on which duty paid was Rs. 10,000 was used in
manufacture of a final product for which the duty payable is Rs. 8000
(iv) The original invoice for 1,000 units of inputs purchased were missing; however
duplicate for transport copy of invoice is available, which shows that duty of Rs.
10,000 had been paid on inputs
Answer
(i) Credit is available on inputs only when used in manufacture. If inputs are
destroyed before being used in the process of manufacture, CENVAT credit
already availed shall be reversed or paid back. In other words, in the given case,
CENVAT credit is not available.
(ii) If finished goods are dutiable then full CENVAT credit is available on inputs. It is
immaterial that the amount of duty paid on input is higher than the duty payable
on the finished goods. Therefore, in the given case, credit is available for Rs.
10,000 out of which Rs. 8,000 shall be utilized to pay duty on finished goods and
balance Rs. 2,000 shall be carried forward.
(iii) As per rule 9 of the CCR, CENVAT credit can be availed on the basis of certain
specified documents only. Rule 9 does not require only original copy for availing
the credit. As long as all the particulars are available on the transporters copy,
credit can be availed.
Problem No. 9
H Ltd. purchased a Boring-brilling machine at a cum-duty price of Rs. 32,14,476. The
Excise duty rate charged on the said machine was @ 16% +EC+SHEC. The machine was
purchased on 01.04.2011 and disposed of on 30.09.2012 for a price of Rs. 12 lakhs. The
company was claiming depreciation @ 25% following Straight Line Method. Using the
said information, answer the following questions:
(i) what is the Excise duty paid on the machine?
(iii) What is the amount of Cenvat credit reversible or duty payable at the time of
clearance of the said machinery
Solution
1. According to Rule 4(4), the assessee can either claim depreciation on the amount of
duty or CENVAT credit.
2. The assessee is always authorised to claim depreciation for the value of goods
excluding amount of duty for which CENVAT credit is claimed. This depreciation on
the value of goods does not affect right of the assessee to claim CENVAT credit for the
amount of duty paid on machine.
3. According to Rule 4(2), CENVAT credit on capital goods is limited to 50% during first
financial year in which goods are received and balance credit can be availed in any of
the subsequent financial years.
4. According to Rule 3(5A), if goods are removed after partial use, the assessee is
entitled to retain 2.5% of the total credit for every three months or part thereof and
balance credit shall be reversed.
Calculation of Excise duty, CENVAT credit and reversal
Cum duty price 32,14,476
Assessable Value 3214476 x 100/116.48 27,59,681
Excise duty including EC and SHEC 3% of duty 4,54,795
Availability of Cenvat credit
During first year -50% of Rs. 454795 2,27,398
During subsequent year remaining 50% Of Rs. 454795 2,27,397
Credit of EC available only on payment of EC
Cenvat credit reversible at the time of clearance
Cenvat Credit availed in year 11-12 Rs. 2,27,398
Less: 2.5% per quarter for 6 quarters-15% 34410 1,93,288
Cenvat Credit availed in year 12-13 2,27,397
Less : 2.5% per quarter for 2 quarters 11371 2,16,027
Total amount of CENVAT credit reversible / payable at the time of clearance 4,09,315
1. An assessee had procured machinery in April 2011 for Rs 10 lakhs by paying duty of
Rs 1,60,000. It was commissioned in June 2011. Assessee had availed 50% Cenvat
credit of Rs 80,000 in 20011-12, and Rs 80,000 (balance 50% credit) in 2012-13. He
sold the capital goods after use, on 10
th
April 2103 as second hand goods for Rs
3,00,000. How much excise duty or amount is payable while clearing the machinery?
2. Machinotech Ltd. purchased a lathe machine at a price of Rs. 1,00,000 on which 16%
Excise duty was paid and the company availed of the Cenvat credit on the said capital
goods. The lathe machine was purchased on 27-01-2010 and it was disposed of on 29-
04-2011. How much CENVAT credit and when it can be availed by the assessee. Is it
necessary to reverse the cenvat credit on disposal of the machine? If your answer is yes,
quantify the amount.
Problem No. 10
UTV Limited manufactures 10,000 units of Product A having assessable value of Rs.
400/- per unit attracting duty of Rs. 16/- per unit (all inclusive). UTV Limited has paid
duty of Rs. 3,00,000 on inputs. Out of 10,000 units manufactured by UTV Limited,
2,000 units are sold in India and remaining 8,000 are exported. Based on these fact,
answer the following questions
(i) What is CENVAT credit available?
(ii) What is the duty payable through personal ledger account (PLA)?
(iii) Can UTV Ltd. get any refund of CENVAT credit?
Answer:
(i) CENVAT credit is available for the inputs used in manufacture of dutiable goods.
Export goods are also dutiable if sold in India but particular transaction of export
is exempt. Export goods cannot be referred as exempted goods. Therefore, credit is
available even for the inputs used in manufacture of export goods.
In the given credit the assessee is entitled to get credit of Rs. 3,00,000 i.e. duty
paid on inputs.
(ii) Duty is payable only on the goods removed within India. The assessee is required
to pay duty on 2000 units @ Rs. 16/- per unit i.e. Rs. 32,000. The assessee is
having sufficient credit balance, therefore nothing is payable through PLA (cash).
(iii) Yes, the assessee is entitled for refund. According to Rule 5 of CCR, the assessee
is entitled to get refund of CENVAT credit availed on inputs used in manufacture
of export goods in accordance with the prescribed formula.
Apply your understanding
A manufacturer manufactures 1,000 units of product P having a, Assessable Value of
which is Rs. 2,000 per piece. Duty payable is 20%.
Duty paid on raw materials is Rs. 2,00,000+EC+SHEC. The manufacturer sells 700
pieces in India and 300 pieces are exported. What is CENVAT available and what is the
duty payable through PLA?
Problem No. 11
MIs Tips and Toes Ld., manufactures four types of Nail Polishes, namely Sweety,
Pretty, Beauty, Tweety. The company has availed CENVAT credit of Rs. 4,00,000 on the
common inputs used in the manufacture of Nail Polishes during the financial year
2011-12 the company manufactured 1000 litres of each type of Nail Polishes. The
CENVAT availed input was used in equal proportion in all the four types of the products.
Examine the availability of Cenvat Credit and duty payable
Product Nature of Sale
Sale Price excluding Sales Tax
&
other local taxes
Sweety Sale to Home Consumption Rs. 30 per 20 ml bottle
Pretty Sold to a 100% EOU Rs. 40 per 20 ml bottle
Beauty Fully exported Rs. 50 per 20 ml bottle
Tweety
Supplied to defence Canteen under
exemption
Rs. 60 per 20 ml bottle
Solution
The assessee is authorised to avail full CENVAT credit for the inputs used in
manufacture of the goods which are removed for
1. Home consumption
2. Export
3. Supplied to 100% EOU
In respect of goods supplied to defence canteen, the assessee is having following options
1. If assessee is maintaining separate record for use of inputs used in manufacture of

various articles, then CENVAT credit cannot be availed on the inputs used in
manufacture of goods supplied to defence canteen or
2. On removal of goods to defence canteen duty can be paid @ 6% or
3. CENVAT credit availed on inputs used in manufacture of goods supplied to defence
can be reversed in accordance with the formula prescribed under rule 6(3A).
Problem No 12
An assessee cleared his manufactured final Product during the month of January 2013.
The duty payable on the final product for the month is
Basic excise duty Rs. 48,000,
NCCD Rs.2000 and applicable education cess.
During the month he has received various inputs total duty paid on the inputs was as
follows.
Basic Excise duty Rs. 40000,
Special excise duty 4000,
Service tax paid on input services Rs. 8000.
Applicable education cess and SHEC was also paid. How much duty is payable through
account current
Solution
BED SED NCCD Service
Tax
EC and
SHEC
Total
Credit
available
40,000 4,000 8000 1,600 53,600
Duty
payable
48,000 2000 1500 51500
BED can be paid
out of credit of
BED, SED as well
as ST. There is
surplus credit of
Rs. 4,000.
NCCD is
payable only
in cash or
out of NCCD
credit. Since
there is no
credit for
NCCD, then
it is payable
in cash only
This
credit
can be
used to
pay BED,
SED, EC,
SHEC
Credit
exceeds
the
liability.
Therefore,
excess
credit can
be carried
forward
An assessee cleared his manufactured final Product during the month of March 2013.
The duty payable on the final product for the month is
Basic excise duty Rs. 200000,
Special excise duty Rs. 1,00,000 and applicable education cess.
During the month he has received various inputs total duty paid on the inputs was as
follows --
Basic Excise duty Rs. 50000,
Special Excise duty is Rs. 5000.
Excise duty paid on capital goods received during the month was Rs. 12000
Service tax paid on inputs Rs. 1000,
Applicable EC and SHEC was also paid. How much duty is payable through account
current
Problem No 13
X availed Cenvat credit of Rs. 42,000 for manufacture of an item chargeable to duty.
These goods were lying in his factory till 29-02-2013. From 1.3.2013 the final product
was made exempt from duty. What is the responsibility of assessee in respect of CENVAT
credit.
Solution
According to Rule 11 of CCR, if finished goods become exempt, the assessee shall reverse
CC for all the inputs lying in stock as well as inputs contained in the finished goods in
stock.
In the given case, all the finished goods are in stock when dutiable goods become
exempt. Therefore, the assessee is required to make reversal of CENVAT credit of Rs.
42,000.
Problem No 14
A manufacturer received certain inputs. The cost of inputs was Rs. 2,00,000 and duty
paid @ 16% was Rs. 32,000. After receipt of the inputs, the cenvat credit was availed of
by the manufacturer. He further carried out some processes on the inputs. The cost of
processing was Rs. 50,000. The semi-processed material was sent to a small-scale unit
for a job work. -Is there any duty payable at the time of removal of inputs for the job
work? The material sent was not returned by the small- scale unit after the job work
within 180 days. What will be the duty payable on such goods not returned after being
sent out for the job work?
Solution
According to Rule 4(6) of the CCR, if inputs or semi-finished goods are sent for job work
without paying duty and if those are not returned within 180 days, the assessee is
required to make reversal of the CENVAT credit on the inputs/inputs used in semi
finished goods for the job-work.
In the given case, if goods are not returned within 180 days since removal for job-work,
the assessee is required to make reversal of the credit availed. However, special
permission can also be obtained for removal of finished goods from the premises of job-
worker and in that case, duty will be payable on assessable value of finished goods.
Problem No 15
A Small Scale Industrial unit (SSI) is required to pay the following central excise duties
by January 10, 2013 for clearances effected from its factory in respect of final products
manufactured during the month of December, 2012:
Basic Excise Duty (B.E.D.): Rs.36,000
Special Excise Duty (S.E.D.): Rs.18,000
National Calamity Contingency Duty (N.C.C.D.): Rs.1,000
EC and SHEC as applicable
Balances available as credit at the beginning of the month i.e. December, 2012 were as
follows:
BED Rs. 24,000
N.C.C.D. Rs. 2,000
E.C. Rs. 780
No inputs were received during the month. However, certain inputs were received on
January 1, 2013 on which total duty paid by the suppliers of inputs was as follows:
B.E.D Rs.16000,
E.C. and S.H.E.C Rs.480
Excise duty paid on capital goods received during the month was as follows:
B.E.D. Rs.40,000,
E.C. and SHEC Rs.1200
For the month of December, 2012 you are required to determine:
(i) the credit available for utilization;
(ii) the permissible extent to which such available credit may be utilised against
payment of B.E.D.,S.E.D., N.C.C.D., and E.C.; and
(iii) The B.E.D., S.E.D., and E.C. payable through account current (P.L.A.).
Solution
CENVAT credit available for utilization
Excise SED NCCD EC SHEC Total
Opening
balance
24,000 - 2,000 520 260 26,780
Inputs
received in
December
2103
- - - - - -
Capital
Goods
received in
December
2012
20,000 400 200 20,600
Total 44,000 - 2,000 920 460 47,380
Excise SED NCCD EC SHEC Total
Duty
payable
36,000 18,000 1,000 1100 550 56,650
Credit
available
44,000 2,000 920 460
Through CC 36,000 8,000 1,000 920
By cash - 10,000 - 180 90 10,270
Surplus
carried
forward
- - 1,000 - - 1,000
Problem No 16
An assessee cleared various manufactured final products during January 2013. The
duty payable for January 2013 on his final products was as follows - Basic - Rs.
2,00,000 EC and SHEC - as applicable.
During the month, he received various inputs on which total duty paid by suppliers of
inputs was as follows
Basic duty - Rs. 50,000,
Education Cess - Rs. 1,000,
SHEC - Rs. 500.
Excise duty paid on capital goods received during the month was as follows
Basic duty - Rs. 12,000.
Education Cess - Rs. 240.
SHEC - Rs. 120.
Service tax paid on input services was as follows - Service Tax - Rs. 10,000. Education
cess - Rs. 200 SAH Education Cess - Rs. 100.
How much duty the assessee will be required to pay by GAR-7 challan for the month of
January 2013, if assessee had no opening balance in his PLA account2 What is last date
for payment?
Answer
CENVAT credit available for January 2013
Excise Duty/ST EC SHEC Total
Inputs 50,000 1,000 500 51,500
Capital Goods 6,000 120 60 6,180
Input Service 10,000 200 100 10,300
Total 66,000 1,320 660 67,980
Payment of duty through CC and through GAR 7
Duty Amount Payment through CC Payment through GAR 7
Excise 2,00,000 66,000 1,34,000
EC 4,000 1,320 2,680
SHEC 2,000 660 1,340
According to Rule 8 of CER, the duty shall be paid within 5 days after the end of the
month but where e-payment is made, instead of 5 days, 6 days are allowed. It is also to
be noted that e-payment is compulsory for the assessee who has paid duty of Rs. 10.00
lacs or more during the preceding financial year.
In the case of specific rate of duty,
the basis of levy is a specific
quantity of goods such as weight,
length, volume, number of units
produced etc. Thus specific rate of
duty has no relevance to the
selling price or value of the
excisable goods and is, in fact,
independent of it e.g. Rs. 50/- per
KG or Rs. 5000/- per KL
In the case of ad-valorem rate of duty, the
basis of levy is the value of the goods. It is,
therefore, necessary to determine the value
of the excisable goods and then apply the
ad-valorem rate of duty which is a fixed
percentage of the value, say, 15% ad-
valorem, 20% ad-valorem etc. Thus, ad-
valorem rate of duty is entirely related to and
is dependant on the value of excisable goods
e.g. 20% or 8%.
Valuation of Excisable Goods
Under Central Excise Act, excise duty may be specific or ad-valorem. Specific duty is
quantity based while ad-valorem duty is value based. This chapter is relevant only where
duty is ad-valorem.
Types of Duties under the Central Excise
This chapter deals with determination of assessable value on the basis of which duty
may be charged. It is to be noted that price and value are not synonymous terms for
the purpose of excise. The assessable value for the purpose of duty may be -
(a) Tariff Value fixed by Central Government under Section 3(2) of Central Excise Act,
1944; or
(b) On the basis of valuation under Section 4 of Central Excise Act, 1944:
(i) Transaction Value
(ii) Valuation as per Central Excise Valuation (Determination of Price of
Excisable Goods) Rules, 2000, or
(c) On the basis of Retail Sale Price Valuation under Section 4A of Central Excise
Act, 1944.
Valuation under Section 3(2) of Central Excise Act, 1944 i.e., Tariff Value
The Central Government may, by notification in the Official Gazette, fix, for the purpose
of levying CENVAT or Special Excise Duty on any articles chargeable with duty ad
valorem, the Central Government may, by notification in the Official Gazette ,
Fix the tariff value of any article enumerated in First/Second Schedule
Alter any tariff values for the time being in force.
Under Section 3(3), the Central Government may fix different tariff values for
(a) Different classes or descriptions of the same excisable goods; or
(b) Excisable goods of the same class or description
(i) Produced or manufactured by different classes of producers or
manufacturers; or
(ii) sold to different classes of buyers:
Provided that in fixing different tariff values, regard shall be had to the sale prices
charged by the different classes of producers or manufacturers, or the normal practice of
the wholesale trade in such goods.
Century Manufacturing Company Limited V. UOI Section 4 is subject to section 3(2) i.e.
when tariff value is fixed, provision of section 4 will not be applicable. Section 3(2) over
rides section 4. Section 3(2) and section 4A are mutually exclusive.
Valuation under Section 4A or RSP based Valuation
(1) The Central Government may, by notification in the Official Gazette, specify any goods,
in relation to which it is required, under the provisions of the Legal Metrology Act, 2002 or
the rules made thereunder or under any other law for the time being in force, to declare on
the package thereof the retail sale price of such goods, to which the provisions of sub-
section (2) shall apply.
(2) Where the goods specified under sub-section (1) are excisable goods and are
chargeable to duty of excise with reference to value, then, notwithstanding anything
contained in section 4, such value shall be deemed to be the retail sale price declared on
such goods less such amount of abatement, if any, from such retail sale price as the
Central Government may allow by notification in the Official Gazette.
(3) The Central Government may, for the purpose of allowing any abatement, take into
account the amount of duty of excise, sales tax and other taxes, if any, payable on such
goods.
(4) Where any goods specified under sub-section (1) are excisable goods and the
manufacturer-
(a) removes such goods form the place of manufacture without declaring the retail sale
price of such goods on the packages or declares a retail sale price which is not the retail
sale price as required to be declared under the provisions of the Act, Rules or other law as
referred to in sub-section (1) ; or
(b) tampers with, obliterates or alters the retail sale price declared on the packages of such
goods after their removal from place of manufacture,
then, such goods shall be liable to confiscation and the Central Government shall ascertain
in the prescribed manner the retail sale price of such goods and the retail sale price so
ascertained shall be deemed to be the retail sale price for the purposes of this section.
Explanation 1: "Retail sale price" means the maximum price at which the excisable
goods in packaged form may be sold to the ultimate consumer and includes all taxes local
or otherwise, freight, transport charges, commission payable to dealers, and all charges
towards advertisement, delivery, packing, forwarding and the like, as the case may be,
and the price is the sole consideration for such sale.
Provided that in case the provisions of the Act, Rules or other law as referred to in sub-
section (1) required to declare on the package, the retail sale price excluding any taxes,
local or otherwise, the retail sale price shall be construed accordingly. [Nov. 05]
Explanation 2:
(a) Where on the packages of any excisable goods more than one retail sale price is
declared, the maximum of such retail sale price shall be deemed to be the retail sale
price;
(b) Where the retail price declared on the package of any excisable goods at the time of its
clearance from the place of manufacture, is altered to increase the retail sale price,
such altered retail sale price shall be deemed to be the retail sale price.
