Chapter 5
VALUATION OF EXCISABLE GOODS

A wide range of the excisable commodities are leviable to ad valorem rates of duty. The valuation of excisable goods is governed by section 4 of the Central Excise Act, 1944 read with the Central Excise (Valuation) Rules, 1975.

Some of the illustrative cases of short levy due to undervaluation are mentioned below :

5.1 Price fixed by the Government - adoption of incorrect value

As per section 4(1)(a)(ii) of the Central Excise Act, 1944, where excisable goods are sold in the course of wholesale trade at a price fixed under any law, then the price so fixed shall be deemed to be the assessable value of these goods.

The Supreme Court in the case of Pyrites Phosphate and Chemicals Limited upheld the Tribunal’s decision that when a price is fixed under Control Order, the assessable value shall be determined on the basis of the price fixed under that Control Order {1996 (88) ELT - A 131}.

(a)    Ministry of Petroleum and Natural Gas had been fixing from time to time different prices for LPG packed domestic, LPG packed non domestic and LPG bulk. The price fixed for LPG bulk was Rs 11601.78 per tonne in March 1994 whereas the price for LPG packed domestic was Rs 5309.19 per tonne. Thus, there was a wide variation in the price of the two categories from time to time.

Eleven assessees, in eight Commissionerates of Central Excise, manufactured and cleared LPG (bulk) to the various depots for refilling. Though the goods were cleared in bulk condition, the assessees paid excise duty on the price applicable to LPG packed domestic, where the price was much lower as compared to LPG bulk, in which condition the goods were actually cleared. The goods were undervalued to that extent. By virtue of the fact that at the time of clearance from the place of manufacture and at the time of paying duty the goods were in bulk condition, the duty should have been paid on the price fixed for LPG bulk. Thus the product was undervalued and resulted in short collection of duty of Rs 194.48 crore between March 1994 and June 1998.

The department issued show cause cum demand notices for Rs 55.11 crore to four assessees out of which, demand of Rs 43.43 crore relating to one assessee had been confirmed in November 1997. Action taken for recovery of duty in the remaining cases was awaited (October 1998).

Reply of the Ministry of Finance had not been received (November 1998).

(b)    The Ministry of Chemicals and Fertilisers fixed maximum price for bulk drug "Ciprofloxacin-HCL" from time to time under Drugs (Price Control) Order,1995.

An assessee, in Hyderabad-I Commissionerate of Central Excise, manufactured and cleared the bulk drug at prices lower than the maximum price fixed and paid duty at the lower price. This was incorrect because as per the provisions of the Central Excise Act, 1944, irrespective of the price charged by the assessee from the buyer, the maximum price fixed under any law for the time being in force would be the assessable value. This resulted in short levy of duty of Rs 3.38 crore during April 1996 to December 1997.

On being pointed out (January 1998), the department intimated (April 1998) that a show cause notice demanding duty of Rs 4.49 crore for the period from April 1996 onwards had been issued in February 1998.

Reply of the Ministry of Finance had not been received (November 1998).

5.2 Additional considerations not included in the assessable value

(i) Distribution charges

The Supreme Court, in the case of Bombay Tyre International, held in October 1983 that the expenses incurred on account of the several factors which have contributed to the value of the product upto the date of sale are to be included in the assessable value. This was reinforced by the judgement of the Supreme Court in the case of Madras Rubber Factory Limited {1995 (77) ELT 433} upholding the view that the expenses incurred in maintaining and running the sale depots (distribution expenses) cannot be deducted from the assessable value.

An assessee, in Raipur Commissionerate of Central Excise, engaged in the manufacture of various iron and steel products, undertook sale of their excisable goods through depots. It was noticed (November 1995) that the assessee had collected distribution charges from the buyers relating to expenses incurred towards running and maintenance of stock yards/depots, which were not included in the assessable value, resulting in short levy of duty of Rs 13.86 crore during March 1993 to January 1995.

In subsequent audit, it was noticed (February 1997) that a show cause cum demand notice for Rs 18.67 crore covering the period from March 1992 to January 1995 was issued by the Commissioner of Central Excise in November 1996 which was pending adjudication. Further progress was awaited (June 1998).

