Fresh Board clarifications – As usual sure to cause litigation
Valuation of free samples – Board takes a U turn – What is the value for payment of excise duty on samples distributed free like Physicians’ samples for example? They are not sold, so there is no transaction value. We will have to go to the Valuation Rules. Rules 4 to 11 deal with determining the value. Just have a look at these provisions in brief in ordinary English.
++ Rule 4: Based on the value of such goods for delivery nearest to the time of removal that is when the value is not known at the time of removal and there is a difference in value between the time of removal of the assessed goods and such goods.
++ Rue 5: For delivery at a place other than place of removal
++ Rule 6: Additional consideration when price is not the sole consideration
++ Rule 7: Clearances from depot, warehouse etc,
++ Rule 8: Not sold but used for captive consumption – 110% of cost of production
++ Rule 9: Sold to or through related persons
++ Rule 10: Sold to or through inter connected undertakings.
++ Rule 11: When all the above methods are not applicable, use reasonable means consistent with the Act and the Rules.
Now where does our sample fit in? Apparently nowhere! The nearest possible rule would be Rule 8 as the goods are not sold. In the old valuation Rules, prior to 1.7.2000, there was a concept of ‘price of comparable goods’. But with the advent of ‘transaction value’, where a different price for each transaction is accepted as assessable value, there is no scope for a comparable price. In my book, “Guide to Excise Valuation” 2nd edition released on 1.3.2002, I had suggested that valuation of samples had to be done under Rule 11 and as per Rule 11, it had to be consistent with the rules and the only option available was Rule 8 and therefore the value had to be 110% of the cost of production. I had suggested in my book,
So accordingly, the position would be that when goods are not sold, the first option is to go to Rule 11, i.e. determine by using reasonable means. But the reasonable means have to be consistent with the principles and provisions of Valuation rules and Sub section (1) of Section 4 of the Act. So it is Rule 8 which speaks of a situation when goods are not sold. Now the present Rule 8 does not have a provision for value of comparable goods. So we are left with only one option, that of 115% (now 110%) of the cost as per Rule 8. And this seems to be the only option as of now.
I was thrilled when Board gave a clarification exactly the way I suggested. Circular No. 643/34/2002 dated 1-7-2002 in para 13 clarified,
Since the goods are not sold Section 4(1)(a) will not apply and recourse will have to be taken to the Valuation Rules. No specific rule covers such a contingency. Except Rule 8 all the other rules cover contingencies where sale is involved in some form or the other. Therefore, the residuary Rule 11 will have to be adopted along with the spirit of Rule 8. In other words, the assessable value would be 115% (now 110%) of the ‘cost of production or manufacture’ of the goods.
This view prevailed for nearly three years – a fairly long time for any clarification. But for some inexplicable reason, the Board thrives on clarifications and the resultant confusion and the inevitable litigation. Now suddenly Board clarifies that valuation for samples has to be done according to Rule 4 of the Valuation Rules. Now see what happens. According to the Board clarification, when samples are cleared, duty has to be paid on the value of such goods that is the main goods and any adjustment due to time difference is permitted. How to calculate this? And what happens if a sample of a product which is yet to be released in the market is cleared? There are no such goods. What is to be the value?
Rule 8 has been a fair proposition. God knows why the Board wants to upset the applecart all of a sudden?
Now does this clarification have retrospective effect and if so how far back do you go? The department is capable of charging suppression of fact to invoke the larger period of limitation. The Show Cause Notice would read something like this,
“as the assessee, while clearing the said samples from 1.7.2002, had suppressed the information that the Board is going to come up with a clarification in 2005 that the value had to be determined under Rule 4 and with an intent to evade duty followed the Board circular No 643 dated 1.7.2002 and determined the value under Rule 8. Therefore the larger period of limitation is invokable and they appear to be liable to a mandatory penalty.”
Board is indeed one solid source sustaining a large number of consultants. Next time you pay duty based on a Board circular, give a notice to the department that you are not liable for future change of opinion by the Board. Then they will go for retrospective amendment of the law.
Valuation when inputs or capital goods are cleared as such - Yet another retrospective clarification - Board clarifies, that when inputs or capital goods are cleared as such under
1. Rule 57AB of Central Excise Rules or
2. Rule 3(4) of the Cenvat Credit Rules 2001 or
3. Rule 3(4) of the Cenvat Credit Rules 2002,
valuation should be as per Rule 3(5) of the Cenvat Credit Rules 2004. Now this Rule does not speak of any valuation. An amount equal to the credit taken is to be reversed. But how on earth can the provisions of Cenvat Credit Rules, 2004 be applicable to Central Excise Rules 1944, Cenvat Credit Rules 2001 & Cenvat Credit Rules 2002? Only the good Board can think of such ingenious methods of taxation. Somebody who was clearing inputs as such in the year 2000 was required to anticipate the Board clarification to be issued in 2005 before paying an amount or reversing the credit.
• As per Rule 57AB of the Central Excise Rules 1944, the value for such clearances had to be determined under Section 4.
• Same was the case under Cenvat Credit Rules 2001.
• But under Cenvat Credit Rules 2002 there was no valuation and an amount equal to the credit taken was to be reversed.
Now the Board wants to apply the present Cenvat Credit Rules to all these earlier rules - obviously with retrospective effect.
Board certainly does not have the power to retrospectively amend the law, however much it wants to usurp the powers of Parliament. The instructions in this circular are going to result in hundreds of audit objections and thousands of Show Cause Notices. Central Excise consultants are assured of buttered bread as long as the Board is active and gives such clarifications. Board had recently asked Commissioners not to issue individual trade notices as they cause confusion. It is high time the FM puts a bar on the Board from issuing clarifications. Interpretation of the law should be left to the field officers and/or the judiciary.
Circular No. , dated 25-4-2005
War is too serious a matter to be left to generals; Excise law is too serious a matter to be left to the Board and its interpretation!