(c) Where different retail sale prices declared on different packages for the sale of any
excisable goods in packaged form in different areas, each such retail price shall be the
retail sale price for the purposes of valuation of the excisable goods intended to be sold
in the area to which the retail sale price relates.
Applicability
Provisions of section 4A are applicable if all the following requirements are satisfied
a) The goods are satisfied goods
b) The goods are already covered under the Legal Metrology Act, 2002, and
c) The goods have been notified by the central government under sub-section (1) of
this section.
However, in following cases, provision of section 4A will not be applicable even if all the
aforesaid requirements are satisfied --
a) The weight is less than 10 grams
b) Liquid contents are less than 10 ML
c) The goods covered under section 4A are not being removed in consumer pack
d) The goods covered under section 4A are being offered as free along with the goods
covered under section 4.
Assessable value
The assessable value of the goods covered under section 4A shall be the RSP declared on
the goods reduced by the rate of abatement prescribed by the Central Government i.e.
AV = RSP declared (-) Prescribed rate of abatement
Rate of abatement
The rate of abatement is fixed the Central Government after taking into account all the
expenses incurred by the assessee, any brokerage or commission, his prodit margin as
well as all applicable taxes. It means except the prescribed rate of abatement no other
deduction shall be admissible.
Few examples of rate of abatement prescribed by Central Government: (list
illustrative and not exhaustive): Government has notified 99 categories of goods under
section 4A. Few of them are as under
Description Abatement as a % of RSP
Condensed Milk 35%
Chocolates 35%
Toothpaste 35%
Footwear 40%
Electric Fans 40%
Aerated Waters 45%
Ice Cream 45%
The procedure of valuation of calculation of central excise duty may be understood with
the following example:
MRP is affixed on product X, including sales tax @ 3%, is Rs. 100/-. Rate of Rebate is
40% in terms of notification no. 2/2006. Rate of Excise Duty is 16% and Cess 3% (2% +
1%). Wholesale price of the product is Rs. 45 with duties of excise and local taxes.
Now for the purpose of Excise duty the following steps should be taken:
1 MRP Rs. 100
2 Less Rebate @ 40% Rs. 40
3 Value on which excise duty is to be paid Rs. 60
4 Amount of duties Rs. 9.888
a. Basic Excise Duty @ 16% = Rs. 9.6
b. Education Cess @ 2% = Rs. 0.192
c. SH Education Cess @ 1% = Rs. 0.096
5 For the purpose of calculation of excise duty actual sale
price shall be ignored.
6 Local taxes like sales tax shall be ignored
7 Any discount whether quantity discount / volume
discount or performance discount shall be ignored
8 All other adjustments prescribed under section 4 shall be
ignored.
9. Provisions of Central Excise Valuation (Determination of
Price of Excisable Goods) Rules, 2000 shall be ignored.
Contravention
Following contraventions can take place under this section
a) RSP is required to be declared on the goods but it is not decalred;
b) The value declared on the goods is not the RSP; or
c) RSP declared on the goods has been obliterated
In any such case, the goods are liable to be confiscated and the RSP shall be
ddetermined in accordance with the prescribed Rules.
Central Excise (Determination of Retail Sale Price of Excisable Goods) Rules, 2008
1.(1) These rules may be called the Central Excise (Determination of Retail Sale Price of
Excisable Goods) Rules, 2008.
(2) They shall come into force on the date of their publication in the Official Gazette.
2. In these rules, unless the context otherwise requires,-
(a) 'Act' means the Central Excise Act, 1944 (1 of 1944);
(b) 'retail sale price' means the retail sale price as defined in section 4A of the Act;
and
(c) words and expressions used in these rules and not defined but defined in the Act
or any other rules made under the Act shall have the meaning as assigned therein.
3. The retail sale price of any excisable goods under sub-section (4) of section 4A of
the Act, shall be determined in accordance with these rules.
4. Where a manufacturer removes the excisable goods specified under sub-section
(1) of section 4A of the Act,-
(a) without declaring the retail sale price on the packages of such goods; or
(b) by declaring the retail sale price, which is not the retail sale price as required to
be declared under the provisions of the Standards of Weights and Measures Act,
1976 (60 of 1976) or rules made thereunder or any other law for the time being in
force ; or
(c) by declaring the retail sale price but obliterates the same after their removal from
the place of manufacture, then, the retail sale price of such goods shall be
ascertained in the following manner, namely:-
(i) if the manufacturer has manufactured and removed identical goods,
within a period of one month, before or after removal of such goods, by declaring
the retail sale price, then, the said declared retail sale price shall be taken as the
retail sale price of such goods:
(ii) if the retail sale price cannot be ascertained in terms of clause (i), the
retail sale price of such goods shall be ascertained by conducting the enquiries in
the retail market where such goods have normally been sold at or about the same
time of the removal of such goods from the place of manufacture:
Provided that if more than one retail sale price is ascertained under clause (i) or clause
(ii), then, the highest of the retail sale price, so ascertained, shall be taken as the retail
sale price of all such goods.
Explanation.- For the purposes of this rule, when retail sale price is required to be
ascertained based on market inquiries, the said inquiries shall be carried out on sample
basis.
5. Where a manufacturer alters or tampers the retail sale price declared on the
package of goods after their removal from the place of manufacture, resulting
into increase in the retail sale price, then such increased retail sale price
shall be taken as the retail sale price of all goods removed during a period of
one month before and after the date of removal of such goods.
Multiple RSPs
Multiple RSPs declared on
the goods but there is
only one valid RSP and
Multiple valid RSPs are
declared on the goods (for
any reason)
Different RSPs have been
declared on different
units of the same goods
remaining have been
cancelled by assessee
Assessment shall be
based on declared valid
RSP only
Assessment shall be
based on highest declared
RSP
Each unit shall be
assessed according to
RSP declared on it.
Multi-pack
When more than one assessable units of the goods are contained in the same pack, it is
referred as multipack. Assessable value of the multipack shall be determined in
accordance with Boards Circular dated 28
th
February 2002 has clarified as under
(a) If individual item comprises the multi-pack (two or more items with MRP printed)
have clear marking that they should not be sold separately or they are packed in
such a way that they cannot be sold separately then MRP indicated on the multi-
pack would be the basis for section 4A.
(b) Where individual item do not contain such an inscription and they are capable of
being sold separately at the MRP printed on the individual pieces, then aggregate
of MRPs of the prices comprising the multi-pack would be considered for payment
of duty under section 4A.
(c) Where the individual items have MRPs printed on them but are scored out, then
only valid MRP on the multi-pack would be adopted.
(d) If an individual item is supplied free in the multi-pack and has no MRP printed on
it, the MRP printed on the multi-pack would be for the purpose of section 4A.
Refundable security deposit The issue has been clarified by the Department vide
Circualr No. 643/34/2002. According to it, if cost of reusable containers (glass bottles,
crates etc.) is amortised and included in the cost of the product itself, the question of
adding any further amount does not arise except where audit of accounts reveals that
such cost has not been amortised and included in the value of the product.
A. CCEx V. Pepsi Foods Limited When the goods falling under section 4A are
supplied free of cost with other products and the packet of such goods does not
bear any MRP, the such goods will be assessed under section 4 and not under
section 4A.
B. Mount Everest Mineral Water Limited V. CCEx The assessee had different sale
prices on its mineral water bottles for sale in different regions. It contended that
each of those prices should be taken for assessment depending upon to which
region this is cleared.
Held that the assessee did not satisfy the requirement under explanation 2(c) to
section 4A that marking of different prices must be on different packages. Thus,
as per explanation 2(a) the highest price declared on the package is to be taken
into account for valuation.
C. Indica Laboratories Pvt. Ltd. Vs. CCEx., Ahmedabad In case of MRP based
assessment, no deduction is admissible for quantity discount and actual
transaction value is also irrelevant.
D. Rallis India Limited Vs. CCEx., Nagpur [2007][Tri-Mum] If goods covered under
section 4A are not offered for sale in retail but those are supplied free of cost then
valuation of such goods has to be done under section 4 and not under section 4A.
E. Kwality Biscuits Pvt. Ltd. Vs. CCEx.(Ap) [2007][Tri-Bang] - Goods covered under
section 4A are to be valued under these provisions only even if goods are sold in
bulk.
F. Provisions of Standards of Weight & Measures (Packaged Commodities) Rules,
1977 shall apply in case of bulk sale of ice cream in packages to hotel/catering
industry etc. and accordingly, the assesee is required to declare the retail sale
price on such packages. [Circular No. 843/1/2007-CX dated 17.01.2007]
G. Where different MRPs are mentioned on different packeages of the same
commodity, the area in which such packages have to be sold need not mentioned
on it and the MRP declared on each of them is required to accepted for
assessment. GUJARAT GOLDCOIN CERAMICS LTD. Vs. COMMISSIONER OF C.
EX., RAJKOT - 2008 (223) E.L.T. 556 (Tri. - Ahmd.)
Question: P Limited manufactures two products namely A and B.A is a
specified product under section 4A of the Central Excise Act, 1944.The sale
prices of both the products are Rs. 50/- per unit and Rs. 30/- per unit respectively.
The sale price of both the products included 14% basic excise duty plus 2%
education cess and 1% secondary and hiher education cess.Central Sales Tax @
3% is also included in both the selling prices.
1,00,000 units of each of the two products were removed from the factory for
sale. Calculate the total excise duty liability of P Limited on both the products
assuming that 40% abatement is permissible under section 4A on product A. (5
marks)
Question: What are the conditions under which MRP based valuation shall apply
under Central Excise? 4 Marks)
Answer: The provisions relating to valuation of excisable goods based on MRP are dealt
with in section 4A of the Central Excise Act, 1944. The conditions under which the MRP
based valuation shall apply are as follows:
(a) the excisable goods to be valued are covered under Standards of Weights and
Measures Act, 1976 or related rules or under any other law and such law requires to
declare on the package the retail sale price thereof; and
(b) the Central Government has notified the said goods as goods in relation to which the
payment of excise duty shall be on the basis of the MRP less such
deductions/abatements as it may allow in the notification. However, it must be noted
that if the goods have been so notified, Standards of Weights and Measures Act or the
rules made thereunder must require a declaration of the retail sale price on the package
of such goods.
Question: What legal/penal actions can be taken in case the retail sale price is
not mentioned or is unduly tampered after the removal? (4 Marks)
Answer: If the retail sale price is not mentioned on the excisable goods or is unduly
tampered after the removal, then
(i) such goods shall be liable to confiscation and
(ii) the retail sale price of such goods shall be ascertained in the manner prescribed by
the Central Government and such price shall be deemed to be the retail sale price.
Valuation under Section 4 of Central Excise Act, 1944
Provisions of Section 4 become applicable only where the Central Government has not
fixed any tariff value for the goods under section 3(2) and such goods are also not
specified under section 4A.
Section 4: Valuation of excisable goods for purposes of charging of duty of excise
(1) Where under this Act, the duty of excise is chargeable on any excisable goods with
reference to their value, then, on each removal of the goods, such value shall
(a) in a case where the goods are sold by the assessee, for delivery at the time and
place of the removal, the assessee and the buyer of the goods are not related and
the price is the sole consideration for the sale, be the transaction value;
(b) in any other case, including the case where the goods are not sold, be the value
determined in such manner as may be prescribed.
Explanation.For the removal of doubts, it is hereby declared that the price-cum-
duty of the excisable goods sold by the assessee shall be the price actually paid to him for
the goods sold and the money value of the additional consideration, if any, flowing directly
or indirectly from the buyer to the assessee in connection with the sale of such goods, and
such price-cum-duty, excluding sales tax and other taxes, if any, actually paid, shall be
deemed to include the duty payable on such goods.
(2) The provisions of this section shall not apply in respect of any excisable goods for
which a tariff value has been fixed under sub-section (2) of section 3.
(3) For the purpose of this section,
(a) "assessee" means the person who is liable to pay the duty of excise under this Act
and includes his agent;
(b) persons shall be deemed to be "related" if
(i) they are inter-connected undertakings;
(ii) they are relatives;
(iii) amongst them the buyer is a relative and a distributor of the assessee, or a sub-
distributor of such distributor; or
(iv) they are so associated that they have interest, directly or indirectly, in the
business of each other.
Explanation.In this clause
(i) "inter-connected undertakings" (this definition has been given in detail in the
first chapter)
(ii) "relative" shall have the meaning assigned to it in clause (41) of section 2 of the
Companies Act, 1956 (1 of 1956);
(c) "place of removal" means
(i) a factory or any other place or premises of production or manufacture of the
excisable goods;
(ii) a warehouse or any other place of premises wherein the excisable goods have
been permitted to be deposited without payment of duty [;]
(iii) a depot, premises of a consignment agent or any other place or premises from
where the excisable goods are to be sold after their clearance from the factory;
from where such goods are removed.
(cc) "time of removal", in respect of the excisable goods removed from the place of
removal referred to in sub-clause (iii) of clause (c), shall be deemed to be the time at
which such goods are cleared from the factory;
(d) "transaction value" means the price actually paid or payable for the goods, when
sold, and includes in addition to the amount charged as price, any amount that the
buyer is liable to pay to, or on behalf of, the assessee, by reason of, or in connection
with the sale, whether payable at the time of the sale or at any other time,
including, but not limited to, any amount charged for, or to make provision for,
advertising or publicity, marketing and selling organization expenses, storage,
outward handling, servicing, warranty, commission or any other matter; but does
not include the amount of duty of excise, sales tax and other taxes, if any, actually
paid or actually payable on such goods.
Explanation to Section 4(1):
The price-cum-duty of the excisable goods sold by the assessee shall be the price actually
paid to him for the goods sold and the money value of the additional consideration, if any,
flowing directly or indirectly from the buyer to the assessee in connection with the sale of
such goods, and such price-cum-duty, excluding sales tax and other taxes, if any, actually
paid, shall be deemed to include the duty payable on such goods.
Example: Certain Excisable goods are sold by M for Rs.140 and 20% is the rate of duty.
Then, transaction value for charging excise duty is computed as shown below:
Value= (Price Cum Duty)/ [1+(Rate of Duty/100)]
= (140)/[1+(20/100)] = Rs.116.67 (approx).
Subsequently, if it is found that the cum duty price of goods was Rs.180 and not
Rs.140, as the assessee had collected Rs.40 separately, then such additional
consideration shall be deemed to include the excise duty payable on such goods. In this
case, the revised transaction value of goods shall be as shown below:
Value= (Price Cum Duty)/ [1+(Rate of Duty/100)]
= (140+40)/[1+(20/100)] = Rs.150 (approx).
Thus, Section 4(1)(a) provides for calculation of assessable value as per Transaction
Value and Section 4(1)(b) provides for calculation of assessable value as per Valuation
Rules.
Duty is chargeable at the rate and on the price prevailing on the date of actual removal
of goods from the factory gate and subsequent reduction in the price even at the behest
of the government does not create a right in favour of assessee for refund of duty on
reduction in the price. MRF Ltd. V. CCEx.
Transaction value as assessable value under section 4(1)(a)
According to Section 4(1)(a) Where under this Act, the duty of excise is chargeable on any
excisable goods with reference to their value, then, on each removal of the goods, such
value shall in a case where the goods are sold by the assessee, for delivery at the time
and place of the removal, the assessee and the buyer of the goods are not related and the
price is the sole consideration for the sale, be the transaction value.
Therefore, the transaction value will be accepted as assessable value only if: -
(a) Goods are sold
(b) The sale is by assessee
(c) Delivery is at the time and place of removal
(d) The assessee and buyer are not related persons
(e) Price is the sole consideration for sale
If these conditions are satisfied, Section 4(1)(a) accepts different transaction value which
may be charged by the assessee to different buyers, for assessment purpose. When there
is nothing to show that either the buyer was a related person or that the price was not
the sole consideration or there were other vitiating circumstances to doubt the normal
price, the price under Section 4(1)(a) shall be considered for valuation. UOI V. Hindalco
Industries.
It is to be noted that the though the excisable event under the Act is manufacture or
production of goods but payment of duty is postponed till removal of goods from the
place of removal. The removal of goods may be because of sale or for some other reason.
Where the goods are not sold but those are consumed captively or those are transferred
to depot, in absence of transaction value, the valuation of goods has to be in accordance
with Rule 8 of Valuation Rules or Rule 7 of valuation rules, respectively.
The value to be adopted is the price at which such goods are ordinarily sold by the
assessee to a buyer in the course of trade for delivery at the time and place of removal.
Therefore, chargeability of excise is based on the value of goods on each removal at the
time and place of removal.
Elements of Cost which are generally included in the assessable value
The term transaction value as per Section 4 means the price actually paid or payable for
the goods, when sold, and includes in addition to the amount charged as price, any
amount that the buyer is liable to pay to, or on behalf of, the assessee, by reason of, or in
connection with the sale, whether payable at the time of the sale or at any other time,
including, but not limited to, any amount charged for, or to make provision for,
advertising or publicity, marketing and selling organization expenses, storage, outward
handling, servicing, warranty, commission or any other matter but does not include the
amount of duty of excise, sales tax and other taxes, if any, actually paid or actually
payable on such goods.
The words including but not limited to used in the definition of transaction value
indicate that the items included are only illustrative and many other items may be
includible. Example: Where the assessee recovers advertising charges from the buyer
either at the time of sale or subsequently, the assessee cannot claim that such charges
are not includible in the transaction value.
It is to be noted that an item is includible only if the buyer is liable to pay for or on
behalf of the assessee. But any amount of taxes, which are paid or payable by the
assessee and recovered from the buyer, are not includible in assessable value.
Meaning of transaction value
The price actually paid or payable for the goods
Differential pricing is acceptable
The amount which the buyer is liable to pay may have to pay it to the assessee or
to some other person on behalf of the assessee.
The amount may be payable at the time of sale or at any time later on.
The amount payable should be by reason of or in connection with the sale of
goods.
Amount referred above includes the following but not
limited to
Advertising and publicity
Marketing selling and organization expenses
Storage and warehousing
Servicing and warranty
Commission
Does not include any tax
already paid or actually
payable e.g.
Excise duty
Sales Tax
Other taxes
In nut shell, any amount already known at the time of delivery of goods is includible in
the assessable value provided such payment is in relation to goods e.g. extra test or
packing but interest amount, being finance charges, is not includible.
Any payment received by the assessee in relation to goods, not known at the time of
delivery is not includible in the assessable value e.g. extended warranty or service
charges
Question: What are the situations where transaction value under Section 4 of
the Central Excise Act does not apply? (4 marks)
Answer: As per section 4(1) of the Central Excise Act, the transaction value shall be
the assessable if the following conditions are fulfilled
(i) If the goods are sold
(ii) By the assessee
(iii) For delivery at the time and place of removal
(iv) Where assessee and buyer are not related persons; and
(v) Price is the sole consideration for sale.
