Thursday, August 05, 2010

TRANSACTION VALUE – INTERST - WHOSE INTERESTS?

by


 

K. VIJAY KUMAR1

MA, BL, B.Ed, MBA

Superintendent of Central Excise, Hyderabad


 

Interest is of two types. Interest on delayed payments which the assessee receives and interest on advances which the assessee may or may not pay. There may be an intrinsic or notional value of the interest. Inclusion or otherwise of interest in the assessable value has been a bone of contention between the department and the trade for quite a long time and the law is fairly settled on this count. Or is it?

    The new concept of transaction value does not explicitly mention interest. How ever Board's circular F. No. 354/81/2000 TRU dated 30.6.2000 - 2000(119)ELT T-22, para 8 deals with interest on delayed payments. The circular says that such interests will not form part of the assessable value provided that

  1. the interest charges are clearly distinguished from the price actually paid or payable for the goods;
  2. the financing arrangement is made in writing; and
  3. where required, assessee demonstrates that such goods are actually sold at the price declared as the price actually paid or payable.


 

According to this, every time there is a deduction of interest charged for delayed payments, we in the department are to see that the interest is clearly distinguishable, that there is an agreement in writing and where required, (it is not clear at what level this requirement is and how should I decide where it is required) the assessee demonstrates that the goods are actually sold at the declared prices. All this is fine. There is only a small problem. I do not get the invoices from the assessees. I come to know this only when I call for the records for a random check or when my auditors go for an exhaustive study. At the time of clearance, there is no assessment by the department. Or are we to follow Provisional Assessments here too? This is the problem of trying to import Customs procedures into Central Excise. Unlike in Central Excise, in Customs there is an assessment before the goods are cleared and the officer can get all these points cleared while there is no such chance in Central Excise.

In fact the above para 8 instructions of the Board is a straight lift from Decision 3.1 of the CCC Technical Committee which reads as follows:-

  1. the charges are distinguished from the price actually paid or payable for the goods;
  2. the financing arrangement is made in writing; and
  3. where required, the buyer can demonstrate that
  • such goods are actually sold at the price declared as the price actually paid or payable, and
  • the claimed rate of interest does not exceed the level for such transactions prevailing in the country where, and at the time when the finance was provided.

    But here also unfortunately, there has been a slip. Under clause C above, in decision No.3.1 of the CCC technical Committee, there are two clauses, the second (highlighted above) is glaringly missing from the Board circular. And this can play a lot of mischief. Now if there is a written arrangement between the assessee and his buyer that for delayed payments, he has to pay interest at the rate of 100% per month, this 100% interest as per Board Circular is excludable from the assessable value. That is why the second clause to C of the CCC decision is important. The interest claimed should not exceed the level for such transactions prevailing in the country where, and at the time when the finance was provided. In India, say the normal rate of interest charged for delayed payments is 24% pa. Therefore the interest claimed should not exceed 24%. This vital point is absent in the Board's circular.

    It may be pertinent to know what the position is in the United States of America. Section 53.91 of the CFR Title 27 declares "In the case of sales on credit, a carrying, finance, or service charge is excludable from the sale price if it is reasonably related to the costs of carrying the deferred portion of the sale price (such as interest on the deferred portion of the sale price, expenses of bookkeeping necessary to keep the records of such sales, and expenses of correspondence and other communication in connection with collection)"


 

As per the American law, not only the interest but also the expenses of book keeping and correspondence relating to collection of such interest, are deductable from the price for arriving at the taxable value.


 

While the Board circular clarified that interest paid by the buyer for delayed payments is not includable, it has not been clarified as to what the position is regarding interest on advance deposits. The law is almost settled with the Metal Box decision but still there is a lurking fear in the department as to what the real consequences are. This could have been clarified in the new section or the rules.

There is yet another angle. Damages for delayed delivery. When the assessee is not able to supply a product within the stipulated time a percentage of the agreed price is cut as penalty for delayed deliveries. Is this excludable from the Value?


 

                        Any Clarification?


 


 


EXCISE LAW TIMES – 01.10. 2000 – A 7

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