Chapter - II
Review On Determination of Assessable Value Under New Section 4 (Transaction Value)

2.1    Highlights

The absence of suitable provisions in the statute helped three oil companies to avoid payment of duty of Rs.713.17 crore on the indirect sale consideration received in the form of subsidy from the government on sale of petroleum products.

(Paragraph 2.6)

Adoption of lower “mutually agreed price” for payment of duty by 12 terminals of three petroleum companies led to a revenue loss of Rs.113.79 crore.

(Paragraph 2.7)

Clearance of goods by job workers manufacturing branded as well as un-branded goods for brand name owners/principal manufacturers, at lower assessable value resulted in a revenue loss of Rs.90.53 crore to the government as the said goods were sold by the brand name owners/principal manufacturers at much higher prices.

(Paragraph 2.8)

Absence of mechanism to verify the correctness of the transaction value of assessee’s own manufactured goods as well as the cost of bought out goods and the installation cost forming part of the total value of project installed at site, led to a revenue loss of Rs.90.88 crore in 10 cases where assessees could conveniently suppress value of their own manufactured goods while inflating the value of bought out items.

(Paragraph 2.9)

Lacunae in the valuation rules permitting the assessees to determine the value of goods consumed captively at lower value despite availability of higher value of comparable goods during the relevant period, led to revenue loss of Rs.26.99 crore in seven cases.

(Paragraph 2.11.1)

The assessment on transaction value basis has failed to plug leakage in revenue due to lacuna in the provisions and inadequate internal control mechanism.

(Paragraph 2.14)

Irregularities in the valuation of excisable goods due to non-inclusion in the assessable value of various elements such as equalized freight, freight and insurance, dealer’s margin, service licence fee, excess freight charges recovered, retail pump outlet charges for petroleum products and pre delivery inspection charges or service charges etc. resulted in short levy of duty of Rs.242.75 crore.

(Paragraphs 2.15 to 2.20)

2.2    Introduction

Valuation of excisable goods chargeable to duty of excise on ad valorem basis has been laid down in section 4 of the Central Excise Act, 1944. Section 4 was amended to incorporate the concept of ‘transaction value’ for levy of duty with effect from 1 July 2000.

‘Transaction value’ means the price actually paid or payable for the goods, when sold, and includes any amount that the buyer is liable to pay to the assessee in connection with the sale whether payable at the time of sale or at any other time, including any amount charged for, or to make provisions for advertising or publicity, marketing and selling and storage etc. but does not include duty of excise, sales tax or any other taxes, if any, actually paid or payable on such goods. Therefore, each removal is a different transaction and duty is charged on the value of each transaction.

The new section 4, therefore, accepts different transaction values which may be charged by the assessee to different customers, for assessment purposes. Where one of the three requirements namely (i) where the goods are sold for delivery at the time and place of delivery; (ii) the assessee and buyers are not related; and (iii) price is sole consideration for sale, is not satisfied, then the transaction value shall not be the assessable value and value in such case has to be arrived at under the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000, also made effective from 1 July 2000.

2.3    Audit objectives

A review was conducted in audit to evaluate the adequacy of provisions relating to valuation of excisable goods as substituted with effect from 1 July 2000 at the macro level and to identify weaknesses in the present provisions vis-à-vis the provisions in the old Valuation Rules.

At the micro level, records maintained by the manufacturing units were subjected to detailed scrutiny to seek assurance that the provisions as contained in section 4 of the Act and in the Central Excise Valuation Rules, 2000, effective from 1 July 2000, were being followed correctly and that the functioning of internal control was effective.

2.4    Audit coverage

Administrative control for collection of central excise duty vested with 92 Commissionerates of Central Excise of which 74 were covered in the review. Assessment records of 468 out of 4589 units engaged in the manufacture of excisable goods and paying more than Rs.1 crore duty each from PLA were reviewed in audit covering the period between July 2000 and March 2003.

2.5    Results of audit

During test check of records 360 cases of short collection/loss of revenue/duty forgone to the extent of Rs.1328.18 crore were noticed, in 64 Commissionerates of Central Excise.

Out of the above (i) Rs.1085.43 crore in the cases of 77 assessees, under 49 Commissionerates of Central Excise was due to lacuna in the statute provisions; and (ii) Rs.242.75 crore relating to 283 assessees, in 60 Commissionerates of Central Excise was on account of incorrect determination of transaction value on various grounds. The findings are contained in succeeding paragraphs.

Macro evaluation

  • Weaknesses in the present system

2.6    Indirect consideration as a result of sale of goods, received from sources other than buyers

Losses suffered by oil companies on account of clearance of kerosene and LPG at lower prices fixed by Oil Co-ordination Committee (OCC) are compensated by government in the form of subsidies. Prior to 1 April 2002 subsidies on the above products, were being credited to the oil pool account. Thereafter, this subsidy is being paid in cash. Audit noticed that in the absence of specific codal provision to charge duty on the full value of consideration (including the part consideration received in the form of subsidy from the government), the additional consideration received from the government is excluded from levy of duty.