If any one or more of the above conditions are not satisfied, the transaction value will
not be taken as the assessable value. The value in such a case shall be determined
on the basis of the Central Excise (Determination of Price of Excisable Goods) Rules,
2000 notified under section 4(1)(b) of the Central Excise Act.
Further, Transaction value also does not apply where tariff value has been fixed by
the Central government under section 3(2) and in cases where provisions of section
4A are applicable.
Valuation under section 4(1)(b) as per Central Excise Valuation Rules, 2000
According to section 4(1) Where under this Act, the duty of excise is chargeable on any
excisable goods with reference to their value, then, on each removal of the goods, such
value shall -
a. in a case where the goods are sold by the assessee, for delivery at the time and
place of the removal, the assessee and the buyer of the goods are not related and the
price is the sole consideration for the sale, be the transaction value;
b. in any other case, including the case where the goods are not sold, be the value
determined in such manner as may be prescribed.
By virtue of powers vested under section 37, the Central Government has made Central
Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 that came into
effect from 1
st
July 2000. These Rules are reproduced, with comments, hereunder for
ready reference.
Central Excise Valuation
(Determination of Price of Excisable Goods) Rules, 2000
CHAPTER I
PRELIMINARY
Rule 2: In these rules, unless the context otherwise requires: -
(a) "Act" means the Central Excise Act, 1944 (1 of 1944);
(b) "normal transaction value" means the transaction value at which the greatest
aggregate quantity of goods are sold;[Nov. 08]
(c) "value" means the value referred to in Section 4 of the Act;
(d) words and expressions used in these rules and not defined but defined in the Act
shall have the meanings respectively assigned to them in the Act.
Rule 3: The value of any excisable goods shall, for the purposes of Section 4(1)(b) of the
Act, be determined in accordance with these rules.
Rule 4: Where price of the goods is not known at the time and place of removal
The value of the excisable goods shall be based on the value of such goods sold by the
assessee for delivery at any other time nearest to the time of the removal of goods under
assessment, subject, if necessary, to such adjustment on account of the difference in the
dates of delivery of such goods and of the excisable goods under assessment, as may
appear reasonable to the proper officer.
Such a situation arises when the goods are not sold at the time of removal.
Question: Briefly examine the correctness or otherwise of the statement with
reference to the Central Excise Act, 1944 giving reasons to support your answer: In
case of samples distributed free, valuation should be adopted on the basis of Rule 8
of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules,
2000 i.e. cost of production plus 10%
Answer: Incorrect. CBEC vide Circular No.813/10/2005-CX dated 25.4.2005 has clarified
that in case of samples distributed free, valuation should be done on basis of rule 4, i.e.
valuation should be done on the basis of value of identical goods cleared at or around
the same time. In ITC Limited case, [2006], the Supreme Court has decided samples
have to be valued under Rule 4.
Rule 5: Sale of goods for delivery a place other than the place of removal
Where any excisable goods are sold in the circumstances specified in Section 4(1)(a) of
the Act except the circumstances in which the excisable goods are sold for delivery at a
place other than the place of removal, then the value of such excisable goods shall be
deemed to be the transaction value, excluding the cost of transportation from the place
of removal upto the place of delivery of such excisable goods.
Explanation 1:Cost of transportation includes
(i) the actual cost of transportation; and
(ii) in case where freight is averaged, the cost of transportation calculated in
accordance with generally accepted principles of costing.
Explanation 2: The cost of transportation from the factory to the place of removal,
where the factory is not the place of removal, shall not be excluded for the purposes of
determining the value of the excisable goods.
Illustration : X (assessee) clears goods from a factory at Pune to the customers factory
located in Mumbai. The goods are loaded in a lorry at Pune and delivered at Mumbai
and X recovers freight from the buyer. In this case, all the conditions of Section 4(1)(a)
are satisfied except that the goods are not delivered at the time and place of removal
(delivery which happens at Mumbai). By virtue of Rule 5, Assessable Value in such a
case would be Transaction Value minus the freight incurred in delivering the goods at
Mumbai.
Where the goods are sold at ex-factory price, the transit risk and insurance is to be
borne by the buyer and the place of removal in such a case shall be the factory premises
since sale of goods, payment of price and delivery to the buyer or his representative all
occurs at the factory premises. In such a case, freight and insurance are not includible
in the assessable value. JCB Escorts Ltd Vs CCE
Rule 6: When price is not the sole consideration for sale
Where the excisable goods are sold in the circumstances specified in Section 4(1)(a) of
the Act except the circumstances where the price is not the sole consideration for sale,
the value of such goods shall be deemed to be the aggregate of such transaction value
and the amount of money value of any additional consideration flowing directly or
indirectly from the buyer to the assessee.
Explanation 1: The value, apportioned as appropriate, of the following goods and
services, whether supplied directly or indirectly by the buyer free of charge or at reduced
cost for use in connection with the production and sale of such goods, to the extent that
such value has not been included in the price actually paid or payable, shall be treated
to be the amount of money value of additional consideration flowing directly or indirectly
from the buyer to the assessee in relation to sale of the goods being valued and
aggregated accordingly, namely:-
(i) value of materials, components, parts and similar items relatable to such goods;
(ii) value of tools, dies, moulds, drawings, blue prints, technical maps and charts
and similar items used in the production of such goods;
(iii) value of material consumed, including packaging materials, in the production of
such goods, and
(iv) value or engineering, development, art work, design work and plans and
sketches undertaken elsewhere than in the factory of production and necessary
for the production of such goods.
Explanation 2: Where an assessee receives any advance payment from the buyer
against delivery of any excisable goods, no notional interest on such advance shall be
added to the value unless the Central Excise Officer has evidence to the effect that the
advance received has influenced the fixation of the price of the goods by way of charging
a lesser price from or by offering a special discount to the buyer who has made the
advance deposit.
Illustration 1: X, an assessee, sells his goods to Y against full advance payment at
Rs.100 per piece. However, X also sells such goods to Z without any advance payment at
the same price of Rs.100 per piece. No notional interest on the advance received by X is
includible in the transaction value.
Illustration 2: A, an assessee, manufactures and supplies certain goods as per design
and specification furnished by B at a price of Rs.10 lakhs. A takes 50% of the price as
advance against these goods and there is no sale of such goods to any other buyer.
There is no evidence available with the Central Excise Officer that the notional interest
on such advance has resulted in lowering of the prices. Thus, no notional interest on the
advance received shall be added to the transaction value.
In UOI Vs Lakshmi Works Ltd, it was held that in case interest accrued on advances
received by the manufacturer is to be added to the assessable value, then the burden is
on the Department to show the extent of benefit obtained by the assessee on interest
free loan. Moreover, the price has to be loaded only to the extent the Department is able
to show the extent of benefit obtained by the assessee on interest free loan. (May 98,
May 02)
Important points
Where price is not the sole consideration for the sale, but the other requirements of
Section 4(1)(a) of the Central Excise Act are satisfied, the value shall be determined
in accordance with the provisions of Rule 6 of the Valuation Rules.
This rule provides for adding to the transaction value the money value of any
additional consideration flowing directly or indirectly from the buyer to the assessee.
Such additional consideration would include the money value of goods and services
provided free or at reduced cost by or on behalf of the buyer to the assessee.
However, where the same price is charged from the buyers who have given the
deposit and who have not given the deposit and/or where the advance is purely a
security deposit and the interest earned thereon is credited to the buyer; then, in
such cases, the notional interest cannot be added to the price. VST Industries Ltd Vs
CCE (May 98, May 02)
CCEx V. IFGL Refractories (SC) Benefits received under the licence received by the
assessee as a result of surrender of licence by the buyer, is additional consideration and
its value is the difference between original offer price and actual sale price.
CCEx V. Mazgaon Dock Limited (SC) Subsidy received from the government is not an
additional consideration while subsidy received from the buyer of the goods is an
additional consideration even if the same is received under a policy of the government.
Question: Briefly answer with reference to the provisions of the Central Excise
Valuation (Determination of Price of Excisable Goods) Rules, 2000 whether in the
following cases any notional interest on the advance received is includible in the
value for purpose of assessment:
(i) An assessee sells his goods against full advance payment to X. He also sell
such goods to Y without any advance payment at the same price per unit.
(ii) A, the assessee manufactures and supplies certain goods as per design and
specification of B. A takes 50% of the price as advance against these goods
and there is no sale of such goods to any other buyer. (2 x 2 = 4 Marks)
Answer: Explanation 2 to rule 6 of the Central Excise Valuation (Determination of Price
of Excisable Goods) Rules, 2000 provides that where any advance payment from the
buyer is received against delivery of excisable goods, no notional interest on such
advance shall be added to the value unless the central excise officer has evidence to the
effect that the advance received has influenced the fixation of price of the goods by way
of charging a lesser price or by offering of a special discount to the buyer who has made
the advance deposit.
(i) No notional interest on the advance received by the assessee is includible in the
transaction value in the present case as same price is also charged from Y (another
buyer) who has not given the advance deposit.
(ii) Notional interest would be includible only if there is evidence available with the
central excise officer that advance has resulted in lowering of prices. In the absence of
any such evidence, no notional interest on the advance received shall be added to the
transaction value.
Rule 7: When goods are removed to depot etc.
Where the excisable goods are not sold by the assessee at the time and place of removal
but are transferred to a depot, premises of a consignment agent or any other place or
premises (hereinafter to as "such other place") from where the excisable goods are to be
sold after their clearance from the place of removal and where the assessee and the
buyer of the said goods are not related and the price is the sole consideration for the
sale, the value shall be the normal transaction value of such goods sold from such other
place at or about the same time and, where such goods are not sold at or about the
same time, at the time nearest to the time of removal of goods under assessment.
If the goods are not sold at the factory gate or at the warehouse but they are transferred
by the assessee to his depots or consignment agents or any other place for sale, the
assessable value in such case for the goods cleared from factory/warehouse shall be the
normal transaction value of such goods at the depot, etc. at or about the same time on
which the goods as being valued are removed from the factory or warehouse.
Normal Transaction value means the transaction value at which the greatest aggregate
quantity of goods are sold. It has been clarified by the Government that while adopting
the normal transaction value, the largest quantity sold on a particular date is relevant
and not the number of buyers e.g. ABC Ltd. transfers 200kgs of Product Z to its depot
on 1-1-2007. On that date, there has been no sale from the depot. However, Product Z
has been sold from the depot at the nearest point of time i.e., 25-12-2006.
The sales details on that date were as follows:
i. 800 kgs at Rs.25 per kg
ii. 80 kgs at Rs.32 per kg
iii. 100 kgs at Rs.27 per kg
iv. 700 kgs at Rs.32 per kg
Normal transaction value, for the purpose of valuation of 200 kgs of Product Z
transferred to the depot on 1-1-2007, will be taken as Rs.25.
Prabaht Zarda Factory Limited V. CCE (SC/ CCEx V. Brakes India Limiuted (SC) In case
of inter-depot transfer the price prevalent at the later depot i.e. the last depot from
where the goods are actually sold will be taken as the assessable value of the goods.
Rule 8: When goods are captively consumed
Where the excisable goods are not sold by the assessee but are used for consumption by
him or on his behalf in the production or manufacture of other articles, the value shall
be one hundred and ten per cent of the cost of production or manufacture of such
goods.
Thus, the assessable value of captively consumed goods will be taken at 110% of the
cost of manufacture of goods even if identical or comparable goods are manufacture and
sold by the same assessee. 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.11,000 per unit.
Important Points
The ICWAI has introduced Cost Accounting Standard - 4 (CAS- 4) for determining
cost of production for the purpose of Excise valuation. The CBEC has clarified
that cost of production of captively consumed goods has to be strictly done in
accordance with CAS-4 issued by ICWAI.
As per CAS-4, the Cost of Production shall consist of material consumed, direct
wages, salaries, direct expenses, work overheads, administrative overheads
relating to production, quality control cost, research and development cost and
packing cost. Further, adjustment for stock of work-in-progress, finished goods,
recoveries for sales of scrap. Wastage etc shall be made for arriving at the cost of
production of goods which are used for captive consumption.
The cost of material should be net of excise duty if CENVAT credit has been
availed for such inputs. In case no CENVAT credit has been availed on such
inputs, the material cost should be inclusive of the excise duty.
As per this standard, following shall not form part of cost of production
- Selling and distribution expenses
- Interest and financial charges
- Administrative overheads which are not related to factory
- Abnormal and non-recurring cost
Note: In a recent case of ITC Limited, the Supreme Court has held that the
interest for borrowing for purchase of capital goods is not includible in assessable
value.
Steel Complex Limited V. CCEx If a part of goods, instead of being sold, are
transferred to job-workers and the assessee is incurring huge losses, the goods so
transferred are to be valued at sale price to unconnected buyers and not as per rule 8 at
110% of cost of production.
Rule 9: When sale is made only to or through related persons not being inter-
connected undertakings (ICUs)
When the assessee so arranges that the excisable goods are not sold by an assessee
except to or through a person who is related in the manner specified in either of sub-
clauses (ii), (iii) or (iv) of clause (b) of sub-section (3) of Section 4 of the Act, the value of
the goods shall be the normal transaction value at which these are sold by the related
person at the time of removal, to buyers (not being related person); or where such goods
are not sold to such buyers, to buyers (being related person), who sells such goods in
retail;
Provided that in a case where the related person does not sell the goods but uses or
consumes such goods in the production or manufacture or articles, the value shall be
determined in the manner specified in Rule 8.
According to Section 4(3)(b) of the Central Excise Act, 1944, the assessee and the buyer
shall be deemed to be related persons, if: -
i. they are inter connected undertakings (as per MRTP Act) or
ii. they are relatives (as per Companys Act) or
iii.amongst them the buyer is a relative and a distributor of the assessee, or a sub-
distributor of such distributor or
iv. they are so associated that they have interest, directly or indirectly, in the business of
each other.
Thus, Rule 9 provides that where the assessee arranges to sell goods only to or
through:
a. his relative
b. relative and distributor or sub-distributor of such distributor.
c. persons who are mutually interested in the business of each other
then, the normal transaction value at which the goods are sold by such persons at the
time of removal can be taken as value, provided the other buyer is not related.
When goods are sold to related persons who are also retailers, then the price at which
goods are sold to the related retailer shall be adopted.
Examples:
1. A sells to B (A & B are related) a product X @ Rs.275. Normal Transaction Value at
which B sells the goods to a buyer (who is unrelated) is Rs.300. Applying Rule 9, the
value of Product X in hands of A is Rs.300.
2. A sells to B (A & B are related) a product X @ Rs.275. B sells to C (B & C are
related) the same product X @ Rs.300. Normal Transaction Value at which C sells
the goods to a buyer (who is unrelated) is Rs.365. Applying Rule 9, the value of
Product X in hands of A is Rs.365.
3. A sells to B (A & B are related) a product X @ Rs.275. B sells to C (B & C are
related) the same product X @ Rs.300. C sells to D the same product X @ Rs.335 (C
& D are related and D sells the product in retail). Normal Transaction Value for A
shall be the price at which the goods are sold to the retailer i.e., D in this case.
Hence the value of Product X to be taken for A for valuation purpose shall be Rs.335.
To sum up:
If the assessee sells to Related Person (who is a Whole Sale Trader, then the sale
price of Related Person on Whole Sale Trade to Un-Related Person should be
adopted.
If assessee sells to Related Person (in Whole Sale Trade), who in turn sells to another
Related Person (in Whole Sale Trade), and if the latter sells in retail, then adopt the
last Whole Sale Trade price as assessable value for the assessee.
In both these cases, Sale Price means the Normal Transaction Value.
Rule 10: When the sale is made only to or through persons being interconnected
undertakings (ICU)
When the assessee so arranges that the excisable goods are not sold by him except to or
through an inter-connected undertaking, the value of goods shall be determined in the
following manner, namely: -
(a) If the undertakings are so connected that they are also related in terms of sub-
clause (ii) or (iii) or (iv) of clause (b) of sub-section (3) of Section 4 of the Act or the
buyer is a holding company or subsidiary company of the assessee, then the value
shall be determined in the manner prescribed in Rule 9.
Explanation- In this clause "holding company" and "subsidiary company" shall have
the same meanings as in the Companies act, 1956 (1 of 1956).
(b) in any other case, the value shall be determined as if they are not related
persons for the purpose of sub-section (1) of section 4.
Thus, Rule 10 provides that even if the assessee and the buyer are inter-connected
undertakings, the transaction value will be rejected only when they are related in any of
the following manner:
1) They are relatives
2) The buyer is a relative and a distributor of the assessee or sub-distributor of such
distributor
3) They have a direct or indirect interest in the business of each other.
In other cases, they will not be considered related.
Examples:
1. M/s Anil Ltd & M/s Mukesh Ltd hold 25% of the equity in M/s Dhiru Ltd. M/s Anil
Ltd & M/s Mukesh Ltd are interconnected as per MRTP Act. However, only if
mutuality of business interest is established between M/s Anil Ltd & M/s Mukesh
Ltd, Rule 9 can be applied when excisable goods are sold by the former to the latter.
In case the mutuality of business interest cannot be established, then M/s Anil Ltd &
M/s Mukesh Ltd would be treated as unrelated and the value shall be determined as
per Section 4(1) i.e., transaction value shall form the basis for valuation.
2. M/s John Ltd sold goods to M/s Uday Ltd, which is its subsidiary company. Both the
companies are interconnected as per MRTP Act. However, since there is a
holding- subsidiary relationship, value has to be determined as per Rule 9. Thus, the
price at which M/s Uday Ltd sells the goods to an unrelated buyer will form the basis
for valuation.
Important points
The term inter-connected undertakings cover large categories of legal
entities/undertakings, to whom goods are sold by the assessee, which may be held as
"related person".
However, where the assessee and the buyer are inter-connected undertakings, the
transaction value will be "rejected" only when they are "related" in the sense of any of
clauses (ii), (iii) or (iv) of Section 4(3)(b) or the buyer is a holding company or a
subsidiary company of the assessee.
Thus, while dealing with transactions between inter-connected undertakings, if the
relationship as described in clauses (ii), (iii) or (iv) does not exist and the buyer is also
not a holding company or a subsidiary company, then for assessment purposes, they
will not be considered related.
"Transaction value" could then form the basis of valuation provided other two
conditions, namely, price is for delivery at the time and place of removal and the price
is the sole consideration for sale are satisfied.