Reply of the Ministry of Finance had not been received (November 1998).

(ii) Interest on deposits

The Ministry of Finance clarified on 13 June 1990 that interest accrued on advance deposits made by customers should be included in the assessable value since the manufacturer would have incurred liability to pay interest had he borrowed from banks and, therefore, it was not necessary to establish separately the nexus between the deposits and the price.

Five assessees, in Delhi II, Delhi III and Indore II Commissionerates of Central Excise, collected deposits/advances from the buyers and utilised the money as working capital. The element of interest on money advanced had a direct nexus with the price charged from the customers. Non inclusion of interest earned/accrued resulted in undervaluation of goods and consequent short levy of duty of Rs 5.43 crore during April 1994 and March 1997.

On being pointed out between February and December 1997, the department accepted the objection in the case of three assessees and intimated recovery/confirmation of demand of Rs 0.10 crore. In the case of fourth assessee, it stated that show cause notice issued was pending adjudication. In the case of the fifth assessee, the department stated (October 1997) that a stand was taken to include the value of notional interest on security deposit in the assessable value, and this was one of the grounds for provisional assessment.

Reply of the Ministry of Finance had not been received (November 1998).

(iii) Escalation charges

According to the circular of the Central Board of Excise and Customs dated 4 October 1980, in the case of running contracts, where there is a price variation clause, the goods should be provisionally assessed at the time of clearance and final assessment be made as soon as the assessee submits his bills for the escalated value, without waiting for their acceptance by the customers.

Twenty seven assessees, in Aurangabad, Chandigarh II, Delhi III, Jaipur II, Mumbai III, Pune I and II Commissionerates of Central Excise, either received the enhanced price or raised demands on the customers for escalation of prices but duty due was not paid. This resulted in short levy of duty of Rs 4.45 crore between April 1992 and April 1997.

On being pointed out between August 1995 and January 1998, the department stated (between July 1997 and April 1998), that while duty of Rs 0.64 crore had been recovered in seven cases, in fifteen cases recovery could not be effected as the relevant demands had become time barred. Reply in the remaining five cases had not been received (June 1998).

Reply of the Ministry of Finance had not been received (November 1998).

(iv) Freight charges and surcharges

(a)    Seven assessees, in Calcutta I, Chandigarh II, Cochin, Hyderabad I and Patna Commissionerates of Central Excise, engaged in the manufacture/procurement of various petroleum products, had incurred certain expenses such as transportation charges, state surcharges, retail pump outlet charges etc, between the place of procurement and the place of clearance of final product for sale. While clearing the goods for sale, the assessees recovered these expenses/charges from the purchaser but did not include them in the assessable value of the product. This resulted in undervaluation of the products and consequential short levy of duty of Rs 2.30 crore between March 1994 and November 1997.

On being pointed out between April 1997 and March 1998, the department admitted (between May 1997 and January 1998) the objection in six cases and raised demand of Rs 1.77 crore out of which demand of Rs 0.43 crore had been recovered.

The Ministry of Finance accepted the objection in one case (October 1998). Reply in the remaining cases had not been received (November 1998).

(b)    An assessee, in Delhi III Commissionerate of Central Excise, engaged in the manufacture of ‘Motor cars and other motor vehicles’ collected freight charges from the customers in excess of the actual expenditure on freight. The excess collection being an additional consideration, was required to be included in the assessable value. Non inclusion in the assessable value of excess freight so collected, resulted in short levy of duty of Rs 1.65 crore during the period April 1994 to March 1995.

On being pointed out (August 1995), the department contended (April 1996) that the assessee had only gained a surplus amount on account of transportation charges. The reply of the department is not tenable as the surplus amount was an additional consideration flowing from the buyer to the assessee which was to be included in the assessable value in terms of rule 5 of the Central Excise Valuation Rules, 1975, which requires that the money value of any additional consideration, flowing directly or indirectly from the buyer, shall be included in the assessable value of goods, if price is not the sole consideration.

Reply of the Ministry of Finance had not been received (November 1998).