Scrutiny of the financial records of M/s. Indian Oil Corporation Limited (IOCL), M/s. Hindustan Petroleum Corporation Limited (HPCL) and M/s. Bharat Petroleum Corporation Limited (BPCL) revealed that the total subsidy claimed by the oil companies on account of sale of kerosene and LPG amounted to Rs.4457.27 crore during the period 1 April 2002 to 31 December 2002. Duty was paid on the controlled price and subsidy received from Petroleum Ministry was excluded from transaction value which resulted in duty amounting to Rs.713.17 crore being lost on clearances during this period.

2.7    Goods cleared at “mutually agreed price”

Audit observed clearances of excisable goods at a lower value on “mutually agreed price” exhibited as “transaction value” even though such a lower “mutually agreed price” did not fall within the definition of transaction value.

2.7.1    Agreed price less than ex-storage sale price

Petroleum products like motor spirit (MS), high speed diesel (HSD), superior kerosene oil (SKO), etc. have been assessed to duty on the basis of ex-storage sale prices that are fixed by the OCC. The assessable value remained the same, irrespective of whether the administered petroleum products were sold at the refineries or through the marketing companies. While introducing the new section 4, the Ministry clarified on 30 June 2000 that there was no essential difference in the scheme of valuation of petroleum products under the old and new section 4.

Though the administered price mechanism (APM) was dismantled with effect from 1 April 2002, prices of petroleum products continued to be monitored and regulated by the OCC.

As a sequel to the dismantling of APM with effect from 1 April 2002, the public sector oil companies entered into Memorandums of Understanding (MOUs) among themselves and inter-alia agreed that the refinery companies and their marketing installations would charge a notional price from 1 June 2002 for the products cleared to depots/terminals (viz. storage point) of other oil companies. Hence, the products (MS, HSD and LPG), falling under chapter 27 were cleared from the terminals of HPCL, IOCL and BPCL to terminals/depots belonging to other oil companies on payment of duty on assessable values which were much lower than the ex-terminal prices fixed for their own outlets/depots. Since terminals of the latter were treated as independent wholesale buyers such lower price were taken as ‘transaction value’ for purpose of payment of duty.

Such a “notional price mutually agreed upon” by oil companies cannot be considered as a genuine price since (i) this price is adopted exclusively for oil exchange transactions alone and not for direct sales effected to distributors; (ii) the prices were lowered only for the benefit of each other; and (iii) the product sharing agreement & terms of MOUs also clearly established mutuality of interest among oil companies.

Petroleum products

The adoption of lower assessable values based on mutually agreed price at the time of clearance of the petroleum products from 12 terminals of IOCL, HPCL and BPCL under ten Commissionerates of Central Excise, to the terminals belonging to other oil companies and their depots (storage point) resulted in short collection of duty of Rs.113.79 crore during different periods between April 2002 and March 2003.

The Department stated (September/October 2003) that show cause notices had been issued to three assessees. In two other cases, the Department stated that the matter was already in their knowledge but no demands were raised till audit pointed out the issue.

Liquefied petroleum gas (LPG)

M/s. IOC Limited, in Chennai I Commissionerate of Central Excise, cleared LPG to various oil companies on payment of duty adopting the administered price during the period May 2002 to December 2002 despite realisation of higher value for the transaction from them. As APM was abolished with effect from 1 April 2002, assessment of LPG should have been determined based only on transaction value, non-adoption of which resulted in short levy of duty of Rs.3.53 crore during the period from May 2002 to December 2002.

The Department justified the assessment stating (May 2003) that the difference between transaction value and the price fixed by OCC pertained to budgetary support which could not be construed as additional consideration for inclusion in assessable value.

The reply of the Department is not tenable. Since the assessee recovered full value of the goods cleared to the marketing companies, there was no direct subsidy received by the assessee. The subsidy was received only by the marketing companies. The duty should have been charged on the full value of consideration received by the assessee.

2.7.2    Agreed price less than value based on cost of production

M/s. Indian Oil Petronas Private Limited, Kasberia, Haldia, in Haldia Commissionerate of Central Excise, entered into an agreement with IOC, HPC and BPCL respectively to receive LPG from Reliance Petroleum under bond on their behalf in cryogenic condition in its refrigerated storage tanks which was then to be subjected to different processes conforming to Bureau of Indian Standards (BIS) norms and cleared to different customers as directed by the oil companies at a price fixed by them.

Further scrutiny revealed that the assessee got terminal charges at fixed rates per tonne from the oil companies on account of such loading/handling and processing charges on such LPG. As the assessee was doing job work, the duty in the instant case ought to have been levied on the cost of production i.e. the value of raw materials plus job charges (in terms of judgement of the Apex court in the case of Ujagar Prints and Board’s circular dated 1 July 2002) instead of on the value fixed by the supplier. Adoption of incorrect procedure resulted in undervaluation of such goods and short levy of duty of Rs.61.33 lakh during the period from December 2001 to September 2002.

The Department’s contention that the process did not amount to “manufacture” and hence duty as paid by the assessee on dictated price was correct is not acceptable since the assessee received such LPG under bond without payment of duty and goods underwent certain processes to enable them to conform to BIS norms and be made marketable. Since duty was paid from the assessee’s premises its value ought to have been the cost of raw material plus processing charges.