Rule 10A Valuation in case of goods manufactured by job-worker
Where the excisable goods are produced or manufactured by a job-worker, on behalf of a
person (hereinafter referred to as principal manufacturer), then,-
(i) in a case where the goods are sold by the principal manufacturer for delivery at
the time of removal of goods from the factory of job-worker, where the principal
manufacturer and the buyer of the goods are not related and the price is the sole
consideration for the sale, the value of the excisable goods shall be the transaction
value of the said goods sold by the principal manufacturer;
(ii) in a case where the goods are not sold by the principal manufacturer at the time
of removal of goods from the factory of the job-worker, but are transferred to some other
place from where the said goods are to be sold after their clearance from the factory of
job-worker and where the principal manufacturer and buyer of the goods are not related
and the price is the sole consideration for the sale, the value of the excisable goods shall
be the normal transaction value of such goods sold from such other place at or about
the same time and, where such goods are not sold at or about the same time, at the time
nearest to the time of removal of said goods from the factory of job-worker;
(iii) in a case not covered under clause (i) or (ii), the provisions of foregoing rules,
wherever applicable, shall mutatis mutandis apply for determination of the value of the
excisable goods:
Provided that the cost of transportation, if any, from the premises, wherefrom the goods
are sold, to the place of delivery shall not be included in the value of excisable goods.
Explanation - For the purposes of this rule, job-worker means a person engaged in the
manufacture or production of goods on behalf of a principal manufacturer, from any
inputs or goods supplied by the said principal manufacturer or by any other person
authorised by him.
Rule 11: Residuary Rule Best Judgement Method
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 Central Excise
Act, 1944.
Question answers
Question 1: The value of price support incentives received from the raw materials
supplier should be included in the assessable value of the final products. Do you
agree? Explain. (3 Marks)[May 07]
Answer: In the case of CCEx. v. Bisleri International Private Limited 2005 (186) ELT 257
(SC), the
value of the price support incentives was held as not includible in the assessable value
of the final product as
a. there was no flow back of any additional consideration from the buyers;
b. the price uniformity was maintained;
c. there was no evidence of any concession to any of the buyers or existence of any
favoured buyers.
It is possible to take a view that if the conditions pointed out by the Apex Court are not
satisfied, the value of the price support incentives would be includible in the assessable
value of the final product.
Question 2: M/s Super Pipes Ltd. is engaged in the manufacture of m.s. galvanized
pipes. The excise department has required the assessee to include the cost of
galvanization in the assessable value of the m.s. galvanized pipes for the purposes
of determination of excise duty. The assessee claims that as the process of
galvanization does not amount to manufacture, the cost of galvanization is not
includible in the assessable value of the said pipes made from H.R. coils.
Briefly discuss whether the stand taken by the assessee is correct with reference
to the provisions of the Central Excise, Act, 1944. 5 Marks)[Nov. 06]
Answer: The facts of the case are similar to the case of Siddhartha Tubes Ltd. v. CCE,
Indore 2006 (193) ELT 6 (SC) wherein the Apex Court has held that galvanization cost
is includible in the assessable value of m.s. galvanized pipes even though galvanization
does not amount to manufacture. The Apex Court explained that the concepts of
manufacture and valuation are two different and distinct concepts and the present
case relates to valuation. The Supreme Court stated that m.s. galvanized pipes were
manufactured out of H.R. coils after passing through various processes (including
galvanization). Such a process added to the quality of the product and increased the
value of pipes. Process of galvanization was incidental to the manufacture of pipes and,
therefore, cost of that process was rightly included in the assessable value. Therefore,
the stand taken by M/s. Super Pipes Ltd. is not correct in law.
Question 3: (i) PQR Ltd. who are in the manufacture of excisable goods had the
practice of providing full reimbursement to all its dealers towards the value of
damaged goods. The company used to charge a certain sum towards the cost of
freight in the return of the damaged goods to it. No other consideration was
received by the company. The Central Excise Department has issued a show cause
notice that the return freight in respect of damaged goods has to be included in
the assessable value for purposes of duty. Examine briefly the correctness in law of
the show cause notice. (2 marks) [November 04]
(ii) State briefly whether "damage discount" is permissible as a deduction for
purpose of arriving at the assessable value under Section 4 of the Central Excise
Act, 1944. (2 marks) [November 04]
Answer: (i) The facts in this case are similar to the facts in Neelkamal Plastics Ltd., v.
CCE, Noida (2004) (Tribunal-Delhi). In this case the Tribunal had held that the amount
collected by the company was related to the cost of return freight on the damaged goods
and hence did not in any way represent the value of the goods. The assessee company
did not receive any additional consideration for the sale nor were any clearances effected
towards replacement without payment of duty. Therefore, the return freight was not
liable to be added to the assessable value.
(ii) In the case of CCE v Vikram Detergent Ltd. 2001 (SC) the Apex Court held that
damage discount is in the nature of a refund or benefit to the buyer by way of
compensation for damage, breakage or losses suffered by the goods after removal from
the factory and is not eligible for deduction. This is the case where goods suffer damage
after removal. However, if goods are already damaged prior to removal then any type of
discount allowed in the ordinary course of business and prior to removal is deductible
for arriving at the assessable value i.e. duty will be chargeable on actual transaction
value.
Question 4: M/s OTV Limited manufacture TV sets. They had sent TV sets from
their plant to their depot at Jammu. The Depot sold the same at Rs. 12,000 on
1.8.2002 and at Rs. 12,500 per set on 10.8.02. Please mention what would be the
value of the TV sets removed from the factory on 3.8.02 and 10.8.02. [Nov. 02]
Answer: In the given case the goods are sold at the time and place of removal but those
are being transferred from the manufacturing plant to the Depot at Jammu. Thus,
valuation of the goods will be in accordance with Rule 7 of the Central Excise Valuation
Rules, 2000.
In accordance with the provisions of Rule 7
- the sets removed on 3.8.02 will be valued at Rs. 12,000, being the nearest to the
time of removal of goods i.e. as on 1.8.02 , and
- the sets removed on 10.8.02 will be valued at Rs. 12,500 being the value of the
goods at which those are being sold at the depot as on the date of removal from
the factory.
Question 5: A manufacturer manufactures a product C which is chargeable to
excise duty. He avails CENVAT credit of the duty paid on inputs, which are used in
or in relation to the manufacture of product C. The product is intermediate
product and is consumed captively in the manufacture of final product. The final
product is wholly exempt from the payment of duty under the Central Excise Act,
1944. While determining the assessable value under Rule No. 8 of the Central
Excise (Valuation) Rules, 2000, the manufacture does not include the element of
duty paid on inputs. The reasoning advanced by the manufacturer is that since
credit has been taken of the duty paid on the said inputs, the cost of manufacture
automatically stands reduced to that extent. Explain briefly with reference to the
decided case law, if any, whether the stand taken by the manufacturer in not
including the amount duty paid on inputs for purpose of valuation is correct. [Nov.
2000]
Answer:
1. Facts of the given case are similar to the facts of Dai Ichi Karkaria Limited V. CCE. In
this case the issue before the Supreme Court was whether excise duty paid on the
raw material should be included in the value while calculating value of the goods
captively consumed.
2. The Supreme Court held that the manufacturer gets credit on excise duty paid on
raw material to be used in the manufacture of finished goods. The manufacturer is
entitled to use the credit anytime thereafter for payment of excise duty.
3. There is no provision which provides for reversal of credit except where it was illegally
or improperly taken. Credit, therefore, is indefeasible.
4. When duty is paid on the raw material, it should be added to the cost while arriving
at the value since it represents an item which gets excluded from computation in
hands of supplier as value does not include excise duty.
5. If a product is purchased at a price of Rs. 100 and duty is Rs. 20 only, then cost of
materialis taken as Rs. 100/- and credit is taken for Rs. 20/-.
6. Therefore, duty paid on inputs does not form part of the value of finished goods.
7. In view of the above, the methodology adopted by the manufacturer is correct.
Question 7: Determine the cost of production on manufacture of the
undermentioned product for purpose of captive consumption in terms of Rule 8 of
the Central Excise Valuation Rules, 2000
Rs.
Direct Material 11,600
Direct wages and salaries 8,400
Works overheads 6,200
Quality control costs 3,200
Research and Development Cost 2,400
Administrative Overheads 4,100
Selling and Distribution costs 1,600
Realizable value of scrap 1,200
Administrative overheads are in relation to production activities. Material cost
includes excise duty Rs. 1,600. [May 04]
Answer: In accordance with the provisions of Rule 8 of the Central Excise Valuation
Rules, 2000, the value of goods captively consumed shall be as under -
Rs. Rs.
Direct Material cost 11,600
Less: Excise Duty 1,600 10,000
Direct wages and salaries 8,400
Works overheads 6,200
Quality control costs 3,200
Research and Development Cost 2,400
Administrative Overheads 4,100
Total 34,300
Less: Realizable value of scrap 1,200
Cost of production 33,100
Add: 10% of the Cost of production 3,310
Total value of goods as per Rule 8 36,410
Notes:
(a) Cost of production has been calculated in accordance with CAS 4 issued by ICWAI
and circulated by the Central Board.
(b) Valuation shall be at 110% of the cost of production - Notification No. 60/2003 CE
(NT) dated 5.8.2003
(c) Selling and distribution expenses have not been taken into account because of
captive consumtion.
Question 8: Examine giving adequate reasons as to whether the manufacturing
company X and its customer company Y are related persons for the purpose of
valuation of excisable goods under the following circumstances
(a) Some directors of X are also the directors of Y.
(b) X sells majority of its production to Y and has financial investment, apart
from not charging rent for use of its vehicles by Y and that the
advertisement expenses of X were incurred by Y.
(c) Y is a distributor of X but not a relative.
Your answer should be distinct and separate for each given situation. [May 97]
Answer: In accordance with section 4 persons are said to be related persons if they are
inter-connected undertakings within the meaning of the MRTP Act or they are relatives
within the meaning of the Companies Act, or amongst them the buyer is a relative and a
distributor of the assessee, or a sub-distributor of such distributor or they are so
associated that they have interest, directly or indirectly, in the business of each other.
In UOI V. Atic Industries, the Supreme court has stated that the mutuality of business
interest, which this definition contemplates, cannot be established by merely showing
that the persons have business dealings between them. It must also be shown that one
has special business interest in the promotion or development of the business of each
other.
In view of this, three situations are as under
(a) A fact that certain directors of X are also the directors of Y is not sufficient to
establish that these are related persons. Brakes India Ltd. V. ACCE.
(b) In the given situation, existence of mutual business interest can be established as
X sells majority of its goods to Y, it is not charging any amount for its vehicles
being used by Y and on the other hand Y incurs all the advertisement expenses of
X. All the facts put together clearly indicate existence of mutual business interest
between X and Y. Piolic Pharma V. CCE.
(c) Definition of the term related person includes relative and a distributor. The
word relative and a distributor of the assessee do not refer to any distributor but
the distributor who is relative of the assessee within the meaning of the
Companies Act, 1956 In Union of India V. Bombay Tyre International Ltd., the
Supreme Court opined that every distributor cannot be treated as a relative but
the definition indicates towards a distributor who is also a relative.
In view of aforesaid and keeping in mind that X and Y, both are bodies corporate, they
cannot be relative within the meaning of section 6 of the Companies Act, 1956.
Therefore, in this situation, both cannot be treated as related persons.
Question 9: M/s KLM gets their grey cloth processed by M/s ABC. M/s ABC carried
out the process of bleaching, dyeing, sizing, finishing etc., on grey cloth and
returns the same to M/s KLM. The cloth is supplied by M/s KLM and the
ownership of the goods vests with M/s KLM all the time. M/s KLM sells the
processed cloth at the rate of Rs. 100 per meter. Cost of grey cloth in the hands of
M/s KLM is Rs. 50 per meter and M/s ABC charges Rs. 20 per meter as the job
charges (which includes M/s ABCc profit) and the job charges are recovered from
M/s KLM.
Upon the above facts, discuss briefly with reference to the relevant provisions of
the Central Excise Act, 1944 and the Rules made thereunder the following
questions
1. Does the process of bleaching, dyeing, sizing, finishing etc. is the above
context amounts to manufacture within the meaning of section 2(f) of the
Central Excise Act, 1944?
2. In the facts and circumstances of the above case, who will be regarded as
manufacturer for the purpose of the Central Excise Act i.e. M/s KLM or M/s
ABC.
3. How will the assessable value of the processed cloth for the purpose of
section 4 of the Central Excise Act, 1944 and the Rules made thereunder be
arrived? [Nov. 2000]
Hint for answer: As per Rule 10A, the value shall be Rs. 100/-
Question 10: A trader supplies fabrics to the independent processor. Cost of
fabrics is Rs. 1180. The processor charges Rs. 450 which includes Rs. 350 as
processing charges and Rs.100 as his profit. After processing goods are sent back
to the trader who sells them at Rs. 1800. Transport charges for receiving the
goods at the premises of the processor is Rs. 150 and transport charges for
sending goods after processing is Rs. 60. Please determine the assessable value of
the goods under section 4 of the Central Excise Act. [May 05]
Solution: As per rule 10A, the assessable value shall be the value at which the goods
are sold by the supplier of inputs to his customers. In the given case, the supplier of
inputs is selling the goods to his customers at Rs. 1800. Therefore, the assessable value
shall be Rs. 1800.
Explanation to section 4(1)
Question 11: Deal with the help of case laws, if any
M/s AUL avails of CENVAT credit of the duty paid on the inputs namely, steel
sheets. The scrap generated during the manufacture of their final product was
cleared by them without payment duty. Subsequently the Department raised a
demand of excise duty on waste and scrape. M/s AUL accepted the duty liability
but contended that the price at which waste and scrap had been sold should be
considered to be cum-duty price and assessable value shall be determined after
deducting the element of excise duty. The contention of the Department is that as
no central excise duty has been paid while clearing the scrap, no deduction on
account of excise duty is available to M/s AUL. [Nov. 2002]
Answer: According to Explanation to section 4(1) of the Central Excise Act, The price-
cum-duty of the excisable goods sold by the assessee shall be the price actually paid to
him for the goods sold and the money value of the additional consideration, if any,
flowing directly or indirectly from the buyer to the assessee in connection with the sale
of such goods, and such price-cum-duty, excluding sales tax and other taxes, if any,
actually paid, shall be deemed to include the duty payable on such goods.
In CCE V. Maruti Udyog Limited, it has been held that the price should be taken as
cum-duty price and duty shall be calculated by working back.
Accordingly in the presents case, as the Department has raised the demand on waste
and scrap, the price collected by M/s AUL will be considered as cum-duty price. It
means, the amount of duty is considered to be already included in the price at which
such waste and scrap has been sold by AUL. Thus, the contention taken by the assessee
is correct and the stand taken by the Department is not proper.
Thus, the transaction value for charging excise duty is computed as follows
Value = (Price-cum-duty Permissible Deductions)/[1+(Rate of Duty/100)]
Freight on return of damaged goods
Question 12: PQR Limited who are in the manufacture of excisable goods had the
practice of providing full reimbursement to all the dealers towards the value of
damaged goods. The company used to charge a certain sum towards the cost of
freight in the return of damaged goods to it. No other consideration received by
the company. The Central Excise Department has issued a show cause notice that
the return freight in respect of damaged goods has to be included in the assessable
value for the purpose of duty. Examine briefly, the correctness in law of the show
cause notice. [Nov. 04]
Answer: The facts in the given case are similar to the case of Neel Kamal Plastics
Limited V. CCE. In this case the CESTAT has held that the amount collected by the
company was related to the cost of return freight on the damaged goods and hence did
not in any way represent the value of the goods. The assessee company did not receive
any additional consideration for the sale nor were any clearances effected towards
replacement without payment of duty. Therefore, the return freight was not liable to be
added to the assessable value.
Warranty Charges [May 99]
Question 13: A Ltd., a manufacturer of tyre was extending a warranty discount on
any tyres that were defective. The scheme of warranty discount operated thus: the
customers lodged their claim with regard to any defects in the tyre. Such claims
were then scrutinized by a Technical Committee of A Ltd., which would decide the
amount of refund due to the customer on the basis of reduction in the normal life of
tyre attributable to the effect. This refund was to be given by the Technical
Committee. The practice was being followed by A Ltd. for last 15 years. A Ltd.
claimed the warranty discount as a Trade discount which is deductible in computing
the assessable value of the tyres. Is this correct? Discuss in light of the provisions
under section 4 of the Central Excise Act, 1944 with respect to trade discount. [May
99]
Answer: The defective tyres brought back by the customers are scrutinized by the
Technical Committee so as to examine the defects which were not apparent at the time
of sale.
The assessee claims that the warranty discount is a established trade practice and fact
of such discount is already known prior to removal of goods.
However, the Technical Committee assesses the defects and determines the refund after
the removal of goods. Any increase or reduction in value after the removal of goods does
not affect the amount of duty already paid. The Supreme Court also stated the same in
MRF Case.
Warranty discount is in the nature of a benefit given to the customers by way of
compensation for loss suffered by them and not in the nature of discount. Thus
warranty discount cannot be allowed as a trade discount.
Damage discount
Question 14: State briefly whether damage discount is permissible as a deduction
for purpose of arriving at the assessable value under section 4 of the Central
Excise Act, 1944. [Nov. 04]
Answer: As per section 4(3)(d) the term transaction value means the actual price paid
or payable . It means, all discounts actually offered to the customer at the time of
removal of goods are acceptable for deduction. Thus, where damaged goods are being
sold by the assessee at a discounted price, the damage discount is admissible as
deduction.
But, where discount is offered after removal of goods, then such discount is not an
admissible deduction. It has been decided by the Supreme Court in CCE V. Vekram
Detergents Limited that damage discount is in the nature of a refund or benefit to the
buyer by way of compensation for damage, breakage or loss suffered by the goods after
removal from the factory and is not eligible for deduction.
Computation of assessable value
Question 15: Having regard to the provisions of section 4 of the Central Excise
Act, 1944 compute/derive the assessable value of the excisable goods for levy of
excise duty of excise, given the following information
Particulars
Cum-duty whole sale price including sales tax of Rs. 2000 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.
1000
Rate of Central Excise 16% Ad Valorem
State in the footnote to your answer, reasons for admissibility or otherwise of the
deductions. [Nov. 96, adopted]
Answer:
Computation of assessable value
Particulars Rs.
Cum-duty whole sale price including sales tax of Rs. 2000
Less: Amount of sales tax
15,000
2,000
Cost of returnable and durable packing
Trade Discount (Normal Practice)
Freight
Insurance on freight
1,500
1,000
750
200
Assessable value including excise duty 9,500
Duty including education cess and SHES @ 16.48%
(9550X16.48/116.48)
1,351
Assessable value 8,199
Working Notes
1. Normal secondary packing cost of Rs. 1000 and cost of secondary packing of Rs.
1500 has not been deducted.
2. The value does not include excise duty, sales tax, trade discount, freight and
insurance.
