Analysis of the Valuation Rules :
The salient features of the Valuation Rules are as under: –
According to rule 3 the valuation rules is invokable only when the condition in section 4(1)(b) is satisfied that is to say when the valuation is not possible as per section 4(1)(a). When the goods are clearly valued according to section 4(1)(a) itself then there is no quest ion of applying the valuation rules.-
Rule 4 requires adjustment for the differences in the time of removal and the time of delivery when the delivery time is different from the time of removal. This rule will apply in situations where the asseseee does not sell goods at the time of removal of goods. Thus, situations like removal of free samples or free replacement under warranty claims will be covered under this rule. Valuation of such free samples or replacement will be based on price of identical goo ds sold by the assessee near about the time of removal of such free samples or replacements.
Valuation of samples: Value of samples distributed free as part of marketing strategy or as gifts or donations shall be determined under Rule 4 of Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 [Circular No. 813/10/2005-CX dated 25.04.2005].
Rule 5 provides for the valuation when all the conditions as per section 4(1)(a) which are mentioned earlier are fulfilled except for the condition that the place of delivery is different from the place of removal. In such circumstances the rule allows the adjustment for the transportation from the place of removal to the place of delivery. The actual transportation cost may be excluded on an averaged or equalized basis. For this purpose, the average transportation cost shall be computed in accordance with the generally accepted principles of costing. Where necessary, the assessee may be asked to furnish certification from a Cost Accountant, inter alia, showing the computations separately in respect of the exempted, non – excisable and specific rated products and the basis for apportionment for arriving at the average cost of transportation.
However, no deduction shall be allowable whether on actual or equalized freight basis, for the cost of transportation from the factory to the point of removal (if other than the factory gate). Since as per the amended section 4, “place of removal” shall include a depot, the premises of the consignment agent as well as any other place or premises from which the goods are to be sold after their clearance from the factory, it may be noted that deduction in respect of the transportation cost from the factory premises to the depot or to any other place of removal shall not be allowed.
In other words, the deduction of average freight or actual freight is only in respect of cost of transportation beyond the place of removal when the goods are sold for delivery at a place other than the place of removal. In case of a depot, the cost of transportation upto the point of depot or any other place from where the goods are sold will continue to be included.
Cost of transportation when vehicle is owned by the manufacturer: In cases where the vehicle is owned by the manufacturer, the cost of transportation can be calculated through costing method following the accepted principles of costing. A cost certificate from a certified Cost Accountant/Chartered Accountant/Company Secretary, may be accepted. The cost of transportation should, however, be separately shown in the invoice [Circular No.643/34/2002 CX dated 1st July 2002]
Cost of return fare not to be added for determining value: It has been clarified vide Circular No. 923/13/2010 – CX dated 19.05.2010 that cost of return fare of vehicles is not required to be added for determining value.
Rule 6 takes up another condition and continues to say that other conditions as said above are being fulfilled except for the condition of consideration to be received for such goods. If the price received is not the sole consideration, then the rule requires to add the value of the additional consideration whether directly or indirectly received (not necessarily from the buyer, it may be received even from the third party but which should have relation with the goods being transferred) to the transaction value.
Where price is not the sole consideration for sale of such excisable goods and they are sold by the assessee at a price less than manufacturing cost and profit, and no additional consideration is flowing directly or indirectly from the buyer to such assessee, the value of such goods shall be deemed to be the transaction value.
In Explanation 1 to Rule 6 it is said that when any goods or services are given by the buyer free of cost or at concessional price, the value of such goods or service or the concession so received may be added or apportioned (in case such goods or service is used for the manufacture of more than one product) and should be included in the value of the finished goods. The examples given in the said explanation as to the goods and services are :
(a) value of materials, components, parts and similar items relatable to such goods;
(b) value of tools, dies, moulds, drawings, blue prints, technical maps and charts and similar items used in the production of such goods;
(c) value of material consumed, including packaging materials, in the production of such goods;
(e) 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
Example:
1. A sells goods to B who supplies some raw materials free of cost to facilitate the manufacture process. The additional consideration represented as free raw materials has to be added in terms of Rule 6.
2. If X, a manufacturer, receives a subsidy from the buyer even if it is under the policy of Government it will be treated as additional consideration. However, if X himself manufactures patterns and clears them with castings and duty is discharged on transaction value rule 6 is not applicable.