2.7.3    Agreed price less than the cost adopted for captive consumption

M/s. Albright Wilson, in Raigad Commissionerate of Central Excise, arranged for procurement of sulphuric acid for its unit at Ambernath (Thane II Commissionerate) from M/s. Dharmjee Morarjee Chemicals. The price adopted was a mutually acceptable price lesser than the value for captive consumption. Lack of provision in the present rules to value such transaction, at a value at least equal to the value for captive consumption resulted in unintended benefit to the assessee at the cost of the exchequer. The clearance of goods at an agreed price resulted in undervaluation of goods amounting to Rs.77.49 lakh and short levy of duty of Rs.12.40 lakh for the period 1 October 2000 to 31 December 2001.

2.7.4    Agreed price less than cost of inputs

M/s. ITC Bhadrachalam (Paper Board Division), in Hyderabad III Commissionerate of Central Excise, engaged in the manufacture of paper and paper board falling under chapter 48 entered into an agreement with two job workers for converting reels of paper and paper board into sheets/reams. The assessee supplied white duplex board reel to one job worker at an assessable value of Rs.19000 per tonne. The finished sheets, however, were despatched by the job worker to the customer specified by the assessee adopting assessable value of Rs.18000 only per tonne. Thus, the finished product was valued at a price lower by Rs.1000 per tonne compared to the cost of material itself without the addition of job charges. In the case of second job worker it was observed that the assessee as well as the job worker cleared the input goods and finished products respectively adopting the same assessable value of Rs.19995.69 per tonne. In both the cases, conversion charges paid to the job workers were not included in the assessable value. Non-inclusion of conversion charges, of Rs.6.81 lakh and Rs.36.73 lakh respectively paid to the job workers during the period 2000-01 and 2001-02 resulted in short levy of duty of Rs.6.97 lakh, apart from differential duty payable on cost of raw material short adopted by Rs.1000 per tonne in the first case.

The Department’s contention (July 2003) that the value at which the goods were cleared by the job worker represented transaction value is not correct, since conversion charges paid to the job worker were not included in the assessable value, and hence, were not subjected to duty.

2.8    Goods cleared by job workers on behalf of principal owners not to be considered as sale

Pursuant to the Supreme Court’s decision in the cases of Ujagar Prints Limited {1989(34) ELT 493(SC)} and Pawan Biscuits Company Limited {2000(120) ELT 24(SC)} upholding valuation of goods in the hands of job workers, certain big brand owners have been resorting to the modus operandi of getting their goods cleared through job workers on payment of duty either on cost of raw materials plus job charges or on an agreed price which are substantially lower than the wholesale prices at which the products are eventually being sold by the brand name owners/principal manufacturers. The lacuna is still not plugged in the new valuation rules.

The cases noticed during test check are discussed below: -

2.8.1    Clearances of branded goods

Test check of records of 26 assessees in 11 Commissionerates of Central Excise, revealed that they were manufacturing different excisable products on job work basis for the brand name owners and clearing the goods at an agreed price which was much lower than the normal price at which the principal manufacturers sold these goods. Job workers got assistance such as personal supervision, help in selection and purchase of raw material and its quality, preparation/formulation, technical knowhow by way of knowledge, training of staff all of which contributed towards the intrinsic value of the goods and were not accounted for. Besides, the principal brand owners incurred expenses on account of marketing, distribution, development of brand also. Since the possession of the goods remained with the brand name owners, the transaction cannot be termed a sale. Absence of provision in the Central Excise Act to charge duty at normal price i.e., the price at which the principal manufacturer/brand name owner sold these goods resulted in undervaluation of goods leading to short collection of duty of Rs.80.51 crore on clearances during the periods between July 2000 and March 2003.

2.8.2    Clearance of unbranded goods

Test check of records of eight assessees in five Commissionerates of Central Excise, engaged in the manufacture of excisable goods on job work basis for the principal manufacturers revealed that the assessees received raw material either from the principal manufacturers, or procured it from other sources as per their directions and cleared the entire processed goods back to them or to another destination on payment of duty on the basis of cost of production determined on the basis of landed cost of material plus processing charges including profit margin. Non adoption of prices charged by principal manufacturers resulted in short realisation of duty of Rs.10.02 crore during the periods between July 2000 and December 2002.

The Department cited the Supreme Court’s judgement in the case of Ujagar Prints supra, according to which the duty was to be paid by job worker on the assessable value arrived at after adding the cost of material, processing charges and the profit of the job worker or the processor.

The absence of a suitable provision in the present Valuation Rules to charge duty at normal price (i.e. the sale price charged by the principal owner on the basis of whole sale market) has led to revenue leakage.

2.9    Uniformity of price/genuineness of transaction value not ascertainable - value of bought out items inflated

Under transaction value system, value of goods may vary even for the same buyer for different transactions. The genuineness of the transaction value cannot be scrutinised in the absence of statutory requirements for submission of declaration before the jurisdictional excise authority indicating the elements making up the transaction value.