(v) Value of waste/scrap retained

An assessee, in Calcutta II Commissionerate of Central Excise, manufactured M.S. twisted rod (on fabrication contract basis) out of raw materials supplied free of cost by the customer. Waste and scrap generated during the process of manufacture of finished goods, was not returnable to the customer and was infact sold by the assessee in the market at Rs 7500 per tonne. However, while computing the assessable value of the finished goods, the sale value of such waste and scrap was not added. The benefit thus reaped by the assessee as a profit was in the nature of an additional consideration flowing indirectly from the customer and was accordingly liable to be included in the assessable value. As this was not done, there was a short levy of duty of Rs 56.97 lakh during April 1994 to July 1997.

On being pointed out (July 1995), the department contended (August 1996) that as per contract, the waste and scrap which arose during the manufacture of finished goods belonged to the processor company.

The department’s contention is not acceptable since retention of waste and scrap valuing Rs 3.80 crore was an additional consideration which would have been taken into account while fixing the processing charges at a lower value.

Reply of the Ministry of Finance had not been received (November 1998).

5.3 Inadmissible deductions allowed from assessable value

(i) Duty element on inputs

The Supreme Court in the case of Kirloskar Brothers Limited {1992 (59) ELT 3 (SC)} held that while abatement of duty of excise is allowable for determining the assessable value of the goods being assessed, the excise duty paid on inputs/raw materials is not deductible from the assessable value. The Tribunal in the case of Incab Industries {1990 (45) ELT 342 (T)} has held that Modvat availed do not automatically reduce the assessable value under section 4 of the Central Excise Act, 1944.

(a)    Three assessees, in Kanpur and Vadodara Commissionerates of Central Excise, manufactured pre-stressed/B.G. monoblock concrete sleeper and electrical conductor and supplied the product to Railways and various State Electricity Boards on contract price. These assessees cleared their product at the assessable value after deduction of Modvat credit availed. It was also noticed that the assessees were passing on the Modvat credit to the purchaser. The exclusion of Modvat credit from assessable value was incorrect and resulted in short levy of duty of Rs 5.07 crore between April 1992 and March 1996.

On being pointed out (April 1997), the department contended (between June 1996 and December 1997) that as the goods were cleared at a contract price, the judgement of Supreme Court was not applicable. The department however issued show cause cum demand notice for Rs 5.08 crore in two cases.

The departments contention is not acceptable in view of aforesaid decision of the Supreme Court and further section 4 does not permit abatement of duty paid on inputs.

Reply of the Ministry of Finance had not been received (November 1998).

(b)    Five assessees, in Bangalore (1) and Chandigarh (4) Commissionerates of Central Excise, engaged in the manufacture of high density polyethylene woven sacks, viscose yarn and acrylic yarn, took Modvat credit of duty paid on inputs, which were used in the manufacture of intermediate excisable products. However, while determining the assessable value of intermediate excisable goods on cost basis, the assessees excluded the element of duty paid on the raw materials. The exclusion of the element of excise duty paid on the inputs in the cost data, led to undervaluation of the goods and consequential short levy of duty of Rs 1.16 crore during the period October 1994 to July 1995.

On being pointed out between September 1996 and April 1997, the Ministry of Finance confirmed (November 1998) the facts in one case. Reply in the remaining cases had not been received (November 1998).

(ii) Trade discount

As per section 4(4)(d)(ii), value in relation to any excisable goods does not include trade discount allowed in accordance with the normal practice of the wholesale trade.

An assessee, in Allahabad Commissionerate of Central Excise, engaged in the manufacture of polyester filament yarn had been claiming trade discount from the assessable value without actually passing it on to the buyers which was incorrect. As records relating to the details of the discount so claimed were not made available during audit (January 1996), short levy on this account could not be quantified. While pointing out the omission, the department was asked (April 1996) to work out the short levy since August 1995 under intimation to Audit. Accordingly, show cause notices for Rs 3.07 crore for the period September 1995 to March 1996 were issued during April 1996 to August 1996 by the department, out of which demand of Rs 2.68 crore was subsequently (June and July 1997) confirmed.

The Ministry of Finance confirmed the facts in November 1998.

