Circular No.619/10/2002-CX
19^th February, 2002

F.NO. 6/47/2001 – CX 1
Government of India
Ministry of Finance
Department of Revenue
Central Board of Excise & Customs

Sub: Valuation of goods manufactured on job-work

            I am directed to say that a number of representations have been received from the trade as well as the Commissioners on the method of valuation of goods manufactured on job-work basis after the introduction of the new valuation provisions w.e.f. 1.7.2000.

2.            The matter has been examined by the Board. It is observed that the system of getting goods manufactured on job-work basis is not new. Under the provisions of the earlier section 4 and the Rules made thereunder the matter has been finally decided by the Apex Court in the case of Ujagar Prints Ltd [1989(039)ELT0493(SC)] and the case of Pawan Biscuits Co. Pvt Ltd [2000(120)ELT0024(SC)]. It was clearly held that in respect of goods manufactured on job-work basis, assessable value would be the job charges (including the profit of the job-worker if not already included in the job-charges) plus the cost of the materials used in the manufacture of the item (including the cost of the materials supplied free of cost to the job-worker). The assessable value in such cases will not include the profit or the expenses (like advertisement and publicity, overheads etc ) incurred by the buyer (or the supplier of the raw materials), where the dealing between the two are on principal to principal basis . The mere fact that the buyer is supplying some raw materials free of cost to the job-worker, will not be sufficient ground to contend that the dealings between the two are not at arms length. Goods manufactured on job-work were earlier assessed under the residuary Rule 7 of the erstwhile valuation Rules of 1975 read with rule 6(b) read with the Apex Court decisions referred to above.

3.            Under the new valuation provisions, introduced with effect from 1.7.2000, there is no departure from the principles laid down by the Apex Court in the above two decisions, in respect of goods manufactured on job-work basis. In other words goods manufactured on job-work basis after 1.7.2000 will continue to be valued in the same manner as they were being valued before 1.7.2000. In other words, after 1.7.2000, in respect of goods manufactured on job-work basis, valuation would be governed by Rule 11 of the new valuation Rules of 2000 read with rule 6 read with the above two decisions of the Apex Court.

4.            As for example, problems have been reported in the case of recorded CD(Compact Disc) manufactured on job-work basis. The practice in most cases in the CD industry is that a music or a film company acquires the copyright of some songs or movie on payment of a lump sum amount of royalty to the artiste/producer and sends the master copy of the musical score or movie either in the form of a digital audio tape (DAT) or a cinematograph reel or a CD to a job-worker for making CDs on payment of job charges. The job worker is provided, in most cases, the inlay cards, jackets and the jewel box (plastic cover) to pack the CDs and return the same to the copyright owner. The copyright owner then sells the CDs in the wholesale market through its dealers, distributors or consignment agents. The copyright is perpetual in nature and the copyright owner can give repeat orders to the job worker. Thus even if the cost of obtaining the copyright is known, problems arise in apportioning this cost to the CDs manufactured on job work because it is not possible to ascertain the number of CDs which would get manufactured over a period of time (which may extend to even 20 or 30 years). Further, the copyright acquired covers audio cassettes also.

5.            The expenses incurred by the copyright owner towards advertisements and overheads cannot be included in the assessable value of the CDs since the job worker (manufacturer) has no connection with these expenses and these costs are not incurred at the instance or on behalf of the manufacturer (job-worker). Since the job-worker receives some items free of cost from the copyright owner, price is not the sole consideration for the transaction between the copyright owner and the job-worker. Therefore, resort will have to be taken to the Central Excise Valuation Rules. No specific rule covers such a contingency. Resort will therefore have to be taken to rule 11 of the valuation rules read with rule 6, read with the Apex Court decisions cited above. The money value of the additional consideration will have to be added to the job-charges. The cost elements which have to be included are the cost of the items supplied free by the music company to the job worker, namely inlay cards, jackets, jewel boxes and the DAT/disc.

6.            The DAT/discs contains the original recorded music/movie. Its cost would include the royalty amount paid/payable by the music company for acquiring exclusive rights for the music/movie and the cost incurred in getting the original score recorded in a studio (if this has been incurred by the copyright owner). In such cases the most reasonable method would be to ascertain the royalty amount and studio hire charges contained in the wholesale price of the CDs at which the copy right owner sells, to its dealers, at arms length. This could be done by determining the royalty amount plus the studio hire charges as a percentage of the net sale value (gross sale minus central excise duty element) of the music company or copyright owner in respect of the recorded media. In case the company also sells audio cassettes of the same music, there would be no need to break up the sale value for CD’s and cassettes separately for determining the percentage since the royalty amount would cover rights for both. The figures of net sales and royalty payments are normally available in the balance sheets of these companies. This percentage will be used to determine the element of royalty cost attributable to each CD. Duty will have to be paid by the job-worker on the royalty amount also. As an illustration, if the ratio of the royalty amount plus studio hire charges, to net sales of a music company is, say, 9.41% and the whole sale price of a recorded CD of the music company is, say, Rs 100/- and the job-charges charged by the job-worker is Rs 25/-, then the value on which duty will have to be paid by the job-worker would be Rs 25 + 9.41% of Rs 100 = Rs 25 + Rs 9.41= Rs 34.41. In case the music company has also supplied to the job worker, free of cost, inlay cards, jackets, jewel box or any other material/input, their cost should also be added to the job-charges. If the job worker has purchased some raw materials (e.g. poly carbonate) or inputs, their value will also be added.

7.            For this it will be necessary for the music company to supply to the job-worker the data relating to royalty payment and the wholesale price of each CD, the cost of the inlay cards, jacket, jewel box and other material supplied free of cost. Since net sales value and total royalty payment for the current year will not be available with the music company, duty should be determined on the basis of figures for the previous year. Till the figures for the previous year are provided assessments should be done provisionally. Assessments should be finalized immediately after the figures for the previous year are made available.

8.            Care should be taken to ascertain the correct amount of expenditure involved in a year on royalty/copyright. Some companies capitalize part of this amount and the expenditure may also be reflected under the head "assets". In that case depreciation taken/shown during the relevant year under this head would be added to the expenditure incurred on royalty/copyright during the said year. Some companies sell part of their acquired copyrights to other companies and the income on this may be shown under the head license fees. In that case total expenditure on royalty/copyright during a year would be the gross amount spent under this head in a year minus the amount received for sale of part of the rights during the same year.

9.            Pending cases on valuation of goods manufactured on job-work basis may be decided on the basis of these instructions.

10.            Suitable Trade notices may be issued for the information of the Trade

11.            Hindi version will follow

12.            Receipt of these instructions may be acknowledged.