3. Freight and insurance on freight will be allowed as deduction as per Rule 5 of the
Central Excise Valuation Rules.
Question 16: Agricultural Implements Limited sold farm equipments to the
agriculturists on ex-factory basis upon payments made before dispatch of the
goods. Agricultural Implements Limited, at the request of their customers, arrange
for payment of freight and transit insurance and for the dispatch of the goods to
the destination. The Departments view is that since they have also arranged for
transport of goods, there is no ex-factory delivery of goods and the cost of
insurance and freight is to be included to the price for determination of value and
excise duty should be payable on such basis. Briefly examine whether contention
of the Department is correct in law. [May 03]
Answer: According to section 4(1)(a) of the Central Excise Act, 1944, in a case where
the goods are sold by the assessee, for delivery at the time and place of removal, the
assessee and buyer of the goods are not related persons and the price is the sole
consideration for sale, the assessable value shall be the transaction value. In the given
case, the place of removal is factory.
The contention of the assessee is that the transaction ends at the factory and nothing
remains to be done afterwards. The delivery of the goods at the customers destination
and payment of freight anf transit insurance are only made by the company on the
request of the customer. Hence the insurance and freight have no relevance in the
matter.
Accordingly, the company is not liable to pay excise duty on the basis of price inclusive
of freight and insurance. The view has been upheld in Escorts JCB Limited V. CCE.
Hence, contention of the Department is not goods in law.
Question 17: A SSI unit clears goods with label carrying MRP of Rs. 67/- per unit
in the ordinary course of business. The same goods are supplied at Rs. 52/- per
unit pack marked as MRP Rs. 52 per unit to Canteen Stores Department (CSD),
which in turn sales the same , at the same price to the Defence Personnel at
different places. The goods sold to CSD carry the inscription for CSD only. The
Excise Department insists that the SSI unit should pay duty with reference to the
MRP Rs. 67/- even in respect of sale to CSD. With reference to the provisions of
Section 4A of the Central Excise Act, 1944, briefly discuss whether the stand
taken by the Department is correct. (May 01)
Answer: Section 4A of the Central Excise Act, 1944 empowers the Central Government
to levy Central Excise on the basis of MRP specified on the package of the goods.
Explanation 2(c) to section 4A to the said section states that where different retail sale
prices are declared on different packages each such retail sale price shall be the retail
sale price for the purposes of valuation of the excisable goods. Therefore, in the given
case, stand taken by the Department is not correct.
Question 18: Asha Limited supplies raw material to the job-worker Kareena
Limited. After completing the job-work, 5000 packets of finished goods are
returned to Asha Limited putting the retail sale price of Rs. 20/- on each packet.
The product in the packet is covered under the MRP provisions and 40%
abatement is available on it. Determine the assessable value under the Central
Excise provisions from the following details
Cost of raw material supplied Rs. 30,000
Job workers charges including his profit Rs. 10,000
Transportation charges for sending the goods to the job worker Rs. 3,000
Transportation charges for returning the goods to Asha Limited Rs. 3,000
[Nov. 05]
Answer: In case of goods covered under section 4A of the Central Excise Act, 1944, the
assessable value is to be arrived at after allowing permitted abatement from MRP. In the
given case, MRP is Rs. 20/- and abatement allowed is 40%. Therefore, assessable value
will be Rs. 12/- per unit and aggregate value for all 5000 units will be Rs. 60,000.
Question 19: An assessee sold certain goods for Rs.4,35,000 and did not charge
any excise duty in his invoice on the understanding that the product was exempt
from excise duty. Subsequently, it was found that such goods were not exempt,
but were liable to duty @ 16%. Calculate the amount of duty payable thereon,
stating the reasons for your calculation. (CS Final New Syllabus Dec 03)
Answer:
In such cases, it has been held in CCE V. Maruti Udyog that the invoice price
should be considered as cum-duty price and excise duty shall be calculated by
making backward calculations.
Thus, assessable value in the given case will be Rs.4,35,000 X100/116.48 =
Rs.3,73,455.
It has been held that the whole sale price includes the element of duty payable on
any goods because such duty forms part of any goods and is a part of the
consideration for sale of the goods.
If any further demand of duty is created against an assessee, he cannot pass on such
demand on to his customer.
Therefore, the original consideration received by an assessee has to be taken as cum-
duty price for the purpose of demand of higher duty subsequently.
Total duty proposed to be demanded still has to be abated from the cum duty price.
However, the final duty payable is subject to CENVAT credit on inputs consumed.
Some more solved Practical Problems
Computation of Assessable Value & Excise Duty:
1. The selling price of a product inclusive of excise duty and sales tax is Rs.3,500 per
dozen. Sales tax is 4%. The excise duty payable is 16%. Work out the assessable
value and total duty payable per dozen. (CWA Inter June 2000)
Solution: Computation of Assessable Value & Duty Payable per piece
Selling price inclusive of sales tax @ 4% 3500
Less - Sales Tax (3500 X 4/104) 134.61
Cum-duty price 3365.39
Less: Excise Duty including education cess
@ 16.48% = 3365.39 X 16.48/116.48 476.14
Assessable value 2889.25
*******
2. If a product was sold at Rs.500 per piece inclusive of sales tax @ 10% and excise
duty as per an exemption notification @ 8% (though the tariff rate of excise duty is
16%), what would be:
(i) the assessable value per piece; and
(ii) the duty payable per piece? (CS Final Dec 04).
Solution: Computation of Assessable Value & Duty Payable per piece
Selling price inclusive of sales tax @ 4% 500
Less - Sales Tax (500 X 10/110) 45.45
Cum-duty price 454.55
Less: Excise Duty including education cess
@ 8.24% = 454.55 X 8.24/108.24 34.60
*******
Computation of Transaction Value & Excise Duty:
3. How would you arrive at the T.V. for the purpose of levying excise duty from the
following data? (CWA Inter New Syllabus Jun 03)
Cum-duty selling price (exclusive of Sales Tax) Rs.10,000
Rate of Excise Duty 16%
Trade discount allowed Rs.1,200
Freight Rs.750
Solution:
A) Cum-duty selling price (exclusive of Sales Tax) Rs.10,000
B) Less: Permissible Deductions
Freight Rs.750 Rs.1,950
C) Net price excluding taxes on final product (but
inclusive of excise duty)
Rs.8,050
D)Excise duty thereon @16.48% (Rs.8,050 X
16.48/116.48)
Rs.1,139
E) Assessable Value (C-D) Rs.6,911
Working Notes:
Excise Duty is to be charged on the net price. Hence, Trade Discount is allowed
as deduction.
Freight will be allowed as deduction (Refer Rule 5 of C.E.Valuation Rules, 2000)
Thus, trade discount of Rs.1,200 and freight of Rs.750 are allowed as deductions.
*******
Computation of Transaction Value & Excise Duty:
4. 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%
Freight Rs.1,500. (CS Final Dec 98)
Solution:
A) Cum-duty selling price (exclusive of Sales Tax) Rs.20,000
Freight Rs.1,500 Rs.3,900
C) Assessable Value including excise duty @ 15.45% Rs.16,100
D)Excise duty thereon @15.45%
(Rs.16,100X15.45/115.45)
Rs.2,155
Working Notes:
Excise Duty is to be charged on the net price. Hence, Trade Discount is allowed
as deduction.
Freight will be allowed as deduction (Refer Rule 5 of C.E.Valuation Rules, 2000)
Thus, trade discount of Rs.1,200 and freight of Rs.750 are allowed as deductions.
*******
5. Find Assessable Value and duty payable from the following particulars:
a) Maximum Retail Trade Price: Rs.1,100/- per unit.
b) Sales-Tax, Surcharge, Octroi and other Local Taxes: 10%
c) Cash Discount: 2%
d) Trade Discount: 8%
e) Primary and Secondary packing cost included in the above MRP: Rs.100
f) Excise duty rate: 8% ad valorem. (CWA Inter Dec 97)
Solution:
Computation of Assessable Value & Excise Duty
MRP 1100
Sales-Tax, Surcharge, Octroi and other Local Taxes 100
Cash Discount + Trade Discount (2 + 8 = 10%) 100
Value of goods inclusive of duty 900
Duty @ 8.24% (900 X 8.24/108.24) 68.51
Working Notes:
a) Cash discount & Trade discount shall be allowed as a deduction for the purpose of
determining the assessable value. Therefore -
2% of Rs.1,100 = Rs.22 shall be allowed as a deduction towards Cash discount.
8% of Rs.1,100 = Rs.88 shall be allowed as a deduction towards Trade discount.
b) Packing cost is not allowable as deduction. Any charges recovered for packing are to
be included because these are essentially in relation to the goods under assessment
and will form part of the transaction value.
******
6. A manufacturer has agreed to supply a machine on following terms: -
(i) Price of the machine at Rs.4,50,000 (Exclusive of taxes and duties)
(ii) Packing for transportation of the machine Rs.15,000
(iii) Transport charges of machinery Rs.25,000
(iv) Development and tooling charges Rs.40,000 (exclusive of taxes and duties)
(v) C.S.T. @ 4%
(vi) Octroi paid on machine supplied Rs.2,000 (not recovered from party
separately)
(vii) Excise duty @ 16%
(viii) Interest will be charged @ 16% on delayed payment beyond 30 days
(ix) Special discount of Rs.5,000 if advance of Rs.2,00,000 is paid with order.
Work out the excise duty liability based on following additional information:
(i) Actual transportation cost is Rs.26,000
(ii) Interest of Rs.5,000 was charged as party has failed to make payment within
30 days
(iii) The buyer paid advance with the order. (CWA Inter June 97)
Solution:
Computation of Assessable Value & Excide Duty liability:
Particulars
Amount
(Rs.)
Reason for inclusion/exclusion from
Assessable Value
A) Price of the machine
(exclusive of taxes)
4,50,000 Cost of machine
B) Packing Charges for
Transportation
15,000 Packing Charges are includible in Assessable
Value. These charges are essentially in relation
to the goods under assessment and will form
part of the transaction value.
C) Transport charges of
machinery
(-) 1000 Actual expenditure incurred on transp[ortation
is required to be dedcuted. The fact is that
transport charges charged were Rs.25,000
against actual charges incurred of Rs.26,000.
Loss of Rs.1,000 shall be allowed as deduction.
D) Development and tooling
charges
40,000 Such charges are incurred by reason of or in
connection with sale. Hence includible in the
Assessable Value.
E) C.S.T. @ 4% NIL CST is not includible in the price of the
machinery.
F) Octroi paid on machine
supplied
NIL Octroi is not includible in the price of the
machinery.
G) Interest @ 16% on
delayed payment
NIL If Interest on delayed is allowed as deduction,
then 'price' will not be the sole consideration'.
Hence, not allowable.
H) Special discount if
advance of Rs.2,00,000 is
paid with order.
NIL If special discount is allowed as deduction, then
'price' will not be the sole consideration'. Hence,
not allowable.
I) Assessable Value Rs.5,04,000 (A)+(B)+(D)
J)Excise duty thereon @
16.48 %
Rs.83, 059 @16.48%(Rs.5,04,000X16.48/100)
******
7. 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%. (CWA
Final June 98)
Solution: Assessable Value = (Cum-duty Price Permissible Deductions)/(1+ Rate of
Excise Duty)
Computation of Assessable value & Duty liability:
Particulars Amount
(Rs.)
Reasons for inclusion/exclusion
Cum Duty price 16,000
Permissible Deductions:
Sales Tax 3,000 Sales tax of Rs.3,000 is allowable as deduction.
Normal secondary packing
cost
NIL Secondary Packing cost of Rs.1,000 is
includible.
Cost of special secondary
packing
NIL Cost of special secondary Rs.2,000 is includible
if it is in connection with sales. In absence of
information, assumed that it is essential for
sale and hence included in assessable value.
Cost of durable and
returnable package
1,000 Cost of durable and returnable packing is not
includible in assessable value.
Freight (outward) 750 Transport charges are not includible in AV.
Insurance on freight 300 Insurance charges on freight are not includible
in AV.
Trade discount (as per
normal practice)
900 Trade discount is allowable as deduction.
Total 10,050 Rs.16,000-3,000-1,000-750-300-900
Duty liability @ 15.45% 1,553 Rs.10050 X 15.45/115.45
Assessable Value 8,497
*******
Explanation to Sec 4(1):
8. An assessee was under impression that his product is exempt from excise duty and
hence sold the goods @ Rs.100 per piece without charging excise duty. Later, it was
found that actually, the product was dutiable @ 16%. Department claimed that since
goods were removed without duty, assessable value should be Rs.100 and duty is
payable accordingly. Assessee contended that price of Rs.100 should be taken as
cum-duty price and actual duty payable should be calculated by back calculations.
Determine the correct duty payable per piece. (CWA Final New Syllabus Dec 03)
Solution
Explanation to Section 4(1) provides:
The price-cum-duty of the excisable goods sold by the assessee shall be the price
actually paid to him for the goods sold and the money value of the additional
consideration, if any, flowing directly or indirectly from the buyer to the assessee in
connection with the sale of such goods, and such price-cum-duty, excluding sales tax
and other taxes, if any, actually paid, shall be deemed to include the duty payable on
such goods.
Also, in CCE v. Maruti Udyog Ltd. (2002) 141 ELT 3 (SC) it has been held that the
price should be taken as cum-duty price and duty payable should be calculated by
working back.
Thus, the transaction value for charging excide duty is computed as shown below:
Value = (Price Cum Duty)/ [1+(Rate of Duty/100)]
= (100)/[1+(16.48/100)] = Rs.186.21 (approx).
Duty payable is = Rs.14.14 i.e {(100)/[1+(16.48/100)] }
******
9. Determine the transaction value and the Excise duty payable from the following
information:
Total Invoice Price Rs.18,000
The Invoice Price includes the following: (CWA Inter June 01)
a)Sales-tax Rs. 1000
b)Surcharge on ST Rs. 100
c)Octroi Rs. 100
d)Insurance from Factory to depot Rs. 100
e)Freight from factory to depot Rs. 700
f)Rate of Basic Excise duty 16% ad valorem
g)Rate of Special Excise duty 24% ad valorem
Solution:
Computation of Assessable Value & Duty liability:
A) Cum-duty Selling Price Rs.18,000
Sales Tax Rs.1,000
Surcharge on Sales Tax Rs.100
Octroi Rs.100
C) Net price excluding taxes on final product (but inclusive of excise
duty)
Rs.16,800
D)Excise duty thereon @41.20% (% Basic Excise Duty + 24% Special
Excise Duty+ Education cess) [Rs.16,800 X 41.20/141.20]
Rs.4,902
Working Notes:
Assumed that the Invoice Price of Rs.18,000 is the price prevailing at the depot.
Hence, insurance and transport charges from factory to depot will not be allowed
as a deduction.
Alternative treatment possible.
******
Computation of Assessable Value & Excise Duty + Rule 6
10.Sigma Ltd. asked for a quotation from Omega Ltd. for the supply of 100 complete
computer systems. Omega ltd. furnished the following quotation :
(A) Components
CPU Rs.20,000
Monitor Rs.10,000
Keyboard Rs.5,000
Sub-Total Rs.35,000
(B) Labour & Overheads Rs.10,000
(C) Profit Rs.5,000
Total price per unit (A+B+C) Rs.50,000
Advance of Rs.20,000 was payable along with order. Delivery period was one month from
date of receipt of firm order and advance.
Sigma Ltd. accepts the quotation subject to the following alterations which are agreed to
by Omega Ltd.:
i) Keyboard would be supplied free of cost by Sigma Ltd. to Omega Ltd. since Sigma
Ltd. is able to purchase the keyboard for Rs.3,000 per unit.
ii) Profit charged by Omega Ltd. is to be reduced to Rs.4000 since Sigma Ltd. would
make an advance of Rs.20,000. However, no interest is payable on the advance.
Determine the assessable value under section 4 of the Central Excise Act, 1944, and the
Excise Duty liability @ 15% ad valorem. (CWA Inter Dec 99)
Solution:
Computation of Assessable Value & Excise duty liability:
Particulars Amount
in Rs.
Reasons for inclusion/exclusion
A) Components:
CPU 20,000
Monitor 10,000
Keyboard 3,000 Since the keyboard is supplied free of cost by Sigma
Ltd, it cannot be said that price is the sole
consideration for sale. Rule 6 of CE Valuation Rules,
2000 provides that in such cases the cost of materials
supplied by the buyer shall be added to determine the
assessable value.
Total Material
Cost
33,000
B) Add: Labour &
Overheads
10,000
Cost of Production 43,000
C) Add: Profit
element
5,000 The profit margin shall not be reduced by the element
of interest earned.
Where the same price is charged from the buyers who
have given the deposit and who have not given the
deposit and/or where the advance is purely a security
deposit and the interest earned thereon is credited to
the buyer; then, in such cases, the notional interest
cannot be added to the price.(VST Industries Ltd Vs
CCE)
Assessable Value 48,000 A+B+C
Excise Duty payable
@ 15.45%
7,416 48,000 X 15.45%
******
Rule 7 of CE Valuation Rules,2000:
11.Shiva and Co., an assessee, transferred a consignment of 10 tons paper to the depot
from Delhi to Chandigarh on 10
th
July, 2003 for value of Rs.12,500 per ton. The
transport cost was Rs.500 per ton. The same variety and quality of paper normally
being sold at Chandigarh depot on 10
th
July, 2003 was at a transaction value of
Rs.15,000 per ton to unrelated buyers.
a) Which transaction value should be considered for assessment to excise duty?
b) In case there were no sales of that variety and quality of paper on 10
th
July, 2003,
but sales were effected on 1
st
July, 2003 previously for Rs.14,000 per ton, what
would be the position? (CS Inter New Syllabus Dec 04)
Solution: As per the provisions of Rule 7 of Central Excise valuation Rules, 2000:
Where the excisable goods are not sold by the assessee at the time and place of removal
but are transferred to a depot, premises of a consignment agent or any other place or
premises from where the excisable goods are to be sold after their clearance from the
place of removal and where the assessee and the buyer of the said goods are not related
and the price is the sole consideration for the sale, the value shall be the normal
transaction value of such goods sold from such other place at or about the same time
and, where such goods are not sold at or about the same time, at the time nearest to the
time of removal of goods under assessment.
Situation (a): The goods removed from the factory on 10.07.2003 shall be assessed to
duty by adopting Rs.15,000 per ton as value (this is the normal transaction value of
goods sold from depot at the same time as to the time of removal of goods from the
factory.)
Situation (b): Normal Transaction Value on 1.7.2003 from Chandigarh depot to
unrelated buyers shall be the valuation of the goods removed from factory on 10.7.2003
provided price is the sole consideration. Thus, the transaction value to be considered for
assessment to excise duty shall be the price at the depot nearest to the time of removal
of goods from the factory i.e, on 1.7.2003 at Rs.14,000.