(iii) Dealers commission

As per decision of the Supreme Court in the case of Seshasayee Paper Mills {1990 (47) ELT 202 (SC)}, commission paid to selling agents is not deductible from the assessable value as a trade discount because such a commission is paid to an agent for the services rendered by him for procuring orders. In the case of Kirloskar Brothers {1992 (59) ELT 3 (SC)}, Supreme Court held that higher discounts given to some dealers in consideration of an obligation to undertake after sale services is not deductible while determining the assessable value.

Five assessees in Delhi I, Delhi II, Hyderabad II and Meerut I Commissionerates of Central Excise, engaged in the manufacture of various excisable goods, were selling their products through dealers/distributors, who were allowed commission/discount. Such commission/discount was deducted from assessable value of the products which was incorrect. This resulted in short levy of duty of Rs 2.29 crore during April 1992 to August 1997.

On being pointed out between August 1993 and August 1998, the department contended (May 1997) in one case that dealers margin was not includible as they were independent buyers and sales were at arm’s length and the expenses incurred by them could not be said to have been incurred by the assessee. In the other case, it contended (October 1997) that the dealers were different class of buyers and the Supreme Court decision in the case of Kirloskar Brothers was not applicable.

The reply of the department is not tenable as the after sale services and advertisement charges had been paid as a part of dealer’s commission as per sales agreement to promote the marketability of the article, and were thus includible in the assessable value.

Reply in the remaining three cases had not been received (November 1998).

5.4 Incorrect computation of assessable value

The Supreme Court in the case of Bombay Tyre International Limited had held that expenses incurred on account of several factors including after sale service which contribute to the enhanced value of the excisable goods are liable to be included in the assessable value.

(i) Value of tool kits not included

The Tribunal in the case of Bajaj Auto Limited {1996 (88) ELT 355 (T)} held that tool kits supplied alongwith the motor vehicles are input and Modvat credit is admissible. In view of this, the value of tool kits is includible in the assessable value of the final product, alongwith which it is cleared.

An assessee, in Delhi III Commissionerate of Central Excise, engaged in the manufacture of motor vehicles of heading 87.03 was clearing the tool kits and jack assemblies with every vehicle without including their cost in the assessable value, which was incorrect. This resulted in short levy of duty of Rs 4.31 crore during 1995-96 and 1996-97.

On being pointed out (January and December 1997), the department stated (March 1997), that value of tool kits and jack assemblies was not included as Modvat credit on these was not availed of by the assessee. The plea of the department is not acceptable as the cost of tool kits and jack assemblies was required to be added in the assessable value of the motor vehicles in view of the Supreme Court/Tribunals decision supra. Further, the material fact that Modvat credit on tool kits and jack assemblies was not availed by the assessee is not relevant for the purpose of determination of assessable value.

Reply of the Ministry of Finance had not been received (November 1998).

(ii) Value of raw materials/inputs

In the case of Burn Standard Company Limited {1992 (60) ELT 671}, it was held on 16 July 1991 by the Supreme Court that the value of free items supplied by Railways for the manufacture of wagons should be included in the assessable value of the wagons manufactured.

Nine assessees, in Delhi III, Guntur, Hyderabad I, II, III and Pune I Commissionerates of Central Excise, received certain raw materials/inputs free of cost from the buyers of the final products. The assessees cleared the final products to the suppliers of raw materials on payment of duty on contract prices excluding the value of input materials supplied free of cost. This resulted in undervaluation of excisable goods and consequent short levy of duty of Rs 3.49 crore between July 1992 and November 1997.

On being pointed out (between December 1994 and January 1998), the department intimated (between March 1996 and February 1998) recovery of Rs 64.78 lakh in three cases and issue of show cause notice in the fourth case. In the two cases it contended that they were seized of the matter even before audit raised the issue in December 1994/November 1996 and in other two cases, demand was not raised because of Andhra Pradesh High Court decision of October 1984 in the case of Mysore Structurals Limited wherein it was held that the value of inserts supplied free of cost by railways was not to be included in the value of sleepers.

The reply of the department is not acceptable as out of the two cases in which the department contended that they were aware of the undervaluation, in one case, no show cause notice was issued and in the other case, the show cause notice was issued only in January 1995, after audit raised the point in December 1994. Further this case was adjudicated by the department in January 1997 holding that the decision of the Apex Court in Burn Standard case was binding on revenue. Action for demanding duty was also initiated by issuing show cause notices in two other cases on the basis of audit observations. This supports the audit’s point of view that the cost of free supplied items was includible in the assessable value of the finished products.