Test check of records of 10 assessees in five Commissionerates of Central Excise, revealed the absence of any mechanism to verify the actual transaction value of assessee’s own manufactured goods, bought out goods and installation charges which led to deliberate undervaluation of the assessee’s own manufactured goods by over invoicing bought out goods although the total contract price of the final products remained unchanged. Total duty loss amounted to Rs.90.88 crore in respect of goods cleared during different periods between July 2000 and March 2003.

One of these cases is given below: -

M/s. Alstom Projects India Limited, Durgapur, in Bolpur Commissionerate of Central Excise, engaged in the manufacture of boilers and parts and accessories thereof, procured large lump-sum contracts with different customers for manufacture and supply of on-shore equipment of boilers. The contract included transportation, unloading and storage, erection, testing and commissioning charges of the equipment at site.

Test check of records revealed that while the lumpsum contract for supply of equipment for boilers was in consolidated form, excise duty was not paid on the entire contract value on the plea that a major portion of such equipment consisted of bought out items. Excise duty was, however, paid on such portion of the value that constituted the manufactured goods (ratio of bought-out items to such manufactured goods being 50:50 in most cases.) The assessee devised a billing break-up of numerous equipment both for manufactured goods and bought out items for supply to the customer. Accordingly, the payment was made by the customer on the condition that the break up of such billing did not exceed the total contract price of the goods to be supplied.

Test check of costing records also revealed that the value on which duty was paid (herein referred to as transaction value of manufactured goods) was kept abnormally low while distributing the total contract price between bought out items and own manufactured goods, and compensated such lower value by increasing the price of bought items (although bought out at much lower agreed price) so that it never exceeded the total contract price.

The correctness of the duty paid was not verifiable in the absence of statutory requirement of submission of declaration before the jurisdictional excise authority indicating the elements making up the transaction value. The assessee took advantage of this lacuna in the rule and undervalued own manufactured goods by increasing the price of bought out items. The value ought to have been arrived at as per rule 8 read with rule 11 of the Valuation Rules, 2000 on which basis Rs.1.09 crore during the year 2002-2003 escaped levy.

2.10    No provision for exclusion of cost of durable and returnable container from the transaction value

As per new section 4 cost of all durable and returnable containers shall form part of assessable value even if such packing or containers are supplied by the buyer for repeated use.

M/s. Solaris Chemtech Limited, Karwar in Mangalore Commissionerate of Central Excise, manufacturer of inorganic chemicals falling under chapter 28 cleared the excisable goods, viz., liquid chlorine and caustic soda lye on sale, after packing the goods in cylinders and tankers respectively. Excise duty was paid on the value of the goods, which did not include the cost of cylinders and tankers. In the absence of any exclusion clause, the packing of the said excisable goods in cylinders and tankers would be the essential part of the transaction, without which the goods could not be made marketable. This resulted in undervaluation of excisable goods of Rs.215.83 crore and short levy of duty of Rs.34.53 crore for clearances during the period from July 2000 to March 2003.

2.11    No provision for adoption of comparable goods price

2.11.1    Valuation of goods captively consumed

Before introduction of Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000, excisable goods cleared for captive consumption by an assessee for further manufacture of other goods by himself or by his related persons, were to be valued under rule 6(1)(b) of Central Excise Valuation Rules, 1975, on the basis of comparable price of the same goods cleared to others. Under the new Valuation Rules, there is no provision for adoption of comparable price for goods captively consumed. They are to be valued at 115 per cent (110 per cent from 5 August 2003) of the cost of production under rule 8 of the new Valuation Rules, even if the same goods are sold to others at higher prices. The lacuna is leading to undervaluation of goods and short levy of duty.

Seven assessees in seven Commissionerates of Central Excise, engaged in the manufacture of excisable goods like bulk drugs, steel tubes, aluminium rolled products etc. falling under different sub-headings cleared products both for captive consumption within their units as well as to other units. While the products were cleared to others at higher prices during the periods between July 2000 and March 2003, the same were cleared for captive consumption on payment of duty on lower assessable values. Lack of provisions in the new Valuation Rules for adoption of comparable price resulted in short realisation of duty of Rs.26.99 crore during the aforesaid periods.

The Department replied that goods were being cleared as per existing rules.

2.11.2    Clearances of capital goods

As per erstwhile rule 57S of the Central Excise Rules, 1944, where capital goods were removed after being used in the factory, for home consumption on payment of duty of excise as if such goods were manufactured in the assessee’s factory, duty was being calculated by allowing deduction of 2.5 per cent of Modvat credit already taken for each quarter of a year of use or fraction thereof from the date of availing credit under rule 57Q. In the absence of a similar provisions in the new Central Excise Rules, duty is being paid on the agreed price which works out to less than the duty payable under the old provisions.

M/s. Philips India Limited, in Pune Commissionerate of Central Excise, cleared capital goods on payment of duty by adopting transaction value. A comparable study of duty paid and duty payable as per old rules revealed that there was short collection of duty of Rs.26.44 lakh on capital goods cleared during August 2001.

2.12    Transaction value lower than price fixed under law

After introduction of the concept of “transaction value” under new section 4, there is no provision where a price fixed under a law (i.e. controlled price, administered price etc) could be taken as the transaction value, as was done under the erstwhile section 4(1)(a)(ii) of the Act.