******
Rule 8 of CE Valuation Rules,2000:
12.Thunder TV Ltd. is engaged in the manufacture of colour television sets having its
factories at Bangalore and Pune. At Bangalore the company manufactures picture
tubes which are stock transferred to Pune factory where it is consumed to produce
television sets. Determine the Excise duty liability of captively consumed picture
tubes from the following information: -
Direct material cost (per unit) Rs.600
Indirect Materials Rs.50
Direct Labour Rs.100
Indirect Labour Rs.50
Direct Expenses Rs.100
Indirect Expenses Rs.50
Administrative Overheads Rs.50
Selling and Distribution Overheads Rs.100.
Additional Information: -
(1) Profit Margin as per the Annual Report of the company for 1999-2000 was 15% before
Income Tax.
(2) Material Cost includes Excise Duty paid Rs.100
(3) Excise Duty Rate applicable is 16%. (CWA Inter Dec 2000)
Solution: Rule 8 of CE Valuation Rules, 2000 provides -
Where the excisable goods are not sold by the assessee but are used for consumption
by him or on his behalf in the production or manufacture of other articles, the value
shall be 110% of the cost of production or manufacture of such goods.
The ICWAI has introduced Cost Accounting Standard - 4 (CAS- 4) for determining
cost of production for the purpose of Excise valuation. The CBEC has clarified
that cost of production of captively consumed goods has to be strictly done in
accordance with CAS-4 issued by ICWAI.
As per CAS-4, the Cost of Production shall consist of material consumed, direct
wages, salaries, direct expenses, work overheads, administrative overheads
relating to production, quality control cost, research and development cost and
packing cost. Further, adjustment for stock of work-in-progress, finished goods,
recoveries for sales of scrap. Wastage etc shall be made for arriving at the cost of
production of goods which are used for captive consumption.
The cost of material should be net of excise duty if CENVAT credit has been
availed for such inputs. In case no CENVAT credit has been availed on such
inputs, the material cost should be inclusive of the excise duty.
Computation of Assessable Value:
Particulars Amount in
Rs.
Amount in
Rs.
Direct Material Cost 600
Less: Excise Duty (assuming CENVAT has been
claimed)
100 500
Indirect Materials 50
Direct Labour 100
Indirect Labour 50
Direct Expenses 100
Indirect Expenses 50
Administrative Overheads 50
Selling & Distribution Overheads NIL
Total Cost of Production as per CAS-4 900
Assessable Value (Total Cost of Production X
110%)
990
Excise Duty payable @ 16.48% on Rs.990 163.15
******
Rule 9 & 10 of CE Valuation Rules, 2000:
13.Determine the value on which Excise duty is payable in the following instances.
Quote the relevant section / rules of Central Excise Law.
i) A. Ltd. sold goods to B Ltd., at a value of Rs.100 per unit. In turn, B Ltd. sold the
same to C Ltd. at a value of Rs.110 per unit. A Ltd. and B Ltd. are related, whereas B
Ltd. and C Ltd. are unrelated.
ii) A Ltd. and B. Ltd. are inter-connected undertakings under section 2(g) of MRTP
Act. A Ltd. sells goods to B Ltd. at a value of Rs.100 per unit and to C Ltd. at Rs.110
per unit, who is an independent buyer.
iii) A Ltd. sells goods to B Ltd. at a value of Rs.100 per unit. The said goods are
captively consumed by B Ltd. in its factory. A Ltd. and B Ltd. are unrelated. The cost
of production of the goods to A Ltd. is Rs.120 per unit.
iv) A Ltd. sells motor spirit to B Ltd. at a value of Rs.31 per litre. But motor spirit has
administered price of Rs.30 per litre, fixed by the Central Government.
v) A Ltd. sells to B Ltd. at a value of Rs.100 per unit. B Ltd. sells the goods in retail
market at a value of Rs.120 per unit. The sale price of Rs.100 per unit is wholesale
price of A Ltd. Also, A Ltd. and B Ltd. are related.
vi) Depot price of a company are
Place of
removal
Price at
depot on
1.1.2001
Price at depot
on 31.1.2001
Actual sale price at depot
on 1.2.2001
Amritsar
Depot
Rs.100 per
unit
Rs.105 per unit Rs.115 per unit
Bhopal Depot Rs.120 per
unit
Cuttack
depot
Rs.130 per
unit
Additional information:
i) Quantity cleared to Amritsar Depot - 100 units
ii) Quantity cleared to Bhopal Depot - 200 units
iii) Quantity cleared to Cuttack Depot - 200 units
iv) The goods were cleared to respective depots on 01/01/2001 and actually sold at the
depots on 01/02/2001. (CWA Dec 01)
Solution:
(i) Rs.110 per unit shall be the Transaction value. (Refer Rule 9 Sale only to or through
related persons not being inter- connected undertakings (ICUs)of Central Excise
Valuation Rules, 2000).
(ii) Transaction value shall be Rs.100 per unit for sale to B and Rs.110 for sale to C
(Refer Rule 10 Sale only to or through persons being interconnected undertakings (ICU)
of Central Excise Valuation Rules, 2000)
(iii) Where the sale is made to an unrelated person, the question of cost of production
does not arise. Thus, transaction value will be Rs.100 as per Section 4(1) of CEA, 1944.
(iv) The price at which the goods are actually sold shall be considered for the purpose of
determining the transaction value and not the administered price. Thus, the transaction
value will be Rs.31 as per Section 4 of CEA, 1944.
(v) Rule 9 of Central Excise Valuation Rules provides that when the assessee sells goods
to a related person who in turn sells it to an unrelated dealer (whether a wholesaler or
retailer), the value of the goods shall be the normal transaction value at which these
goods are sold by the related person to such unrelated person at the tome of removal of
goods from the place of removal. Thus, in the given case, the transaction value shall be
Rs.120 per unit.
(vi) Rule 7 of the Central Excise Valuation Rules, 2000 provide that the price prevailing
at the Depot on the date of clearance from the factory will be the relevant value to pay
Excise duty. Thus, in the given problem:
Clearance to Amritsar depot will attract duty based on the price as on
01/01/2001. Transaction value is Rs.100 X 100 units = Rs.10,000/-
Clearance to Bhopal depot will attract duty based on the price as on 01/01/2001.
Transaction value is Rs.120 X 200 units = 24,000/-
Clearance to Cuttack Depot will attract duty based on the price as on
01/01/2001. Transaction value is Rs.130 X 200 units = Rs. 26,000/-
Note: The relevant date is 01/01/2001, since the goods were cleared to the depots on
that date. No additional duty is payable even if goods are later sold from depot at a
higher price.
******
Rule 9 & 10 of CE Valuation Rules, 2000:
14.X Ltd. manufactures three health drinks viz. Slim, Trim, Prim.
Slim was sold only to Y Ltd., a subsidiary company of X Ltd.
Trim was sold to Z Ltd., where the Managing Director of X Ltd. is a Manager.
Prim is sold to P Ltd. who are sole distributor of X Ltd., and was coming under the
same management of X Ltd.
Determine the assessable value/transaction value of the three products in the hands of
X Ltd. on the basis of the following information: (CWA Inter Dec 02)
a) Price of X Ltd. to Y Ltd. Rs. 100
b) Price of X Ltd. to Z Ltd. Rs. 50
c) Price of X Ltd. to P Ltd. Rs. 20
d) Price of Y Ltd. to consumer Rs. 120
e) Price of Z Ltd. to consumer Rs. 60
f) Price of P Ltd. to consumer Rs. 30
Solution:
Rule 9 of C.E Valuation Rules, 2000 provides that where the assessee arranges to sell
goods only to or through:
1. his relative
2. relative and distributor or sub-distributor of such distributor.
3. persons who are mutually interested in the business of each other
then, the normal transaction value at which the goods are sold by such persons at the
time of removal can be taken as value, provided the other buyer is not related.
When goods are sold to related persons who are also retailers, then the price at which
goods are sold to the related retailer shall be adopted.
Rule 10 of C.E Valuation Rules, 2000 provides that when the assessee so arranges that
the excisable goods are not sold by him except to or through an inter-connected
undertaking, the value of goods shall be determined in the following manner, namely:
1. If the undertakings are so connected that they are also related in terms of sub-clause
(ii) or (iii) or (iv) of clause (b) of sub-section (3) of Section 4 of the Act or the buyer is a
holding company or subsidiary company of the assessee, then the value shall be
determined in the manner prescribed in Rule 9.
2. in any other case, the value shall be determined as if they are not related persons for
the purpose of sub-section (1) of section 4.
Cases given in the problem:
1. Product Slim was sold exclusively to Y which is a subsidiary company of X. Since
Company Y falls under the definition of relative under Section 4(3)(b) of Central
Excise Act, 1944, transaction value in such a case will be the price at which Y sells
the product to ultimate consumer i.e., Rs.120.
2. Product Trim is sold to Z where MD of the manufacturer is Manager. Hence, as per
the definition, Company X and Company Z are inter connected undertakings. Rule
10 of C.E. Valuation Rules provides that inter connected undertakings are
considered as related only if there is holding-subsidiary relationship.
Since in the given case there is no such holding-subsidiary relationship, the
transaction value will be the price at which X sales to Z i.e., Rs.50.
3. Product Prim was sold to P and it has been given that X and P are under same
management. Hence, as per the definition, Company X and Company P are inter
connected undertakings. Rule 10 of C.E. Valuation Rules provides that inter
connected undertakings are considered as related only if there is holding-
subsidiary relationship
Since in the given case there is no such holding-subsidiary relationship, the transaction
value will be the price at which X sales to P i.e., Rs.20.
******
Rule 10A
16.M/s Bharat (Trader) supplies raw material costing Rs.4,500 to processor. Processor
processes the raw material and supplies finished product to the trader.
The processor charged Rs.1,050 as processing charges which includes Rs.800 as
processing charges and Rs.250 as his profit margin.
The cost of transportation of raw material to the premises of the processor is
Rs.400 and for returning of the finished product to the trader is Rs.450.
The finished product is sold by the trader for Rs.6,700.
The rate of excise duty is 16%.
What is the assessable value and what is the total duty payable. (CWA Inter Dec 2000)
Solution: As per Rule 10A, the assessable value in the aforesaid case shall be the value
at which goods are sold by M/s Bharat (Trader) i.e. Rs. 6700/-. The duty inclusive of
education cess @ 16.48% shall be Rs. 1104.16.
******
Rule 10A
Question: A trader supplies fabrics to independent processor. Cost of fabrics is
Rs.1,150. The processor charges Rs.450 which includes Rs.350 as processing
charges and Rs.100 as his profit. After processing, goods are sent back to the
trader who sells them at Rs.1,800. Transport charges for receiving goods at the
premises of the processor is Rs.50 and the transport charges for sending goods
after processing is Rs.60.
Please determine the assessable value of the goods under Section 4 of the
Central Excise Act. (6 marks)[May 05]
Answer: As per Rule 10A of the Central Excise (Determination of Price of Excisable
Goods) Rules, 2000 where goods are manufactured on job-work basis, the assessable
value shall be the price at which the finished goods are sold by the principal
manufacturer who gets the goods manufactured on job-work basis, to his customers
where customer is not a related person.
Therefore, applying the above rule the assessable value shall be Rs.1800 at
which the trader sells the goods.
******
Sec 4 & 4A applicability:
17.B Ltd. manufactures two products namely, Eye Ointment and Skin Ointment. Skin
Ointment is a specified product u/sec. 4A of Central Excise Act, 1944. The sales
prices of both the products are at Rs.43/unit and Rs.33/unit respectively. The sales
price of both products included 16% excise duty as BED and 8% excise duty as SED.
It also includes CST of 4%. Additional information is as follows:
Units
cleared
Eye Ointment : 1,00,000 units Rs. 43/- per unit
Skin Ointment : 1,50,000 units Rs. 33/- per unit
Deduction permissible u/sec 4A: 40%.
Calculate the total excise duty liability of B Ltd. on both the products.(CWA June 02)
Solution: Duty on eye ointment and skin ointment is required to be calculated
separately.
A) Duty liability in case of Eye ointment:
Let the Assessable Value of Eye Ointment be X per unit.
Rupees
Selling price including sales tax 43
Less - Sales Tax @ 4% [43 X 4/104] 1.65
Price including duty 41.35
Duty @ 24.72@ [BED 16% + SED 6% + EC 8.20
3%]
Assessable Value 33.15
Since the excise duty payable per unit of Eye ointment is Rs.8.20 and the total quantity
cleared is 1,00,000; the total excise duty on eye ointment shall be Rs.8,20,000.
B) Duty liability in case of Skin ointment:
Since the product is specified under Section 4A, Assessable Value shall be computed by
deducting the abatement of 40% from the MRP.
Maximum Retail price (MRP) = Rs.33.00
Less: Abatement @ 40% = Rs.13.20
Assessable Value per unit of Skin ointment = Rs.19.80
Excise duty payable per unit @ 24.72% = Rs.4.89
Total Excise Duty payable on 1,50,000 units of Skin
ointment shall be (Rs.4.847 x 1,50,000 units)
= Rs.7,34,184
******
Sec 4A of CEA, 1944:
18.A product which is covered under section 4A provisions has MRP of Rs.25 printed on
the carton. It is cancelled by drawing two lines across the price, but the price is
easily readable. Below that price, MRP price of Rs.21 is shown to indicate the saving
which will be made by buyer. The abatement available is 40% on MRP. Excise duty
rate is 16%. Calculate the excise duty payable. (CWA Final New Syllabus Jun 04)
Solution:
CBEC vide its circular No.673/64/2002-CX dt.28.10.2002 has notified that once an
MRP is scored out and even then it remains visible and another MRP is printed on the
package, then it cannot be said that two MRPs are printed on the package. The scored
out MRP cannot be considered as an MRP either by the seller or by the buyer and hence
such MRP shall be ignored.
For the purpose of valuation for determination of duty liability, the new MRP shall be
considered.
Thus, in the given problem, the MRP shall be taken as Rs.21.
Computation for determining the Duty liability:
Maximum Retail price (MRP) = Rs.21
Less: Abatement @ 40% = Rs.8.4
Assessable Value = Rs.12.6
Excise duty payable per unit @
16.48%
= Rs.2.07
******
Sec 4A of CEA, 1944:
19.Refrigerators under heading No. 8418.10 carry abatement rate of 40% and they are
specified only in the First Schedule to the Central Excise Tariff Act 1985. Find out
the amount of duty, if the maximum retail price (MRP) of a refrigerator is Rs.20,000
only and the rate of excise duty is 16%.(CS Final June 04)
Solution: Computation of Duty liability
Since the product is specified under Section 4A, Assessable Value shall be computed by
deducting the abatement of 40% from the MRP.
Maximum Retail price (MRP) = Rs.20,000
Less: Abatement @ 40% = Rs.8,000
Assessable Value = Rs.12,000
Excise duty payable per unit @
16.48%
= Rs.1,977.60
******
Valuation [Section 14 and Valuation Rules]
CUSTOMS VALUATION (DETERMINATION OF VALUE OF IMPORTED GOODS)
RULES, 2007
Notification No. 94/2007-Cus. (N.T.), dated 13-9-2007
In exercise of the powers conferred by section 156 read with section 14 of the Customs
Act, 1962 (52 of 1962), and in supersession of the Customs Valuation (Determination of
Price of Imported goods) Rules, 1988 except as respects things done or omitted to be
done before such supersession, the Central Government hereby makes the following
rules, namely :-
1. Short title, commencement and application. (1) These rules may be called the
Customs Valuation (Determination of Value of Imported Goods) Rules, 2007.
(2) They shall come into force on the 10th day of October, 2007.
(3) They shall apply to imported goods.
2. Definitions. (1) In these rules, unless the context otherwise requires, -
(a) computed value means the value of imported goods determined in
accordance with rule 8.
(b) deductive value means the value determined in accordance with rule 7.
(c) goods of the same class or kind, means imported goods that are within a
group or range of imported goods produced by a particular industry or
industrial sector and includes identical goods or similar goods;
(d) identical goods means imported goods -
(i) which are same in all respects, including physical characteristics, quality
and reputation as the goods being valued except for minor differences in
appearance that do not affect the value of the goods,
(ii) produced in the country in which the goods being valued were produced,
and
(iii) produced by the same person who produced the goods, or where no such
goods are available, goods produced by a different person,
but shall not include imported goods where engineering, development work,
art work, design work, plan or sketch undertaken in India were completed
directly or indirectly by the buyer on these imported goods free of charge or at
a reduced cost for use in connection with the production and sale for export of
these imported goods;
(e) produced includes grown, manufactured and mined;
(f) similar goods means imported goods -
(i) which although not alike in all respects, have like characteristics and like
component materials which enable them to perform the same functions
and to be commercially interchangeable with the goods being valued
having regard to the quality, reputation and the existence of trade mark;
(ii) produced in the country in which the goods being valued were produced;
and
(iii) produced by the same person who produced the goods being valued, or
where no such goods are available, goods produced by a different person,
but shall not include imported goods where engineering, development work,
art work, design work, plan or sketch undertaken in India were completed
directly or indirectly by the buyer on these imported goods free of charge or at
a reduced cost for use in connection with the production and sale for export of
these imported goods;
(g) transaction value means the value referred to in sub-section (1) of section 14
of the Customs Act, 1962;
(2) For the purpose of these rules, persons shall be deemed to be related only if -
(i) they are officers or directors of one anothers businesses;
(ii) they are legally recognised partners in business;
(iii) they are employer and employee;
(iv) any person directly or indirectly owns, controls or holds five per cent or more
of the outstanding voting stock or shares of both of them;
(v) one of them directly or indirectly controls the other;
(vi) both of them are directly or indirectly controlled by a third person;
(vii) together they directly or indirectly control a third person; or
(viii) they are members of the same family.
Explanation I. - The term person also includes legal persons.
Explanation II. - Persons who are associated in the business of one another in that
one is the sole agent or sole distributor or sole concessionaire, howsoever described, of
the other shall be deemed to be related for the purpose of these rules, if they fall within
the criteria of this sub-rule.
3. Determination of the method of valuation. (1) Subject to rule 12, the value of
imported goods shall be the transaction value adjusted in accordance with provisions of
rule 10;
(2) Value of imported goods under sub-rule (1) shall be accepted :
Provided that -
(a) there are no restrictions as to the disposition or use of the goods by the buyer
other than restrictions which -
(i) are imposed or required by law or by the public authorities in India; or
(ii) limit the geographical area in which the goods may be resold; or
(iii) do not substantially affect the value of the goods;
(b) the sale or price is not subject to some condition or consideration for which a
value cannot be determined in respect of the goods being valued;
(c) no part of the proceeds of any subsequent resale, disposal or use of the goods
by the buyer will accrue directly or indirectly to the seller, unless an
appropriate adjustment can be made in accordance with the provisions of rule
10 of these rules; and
(d) the buyer and seller are not related, or where the buyer and seller are related,
that transaction value is acceptable for customs purposes under the
provisions of sub-rule (3) below.
