Subject: Assessable value – Section 4 of CEA, 1944 – interest – adding value of additional consideration on account of interest free deposits

        It is directed to invite your attention to Board’s Circular No. 6/89 dated 23^rd June, 1989 issued from F.No. 15C/33/86-CX.1 circulating the opinion dated 6^th May, 1989 of the then Attorney General of India on the subject mentioned above.

        The then Attorney General in the said opinion dated 6^th May, 1989 have opined that where the price is not the sole consideration for the sale of excisable goods and there is additional consideration flowing directly or indirectly from the buyers, the money value of such additional consideration should be treated as element forming part of the assessable value of such goods and cannot merely be added to the cum-duty price for working backwards the duty.

        In view of the CEGAT decision in case of Collector of Central Excise, Hyderabad Vs. M/s V.S.T. Industries Ltd. & Ors ( 1991 
( 52 ) ELT 59 ( T ), the appeal against which has been dismissed on merits by the Supreme Court, a doubt has arisen whether money value of the additional consideration has to be added to the cum-duty price or the Assessable value.

Subject: -         Determination of value under See. 4 of the Central Excise Act, 1944 for adding the money
                        value of the additional consideration of account of interest free deposits.

        I have perused the Statement of Case and the Opinions of two former Attorneys General dated 6^th May, 1989 and 19^th April, 1991. The facts are not repeated for brevity.

        It has now settled by series of decisions that if the price is not the sole consideration flowing directly or indirectly from the buyer to the assessee - manufacturer; either in cash or in other form, the additional consideration quantified in terms of money value is to be added to the price declared by the assessee for determining the normal price of the goods. This conslusion has been arrived at by the Court on the reasoning that the assessee would otherwise have been required to borrow the amount for purchase of raw materials etc., from outside ( banks ) and would have been required to pay large amounts of interest which normally would have got reflected in the purchase price to be charged from the buyers as it would be a part of the cost of production which was to be passed on the customers. ( See Metal Box India Ltd. Vs Collector of Central Excise, Madras 1995 ( 2 ) SCC page 90 para 1C ).

        The question that has been raised in this case is how the value to be arrived at in the situation of a cum-duty price. Is it to be arrived at be adding such additional consideration to the cum-duty price and working backwards to determine the assessable value or whether it has to be added to the assessable value which has been worked out from the cum-duty price declared by the assessee. The illustrations in para 14 of the Statement of Case dated 18^th December, 1987 sets out the two alternatives. It would at once be apparent that method-I yields a much larger quantum of excise duty than methoe-II.

        The question squarely arose in the case of one of the cigarette manufacturers, namely, VST. Industries. The Tribunal decided two issues : ( 1 ) that notional interest on advance security deposits taken from the customers it to be added for the purpose of assessable value; ( 2 ) the said addition has to be made to the cum-duty price declared by the assessee and there after the assessable value will have to be worked backwards. The judgement is reported in 1991 ( 52 ) ELT 59.

        The assessee’s appeals on the first issue being Civil Appeal No. 2524 of 1992 with Civil Appeal Nos. 2523 and 2611 of 1992 were allowed by Judgement dated 8^th January, 1998, reported in 1998 ( sic ) SCC 24-VST Industries Ltd. Vs CCL, Hyderabad.

        In the case of VST Industries, the Supreme Court on the facts of the case held that there was nothing on the record to show that the regard of the deposit from some of the dealers could possibly influence the fixation of the sale price even with record to those sales which were made at the factory gate against cash and not on credit. The Court further observed that had there been a difference in the selling price where, for example, special discount was given to the dealers who had given a deposit then it may hace been possible to say that there were two different markets and two different prices and that lesser price was deing charged for an extraneous consideration and, in such a case the notional or actual interest could be added ( emphasisadded ).

        The Court referred to its previous judgement in Metal Box case and distinguished it on the ground that "In Metal Box case large amount of money had been advanced. Secondly, and what is more important, in Metal Box case the assessee had given fifty per cent discount to Ponds India Ltd on its gross sale price and thereby charged lesser price that what was charged from the other buyers. In the present case the cigarettes are sold at the factory gate to the wholesale dealers at a uniform price irrespective of the fact whether the purchaser it buying the cigarettes on credit on against payment of money is cash…..". It is obvious that the principle laid down in the Metal Box case had not been in any manner affected or diluted in the subsequent judgement in the VST Industries case.

        The Department’s Civil Appeals No. 2861-2863 of 1996 against the second determination were dismissed by a non-speaking order dated 29^th March, 1996.

        Although the Tribunal has decided the issue against the revenud, the dismissal of the appeal of the Government of India by a non-speaking order cannot be said to have approved the reasoning of the Tribunal; nor can such dismissal by the Supreme Court at the admission stage by non-speaking order be treated as declaratory of law under Art. 141 of the Constitution, See ( 1 ) Kirloskar Bros. Ltd. Vs Employees State Insurance Corpn. – 1996 ( 2 ) SCC 682 para 12; ( 2 ) Uogendra Narayan Chowdhury Vs. UOI – 1996 ( 7 ) SCC I para 5; ( 3 ) State of Manipur Vs. Thingujam Brojen Meetei 1996 ( 9 ) SCC 29 at para 10 and ( 4 ) Uday Pratap Singh Vs. State of Bihar – 1994 Supp ( 3 ) SCC 451 at 456 & 9.

           The bsic premise of the question posed to mne for opinion is that price is not the sole consideration for the sale of assessable foods and there is additional consideration by way of notional interest of interest free deposits obtained by the assessee from the buyers and consequently the money value of such additional consideration should be treated as an element forming part of the assessable calue of such goods.