3. X, a manufacturer, bills ` 5 lakhs towards design charges and shows the same separately in the invoice along with the price of the material A. In the given case, the value of the design charges will be included in the assessable value of material A only if such design charges are related to the material A and not merely because it is shown in the invoice along with material A.
Explanation 2 to Rule 6 clarifies that where an assessee receives any advance payment from the buyer against delivery of any excisable goods, no notional interest on such advance shall be added to the value unless the Central Excise Officer has evidence to the effect that the advance received has influenced the fixation of the price of the goods by way of charging a lesser price from or by offering a special discount to the buyer who has made the advance deposit.
Rule 7 says that in cases where the goods are not sold at the factory gate or at the warehouse but they are transferred by the assessee to his depots or consignment agents or any other place for sale, the assessable value in such case for the goods cleared from factory/warehouse shall be the normal transaction value of such goods at the depot, etc. at or about the same time at which the goods as being valued are removed from the factory or warehouse.
It may be pertinent to take note of the definition of “normal transaction value” as given in the valuation rules. What it basically means is the transaction value at which the greatest aggregate quantity of goods from the depots etc. are sold at or about the time of removal of the goods being from the factory/warehouse. If, however, the identical goods are not sold by the assessee from depot/consignment agent‘s place on the date of removal from the factory/warehouse, the nearest date/time on which such goods were sold or would be sold shall be taken into account.
In either case if there are series of sales at or about the same time, the normal transaction value for sale to independent buyers will have to be determined and taken as basis for valuation of goods at the time of removal from factory/warehouse. It follows f rom the Valuation Rules that in such categories of cases also if the price charged is with reference to delivery at a place other than the depot, etc. then the actual cost of transportation will not be taken to be a part of the transaction value and exclusion of such cost allowed on similar lines as discussed earlier, when sales are effected from factory gate/warehouse.
Where the valuation in the above discussed manner is not possible, the assessee may opt for provisional assessment and discharge the duty at estimated values. At periodic intervals the same should be adjusted for actual values.
Greatest aggregate quantity: Circular No.643/34/2002 CX dated 1st July 2002 has clarified inter alia that with reference to the term “greatest aggregate quantity” the time period should be taken as the whole day and the transaction value of the “greatest aggregate quantity” would refer to the price at which the largest quantity of identical goods are sold on a particular day, irrespective of the number of buyers.
In case the “normal transaction value” from the depot or other place is not ascertainable on the day identical goods are being removed from the factory/warehouse, the nearest day when clearances of the goods were affected from the depot or other place should be taken into consideration
Example: Goods are transferred from Chennai factory to Bangalore branch on 17.3.20XX. The normal transaction value at Bangalore branch on 17.3.20XX is to be adopted. If there is no such value available for 17.3.20XX, the transaction value at the nearest time, for instance, 16.3.20XX can be adopted.
Rule 8 provides to value goods which are captively consumed on cost construction method. The assessable value of captively consumed goods is taken at 110% of the cost of manufacture of goods even if identical or comparable goods are manufactured and sold by the same assessee. A margin of 10% by way of profit etc. is prescribed in the rule itself for ease of assessment of goods used for captive consumption. This rule is applicable irrespective of whether the whole or a part of the clearances of manufactured goods are captively consumed.
The Supreme Court in CCE v. Cadbury India Ltd. 2006 (200) ELT 353 (SC) has held that intermediate products (milk crumbs, refined milk chocolate and four other intermediate products) captively consumed in own factory is neither sold nor marketable and therefore, advertising, insurance and other expenses of factory which produces final product (chocolates) are not includible for valuation of intermediate products i.e., for ascertaining the cost of production.
Cost of production to be computed as per CAS-4: CBE&C, vide Circular No. 692/8/2003 dated 13-2-2003, has clarified that for the purpose of valuation of excisable goods in case of captive consumption as per Rule 8 of Central Excise Valuation Rules, 2000, calculation of cost of production should be as per CAS-4 issued by Institute of Cost Accountants of India. Cost Accounting Standard – 4 is given below in a summarized form.
