CHAPTER - VII
Valuation of Excisable Goods

Ad valorem rates of duty are charged on a wide range of excisable commodities. The valuation of such goods is governed by section 4 of the Central Excise Act, 1944, read with the Central Excise (Valuation) Rules, 1975 and Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000. The valuation of excisable goods introduced with effect from 14 May 1997 with reference to retail sale price is governed by section 4A. Some illustrative cases of short levy due to incorrect valuation pertaining to the period before 1 July 2000 or cases covered under section 4A are narrated in the following paragraphs :

7.1    Incorrect adoption of value cleared in multi piece packages

The Board clarified in November 1999 that multi piece packages containing individual pieces of less than 10 grams/10 ml by weight or measure would be assessed to duty under section 4A of the Central Excise Act, 1944, as the exemption contemplated in rule 34(b) of the Standards of Weight and Measures (Packaged Commodities) Rules, 1977 was applicable to a package containing a commodity and not to multi piece packages. Moreover, under rule 17 (1) of the Rules ibid, the assessee is statutorily required to declare the retail sale price of multi piece packages and individual pieces contained in such multi piece packages. The Board further clarified (October 2002) that if individual items were capable of being sold separately at the maximum retail price (MRP) printed on them, then the aggregate of MRP’s of the items comprising the multi pack could be considered for the purpose of levy of duty under section 4A of the Central Excise Act, 1944.

M/s. Mul DentPro Limited and M/s. Alfa Packaging Silvassa, in Daman and Valsad Commissionerates of Central Excise, manufactured shampoo, ayush hair oil, fal cos, etc., and cleared them in multi piece packages containing pouches/strips/sachets each having less than 10 grams/10 ml by weight or measure. MRP was also printed on individual piece/pouch. Duty on these packages was paid on assessable value arrived at under section 4 instead of on the basis of MRP under section 4A. This resulted in short levy of duty of Rs.21.78 crore between April 2001 and October 2002.

On this being pointed out (November and December 2002), the Ministry of Finance (the Ministry) stated (January 2004) that the Board’s clarifications of November 1999 and October 2002 would not be relevant as the products under reference were not statutorily required to be affixed with MRP.

Reply of the Ministry is not tenable as the products under reference were multi piece packages and were statutorily required to be affixed with the MRP under rule 17(1) of the Standards of Weight and Measures (Packaged Commodities) Rules, 1977 and exemption under rule 34 of these rules was not applicable to multi piece packages.

7.2    Incorrect valuation of goods cleared to sister concerns

Under section 4(1)(b) of the Central Excise Act, 1944, read with rule 6(b) of the Central Excise (Valuation) Rules, 1975, the assessable value of excisable goods consumed within the factory of production or in any other factory of the same manufacturer had to be determined on the basis of cost data if value of comparable goods was not ascertainable.

7.2.1    M/s. Raymonds Limited, in Mumbai VI Commissionerate of Central Excise, engaged in the manufacture of ‘woollen products’ cleared goods to its sister concern during the period from April 1997 to June 2000. Scrutiny of records revealed that value adopted for payment of duty was less than the value arrived at on the basis of cost data for the relevant period. Non-adoption of correct value resulted in undervaluation of goods and consequent short levy of duty of Rs.3.41 crore during the period from April 1997 to June 2000.

On this being pointed out (May 2001), the Ministry admitted the objection (October 2003).

7.2.2    M/s. Hindustan Lever Limited, in Kolkata I Commissionerate of Central Excise, manufacturing soap noodles cleared some of its products to another unit of the assessee on payment of duty on the basis of cost of production since the value of comparable goods was not ascertainable. Scrutiny of the cost statement revealed that the assessee did not include elements like overhead expenses on actual basis, depreciation, interest as per annual accounts in the cost of production of such goods. Non-inclusion of these elements in the cost of production resulted in undervaluation with short levy of duty of Rs.1.86 crore during the period from November 1996 to December 1998.

On this being pointed out (June 2001), the Ministry admitted the objection and stated (October 2003) that the assessee voluntarily paid duty of Rs.5.06 crore for the years 1996 to 1998.

7.2.3    M/s. Shivaji Works Limited, a Kirloskar group company, in Pune II Commissionerate of Central Excise, engaged in the manufacture of C.I. castings (sub-heading 7325.10), cleared 16937.37 tonne of C.I. castings to M/s. Kirloskar Oil Engines Limited at a price lower than the assessable value arrived at on the basis of cost of production during the period from April 1998 to June 2000. As both the companies were related, the assessee was required to clear the goods adopting cost of production as the basis for valuation in the absence of a comparable price. This resulted in undervaluation of goods amounting to Rs.9.33 crore with short levy of duty of Rs.1.46 crore.

On this being pointed out (March 1999), the Ministry admitted the objection (September 2003).

7.3    Additional consideration not included in the value

Section 4(1)(a)of the Central Excise Act, 1944, read with rule 5 of the Central Excise (Valuation) Rules, 1975, prescribe that where the price charged for excisable goods sold in wholesale trade is not the sole consideration for the sale, the assessable value of such goods shall be determined based on the aggregate of the price and money value of additional consideration flowing directly or indirectly from the buyer to the assessee. In the case of Bombay Tyre International {1983 (14) ELT (1896)}, the Supreme Court held that the value of the article for the purpose of levy of excise duty shall include all costs and expenses which have given the article its marketability.