The Ministry of Finance (the Ministry) had clarified in June 2000 that but for the normal value being replaced by the transaction value, there was no essential difference in the scheme of valuation of petroleum products under the old valuation and new provisions.

2.12.1    Three assessees in Vadodara and Ahmedabad Commissionerates of Central Excise, cleared their manufactured goods “bulk drugs” between July 2000 and October 2001 at a price much lower than those fixed under Drug Price Control Order (DPCO) and paid the duty at lower price. Despite Ministry’s clarification (June 2000), the Department admitted these lower prices as assessable value for levy of duty instead of adopting the maximum price fixed under price control order. This resulted in loss of revenue of Rs.10.75 crore.

The Department stated that the Ministrys’ clarification relates to products not covered by the DPCO. The reply of the Department is not tenable as in both cases the clarification is with reference to adoption of price fixed under any law. On the same analogy and Ministry’s clarification, prices fixed under the DPCO are to be adopted as price of bulk drugs for levy of duty. The Department, however, issued (August 2001 and June 2002) show cause notices for Rs.15.04 crore in two cases. Orders of adjudication were awaited.

2.12.2    Superior kerosene oil (SKO) is cleared under the control of APM as framed/fixed by OCC under Ministry of Petroleum. In the absence of a provision to adopt price fixed by OCC as the transaction value, the assessable value of SKO is being fixed at lower price disregarding the price fixed under APM leading to loss of revenue to the government.

M/s. Indian Oil Corporation Limited, Haldia Refinery, in Haldia Commissionerate of Central Excise, manufacturing different petroleum products falling under chapter 27 of the Central Excise Tariff Act, 1985 cleared SKO (white) to other oil companies at a price which was lower than the price fixed by the OCC. Since the new system does not contemplate that the price fixed under law in respect of any commodity should be the transaction value, the assessee fixed the transaction value different from the administered price fixed for SKO (white). Thus, the product was undervalued and duty short paid by Rs.7.42 crore between March 2002 and April 2003.

2.13    No provision for differential duty on account of upward revision of prices

Unlike under the old section 4, there is no provision in the new section 4, effective from 1 July 2000, to re-determine the assessable value of excisable goods lying in stock at depot and charge differential duty on the basis of upward revision of price from a particular date.

M/s. Indian Oil Corporation Limited, in Chennai I Commissionerate of Central Excise, engaged in warehousing of petroleum products, sold the goods through depots also. The assessee made an upward revision of price on 1 March 2001 and 12 January 2002 which was given effect to simultaneously at factory gate as well as at depots. Since the assessee is not liable to pay differential duty on the stock lying at depot on account of price rise, loss of revenue of Rs.11.39 lakh had arisen which was reckoned with reference to the quantity of stock transfer made to depots on the day preceding the day of upward revision of price. The exact quantum of loss of revenue could not be ascertained in audit in the absence of correct stock position held at depot on the date of upward revision.

The Department stated that the assessee had already been addressed to furnish stock position at depots. The fact, however, remained that the Department had not pursued the issue further and hence their contention that they were seized of the issue is not acceptable.

Micro evaluation

2.14    Lack of control mechanism

2.14.1    Definition of “related person” more complex

Under the erstwhile system of valuation the concept of related person was defined in a very simple manner i.e. mutuality of interest must exist. Under the present system of valuation a more elaborate definition of “inter-connected undertaking” under the Monopolies and Restricted Trade Practice Act, 1969 (MRTP) has been adopted. The term “inter connected undertakings” comprehends three basic tests for inter connection viz. management, ownership and control of one undertaking by another. While the ownership test can be established/proved by verifiable evidence, the control and management aspect requires considerable investigation and collection of facts as to determine who really controls or manages an undertaking. This may lead to avoidance of in-depth scrutiny and attempt to prove the fact of related person by the Department especially in cases where goods are cleared to thousands of customers. Identification of relationship between the assessee and the customers may not be established as required in the statute.

2.14.2    Scrutiny of invoices not possible in normal course

In the absence of provision for submission of copy of invoice with the monthly/quarterly return, there is no possibility of its scrutiny in the normal course unless records are specifically called for from the assessee.

2.14.3    No provision for initiating action at the Department’s level for determination of value of excisable goods on provisional basis

Rule 7 of the Central Excise Rule 2002, permits the assessee to make payment of duty on provisional basis where he is not able to determine the value of the excisable goods or rate of duty applicable thereon.

But, there is no provision in the new rules corresponding to the erstwhile rule 9B whereby the Department could initiate suo-moto action for resorting to provisional determination of value in cases where the value determined by the assessee was not accepted as correct.

2.14.4    Possibility of misuse of invoice by unscrupulous assessee not ruled out

There is no in-built system devised by the Department at range level to check misuse of invoices cancelled after the clearance of goods by unscrupulous assessees whereas under the earlier system assessee was required to submit copy of the cancelled invoice to the range officer within 24 hours of its cancellation.

2.14.5    Use of valuation cells not made mandatory

There is no statutory provision for creation of valuation cells to which doubtful cases of valuation could be referred for correct and final determination of value. The lack of control mechanism also contributed to incorrect determination of transaction values in some cases resulting in short payment of duty. The cases noticed in audit are discussed in the succeeding paragraphs.