Cost of production will include various cost components as defined in Cost Accounting Standard-1 (‘Classification of Cost‘ – CAS-1). The various cost components are:
| Direct Material Cost | Prime Cost | Cost of Production | Cost of Sales |
| + | + | + | + |
| Direct Labour Cost | Production Overheads | Selling Cost | Profit |
| + | + | + | + |
| Direct Expenses | Administration Overheads | Distribution Cost | Selling Price |
| = | + | = | |
| PRIME COST | Research & Development Expenses (Apportioned) | COST OF SALES | |
| = | |||
| Cost of Production |
Cost of Production: Cost of production shall consist of Material Consumed, Direct Wages and Salaries, Direct Expenses, Works Overheads, Quality Control cost, Research and Development Cost, Packing cost, and Administrative Overheads relating to production. To arrive at cost of production of goods dispatched for captive consumption, adjustment for Stock of work-in-Process, finished goods, recoveries for sales of scrap, wastage etc shall be made.
Material Consumed shall include materials directly identified for production of goods such as indigenous materials, imported materials, bought out items, self manufactured items, process materials and other items
Cost of material consumed shall consist of cost of material, duties and taxes, freight inwards, insurance, and other expenditure directly attributable to procurement. Trade discount, rebates and other similar items will be deducted for determining the cost of materials . Cenvat credit, credit for countervailing customs duty, Sales Tax set off, VAT, duty draw back and other similar duties subsequently recovered/ recoverable by the enterprise shall also be deducted.
Direct wages and salaries shall include house rent allowance, overtime and incentive payments made to employees directly engaged in the manufacturing activities.
Direct wages and salaries include fringe benefits such as contribution to provident fund and ESIS, bonus/ex-gratia payment to employees, provision for retirement benefits such as gratuity and superannuation, medical benefits, subsidised food, leave with pay and holiday payment, leave encashment and other allowances such as children‘s education allowance, conveyance allowance which are payable to employees in the normal course of business etc.
Direct expenses are the expenses other than direct material cost and direct employees costs which can be identified with the product.
Direct expenses include cost of utilities such as fuel, power, water, steam etc, royalty based on production, technical assistance/know –how fees, amortized cost of moulds, patterns, patents etc, job charges, hire charges for tools and equipment, and charges for a particular product designing etc.
Works overheads are the indirect costs incurred in the production process. Works overheads include consumable stores and spares, depreciation of and machinery, factory building etc, lease rent of production assets, repair and maintenance of plant and machinery, factory building etc, indirect employees cost connected with production activities, drawing and designing department cost., insurance of plant and machinery, factory building, stock of raw material & WIP etc., amortized cost of jigs, fixtures, tooling etc and service department cost such as tool room, engineering & maintenance, pollution control etc.
Quality control cost is the expenses incurred relating to quality control activities for adhering to quality standard. These expenses shall include salaries & wages relating to employees engaged in quality control activity and other related expenses.
Research and development cost incurred for development and improvement of the process or the existing product shall be included in the cost of production.
Administrative overheads in relation to production activities shall be included in the cost of production. Administrative overheads in relation to activities other than manufacturing activities e.g. marketing, projects management, corporate office expenses etc. shall be excluded from the cost of production.
Packing cost includes both cost of primary and secondary packing required for transfer/ dispatch of the goods used for captive consumption. If product is transferred/dispatched duly packed for captive consumption, cost of such packing shall be included.
Overheads shall be analysed into variable overheads and fixed overheads. The variable production overheads shall be absorbed in production cost based on actual capacity utilisation. The fixed production overheads and other similar item of fixed costs such as quality control cost, research and development costs, administrative overheads relating to manufacturing shall be absorbed in the production cost on the basis of the normal capacity or actual capacity utilization of the plant, whichever is higher. Normal Capacity is the production achieved or achievable on an average over a period or season under normal circumstances taking into account the loss of capacity resulting from planned maintenance (CAS-2).
Stock of work-in-progress shall be valued at cost on the basis of stages of completion as per the cost accounting principles. Similarly, stock of finished goods shall be valued at cost. Opening and closing stock of work-in-progress shall be adjusted for calculation of cost of goods produced and similarly opening and closing stock of finished goods shall be adjusted for calculation of goods despatched. In case the cost of a shorter period is to be determined, where the figures of opening and closing stock are not readily available, the adjustment of figures of opening and closing stock may be ignored.
In case joint products are produced, joint costs are allocated between the products on a rational and consistent basis. In case by-products are produced, the net realisable value of by-products is credited to the cost of production of the main product.