Department’s reply in the ninth case and Ministry’s reply in all cases had not been received (November 1998).

(iii) Value of dies not included

Two assessees, in Mumbai VI and Pune I Commissionerates of Central Excise, manufactured parts of refrigerators and motor vehicles with the dies and tools supplied by the buyer free of cost. The cost of the dies and tools was not included in the assessable value of the final products. This resulted in short levy of duty of Rs 79.92 lakh during April 1994 to March 1997.

On being pointed out (October 1997 and May 1998), the department, in one case contended (October 1997) that the matter was already under investigation. Further progress had not been received (November 1998). Reply in the second case had not been received.

Reply of the Ministry of Finance had not been received (November 1998).

5.5 Incorrect valuation of goods manufactured at site

The Supreme Court in the case of Narne Tulaman Manufacturer (P) Limited {1988 (38) ELT 566} held that assembly of various duty paid components at site, bringing out a different product amounted to manufacture and the mere fact that the manufacturer bought out certain parts and manufactured certain parts and paid duty on manufactured parts would not change the position, because parts and products are separately dutiable.

(a)    An assessee, in Ahmedabad II Commissionerate of Central Excise, entered into an agreement with Orissa Power Generation Corporation Limited for supply of coal handling equipment. For the manufacture of complete machinery, the assessee manufactured some parts in the factory and the rest purchased/imported, which were supplied at site. The assessee did not include the value of purchased/imported parts in the assessable value of coal handling equipment. This resulted in short levy of duty amounting of Rs 3.34 crore during 1995-96.

On being pointed out (June 1996), the department stated (February 1998) that while the demand of Rs 6.81 crore (including penalty) from November 1992 to April 1994 had been confirmed in December 1997, show cause notice for duty of Rs 3.34 crore for the year 1995-96 was under consideration.

(b)    An assessee, in Meerut Commissionerate of Central Excise, entered into contract with the customers for manufacture and supply of heavy electrical equipments like Turbo Generator Sets (chapter 85) at the customer's site. The parts and components required for the manufacture of the complete machinery were partly manufactured by the assessee in his factory and partly bought out from the market but value of the bought out items, testing and other service charges recovered from customers was also not included in the assessable value. This resulted in short levy of Rs 84.87 lakh during 1993-94 and 1994-95.

On being pointed out (August 1995), the department contended (August 1996) that in view of Tribunal's decision in case of Diamond Clock Manufacturing Company Limited {1988 (34) ELT 662 (T)}, value of bought out items were not includible in the assessable value. However, it was subsequently stated (February 1998) that protective demands were under issue.

Reply is not tenable in view of Supreme Court’s decision mentioned above as the expenditure on bought out items, testing and other services were incurred prior to sale of the goods and those expenses enriched the value of goods and were essential for the marketability of the goods.

Reply of the Ministry of Finance had not been received (November 1998).

5.6 Incorrect adoption of assessable value of goods manufactured on behalf of others

An assessee, in Hyderabad Commissionerate of Central Excise, entered into an agreement with another manufacturer who was the owner of brand name 'Robin Blue'. In terms of agreement, brand name owner supplied the manufactured product Robin Blue in bulk, cartons, labels to the assessee and the assessee after repacking in small packs of marketable standard sizes of 100 gms, 200 gms handed them over to the sales depot of the brand name owner in Hyderabad. The factory gate of the assessee was treated as place of removal and duty was paid on the assessable value of the goods which was determined on the cost of production plus job charges. The goods were however sold at a much higher price from the sales depot. The variation in the sale price from depots of brand name owners and the value at the time of clearance ranged from Rs 31 to 93 per kilogram. Incorrect adoption of lower assessable value resulted in short levy of duty of Rs 3.73 crore during April 1995 to June 1997.

On being pointed out (July 1997), the department contended (March 1998) that the assessee was an independent job worker and hence the valuation of goods manufactured on job work basis were to be done under rule 6(b) of the Central Excise Valuation Rules, 1975, as per the Central Board of Excise and Customs circular of 14 October 1996.

