What is the value when goods are not sold?

by

K. VIJAY KUMAR¹

MA, BL, B.Ed, MBA

Superintendent of Central Excise, Hyderabad

 

 

 

As per Section 4 of the CE Act, the value shall

1. in a case where the goods are sold by the assessee, for delivery at the time and place of removal ...., be the transaction value;
   
2. in any other case, including the case where the goods are not sold, be the value determined in such manner as may be prescribed.
   

 

So in a case where the goods are not sold, the value has to be determined under the Valuation rules. Rules 4 to 11 of the valuation rules deal with this great job of finding the value. A brief description of these rules may not be out of place to this article.

 

Rule 4. When goods are sold at a time other than the time of removal

Rule 5. When goods are sold at a place other than the place of removal

Rule 6. When price is not the sole consideration for sale

Rule 7. Depot sales

Rule 8. When the goods are not sold but captively consumed

Rule 9. Sale to or through a related person

Rule 10. Sale to or through an inter connected undertaking

Rule 11. When the value can not be determined under the above rules.

 

From the list above it can be seen that only Rule 8 deals with cases where there is no sale. Sale is mandatory in all other rules except of course rule 11. So it is necessary for us to read the text of Rule 8. Have a look.

Rule 8: where the excisable goods are not sold by the assessee but are used for consumption by him or on his behalf in the production or manufacture of other articles, the value shall be one hundred and fifteen percent of the cost of production or manufacture of such goods.

 

This is the only valuation rule that takes care of cases where there is no sale, but even this rule covers only certain specific situations. It is absolutely necessary that

1. the goods are not sold
   
2. the goods are used by him or on his behalf - in the production or manufacture of other articles
   

for the situation to be covered under Rule 8.

 

What happens if the goods are not sold, nor are they used by him or on his behalf in the manufacture of other articles? The goods may be gifted or used for purposes other than manufacture of other articles. For example if a car manufacturer uses a car manufactured by him. In such cases, Section 4 stipulates that the value shall be determined as per the valuation rules and the valuation rules are silent about such non-sales! Is rule 11 the only remedy? It appears so. Incidentally many of my learned colleagues are under the impression that determination of the price under rule 11 is a departmental prerogative. They are still under the old valuation era of best judgement assessment by the proper officer under rule 7 of the old valuation rules. Now the assessee is going to determine the price as per rule 11 of the new valuation rules and the proper officer can only re assess.

 

It has to be fairly conceded that in the old valuation rules also, there was no provision for determining value when goods were freely distributed. But then there was no need to, as the deemed value of normal price of such goods took care of the situation. But now with transaction value, this needs to be incorporated in the rules. This problem could have been overcome if rule 8 read as follows. " Where the excisable goods are not sold by the assessee or on his behalf, the value shall be one hundred and fifteen per cent of the cost of production".

 

And that brings us to another problem. What is the manufacturing cost? The Board circular dated 30.6.2000 says ' cost of production based upon general principles of costing'. What then are general principles of costing? In a costing Seminar last year, I asked a Cost Accountant who gave us a lecture on costing, whether cost includes the excise duty paid on the raw materials, which is allowed as modvat credit. He replied that it does, as the cost of the raw materials is the total cost of the materials including all taxes. Immediately another cost accountant, a senior executive (dealing with excise also) rebutted and said it was not includable as the real cost did not include the duty, which was later allowed as credit. The first accountant said that modvat credit was only an opinion as most often the department sought to disallow even genuine credit on silly grounds like some rubber stamped inscriptions are missing in the invoice! As the industry is not sure of modvat, the duty on inputs has to be included in the cost. Modvat may be a profit later. This gentleman was a pure cost accountant and for a moment he forgot captive consumption and Dai Ichi Karkaria. Of course now this issue has been settled by the Supreme Court. On a similar analogy, if a manufacturer makes some money by selling the packing material in which he gets his inputs, will the cost be reduced to the extent of the sale price of the packing materials?

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EXCISE LAW TIMES – 01.01.2001 – A 18