For allocation of joint cost to joint products, the sales values of products at the split off point i.e. when the products become separately identifiable may become the basis. Some other basis may also be adopted. For example, in case of petroleum products, each product is assigned certain value based on its certain properties, may be calorific value and these values become the basis of apportionment of joint cost among petroleum products.
The production process may generate scrap or waste. Realized or realizable value of scrap or waste shall be credited to the cost of production. In case, scrap or waste does not have ready market and it is used for reprocessing, the scrap or waste value is taken at a rate of input cost depending upon the stage at which such scrap or waste is recycled. The expenses incurred for making the scrap suitable for reprocessing shall be deducted from value of scrap or waste.
Miscellaneous income relating to production shall be adjusted in the calculation of cost of production, for example, income from sale of empty containers used for despatch of the captively consumed goods produced under reference.
Inputs received free of cost: In case any input material, whether of direct or indirect nature, including packing material is supplied free of cost by the user of the captive product, the landed cost of such material shall be included in the cost of production.
The amortization cost of moulds, tools, dies & patterns etc received free of cost shall be included in the cost of production.
Interest and financial charges being a financial charge shall not be considered to be a part of cost of production.
Abnormal and non-recurring cost arising due to unusual or unexpected occurrence of events, such as heavy break down of plants, accident, market condition restrict ing sales below normal level, abnormal idle capacity, abnormal process loss, abnormal scrap and wastage, payments like VRS, retrenchment compensation, lay-off wages etc. The abnormal cost shall not form the part of cost of production.
The cost sheet should be prepared in the format as per Appendix – 1 or as near thereto as possible.
Statement of Cost of Production of _____________ manufactured / to be manufactured during the period _____________
| Qty | |||
| Q1 | Quantity Produced (Unit of Measure) | ||
| Q2 | Quantity Despatched (Unit of Measure) |
| Particulars | Total Cost (`) | Cost/unit (`) | |
| 1 | Material Consumed | ||
| 2 | Direct Wages and Salaries | ||
| 3 | Direct Expenses | ||
| 4 | Works Overheads | ||
| 5 | Quality Control Cost | ||
| 6 | Research & Development Cost | ||
| 7 | Administrative Overheads (relating to production
activity) |
||
| 8 | Total (1 to 7) | ||
| 9 | Add: Opening stock of Work – in –Progress | ||
| 10 | Less: Closing stock of Work -in- Progress | ||
| 11 | Total (8+9-10) | ||
| 12 | Less: Credit for Recoveries/Scrap/By-Products / misc
income |
||
| 13 | Packing cost | ||
| 14 | Cost of production ( 11 – 12 + 13) | ||
| 15 | Add: Inputs received free of cost | ||
| 16 | Add: Amortised cost of Moulds, Tools, Dies & Patterns
etc received free of cost |
||
| 17 | Cost of Production for goods produced for captive
consumption (14 + 15 + 16) |
||
| 18 | Add : Opening stock of finished goods | ||
| 19 | Less : Closing stock of finished goods | ||
| 20 | Cost of production for goods despatched (17 + 18 – 19) |
It should also be noted that Rule 8 is applicable only in cases where excisable goods are not sold but are cleared for captive consumption.
Rule 9 speaks of the situation where the whole or part of the goods are sold to or through a related person (except inter-connected undertakings which is dealt in Rule 10). In such cases the transaction value is not applicable. Here, the value to be adopted will be the price at which such related person sells to unrelated person.
If such related person sells it to another related person, then the price at which the second related person sells to unrelated person. Further, it is said when such related person uses such goods in the manufacture of other goods (captively consumed) then the valuation will be based on the principle of cost plus 10% as per Rule 8.
Example: X sells to its brother Y at `1000. Normal transaction value at which Y sells to unrelated buyers is `1200. By application of Rule 9 value in hands of X ,would be `1200.
The definition of inter-connected undertaking includes two or more undertakings which are interconnected with each other in any of the ways such as if one owns or controls the other, or where the undertakings are owned by firm, if such firms have one or more common partners, etc.
Rule 10 is applied in situations where whole or part of the goods are sold to or through inter connected undertakings and
(a) the buyer is a holding or subsidiary of assessee or
(b) if it is related as per clause (ii),(iii) or (iv) of sections 4(3)(b).