7.3.1    Cost of bought out components

The Tribunal in the case of M/s. Baroda Machinery Manufacturers held that cost of bought out items being an integral part of a final product is to be included in assessable value {1997 (91) ELT 88 CT}.

M/s. KEC International Limited, in Nagpur Commissionerate of Central Excise, fabricated galvanized steel parts with holes for tightening bolts and nuts as per approved design for erection of transmission line towers and cleared these parts on payment of duty under sub-heading 7308.90 to customer’s site for erection of transmission line tower as per agreement. For erection of tower, assessee had bought out nuts and bolts from market and sent them directly to site. The value of nuts and bolts was not included in the assessable value for the purpose of determining duty. As nuts and bolts were an integral part of the tower, the value should have been included in the assessable value. This resulted in undervaluation with short levy of duty of Rs.72.69 lakh from April 1999 to March 2000.

On this being pointed out (November 2000 and January 2002), the Ministry stated (December 2003) that the value was not includible, since nuts and bolts were procured outside the factory and sent directly to site. It was further stated that the Supreme Court in case of M/s. Triveni Engineering and Industries held that, structures assembled and erected at site by rigid foundation which could not be dismantled without substantial damage to their components and could not be reassembled at any site after dismantling, were not excisable being immovable property.

Reply of the Ministry is not tenable as nuts and bolts are integral parts of the structure without which the tower cannot be erected. The Supreme Court judgement quoted by the Ministry is not applicable in this case as the towers can be erected at another site after dismantling with the help of nuts and bolts without substantial damage to the components. Therefore, towers do not become immovable property and fail the test of permanency, hence are excisable as per Supreme Court judgement in the case of M/s. Triveni Engineering {2000 (120) ELT 273 (SC)} and M/s. Sirpur Paper Mills Limited {1998 (97) ELT 3 (SC)}. It was noticed that the same assessee had included value of nuts and bolts in the assessable value of towers cleared from July 2000 onwards lending credence to the audit stand. Moreover, another assessee viz., M/s. Hundai Unitech Limited in the same Commissionerate had included the value of nuts and bolts in the assessable value of towers for payment of duty.

7.3.2    Cost of packing materials

Section 4(4)(d)(i) of the Central Excise Act, 1944, provides that where goods are delivered at the time of removal in a packed condition, the assessable value includes cost of such packing except the cost of packing, which is of durable nature and is returnable by the buyer to the assessee. The Tribunal in the case of M/s. Jauss Polymers Limited {2002 (132) ELT 675 (Trib - Del} held that cost of packing material supplied by the buyer is includible in the assessable value.

M/s. Pearl Polymers Limited, in Mumbai VII Commissionerate of Central Excise, engaged in the manufacture of plastic goods, had not included the cost of cartons supplied by the buyer while determining the assessable value. Non-inclusion of cost of packing material, resulted in short levy of duty of Rs.17.42 lakh from April 1998 to September 1999.

On this being pointed out (November 1999), the Ministry while admitting audit objection stated (October 2003) that the demand of Rs.48.77 lakh had been confirmed and penalties of Rs.49.77 lakh imposed under section 11AC and rule 173Q.

7.3.3    Research and development charges

M/s. Madhushilica Private Limited, in Bhavnagar Commissionerate of Central Excise, engaged in the manufacture of various grades of silica, had recovered an amount of Rs.3.33 crore towards research and development charges from various parties between April 1997 and March 2001. Although, these charges were recovered for the use of the Research and Development Centre run by the assessee for the development of various grades of silica, the same were not included in the assessable value. Omission to include this additional consideration resulted in short levy of duty of Rs.53.28 lakh.

On this being pointed out (February 2002), the Ministry admitted the objection (December 2003).

7.3.4    Escalation charges

M/s. Southern Structurals Limited, Chennai and M/s. Burn Standard Company Limited, Salem, in Chennai and Coimbatore Commissionerates of Central Excise, respectively manufactured railway wagons and refractory materials/bricks and cleared the goods to Railway Board and steel plants on payment of duty on contract value of the goods. The contract provided for reimbursement of escalation charges towards materials and wages. Accordingly the assessees were reimbursed Rs.1.69 crore and Rs.0.81 crore (respectively) by their customers towards escalation charges on account of revision of cost of raw materials and wages. These escalation charges were not included in the assessable value which resulted in short collection of duty of Rs.37.53 lakh between February 1998 and January 2000.

On this being pointed out (between February 2000 and October 2001), the Ministry admitted the objection in one case and intimated (November 2003) confirmation of demand of Rs.69.77 lakh with imposition of penalty of Rs.69.77 lakh on the assessee. In the second case it stated that provisional assessments were made and exact amount of differential duty would be known on finalisation.

7.4    Other cases

In 133 other cases of valuation of excisable goods, the Ministry/the Department had accepted objections involving duty of Rs.6.25 crore and reported recovery of Rs.4.04 crore in 116 cases till February 2004.