2.15    Undervaluation of goods due to non inclusion of various charges in the assessable value

The Board vide its circular dated 30 June 2000 clarified that transaction value includes all elements which add value to the goods before they are marketed. Where the assessee charges an amount as price for the goods, the amount so charged and paid or payable for the goods will form part of the assessable value. If, however, in addition to the amount charged as price from the buyer, the assessee also recovers any other amount by reason of or in connection with sale, then such amount shall also form part of the assessable/transaction value.

Some of the important cases noticed in audit are highlighted below: -

2.15.1    Non inclusion of equalised freight/insurance

A test check of records of 22 assessees in 15 Commissionerates of Central Excise, engaged in manufacture of different excisable products revealed that the manufacturers inter-alia collected equalised freight/insurance for transportation of goods to the place of delivery. The amount so collected was abated from the total assessable value for purpose of levy of duty. Since under rule 5 of Central Excise Valuation Rules, 2000 abatement from assessable value of the amount of equalised freight/insurance is not a permissible deduction, duty ought to have been paid on the entire value including equalised freight/insurance. Duty of Rs.16.52 crore was levied short during different periods between July 2000 and March 2003.

The Department while confirming the facts in one case stated that the contention of audit would be considered at the time of finalisation of assessment. Reply is not specific, since equalised freight is not an eligible abatement and the same should have been disallowed by the Department without postponing the issue to the time of finalisation of assessment. In another case the Department stated (December 2002 - February 2003) that the matter was already in their notice and show cause notices had already been issued. Reply of the Department is not specific to the issue at hand. Scrutiny of the said show cause notices revealed that the notices issued were based on the Tribunal’s decision in Escorts JCB Limited case, which had already been decided (October 2002) by the Supreme Court in favour of the assessee, whereas the audit objection was based on the non-implementation of Board’s clarification dated 30 June 2000.

2.15.2    Non inclusion of dealers’ margin on goods cleared through company owned and company operated (COCO) outlets

As per rule 9 of Central Excise Valuation Rules, 2000, where the assessee so arranges that the excisable goods are not sold by an assessee except through related person the value of such goods shall be the normal transaction value at which it is sold by the related person at the time of its removal.

Eighteen terminals of petroleum companies, in 14 Commissionerates of Central Excise, engaged in the manufacture and sale of petroleum products cleared MS and HSD through dealers and also through their own outlet viz., COCO in different zones. The assessable value of the products cleared through dealers and COCO outlets remained the same. But in cases of goods cleared to COCO outlets, dealer’s margin was retained by the assessees who owned such outlets. Non-inclusion of dealers’ margin in respect of goods sold through COCO outlets has resulted in short payment of duty of Rs.9.69 crore during the periods between July 2000 and March 2003.

The Department in two cases issued show cause notice covering the period from July 2000 to January 2002. No recovery of differential duty in respect of other assessees in other Commissionerates of Central Excise was started. It was also seen in audit that some of the assessees (in Commissionerates Chennai I & Coimbatore) had begun including the dealer’s margin in transaction value from April 2002 onwards in respect of sale through COCO as a result of audit pointing it out.

2.15.3    Storage service licence fee (SSLF)

Oil companies recover licence fee from dealers for using the company’s assets for dispensing their products like MS, HSD and SKO which is based on the quantity of oil uplifted by the dealers. The recovery of licence fee being an indirect consideration having direct nexus with the sale of product, is includible in assessable value.

Test check of records of oil companies at 22 terminals, in 15 Commissionerates of Central Excise, revealed that these oil companies recovered SSLF totalling Rs.31.88 crore (approximately) from the dealers during the periods between July 2000 and March 2003 but did not include the amount so recovered in the assessable value. This resulted in undervaluation of excisable products with short recovery of duty of Rs.5.36 crore during the aforesaid period.

The Department in five cases reported issue of show cause notices and in three other cases stated that they were under issue. In another case (Rajkot CCE) though the Department claimed knowledge of the issue, it in fact issued show cause notice after audit pointed out the irregularity.

2.15.4    Non inclusion of freight charges collected in excess of expenditure

In the case of 14 assessees, in 11 Commissionerates of Central Excise, it was noticed that the assessees collected freight and insurance in excess of what was actually paid to the transporters. Since only the actual cost of transportation including insurance was allowed to be deducted under rule 5 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000, such excess realisation of freight from the buyers was required to be included in the ‘transaction value’. Non-inclusion of such freight element in the ‘transaction value’ resulted in undervaluation of excisable goods and short levy of duty of Rs.3.66 crore during the periods between July 2000 and March 2003.

The Department in two cases admitted the objections (with recovery of Rs.2.14 lakh in one case) but stated in the third case that the assessee had excluded the total cost of transportation from the total invoice price which he had collected from the customer. The fact, however, remained that the assessee despatched his own manufactured goods as well as other goods in the same vehicle and availed abatement of the entire amount of freight charges instead of the prorata cost of transportation on account of his own manufactured goods.