(3) (a) Where the buyer and seller are related, the transaction value shall be
accepted provided that the examination of the circumstances of the sale of the imported
goods indicate that the relationship did not influence the price.
(b) In a sale between related persons, the transaction value shall be accepted,
whenever the importer demonstrates that the declared value of the goods being valued,
closely approximates to one of the following values ascertained at or about the same
time.
(i) the transaction value of identical goods, or of similar goods, in sales to
unrelated buyers in India;
(ii) the deductive value for identical goods or similar goods;
(iii) the computed value for identical goods or similar goods :
Provided that in applying the values used for comparison, due account shall be
taken of demonstrated difference in commercial levels, quantity levels,
adjustments in accordance with the provisions of rule 10 and cost incurred by
the seller in sales in which he and the buyer are not related;
(c) substitute values shall not be established under the provisions of clause (b) of
this sub-rule.
(4) If the value cannot be determined under the provisions of sub-rule (1), the value
shall be determined by proceeding sequentially through rule 4 to 9.
4. Transaction value of identical goods.
(1)(a) Subject to the provisions of rule 3, the value of imported goods shall be the
transaction value of identical goods sold for export to India and imported at or
about the same time as the goods being valued :
Provided that such transaction value shall not be the value of the goods
provisionally assessed under section 18 of the Customs Act, 1962.
(b) In applying this rule, the transaction value of identical goods in a sale at the
same commercial level and in substantially the same quantity as the goods
being valued shall be used to determine the value of imported goods.
(c) Where no sale referred to in clause (b) of sub-rule (1), is found, the transaction
value of identical goods sold at a different commercial level or in different
quantities or both, adjusted to take account of the difference attributable to
commercial level or to the quantity or both, shall be used, provided that such
adjustments shall be made on the basis of demonstrated evidence which
clearly establishes the reasonableness and accuracy of the adjustments,
whether such adjustment leads to an increase or decrease in the value.
(2) Where the costs and charges referred to in sub-rule (2) of rule 10 of these
rules are included in the transaction value of identical goods, an adjustment shall be
made, if there are significant differences in such costs and charges between the goods
being valued and the identical goods in question arising from differences in distances
and means of transport.
(3) In applying this rule, if more than one transaction value of identical goods is
found, the lowest such value shall be used to determine the value of imported goods.
5. Transaction value of similar goods. (1 )Subject to the provisions of rule 3, the
value of imported goods shall be the transaction value of similar goods sold for export to
India and imported at or about the same time as the goods being valued :
Provided that such transaction value shall not be the value of the goods
provisionally assessed under section 18 of the Customs Act, 1962.
(2) The provisions of clauses (b) and (c) of sub-rule (1), sub-rule (2) and sub-rule (3), of
rule 4 shall, mutatis mutandis, also apply in respect of similar goods.
6. Determination of value where value can not be determined under rules 3, 4 and
5. If the value of imported goods cannot be determined under the provisions of rules
3, 4 and 5, the value shall be determined under the provisions of rule 7 or, when the
value cannot be determined under that rule, under rule 8 :
Provided that at the request of the importer, and with the approval of the proper
officer, the order of application of rules 7 and 8 shall be reversed.
7. Deductive value. (1) Subject to the provisions of rule 3, if the goods being valued
or identical or similar imported goods are sold in India, in the condition as imported at
or about the time at which the declaration for determination of value is presented, the
value of imported goods shall be based on the unit price at which the imported goods or
identical or similar imported goods are sold in the greatest aggregate quantity to persons
who are not related to the sellers in India, subject to the following deductions :
(i) either the commission usually paid or agreed to be paid or the additions
usually made for profits and general expenses in connection with sales in India
of imported goods of the same class or kind;
(ii) the usual costs of transport and insurance and associated costs incurred
within India;
(iii) the customs duties and other taxes payable in India by reason of importation
or sale of the goods.
(2) If neither the imported goods nor identical nor similar imported goods are sold at or
about the same time of importation of the goods being valued, the value of imported
goods shall, subject otherwise to the provisions of sub-rule (1), be based on the unit
price at which the imported goods or identical or similar imported goods are sold in
India, at the earliest date after importation but before the expiry of ninety days after
such importation.
(3) (a) If neither the imported goods nor identical nor similar imported goods are
sold in India in the condition as imported, then, the value shall be based on the unit
price at which the imported goods, after further processing, are sold in the greatest
aggregate quantity to persons who are not related to the seller in India.
(b) In such determination, due allowance shall be made for the value added by
processing and the deductions provided for in items (i) to (iii) of sub-rule (1).
8. Computed value. Subject to the provisions of rule 3, the value of imported goods
shall be based on a computed value, which shall consist of the sum of:-
(a) the cost or value of materials and fabrication or other processing employed in
producing the imported goods;
(b) an amount for profit and general expenses equal to that usually reflected in
sales of goods of the same class or kind as the goods being valued which are
made by producers in the country of exportation for export to India :
(c) the cost or value of all other expenses under sub-rule (2) of rule 10.
9. Residual method. (1) Subject to the provisions of rule 3, where the value of
imported goods cannot be determined under the provisions of any of the preceding rules,
the value shall be determined using reasonable means consistent with the principles and
general provisions of these rules and on the basis of data available in India :
Provided that the value so determined shall not exceed the price at which such or
like goods are ordinarily sold or offered for sale for delivery at the time and place of
importation in the course of international trade, when the seller or buyer has no interest
in the business of other and price is the sole consideration for the sale or offer for sale.
(2) No value shall be determined under the provisions of this rule on the basis of :-
(i) the selling price in India of the goods produced in India;
(ii) a system which provides for the acceptance for customs purposes of the
highest of the two alternative values;
(iii) the price of the goods on the domestic market of the country of exportation;
(iv) the cost of production other than computed values which have been
determined for identical or similar goods in accordance with the provisions of
rule 8;
(v) the price of the goods for the export to a country other than India;
(vi) minimum customs values; or
(vii) arbitrary or fictitious values.
10. Cost and services. (1) In determining the transaction value, there shall be added
to the price actually paid or payable for the imported goods,
(a) the following to the extent they are incurred by the buyer but are not included
in the price actually paid or payable for the imported goods, namely:-
(i) commissions and brokerage, except buying commissions;
(ii) the cost of containers which are treated as being one for customs
purposes with the goods in question;
(iii) the cost of packing whether for labour or materials;
(b) The value, apportioned as appropriate, of the following goods and services
where supplied directly or indirectly by the buyer free of charge or at reduced
cost for use in connection with the production and sale for export of imported
goods, to the extent that such value has not been included in the price
actually paid or payable, namely :-
(i) materials, components, parts and similar items incorporated in the
imported goods;
(ii) tools, dies, moulds and similar items used in the production of the
imported goods;
(iii) materials consumed in the production of the imported goods;
(iv) engineering, development, art work, design work, and plans and sketches
undertaken elsewhere than in India and necessary for the production of
the imported goods;
(c) royalties and licence fees related to the imported goods that the buyer is
required to pay, directly or indirectly, as a condition of the sale of the goods
being valued, to the extent that such royalties and fees are not included in the
price actually paid or payable;
(d) The value of any part of the proceeds of any subsequent resale, disposal or use
of the imported goods that accrues, directly or indirectly, to the seller;
(e) all other payments actually made or to be made as a condition of sale of the
imported goods, by the buyer to the seller, or by the buyer to a third party to
satisfy an obligation of the seller to the extent that such payments are not
included in the price actually paid or payable.
Explanation. Where the royalty, licence fee or any other payment for a
process, whether patented or otherwise, is includible referred to in clauses (c)
and (e), such charges shall be added to the price actually paid or payable for
the imported goods, notwithstanding the fact that such goods may be
subjected to the said process after importation of such goods.
(2) For the purposes of sub-section (1) of section 14 of the Customs Act, 1962 (52 of
1962) and these rules, the value of the imported goods shall be the value of such goods,
for delivery at the time and place of importation and shall include -
(a) the cost of transport of the imported goods to the place of importation;
(b) loading, unloading and handling charges associated with the delivery of the
imported goods at the place of importation; and
(c) the cost of insurance :
Provided that
(i) where the cost of transport referred to in clause (a) is not ascertainable, such
cost shall be twenty per cent of the free on board value of the goods;
(ii) the charges referred to in clause (b) shall be one per cent of the free on board
value of the goods plus the cost of transport referred to in clause (a) plus the
cost of insurance referred to in clause (c);
(iii) where the cost referred to in clause (c) is not ascertainable, such cost shall be
1.125% of free on board value of the goods;
Provided further that in the case of goods imported by air, where the cost referred
to in clause (a) is ascertainable, such cost shall not exceed twenty per cent of free on
board value of the goods :
Provided also that where the free on board value of the goods is not ascertainable,
the costs referred to in clause (a) shall be twenty per cent of the free on board value of
the goods plus cost of insurance for clause (i) above and the cost referred to in clause (c)
shall be 1.125% of the free on board value of the goods plus cost of transport for clause
(iii).
Provided also that in case of goods imported by sea stuffed in a container for
clearance at an Inland Container Depot or Container Freight Station, the cost of freight
incurred in the movement of container from the port of entry to the Inland Container
Depot or Container Freight Station shall not be included in the cost of transport referred
to in clause (a).
Explanation. - The cost of transport of the imported goods referred to in clause (a)
includes the ship demurrage charges on charted vessels, lighterage or barge charges.
(3) Additions to the price actually paid or payable shall be made under this rule on the
basis of objective and quantifiable data.
(4) No addition shall be made to the price actually paid or payable in determining the
value of the imported goods except as provided for in this rule.
11. Declaration by the importer. (1) The importer or his agent shall furnish -
(a) a declaration disclosing full and accurate details relating to the value of
imported goods; and
(b) any other statement, information or document including an invoice of the
manufacturer or producer of the imported goods where the goods are imported
from or through a person other than the manufacturer or producer, as
considered necessary by the proper officer for determination of the value of
imported goods under these rules.
(2) Nothing contained in these rules shall be construed as restricting or calling into
question the right of the proper officer of customs to satisfy himself as to the truth or
accuracy of any statement, information, document or declaration presented for valuation
purposes.
(3) The provisions of the Customs Act, 1962 (52 of 1962) relating to confiscation, penalty
and prosecution shall apply to cases where wrong declaration, information, statement or
documents are furnished under these rules.
12. Rejection of declared value. (1) When the proper officer has reason to doubt the
truth or accuracy of the value declared in relation to any imported goods, he may ask the
importer of such goods to furnish further information including documents or other
evidence and if, after receiving such further information, or in the absence of a response
of such importer, the proper officer still has reasonable doubt about the truth or
accuracy of the value so declared, it shall be deemed that the transaction value of such
imported goods cannot be determined under the provisions of sub-rule (1) of rule 3.
(2) At the request of an importer, the proper officer, shall intimate the importer in writing
the grounds for doubting the truth or accuracy of the value declared in relation to goods
imported by such importer and provide a reasonable opportunity of being heard, before
taking a final decision under sub-rule (1).
Explanation. - (1) For the removal of doubts, it is hereby declared that :-
(i) This rule by itself does not provide a method for determination of value, it
provides a mechanism and procedure for rejection of declared value in cases
where there is reasonable doubt that the declared value does not represent the
transaction value; where the declared value is rejected, the value shall be
determined by proceeding sequentially in accordance with rules 4 to 9.
(ii) The declared value shall be accepted where the proper officer is satisfied about
the truth and accuracy of the declared value after the said enquiry in
consultation with the importers.
(iii) The proper officer shall have the powers to raise doubts on the truth or
accuracy of the declared value based on certain reasons which may include -
(a) the significantly higher value at which identical or similar goods imported
at or about the same time in comparable quantities in a comparable
commercial transaction were assessed;
(b) the sale involves an abnormal discount or abnormal reduction from the
ordinary competitive price;
(c) the sale involves special discounts limited to exclusive agents;
(d) the misdeclaration of goods in parameters such as description, quality,
quantity, country of origin, year of manufacture or production;
(e) the non declaration of parameters such as brand, grade, specifications
that have relevance to value;
(f) the fraudulent or manipulated documents.
Practical Problems in Custom Valuation
Problem 1: From the following particulars, determine the assessable value of the
imported equipment giving explanation for each item:
1. FOB cost of equipment (Japanese Yen) 2,00,000 Yen
2. Freight charges in Japanese Yen 20,000 Yen
3. Charges for development connected to equipment paid in India Rs. 60,000
4. Insurance charge paid in India for transportation from Japan Rs. 15,000
5. Commission payable to agent in India Rs. 15,000
Exchange rate as per RBI is 1 Yen = Rs. 0.45
Exchange rate as per CBEC is 1 Yen = Rs. 0.50
Landing charges: one percent of CIF cost (5 Marks) [June 09]
Problem 2: What would be the value for the purpose of customs, if a consignment
imported by air has a CIF price of US $ 2,500 including freight US $700 and insurance US
$ 90? The exchange rate notified by the Government of India under section 14 of the
Customs Act, 1962 is Rs.45.50. (CS Final Jun 04)
Problem 3: A consignment is imported by air. CIF price is US$ 12,500. Freight is US$
2,450 and insurance cost is US$ 300. On the date of presentation of Bill of Entry, RBI floor
rate was US$ = Rs.47.80 and rate notified by Government of India was Rs.47.75. Find the
value of the consignment for customs purposes. (CS Final Jun 02)
Problem 4: A material was imported by air at CIF price of 5,000 US$. Freight paid was
1,500 US$ and insurance cost was 500 US$. The banker realized the payment from
importer at the exchange rate of Rs.45 per dollar. Central Board of Excise and Customs
notified the exchange rate as Rs.44.50 per US$. Find the value of the material for the
purpose of levying duty. (4 marks)[May 05]
Problem 5: XYZ Industries Ltd., has imported certain equipment from Japan at an FOB
cost of 2,00,000 Yen (Japanese). The other expenses incurred by M/s. XYZ Industries in
this connection are as follows:
(i) Freight from Japan to India Port 20,000 Yen
(ii) Insurance paid to Insurer in India Rs.10,000
(iii) Designing charges paid to Consultancy firm in Japan 30,000 Yen
(iv) M/s. XYZ Industries had expended Rs.1,00,000 in India for certain development
activities with respect to the imported equipment
(v) XYZ Industries had incurred road transport cost from Mumbai port to their factory in
Karnataka Rs. 30,000
(vi) The Central Board of Excise and Customs had notified for purpose of section 14(3)*
of the Customs Act, 1962 exchange rate of 1 Yen = Rs.0.3948. The inter bank rate
was 1 Yen = Rs.0.40
(vii) M/s XYZ Industries had effected payment to the Bank based on exchange rate 1
Yen = Rs. 0.4150
(viii) The commission payable to the agent in India was 5% of FOB cost of the equipment
in Indian Rupees FOB cost of the equipment in Indian Rupees
Arrive at the assessable value for purposes of customs duty under the Customs Act, 1962
providing brief notes wherever required with appropriate assumptions. (6 Marks) [May 08]
Problem 6: From the following particulars, calculate assessable value and total custom
duty payable:
(i) Date of presentation of bill of entry : 20.6.2006 [Rate of BCD 25%; Exchange
Rate : Rs.43.60 and rate notified by CBEC Rs.43.80].
(ii) Date of arrival of goods in India : 30.6.2006 [Rate of BCD 20%; Exchange Rate:
Rs.43.90 and rate notified by CBEC Rs.44.00].
(iii) Rate of Additional Customs Duty : 16.48%.
(iv) CIF value 2,000 US Dollars; Air Freight 500 US Dollars, Insurance cost 100 US
Dollars [Landing charges not ascertainable].
(v) Education cess applicable 3%.
(vi) Assume there is no special CVD. (6 Marks)
Problem 7: M/s Agarwal Industries imported by Air from USA certain goods at CIF value
$6,500. Air freight US$ 1,400 and insurance charges US$100 were also paid. Bill of Entry
was presented on 28.02.06, but the Entry Inwards was granted on 10.03.06. Other
relavant information is as follows:
As on 28.02.06 As on 10.03.06
Rate of Exchange:
As announced by CBEC US $1= Rs. 46.80 Rs. 46.60
As announced by RBI US $1= Rs. 46.70 Rs. 46.50
Rate of Custom Duty
Basic Customs Duty 25% 20%
Additional Customs Duty u/s 3(1) 16% 16%
Additional Customs Duty u/s 3(5) Nil Nil
The same goods are exempt from excise duty in India, if manufactured without the aid of
power.
Compute the Assessable value and give the rates of Basic and Additional Duty to be
adopted in this case, as also the basis for arriving at the Basic and Additional Duty (Actual
duty calculations need not be given). (Nov 03)
Problem 8: An importer has imported a machine from UK at FOB cost of 10,000 UK
Pounds. Other details are as follows:
(i) Freight from UK to Indian port was 700 pounds.
(ii) Insurance was paid to insurer in India: Rs.6,000.
(iii) Design and development charges of 2,000 UK pounds were paid to a
consultancy firm in UK.
(iv) The importer also spent an amount of Rs.50,000 in India for development work
connected with the machinery.
(v) Rs.10,000 were spent in transporting the machinery from Indian port to the
factory of importer.
(vi) Rate of Exchange as announced by RBI was Rs.68.82 = one UK pound.
(vii) Rate of exchange as announced by CBE&C (Board) by notification under
section 14(3)(a)(i): Rs.68.70 = one UK pound.
(viii) Rate at which bank recovered the amount from importer Rs.68.35 = one UK
pound.
(ix) Foreign exporters have an agent in India. Commission is payable to the agent
in Indian Rupees @ 5% of FOB price.
