Valuation under

C. Excise Law

Sanjay Dwivedi
Advocate
Mumbai – May 03, 2008

SRD LEGAL SRD LEGAL

Basis for Charging Duty

• Specific Duty: where duty is based on some quantitative measure of

the product, such as volume, weight, length etc.

• Compounded Levy (based on Capacity of Production): In this system

the duty is charged on the basis of some measure of the machines
installed in the factory.

• Duty as a percentage of ‘assessable value’ of the goods: Assessable

Value refers to the value at which duty is assessed.

SRD LEGAL
Value for Assessment

• Tariff Value fixed under Section 3 (2)

• Assessable Value based on Retail Sale Price [Sec 4A]
• Assessable Value based on value of transaction (ad valorem duty)
[Sec 4].

SRD LEGAL
Idea behind Valuation under Section 4

Selling Price
+
Certain other amounts payable Transaction Value
by reasons of or in connection
with the sale Assessable
Value
[At the time & place of
removal] + Additional
Consideration

SRD LEGAL
 Scheme of Section 4

• 4 (1) (a): Conditions under which value shall be the ‘Transaction Value’

• 4 (1) (b): If any of the aforesaid conditions are not fulfilled, value to be
determined in terms of valuation rules.

• 4 (2) Tariff Values fixed under Sec 3 (2) to have overriding effect

• 4 (3) Defines the terms ‘assessee’, ‘related person’, ‘place of removal’, ‘time of
removal’ and ‘transaction value’

SRD LEGAL
Some General Principles

• Each removal is to be assessed as a separate transaction

• Value can be below cost
• Duty is payable by manufacturer, irrespective of whether he is owner of the
goods or not.
• Duty has to be assessed in the condition in which goods are removed
• Deterioration after removal does not affect assessable value

SRD LEGAL
Conditions for adopting ‘Transaction Value’

Value shall be the Transaction Value only if

• The goods are ‘sold’ by the ‘assessee’

• The sale is for delivery at the time and place of removal
• The sale is to non-related buyer
• Price is the sole consideration.

SRD LEGAL
Definition of ‘Transaction Value’ [Sec 4(3)(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.

SRD LEGAL
Elements Transaction Value

 Price actually paid or payable for the goods

 Any amount that the buyer is liable to pay to, or on behalf of, the
assessee
• The above amount is includible only if it is payable by reason of, or
in connection with the sale,

• Time of payment is irrelevant

• Illustrative list of elements includible: 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

 Amounts that are not includible: Duties & Taxes actually paid or payable

SRD LEGAL
By reasons of or in connection with sale

• As condition of sale
• By reasons of sale
• In connection with sale
• In respect of sale
• In relation to sale

SRD LEGAL
Application of Valuation Rules

• The principal method – ‘Transaction Value’

• Transaction Value – Conditional
• Transaction Value to be rejected only if one or more condition not fulfilled
• Valuation Rules to be applied only after Transaction Value is rejected

SRD LEGAL
Conditions for adopting ‘Transaction Value’

Value shall be the Transaction Value only if

• The goods are ‘sold’ by the ‘assessee’

• The sale is for delivery at the time and place of removal
• The sale is to non-related buyer
• Price is the sole consideration.

SRD LEGAL
What is not sale

• Transfer to Depot/ Branch

• Free Samples/ donations/ gifts

• Hypothecation

[Lease or hire purchase is sale under C. Excise. Sale is defined as ‘transfer

of possession of goods ……. for cash or deferred payment or other valuable
consideration’.]

SRD LEGAL
When sale is not at the time and place of removal

• In case of depot sales – depot is the place of removal but ‘time of removal’ is
the time when goods were cleared from factory

• If the contract is for delivery at some place other than place of removal [Say
F.O.R. Destination]

SRD LEGAL
Rule 4: The general rule

Text:
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.

SRD LEGAL
Rule 5: When Sale is for delivery at a place other than ‘place of
removal’

Prescription: Deduct the cost of transportation

• Actual cost of transportation

• Equalized cost of transportation (CAS-5)

SRD LEGAL
Rule 6: When Price is not the sole consideration

Prescription: Add the money value of additional consideration

Additional Consideration includes

(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.
(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.

SRD LEGAL
Additional Consideration

• Cost of material supplied free

• Landed cost
• Copyright charges
• Patterns/ dies/ moulds
• Drawings
• Advance Licence surrendered in favour of seller
• Inspection/ Testing charges
• Advertisement expenses
• Training charges
• Interest on advances

SRD LEGAL
Rule 7: Goods transferred to Depot

• Applies when other conditions of Sec 4(1) (a) are fulfilled [Sale at depot to
unrelated buyer, price being sole consideration)
• Depot is the ‘Place of removal’ [cost of transportation from factory to depot not
deductible]
• Duty to be assessed when the goods are removed from factory [Time of
removal]
• Prescription: Value = normal transaction value prevailing at depot

• Rule 2(b) "normal transaction value" means the transaction value at which the
greatest aggregate quantity of goods are sold;

SRD LEGAL
Rule 8: Captive Consumption

• Captive consumption means – the goods are consumed in the same factory
in which it was manufactured

• Prescription: Value = 110% of cost of production or manufacture of such

goods. [CAS – 4]

SRD LEGAL
Related Person [Sec 4 (3) (b)]

Persons are deemed related if they are

i. They are inter-connected undertakings [Sec 2(g) of MRTP Act, 1969];
ii. They are relatives [Sec 2 (41) of Companies Act, 1956];
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.

SRD LEGAL
Rule 9: Sale to or through related person

• When goods are not sold except to or through a related person [i.e. when
sale is exclusively through related persons]

• Prescription: Value = Normal Transaction Value at which the related person

sells it (at the time of removal) [unrelated buyer – price being sole
consideration]

• If the related person consumes it in the production or manufacture or articles,

value = value under rule 8 [110% of cost]

SRD LEGAL
Related Person

• Relative & Distributor means distributor who is a relative.

• Purchaser on principal to principal basis is not a distributor.
• Only a natural person can be relative. Companies, firms, trusts cannot be
relatives
• Theory of ‘lifting of corporate veil’ can be applied

SRD LEGAL
Rule 10: Interconnected Undertakings

• Based on ownership, control or management: 25% of total controlling power.

• Valuation in similar manner as in rule 9
• Provision does not apply to all Interconnected Undertakings, but only where:
- The buyer is a holding company or subsidiary company of the
assessee; or
- They are related in any of the other three manners.
[In case of sale to any other Interconnected undertaking, the provision
shall not apply]

SRD LEGAL
Rule 10A: Goods manufactured on job-work basis

• Change in law since 01st April 2007. Earlier, value was based on cost
construction method.

• Policy behind prescription: Assess duty as if the principal himself was the
manufacturer liable to pay duty.

• The goods have to be manufactured from inputs/ goods supplied by the

principle (or by someone authorized by him)

• The rule will not apply if merely a few components are supplied free by the
customer.

SRD LEGAL
Rule 11: Residuary Rule

If the value of any excisable goods cannot be determined under the foregoing
rules, the value shall be determined using

• reasonable means
• consistent with the principles and general provisions
• of these rules and
• sub-section (1) of section 4 of the Act.

SRD LEGAL
 Thank You
S. R. Dwivedi
Advocate

9320 456 555/ 2589 2706

srdlegal@gmail.com

SRD LEGAL
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C. Excise, Service Tax, Customs & Foreign Trade
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