2.15.5    Retail pump outlet (RPO) charges for petroleum products

M/s. IOC Limited, Haldia Refinery, in Haldia Commissionerate of Central Excise, and six other assessees, in four Commissionerates of Central Excise, engaged in manufacture of petroleum products under chapter 27, separately collected RPO surcharge and RPO charges over and above the permissible limit prescribed by the Board on the clearances of HSD sold to retail pump outlets on the sale of HSD and MS to them which ought to have been included in transaction value. Non inclusion of such charges resulted in short recovery of duty of Rs.3.01 crore on clearances during the period from July 2000 to April 2002.

The Department stated that these were only delivery charges and hence not includible in the assessable value. The reply is not acceptable as the assessee was collecting delivery charges separately over and above the RPO charges.

2.15.6    Cost of transportation not shown separately in the invoice but excluded from the transaction value

Scrutiny of records of 17 assessees, in 13 Commissionerates of Central Excise, revealed that although they had recovered transportation cost they did not show such charges separately in the invoice in contravention of rule 5 of the Valuation Rules, 2000. The transportation charges so recovered from the buyers after the sale of excisable goods were, thus, liable to be included in the assessable value. The Board vide circular dated 30 June 2000 clarified that exclusion of cost of transportation from the value is allowed only if the assessee has shown them separately in the invoice for such excisable goods and the exclusion is permissible only for the actual cost so charged from his buyers. Non inclusion of such charges, therefore, resulted in undervaluation of excisable goods with subsequent short-levy of duty of Rs.18.76 crore during the periods between July 2000 and March 2003.

The Department in one case stated that the matter would be examined and in another two cases claimed that action was initiated prior to visit of CERA whereas the fact remains that the show cause notices were issued after the audit objections were raised.

2.15.7    Pre-delivery inspection and testing charges

The Board clarified on 1 July 2002 that after sales service and pre-delivery inspection charges (PDI) provided free by the dealers to the customers on behalf of the assessee, would be included in transaction value.

M/S. Hindustan Motors Limited, Hooghly and three other assessees, in four Commissionerates of Central Excise, engaged in manufacture of motor vehicles and parts and other excisable products had cleared their products to various dealers and government customers under DGSD rate contract. Scrutiny of records revealed that in case of sales to customers, other than sales to government, central excise duty was calculated only on basic price of vehicle excluding the cost of pre delivery inspection charges and testing charges. Non adoption of such charges resulted in short-levy of duty of Rs.1.95 crore (including Rs.1.55 crore in case of Hindustan Motors) on the clearances made during the period between July 2000 and March 2003.

The Department admitted the objection in Hindustan Motors case and agreed to examine the other.

2.15.8    After sales service charges

The Board vide circulars dated 19 November 1997 and 12 January 1999 clarified that the cost towards free after sales service provided by the dealers out of their margin was includible in the assessable value. Based on an Apex court ruling to the contrary on 27 January 2000, the above circulars were withdrawn. The Board, however, subsequently clarified (July2000/December 2002) that after-sales service charges are includible in transaction value and also that earlier circulars would apply to past cases only as provisions of new section 4 introduced from 1 July 2000 were not subject matter of dispute before the Apex court.

M/s. Tractor and Farm Equipment Limited, Sembium, in Chennai II Commissionerate of Central Excise, engaged in manufacture of tractors cleared the product through dealers network who were entrusted with four free after sales services of tractors during warranty period. The cost of four free after sales service was met by dealers out of their margin and, therefore, such charges were includible in the transaction value. Non-inclusion of the same resulted in short levy of duty of Rs.15.66 lakh for the period from July 2000 to December 2002.

The Department stated (May 2003) that it would be taken care of at the time of finalisation of assessment for the period upto June 2002 and show cause notice would be served on the assessee for the later period i.e., July 2002 to December 2002. The Department’s reply for the period from 1 July 2000 to June 2002 is not acceptable since Board’s references cited were explicit on the issue and remedial action did not warrant postponement to the time of finalisation of provisional assessment.

2.15.9    Other charges over and above ‘transaction value’

Test check of records of 22 assessees, in 17 Commissionerates of Central Excise, manufacturing different excisable goods revealed that the assessees did not include various “other charges”(including free supply of inputs or packing material in certain cases) collected over and above the declared transaction value. Since such charges were collected from the customers, as an indirect consideration in relation to the sale of goods, these charges ought to have been included in the transaction value. Non inclusion of these charges resulted in short levy of duty of Rs.5.97 crore during the period between July 2000 and March 2003.

The Department in three cases confirmed the demand of Rs.58.59 lakh; booked offence case for Rs.11.65 lakh in one case and issued show cause notice for Rs.12.34 lakh in another case. In one case the Department justified the amortisation of value of crates because of their repeated use. The reply is contrary to the Valuation Rules since crates are not used in the factory.