        The relevant statutory provision which is applicable in such a situation in Sec. 4 (1) (a) and not Sec. 4(1) (b) of the Act. Sec. 4(4) (d)(ii) provides that "value in relation to any assessable goods……does not include the amount of duty of excise……payable on such goods….." The explanation sets out the meaning of the expression "the amount of duty of any excise payable on any excisable goods". This, however is not very material for the purpose of the present opinion.

        Rule 5 of the central Excise ( Valuation ) Rules, 1975 would be applicable to such determination of value. The opening words of Rule 5 are clear and make Rule 5 applicable in a situation where the value has to be determined on excisable goods sold in the circumstances specified in Sec. 4(1)(a) of the Act. To this extent, I do not share the view expressed by Shri G.Ramaswamy, the then Attorney General for India, in his opinion dated April 18^th , 1991.

        The expression ‘price’ is not defined in the Act. However, ‘price’ in the context in which it has been referred to in Sec. 4(1)(a) is the gross amount of consideration that is received by the seller from the buyer in the course of wholesale trade for delivery at the time and place of removal, where the buyer in not a related person. Where the price is inclusive of the inclusive of the amount of duty of excise, Sec. 4(4)(d)(ii) expressly provides that value does not include the amount of duty of excise payable on such goods and will have to be deducted.

My predecessor Shri K. Parasaran has opined as follows:

"….The assessable calue of the goods is the cum-duty price minus the duty plus the additional consideration…."

"…..when the manufacturer declared only part of the price and ditd not declare the other part of the price which represents the money value of additional consideration, the cum-duty price as originally determined represents only the assessable calue as declared by the manufacturer plus the duty thereon and not the value of the goods representing the additional consideration and the duty thereon. When the additional consideration is taken into consideration, the duty element thereon has also to enter the cum-duty price…."

The Supreme Court had occasion to consider the cum-duty price situation in the following 3 cases :-

( 1 ) Asstt. Collector of Central Excise Vs MRF Ltd. – ( Supp ) SCC 751 para 22 to 25.

( 2 ) Govt. of India Vs madras Rubber Factory Ltd. 1995 ( 4 ) SSC 349 para 60, ( The view in the case of MRF 
       is accepted as the correct view ).

( 3 ) Collector of Central Excise VS Bata India Ltd – 1996 ( 4 ) SCC 563.

        In the first MRF case, the contention of the assessee was that the cum-duty price was arrived at after calculating and adding excise duty payable i.e. before actual duty was paid and that when the assessable value is to be arrived at, the same amount of excise duty which was pre-determined adnadded to the factory price is naturally to be deducted first only there after the permissible deduction s should be deducted to arrive at the value.

The Court did not accept the contention and held:

"….The petitioner’s basis that the assessable value is to be arrived at be taking into consideratin the same amount of excise duty which was hypothetically predetermined and added to the factory price and that this element in an attempt to compute the assessable value should naturally be deducted first, is putting the cart before the horse…."…..Excise duty cannot be computed without proper determination of the assessable value, namely, assessable value exclusive of permissible deduction. Even in the cum-duty sale price, the same principle must be followed to arrive at the assessable value. To compute an excise duty as a predeterminde amountwithout making the permissible deduction sfor reducign the cum-duty selling price is a fallacy both legally and mathemeatically as demonstrated above…." 
( 1986 ) Supp. SCC 751 at 768-69.

        The principles laid down in the said judgement were accepted as correct by the Supreme Court in the second MRF case. 1995 ( 4 ) SCC 349 at 388 para 60.

        In the case of Bata India, the question that arose was in the context of an exemption notification which exempted footwear, the value of which did not exceed. Rs. 60/-per pair.

        The submission of the assessee was that if that if the cum-duty price was Rs. 62.00, Rs. 64.00 or Rs. 66.00 and if the rate of duty is 10% after deducting the duty element, the value as per Sec. 4 would be Rs. 56.36, 58.18 and Rs. 60.00 and as such, they would be entitled to claim exemption. This was rejected by the court. The reasoning of the court is contained in the following passages. 1996 (4) SCC 563 & 568.

Para "10.

For the purpose of excise duty, the manufacturer has to submit a price list to the excise authority before removal of the goods from the factory. He has to indicate in the forms and documents relating to assessment, the value of the goods and the amount of duty which such goods are to be sold. Costs and estimated profits are included in the price of the goods, inclusion of the anticipated amount of the excise duty in the wholesale price is the last part of the pricing mechanism. The manufacturer has to calculate the value on which duty would be payable, estimate the amount of duty payable and add the amount ot the caue of the goods to arrive at the wholesale price. It is on the value of the goods and not the cum-duty price that the duty is paid to the excise authority before the clearance of the goods. If , as in this case, before adding any amount by way of excise duty, the manufacturer found that the value of the footwear was Rs.60.00 per pair or less, no question of payment of excise duty could arise…."

Para "14.

Unless it is shown by the manufacturer that the price of the goods includes an amount of excise duty payable by him, no question of exclusion of the duty element from the price for determination of value under Sec. 4(4)(d)(ii) will arise…."at para 570.

        If and when the assessing authority come to the conslusion that the assessee has failed to declare the true consideration and has, in fact, received additional consideration by way of notional interest on interest free security deposits, the said money value will have to be added to the value which is arrived at by deduction the excise duty on the declared cum-duty price to determine the true assessable value and, therefore, quantity the excise duty payable.

        I am, therefore, of the view that method-I in the Statement of Case Is the appropriate method to be adopted for arriving at the assessable value and method-II is not to be adopted. If the alternative method-II were adopted, that would be putting premium on the assessee who has failed to declare the true consideration and would be giving him a benefit which is not interned by the Statute or the rules. The subsequent judgements do not in any manner detract from correctness of the opinion given by Shri Parasaran and I am, therefore, of the view that the said opinion does not require reconsideration.
 

I shall now answer the questions.