The reply of the department is not tenable as in terms of section 4(1)(a), the principal manufacturer (viz. brand name owner) was the assessee in view of the fact that (i) he manufactured goods in bulk; (ii) retained the ownership of goods right from bulk packs till clearance in small packs; (iii) sold in the wholesale market through his depots and (iv) wholesale price for the goods was available. Further the valuation of goods on cost of production plus job charges under rule 6(b) was not correct as this rule was operative only if the normal price of the goods under section 4(1)(a) and rule 4 and 5 of Central Excise Valuation Rules, 1975 was not ascertainable. The value under section 4(1)(a) and rule 4 of Central Excise Valuation Rules, 1975 in this case was clearly available, being the sale price from depots.

While the reply of the Ministry of Finance had not been received (November 1998), audit recommends that this consumer product be brought under ‘MRP based assessment’ under section 4A of the Central Excise Act, 1944.

5.7 Incorrect computation of assessable value of goods captively consumed

Where excisable goods are wholly consumed within the factory of production or in any other factory of the same manufacturer, the assessable value is to be determined under section 4(1)(b) read with rule 6 (b) of the Central Excise Valuation Rules, 1975, on the basis of value of comparable goods or cost of production if the value of comparable goods is not ascertainable. The Central Board of Excise and Customs also issued instructions in October 1975 that the data for determining the value on cost basis should be based on cost data relating to the period of manufacture and if such data is not available at the time of assessment, duty should be levied provisionally and finalised when data for the relevant period becomes available.

(a)    An assessee, in Chennai Commissionerate of Central Excise, cleared ‘Auto engine assembly’ to their branch factories for captive consumption on payment of duty on the value adopted on cost construction method. The assessee was also clearing the same ‘Auto engine assembly’ to the dealers at a much higher price. Both the products were same except that the former was cleared without two elements namely ‘Air filter’ and ‘Fan assembly’. Therefore, comparable price should have been adopted by reducing the value of two elements contained in the later product cleared to the dealer.

On being pointed out (August/November 1996), the Ministry of Finance admitted (March 1998) the objection and intimated that a demand of Rs 2.82 crore for the period February 1996 to August 1997 had been confirmed and a penalty of Rs 40 lakh also imposed.

(b)    Three assessees, in Aurangabad and Calcutta I Commissionerates of Central Excise, engaged in manufacture of various excisable goods, were allowed to clear their final products to their sister units for captive consumption on payment of duty on the basis of cost of production.

Test check showed that while arriving at the assessable value, cost data for the relevant period was not adopted in one case, whereas in the second case profit margin and overhead expenses were not included in the assessable value and in the third case, profit margin was added to the assessable value at a lower rate. This resulted in short levy of duty of Rs 2.59 crore during the period April 1995 to October 1997.

On being pointed out between April 1997 and June 1998, the department recovered duty of Rs 1.21 crore in two cases but in one of these two cases it contended that the facts were already in their knowledge. Reply in the third case had not been received.

The department's reply is not tenable as no show cause notice was issued to safeguard the Government revenue till this was pointed out in audit.

Reply of the Ministry of Finance had not been received (November 1998).

5.8 Incorrect adoption of assessable value of goods sold to related person

As per section 4 of the Central Excise Act, 1944, where sales are routed through related person, the price at which such goods are sold by the related person, shall be the assessable value for the purpose of payment of duty.

An assessee, in Aurangabad Commissionerate of Central Excise, manufactured ‘Air coolers’ with the brand name of other company and sold the entire production to that company who undertook marketing and incurred all sale promotion expenses. Duty was, however, being paid on lower agreed price. The assessee and the brand name owner company were related persons in as much as one of the directors was common for both the companies. The sale, therefore, could not be treated as sale to a buyer in the course of wholesale trade where price was the sole consideration.

On being pointed out (August 1996), the department stated (February 1998) that show cause notice demanding duty of Rs 81.54 lakh for the period August 1993 to March 1997 had since been issued.

Reply of the Ministry of Finance had not been received (November 1998).

5.9 Other cases

In fifty other cases, the Ministry of Finance/department while accepting short levy of duty of Rs 3.06 crore reported recovery of Rs 1.93 crore in forty two cases till November 1998.