Valuation of Free Samples of the products covered under MRP - Board Clarifies
THERE may be situations when goods are not sold at all. They may be cleared for free distribution or cleared as free samples. As excise duty is not on sale, the fact that goods are not sold is immaterial for payment of duty. But as duty is collected on the value when they are sold, what is the value when there is no sale?
Transaction value is when goods are sold. Rule 8 of the new Valuation Rules covers a situation when the goods are not sold but used for consumption in the manufacture of other goods. The law is silent on cases where goods are not sold and not consumed for further manufacture. This was the position in the old rules also.
Then is the only solution to go to Rule 11, i.e. Determination by using reasonable means (the old best judgment)? It appears so. But not quite! Somewhere an opinion got fortified that valuation has to be done under Rule 4. To add to the confusion, came MRP based valuation. Now, how do you determine the value of free samples of a product covered under MRP? Is the MRP the basis for assessment of samples which are not sold and which are not required to show the MRP? Well, that seems to be the judicial as well as Revenue Opinion.
Board had in circular No. dated 25.4.2005, clarified that in the case of free samples, the value should be determined under Rule 4 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000. And this Circular was upheld by the Bombay High Court.
CESTAT in a majority decision had held that even after the pharmaceutical products have been notified for MRP assessment under Section 4A of the Central Excise Act, the assessment of free physician samples of these products, is appropriately required to be done under Rule 4 of the valuation rules by taking into consideration the deemed value under Section 4A(1) notwithstanding the non availability of normal price under Section 4(1)(a) of the Act, ibid. Accordingly, the value for payment of excise duty for physician sample would be the value determined under Section 4A for the similar goods (subject to adjustment for size & pack etc.).
Board now reiterates its stand and clarifies that the CESTAT decision will apply mutatis mutandis, in respect of free samples of other products which are under MRP assessment.
A colleague asks me, “In today's competitive market there are many items which are being given free when consumers buy certain products. For e.g. coconut oil pouch comes free if you buy a tooth paste. Soap goes free with detergent powder etc. In such instances if coconut oil or soap which are assessable under s. 4A are regarded as free samples then how will they assess the value of such goods given free. Is the Circular suggesting that such goods have to be assessed under Rule 4? What if the assessee is not manufacturing such goods but is procuring them in packed condition from the actual manufacturer? Does he have to pay duty on the purchase price i.e. landed cost? We can go on endlessly.”
Another colleague remarked, “It is like marriage of Sec 4A with Sec 4 with Rule 4 as purohit”
Today we carry an article on this issue – PHARMAPHOBIA - please see Guest Column.
CBEC Circular No. 915/05/2010-CX, Dated : February 19, 2010