Customs duty payable was 25%. If similar goods were produced in India, excise
duty payable as per tariff is 24%. There is an excise exemption notification which
exempts the duty as is in excess of 16%. Find Customs duty payable if
(a) Importer is manufacturer using the goods himself,
(b) Importer is a trader who has imported goods for subsequent sale in India. (CWA
Inter New Syllabus Dec 04 adopted)
Problem 9: M/s. Premium Industries Ltd., has imported a machine from Japan at an
F.O.B. cost of 1,00,000 Yen (Japanese). The other expenses incurred were as follows:
(i) Freight from Japan to Indian Port 10,000 Yen;
(ii) Insurance paid to insurer in India Rs. 5,000;
(iii) Designing Charges paid to consultancy firm in Japan 15,000 Yen;
(iv) M/s Premium Industries Ltd. spent Rs. 50,000 in India for development work
connected with the machine,
(v) Transportation cost from Indian port to Factory Rs. 15,000;
(vi) Central Government has announced exchange rate of 1 Yen = Re. 0.40 by
notification under section 14(3). However the exchange rate prevailing in the
market was 1 Yen = Re. 0.4052
(vii) M/s Premium Industries Ltd. made payment to the bank based on exchange rate
of 1 Yen = Re. 0.4150,
(viii) The commission payable to the agent in India was @ 5% of F.O.B. price in Indian
Rupees. The rate of custom duty is 20%. Similar goods are subject to 16% excise
in India.
Find the custom duty and other duties payable :
(1) If the importer M/s Premium Industries Ltd. is importing goods for captive
consumption
(2) If the importer M/s Premium Industries Ltd. is a trader and imported goods
for the purpose of trading. (CWA Inter Jun 00)
Problem 10: Infotech Limited has imported a machine from Japan at FOB cost of 50,000
Yen (Japanese). The other expenses incurred are as follows -
(i) Freight from Japan to Indian port 5000 Yen.
(ii) Insurance paid to insurer in India Rs. 2500
(iii) Designing charges paid to consultancy firm in Japan 7500 Yen
(iv) M/s Infotech spent Rs. 25,000 in India for development work connected with the
machine.
(v) Transportation cost from Indian port to factory Rs. 7500.
(vi) Central Government has announced exchange rate of 1 Yen = Rs. 0.40 by
notification under section 14(3) of the Customs Act, 1962. The exchange rate
prevailing on that day in the market was 1 Yen = Rs. 0.4052.
(vii) M/s Infotech made payment to the bank based on the exchange rate of 1 Yen =
Rs. 0.4150.
(viii) The commission payable to the agent in India was at 5% of the FOB price in
Indian rupees.
The rate of Custom duty is 35%. Similar goods are subject to 15% Excise Duty in India.
Clearly show your working to arrive at the total assessable value in rupees for
purposes of levy of custom duty. (Nov. 02)
Problem 11: Determine the assessable value and customs duty amount from the following
data :
1. Name of the raw material X
2. FOB value Euro 1 million
3. Ocean freight Actual data not available
4. Ocean Insurance Actual data not available
5. Freight from sea port to godown paid in India Rs.10,000
6. Transit insurance in India Rs.2,000
7. Selling commission paid to agent in India 5%
8. Royalty on manufacture and sale of final product
payable to foreign collaborator 5%
9. Interest payable on raw material imported at
180 days credit (on FOB value) 12% p.a
10. Dividend paid to the foreign supplier of raw material Rs.2 per share on 1
million
on their equity participation for the year 01-02 shares of face value
Rs.10/
share.
a. Importer supplied design and drawings worth Euro 10,000 to the foreign raw
material supplier.
b. Landing charges as per Customs provisions
c. Customs duty rates: BCD - 30%, CVD 16.48%
d. Exchange rate: 1 Euro = Rs.42. (CWA Inter Jun 02 adopted)
=========
Practical questions in VAT
Illustration 1-Operation of VAT system and VAT accounting:
XYZ Mfg. Co. Ltd. of Rajasthan purchased raw material A from Rajasthan for Rs.
10,400 (inclusive of 4% VAT), raw material B from Rajasthan for Rs. 22,500
(inclusive of 12.5 % VAT), raw material C from China for Rs. 33,000 (inclusive of
10% import duty) and raw material D from Maharashtra for Rs. 15,450 (inclusive
of 2% CST). The plant and machinery required for manufacture was purchased for
Rs. 2,08,000 (inclusive of 4% VAT). The manufacturing and other expenses
(excluding depreciation) were Rs. 61,550. The plant is to be depreciated at 100%.
The manufacturers margin is 20% on cost. The VAT rate on the manufactured
product is 4%.
By way of necessary accounting entries and VAT chart, show the mode of
operation of VAT system. Ignore the Central Excise implications, assuming that
there is no excise duty on the manufactured product.
Solution: VAT CHART (amounts in Rs.)
Raw material A (net of VAT Rs. 400) 10,000
Raw material B (net of VAT Rs. 2,500) 20,000
Raw material C (import duty will form part of cost, as it is
not available as credit) 33,000
Raw material D (CST will form part of cost, as it is not available as credit) 15,450
Depreciation on plant and machinery (100% of 2,00,000 i.e. price net of
VAT of Rs. 8,000) 200,000
Manufacturing and other expenses 61,550
Cost of the product 340,000
Add: 20% margin 68,000
Selling price 408,000
Add: VAT @4% of 4,08,000 16,320
Cost to the purchaser 424,320
VAT payable in cash by the manufacturer 16,320-400-2,500-8,000= Rs. 5,420.
Illustration 2-VAT liability at different stages : .Manufacture X extracted raw produce X
and raw produce Y from mines at Rs. 10,000 and Rs. 15,000 respectively and sold the
same at 100% margin to Manufacturer B (VAT rate is 4% on produce X and 12.5%on
produce Y). Manufacturer B used X and Y as raw material and sold the resultant
product for Rs. 2,00,000 to wholesaler C (VAT rate is 4%). Wholesaler C sold the same to
Retailer D at 25% above cost (VAT rate is 4%). The retailer D sold the same to a
consumer at 20% above cost (VAT rate is 4%). Compute the amount of VAT payable in
cash by each person.
Solution: VAT CHART (all amounts in Rs.)
1. VAT payable in cash by Manufacturer A
4% on produce X i.e. 4% of 20,000(10,000+ 100% of 10,000) 800
12.5% on produce Y i.e. 12.5% of 30,000 (15,000 +100% of 15,000) 3,750 4,550
2. VAT payable in cash by Manufacturer B
VAT @ 4% on sale price of Rs. 2,00,000 8,000
Less: VAT credit on raw produce X & Y 4,550 3,450
3. VAT payable in cash by Wholessler C
VAT @ 4% on sale price of Rs. 2,50,000(2,00,000+25% of 2,00,000) 10,000
Less: VAT credit on purchases from Manufacturer B 8,000 2,000
4. VAT payable in cash by Retailer D
VAT @ 4% on sale price of Rs. 3,00,000(2,50,000 + 20% of 2,50,000) 12,000
Less: VAT credit on purchases from Wholesaler C 10,000 2,000
Total VAT paid to the Government 12,000
The above illustration shows that the VAT paid to the Government at various
stages (here, Rs. 12,000) is equal to the VAT collected from the ultimate consumer
(here, Rs. 12,000 or 4% of 3,00,000).
Illustration 3
Computation of VAT liability: Mr. X of Rajasthan started business w.e.f. 1-1-2009
and got himself registered with VAT authorities. He presents the following details
for the month of January, 2009 -
Purchases from Rajasthan 2,000,000
Purchases from Delhi 8,00,000
Sales within Rajasthan out of purchases from Rajasthan 16,00,000
Sales within Rajasthan out of purchases from Delhi 2,00,000
Sales to dealer of Maharashtra Out of purchases within Rajasthan 8,00,000
Sales to dealer of Maharashtra Out of purchases from Delhi 4,00,000
Compute tax payable by Mr. X. Aforesaid amounts are exclusive of taxes. VAT rate
is 4%. CST rate is 2%.
Solution : The tax payable by Mr. X for the month is computed hereinbelow -
Sales within Sales outside
Rajasthan (VAT) Rajasthan (CST)
Total Sales 18,00,000 12,00,000
Gross VAT liability @ 4 % & CST liability @ 2 % 72,000 24,000
Input VAT credit available on purchases
from Rajasthan @ 4% 72,000 8,000
Net taxpayable NIL 16,000
Excess VAT credit to be utilised against payment of CST** 8,000
The VAT liability on sales within Rajasthan is Rs. 72,000 while the VAT credit
availed on purchases from within Rajasthan is Rs. 40,000. Hence, whole of the
output tax of Rs. 36,000 will be paid out of the input tax credit of Rs. 40,000. The
excess credit of Rs. 4,000 will be used for payment of CST on sale outside the
State of Rajasthan. The balance amount of (ST payable of Rs. 8,000(12,000 -
4,000) will be paid in cash.
Illustration 4
Treatment of input VAT-credit: Mr. A presents following details for March, 2009
1. Opening Balance of Input VAT credit as on 1-3-2009: Rs. 15,000.
2. Inputs purchased during the month of March: Rs. 15 lakh.
3. Within the state sales of manufactured goods: Rs. 20 lakh.
4. Inter-state Sales : Rs. 4 lakh.
CST rate is 2%. There was no inventory as on 1-1-2009 or 31-3-2009. The VAT
laws governing Mr. A provide for the refund of input-VAT credit after the end of
the first financial year itself. VAT rate is 12.5% on inputs and 4% on sales.
Compute the amount of refund available to Mr. A. -
Solution : Computation of refund available to Mr. A (amounts in Rs.)
Opening balance of input VAT-credit 15,000
Add: VAT credit availed on inputs purchased during March (12.5% of 15 lakhs)
187,500
Less : VAT payable on sales (4% on Rs. 20 lakh -80,000
Less : CST payable on inter-state sales (2% on 4 lakh) -8,000
Balance lying as VAT-credit as on 31-3-2009 eligible for refund 114,500
Illustration 5: Need for input-credit on capital goods:
Mr. X manufactures product A out of raw material X. The cost of raw material X is
Rs. 1 lakh. The labour and other manufacturing cash costs are Rs. 4 lakh. The
manufacturing process requires a machinery of Rs. 10 lakh (subject to VAT @
12.5%).
The useful life of the plant is 4 years with no salvage. The expected output of
product A is 1,000 units.
Mr. X fixes a profit margin of Rs. 100 per unit. Compute the selling price of
product A and its cost to consumer if - (a) No credit is allowed on the capital
goods; (b) credit is allowed on the capital goods. The VAT rate on final product is
12.5%. There is no VAT on raw material.
Solution: Computation of selling price of product A
(a) No credit on (b) Credit available capital goods on capital-goods
Raw material cost 1,000,00.0 1,00,000.0
Labour and other manufacturing cash costs 400,000.0 400,000.0
Depreciation on machinery:
(10 lakh + 12.5% VAT) 4 (VAT credit not available )281,250.0
10 lakh +4 (VAT credit available, hence, VAT not cost) 250,000,0
Total cost 781,250.0 750,000.0
Cost per unit 781.3 750.0
Profit per unit 100.0 100.0
Selling price per unit 881.3 850.0
Add : VAT @ 12.5% 110.2 106.3
Cost to consumer 991.4 956.3
Thus, the availability of VAT credit on capital goods reduces the cost and
resultant selling price of the goods and, therefore, eliminates cascading effect of
taxation.
Illustration 6
Input-credit on common goods: Mr. K, a manufacturer of taxable as well as tax-
free goods, furnishes the following information for the month of March, 2009: -
(a) Sales of Product A (tax-free goods) : Rs. 50 lakh
(p) Sales of Product B (taxable goods) : Rs. 100 lakhs (VAT @ 12.5%);
(c) Purchases of input X (used in manufacture of Product A only) : Rs. 30 lakhs
(VAT @ 4%);
(d) Purchases of input Y (used in the manufacture of Product B only) : Rs. 75
lakhs (VAT @ 4%);
(e) Purchases of input Z (used in the manufacture of Product A &.B) :.Rs. 15
lakhs (VAT @ 20%).
There was no inventory as on 1-3-2009 as well as on 31-3-2009.
Compute the amount of VAT payable in cash by Mr. K for the month assuming
that input Z is used in product A and B in the ratio of 1 :2. Ignore implications
under other laws.
Solution: Computation of VAT liability of Mr. K for the month of March, 2009
(amounts in Rs. lakhs)
VAT on sales of product B (Rs. 100 lakhs x 12.5%) 12.5
Less : Input VAT credit on input Y (75 lakhs x 4%) 3
Proportionate credit on input Z (15 lakhs x 20% x 2/3) 2
VAT payable in cash by Mr. K 7.5
Illustration 7
Computation of VAT liability : Calculate the total tax liability under the State VAT
law and under the Central Sales Tax Act for the month of October 2008 from the
following particulars:
Particulars Rs.
Inputs purchased within the state 170,000
Capital goods used in the manufacture of the taxable goods 50,000
Inputs purchased from a registered dealer who opts for composition
scheme under the provisions of the Act 10,000
High seas purchases of inputs 100,000
Finished goods sold :
(a) within the state 200,000
(b) in the course of inter-State trade 250,000
Applicable tax rates are as follows : -
Case (a) : VAT rate on capital goods 12.5% ; Input tax rate within the state 12.5%
; Output
tax rate within the state 4%; Central sales tax rate 2%
Case (b) : VAT rate on capital goods 4% ; input tax rate within the state 4% ;
Output tax
rate within the state 12.5% ; Central sales tax rate 2%.
*Note The capital goods are not the goods included in the negative list.
(RTP June, 2009)
Ans : Case (a): Computation of the tax liability for the month of October 2008-
Particulars Rs.
Output-VAT on sales within the State @ 4 % 8,000
CST on the inter-state sales @ 2% 5,000
Total tax due 13,000
Less : Input credit on eligible purchases and capital goods i.e. 12.5%
of 220000 (inputs purchased within state and capital goods).
- Inputs purchased from dealer under composition scheme
and high-seas purchases/import of inputs is not eligible for
input credit. 27,500
Balance input-credit to be carried forward 14,500
Case (b) : Computation of the tax liability for the month of October 2008 -
Particulars Rs.
Output-VAT on sales within the State @ 12.5% 25,000
Less : Input-credit on eligible purchases and capital goods i.e.
4% of 220000 (Inputs purchased within state and capital goods).
Inputs purchased from dealer under composition scheme
and high-seas purchases/import of inputs is not eligible for input credit. 8,800
Total tax payable for the month 21,200
Illustration 8
Computation of VAT liability: Calculate the VAT liability for The period Jan. 1,
2009 to Jan. 31,2009 from the following particulars:
Inputs worth Rs. 1,00,000 were purchased within the State. Rs. 2,00,000 worth of
finished goods were sold within the State and Rs. 1,00,000 worth of goods were
sold in the course of inter-State trade. VAT paid on procurement of capital goods
worth Rs. 1,00,000 during the month was at 12.5%. If the input and output tax
rate in the State are 1.5% and 4% respectively and the central sales tax rate is
3%, show the total tax liability under the State VAT law and under the Central
Sales Tax Act (Nov. 08 (NS) 5 Marks)
Ans : Computation of the tax liability for the period Jan. 1, 2009 to Jan. 31, 2009:-
Particulars Rs.
Output-VAT on sales within the State @ 4% 8,000
Less : Input-credit on eligible purchases and capital goods i.e.
12.5% of 200000 (Inputs purchased within state and capital goods) 25,000
Balance input-credit to be carried forward 14,000
Illustration 9
Normal Taxation v. Composition Scheme: Mr. A, a retailer who keeps no
inventories, presents the following expected information for the year -
(1) Purchases of goods :.Rs. 20 lakhs (VAT @ 4%)
(2) Sales (at fixed selling price indl of all taxes) : Rs. 30 lakhs (VAT on sales @
4%).
Discuss whether he should opt for composition scheme if composite tax is 1% of
turnover. Expenses of keeping detailed statutory records required under the VAT-
laws will be Rs. 50,000 p.a., which shall get reduced to Rs. 20,000 if composition
scheme is opted for. Other expenses are Rs. 3,00,000 p.a.
Solution : The cost to the ultimate consumer under two schemes is as under -
Normal Composition
VAT Scheme*
Cost of goods sold (*No credit under composition scheme,
hence, cost of goods sold will be higher) 2,000,000 2,080,000
Add: Costs of maintaining records 50,000 20,000
Add: Normal Expenses 300,000 300,000
TOTAL COSTS 2,350,000 2,400,000
Sales (inclusive of all taxes) 3,000,000 3,000,000
Less : Tax (VAT =30 lakh x 4+104);
(Composite Tax =30 lakh x 1%) 115,385 30,000
Sales (net of taxes) 2,884,615 2,970,000
Profit of the dealer (Sales, net of taxes Total Costs) 534,615 570,000
Conclusion: It is apparent that while cost to ultimate consumer, in both the cases
remains same, the profit of the dealer is higher if the dealer opts for composition
scheme. Hence, composition scheme should be opted.
Illustration 10
Loss of VAT-chain due to composition scheme: Manufacturer A extracted raw
produce X and raw produce Y from mines at Rs. 15,000 and Rs. 20,000
respectively and sold the same at 150% margin to Manufacturer B (VAT rate is 4%
on produce X and 12.5% on produce Y). Manufacturer B is a dealer operating
under composition scheme who is liable to VAT @ 0.4% of turnover. Manufacturer
B of Jaipur used X and Y as raw material; added 100% of cost of raw materials
towards manufacturing expenses and profits and sold the resultant product to
wholesaler C. Wholesaler C sold the same to Retailer D at 25% above cost (VAT
rate is 4%). The retailer D sold the same to a consumer at 20% above cost (VAT
rate is 4%). Show the amount of VAT payable by each person.
Solution: VAT CHART (all amounts in Rs.)
Particulars VAT on sales VAT creditNet VAT
payable
1. Manufacturer A 7,750 No input tax 7,750
2. Manufacturer B ( Opted for Composition
Scheme) 762 No credit 762
3. Wholesaler C 9,525 No credit 9,525
4. Retailer D 11,430 9,525 1,905
Notes :
(A) The VAT liability at each stage is shown below Rs.
Cost to Manufacturer A (15,000 + 20,000) 35,000
Add: Profit of Manufacturer A @ 150% of cost 52,500
Sale price of Manufacturer A 87,500
Add: VAT [4% of (15000 + 150% of 15000) 12.5% of
(20000 + 150% of 20000) 7,750
Raw material Cost to Manufacturer B 95,250
Add: Margin for expenses and profits at 100% of raw material cost 95,250
Sale price of manufacturer B/Cost to C (Composite Tax cannot be recovered)
190,500
Add: Profit margin @ 25% 47,625
Sale price of Wholesaler C 238,125
Add: VAT @ 4% 9,525
Purchase price of Retailer D (inclusive of VAT) 247,650
Cost to retailer D (net of VAT) 238,125
Add : 20% margin of D 47,625
Sale price of retailer D 285,750
VAT @ 4% thereon 11,430
(B) This illustration shows the effect of breakage of chain due to composition
scheme. A single dealer who has opted for composition scheme in the chain of
sale of a product would lead to increase in cost due to no input-VAT credit to
him and no VAT-able invoice issued by hint.
The End

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