Valuation of goods sold through depot - is rule 7 redundant?
1. Central Excise Valuation law has undergone a sea change with effect from July 1, 2000. A new Section 4 was introduced in the Central Excise Act, 1944 (CEA) supported by a new set of valuation rules [Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000]. The earlier concept of arriving at the value for the purpose of levy of excise duty based on the 'normal price in the course of wholesale trade' was replaced by the concept of 'transaction value'. The other significant change was the definition of 'place of removal' was restricted to that of a factory or a warehouse in the new Section 4 (3) (c) of CEA. The depots, consignment agent's premises were excluded from the definition of 'place of removal'. The definition of 'time of removal' was altogether deleted in the new Section 4.
2. In the new valuation rules, Rule 7 was introduced to deduce the value of a transaction from the factory gate to the customers through the depots/consignment agent's premises. The Rule 7 of the new valuation rules is extracted below for ready reference:
"Rule 7. 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 or any other place or premises (hereinafter referred 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."
The concept of 'normal transaction value' was introduced in Rule 7 of the valuation rules. 'Normal transaction value' was defined as the transaction value at which the greatest aggregate quantities of goods are sold from the depot at or about the nearest time to the time of removal of the goods under assessment at the factory gate.
3. Since the normal transaction value of the greatest aggregate quantity was not immediately available for the factory gate sale at the time of removal, the assessees were forced to reconcile the factory gate stock transfer price with the 'normal transaction value' available at that point in time. This leads to a big arithmetic exercise for assessees who had a majority of sales through their depots. It was a mammoth exercise in futility. It normally resulted in payment of differential duty and also file refund claims wherever the 'normal transaction value' was less than the factory gate stock transfer price to a depot.
4. In the year 2003, vide Section 136 of Finance Act 2003 with effect from 14.05.2003, the definition of 'place of removal' in Section 4 (3) (c) of CEA was amended to include depots, consignment agent's premises among other things. The definition of 'time of removal' was also introduced vide a new sub-clause (cc) in sub-section 3 of Section 4. However Rule 7 of the valuation rules remained the same. When we substitute the words 'place of removal' for depot or the premises of a consignment agent, Rule 7 of the valuation rules will read as
"Where the excisable goods are not sold by the assessee at the time and place of removal but are transferred to a "place of removal" (hereinafter referred 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."
5. So it leads to an absurd situation because the value at one 'place of removal' has to be adopted at the other 'place of removal'. So the price at the factory gate can be adopted at the depot and vice versa. The original intention of the Rule 7 was to adopt the normal transaction value of the goods sold at the depot/consignment agent's at the factory gate by factoring in the nearest time. Now with the change in the definition of the 'place of removal' to include depot/consignment agent's premises etc the 'normal transaction value' at the factory gate can also be adopted for the sale at depot. The net result is that as there is no distinction between the factory gate and the depot, in other words, depot being an extension of the factory gate, the transaction value for each removal of goods at the depot or the factory gate shall be distinct from each other. The transaction value at one place of removal need not be adopted at the other place of removal because every transaction value is independent of each other. This leads us to a situation where even the removal of goods from a depot for sale to an independent buyer shall be covered in terms of Section 4(1) (a) of CEA.
6. Therefore, the assessees need not resort to any arithmetic jugglery to arrive at the 'normal transaction value' at the depots and adopt the same for the factory gate sale. In other words, Rule 7 of the valuation rules and the concept of arriving at the 'normal transaction value' have totally become irrelevant with effect from 14.05.2003.
7. However, unfortunately, many stakeholders viz., assessees, departmental officers and even the consultants in the indirect tax domain have failed to understand this significant change brought in by the amendments through Finance Act, 2003 and the consequential redundancy of arriving at the 'normal transaction value' and Rule 7 of the valuation rules for arriving at the value to be adopted for a factory gate sale. The amendments brought in by the Finance Act 2003 puts depot sales on par with the factory gate sale and the transactions at both the ends have to be viewed independently in view of the provisions of Section 4 (1) (a) of CEA.
My friend Santosh Hatwar sent me the above piece. He has a point. What do you think? Mail us your opinion and will CBEC take note?