In such cases, valuation will be based on rule 9 i.e., the assessable value will be the normal transaction value of buyer to unrelated persons.
In all other cases, the sale will be treated as a sale to unrelated person and conc epts relating to transaction value will apply if the other two conditions, namely, price is for delivery at the time and place of removal and the price is the sole consideration for sale are satisfied. If any of the two aforesaid conditions are not satisfied then, quite obviously, value in such cases will be determined under the relevant rule.
Example: M/s A & Co is a partnership firm that has 2 partners A, B. Goods are sold to M/s B& Co that has 3 partners B, X,Y. The two firms are interconnected as there is a common partner . Unless it is established that there is mutuality of business between the two firms, transaction value would prevail.
Rules 8, 9 and 10 apply irrespective of whether the whole or a part of the clearances of manufactured goods are covered by the circumstances given in these rules. Each clearance is required to be assessed according to section 4(1)(a) or the relevant rule dealing with the circumstances of clearance of the goods, as the case may be.
For example, if an assessee clears his goods in such a way that first removal of goods is to an independent buyer, second removal is to such a related person who is covered under rule 9 and third removal is to a person who is covered under rule 10, while some goods are captively consumed, then the first removal should be assessed under section 4(1)(a), second removal should be assessed under rule 9 and third removal should be assessed under rule 10, while captively consumed goods should be assessed under rule 8 of these rules. It may be noted that Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 are not required to be followed sequentially.
Rule 10A provides for valuation in case of job-work. The rule provides that where goods are manufactured by a job-worker on behalf of a person (commonly known as principal manufacturer), the value for payment of excise duty would be based on the sale value at which the principal manufacturer sells the goods, as against the past practice where the value was taken as cost of raw material plus the job charges.
Where the goods are sold by the principal manufacturer from the factory of the job worker ‘s factory, the price charged by the principal to his customer would have to be taken as the value on which duty would have to be paid at the applicable rate. If the buyer is related to the principal manufacturer, the valuation would have to be done as in case of clearances to related parties.
Where the goods are not removed for sale from the job worker‘s factory but cleared to some other premises of the principal from where the goods are sold, the valuation at the time of removal from the job worker‘s premises would be similar to what is followed under rule 7 i.e., normal transaction value of goods sold from such other place at the time of removal from the factory of the job worker or the time nearest to time of removal where such goods are not sold at the time of removal from the factory of the job worker.
Manufacture of motor vehicles by sending the chassis of the motor vehicles to independent body builders for building the body as per the design/specification of the manufacturer: Circular No. 902/22/2009-CX dated 20.10.2009 has clarified the issue as under:
| Issue | Clarification |
| Some manufacturers of Motor Vehicles were getting complete Motor Vehicles manufactured by sending the Chassis of the Motor Vehicles to independent body builders for building the body as per the design/specification of the manufacturer.
Following practice was being followed:- Chassis was transferred to the body builder on payment of appropriate excise duty on stock transfer basis and was not sold to them. The body builder availed the CENVAT credit of the duty paid on the chassis and cleared the same on payment of duty to the Depot/Sales Office/Distributor of the Motor Vehicle (MV) manufacturer. The duty was discharged by the body builder on the assessable value comprising the value of Chassis and the job charges i.e. cost construction method. The Depot/Sales office of the MV manufacturer sold the vehicles at a higher price than the price on which duty had been paid. |
It has been clarified that:-
1. Wherever goods are manufactured on job work basis, their value would be determined in terms of the provisions of rule 10A subject to fulfillment of the requirements of the said rule. 2. Rule 10A(ii) stipulates that the assessable value, in the cases where the job-worker transfers the excisable goods to the Depot/Sale office/Distributor and/or any other sale point of the principal manufacturer, shall be the transaction value on which goods are sold by the principal manufacturer from such a place. 3. Accordingly, after the insertion of rule 10A, the practice of discharging the duty on cost construction method by the body builder is not legally correct. |
Rule 11 is a residuary rule, which says when the value of any excisable goods cannot be determined under any of the aforesaid rules, the value shall be determined using reasonable means which are consistent with the principles and general provisions of these rules and subsection (1) of section 4 of the Act.
The Supreme court in case of United Glass Vs. Collector, 1995 (75) ELT 209 (SC) has held that Rule 11 being in the nature of residuary rule is applicable only when the value cannot be determined under any rule.