2.16    Incorrect deductions from the assessable value

Test check of records of 20 assessees, in 17 Commissionerates of Central Excise, revealed short levy of duty of Rs.10.50 crore due to incorrect deductions from the assessable value. Some of the interesting cases are given below: -

2.16.1    Commission paid for procuring orders

Two assessees, in Jalandhar and Coimbatore Commissionerates of Central Excise, engaged in the manufacture of nylon/polyester yarn (chapters 54 and 55) and chains (chapter 84) claimed trade discount at 2 per cent and 30 per cent respectively for arriving at the assessable value while transferring goods to their depots, consignment agents and dealers. As per the marketing pattern adopted by the first assessee, dealers were required to procure orders and arrange payments to the assessee alongwith interest wherever the payment was not made by due date. Since trade discount was not allowed on commercial invoices when the goods were invoiced by the assessee to the customers, credit notes were issued to the appointed dealers for 2 per cent of amount of invoice as “commission”. In the second case the assessee passed on discount of 29 per cent and the balance 1 per cent was passed on to the whole sale dealers who acted as agents. This was contrary to the Apex court’s judgement in the case of M/s. Coromondal Fertilizers Limited {1984(17) ELT 607} which had held that the commission paid to selling agents is not a trade discount and hence did not qualify for deduction.

Since relation between the assessees and dealers and consignment agents was that of principal and agents, trade discount at 2 per cent and 1 per cent deducted from transaction value at factory gate on the transfer of goods to consignment agents and dealers was in the nature of a commission paid to them for services rendered which was not admissible. This resulted in short levy of duty of Rs.6.37 crore on clearances during the periods between September 1997 and July 2002.

The Department in one case reported issue of show cause notice for recovery of excise duty of Rs.6.18 crore for the period May 1997 to August 2002 by invoking the extended period clause on the incorrect allowance of deduction of discount.

2.16.2    Incorrect deduction of freight collected for both ways under round trip kilo metre (RTKM) system

Test check of records of 11 terminals of oil companies, in nine Commissionerates of Central Excise, engaged in the manufacturing and marketing of various petroleum products like MS, HSD and SKO etc., revealed that the oil companies while clearing the products to various distribution outlets on payment of duty on ex-terminal prices through hired tankers at the distribution points, collected delivery charges for both ways in the name of RTKM charges from the dealers. The entire amount collected on account of transportation both ways was claimed whereas deduction for only onward freight would be eligible for deduction under rule 5 of the Valuation Rules. Incorrect deduction of two ways freight resulted in undervaluation of excisable products with short levy of duty of Rs.1.40 crore for the period from July 2000 to March 2003.

The Department in five cases promised to examine the issue.

2.16.3    Purchase tax on raw materials

Since only the duties and taxes paid/payable on finished products are eligible abatements to arrive at the transaction value of excisable goods manufactured, purchase tax paid on raw materials is not an allowable deduction. Mention was, therefore, made in Para 10.2 of CAG’s Audit Report for the year ended 31 March 1999 regarding irregular abatement of purchase tax on raw material by M/s. TVS Suzuki Limited in December 1997 which the Ministry had admitted. However, test check of records of the same assessee in March 2003 revealed that such abatement continued upto 2001-02. This resulted in short levy of duty of Rs.1.02 crore for the period July 2000 to March 2002 viz. after the introduction of transaction value.

The Department admitted the objection and intimated issue of show cause notice for Rs.67.80 lakh for the period 2001-02 stating that for the earlier period, action would be taken at the time of finalisation of assessment.

2.16.4    Inadmissible discount

Under amended section 4 of the Central Excise Act, 1944, all types of discounts allowed on declared price and actually passed on to the buyer are permissible as deductions from transaction value.

Three assessees in three Commissionerates of Central Excise, claimed cash turnover discounts from the assessable value, but did not pass on the discount to the buyers on the aggregate quantity of goods sold from depots etc. Such discounts were, however, adjusted separately with the discounts passed on at a later date. Such an adjustment was not admissible after 1 July 2000, being contrary to provision pertaining to transaction value. This resulted in short levy of duty of Rs.62.14 lakh on clearances during the periods between July 2000 and March 2003.

The Department reported recovery of Rs.11.60 lakh in one case but in another case stated that discounts which are known later are also eligible for deduction from assessable value in terms of Board’s circular dated 30 June 2000. The reply is not tenable since in view of rule 7 of the Valuation Rules, 2000 each transaction is treated as a separate transaction, and the amount of discount passed on in one transaction cannot be adjusted against the other.

2.16.5    Average/equalized turn over tax (TOT)

Test check of records of two assessees, in Vadodara and Noida Commissionerates of Central Excise, revealed short levy of duty of Rs.84.79 lakh on account of inadmissible deduction of average/equalised TOT. As per the rules all taxes and levies such as duty of excise, sales tax and other taxes are not included in transaction value provided they are actually paid or actually payable. As per para 8 of Board’s circular of July 2002 transaction value does not allow deduction towards such taxes and levies if they are calculated on average/equalized basis.

One of the cases is given below: -

M/s. Apollo Tyres Limited, in Vadodara II Commissionerate of Central Excise, engaged in manufacture of tyres, determined the assessable value of their products for stock transfer to their depots after deducting government levies at the rate of 0.50 per cent from April 1999 to September 2001 and 0.35 per cent thereafter from the assessable value on account of averaged/equalized payment and octroi charges based on payments on this account made during the previous years. Since deduction of government levies on account of TOT and octroi on averaged/equalized basis was not permissible, deduction of Rs.4.21 crore claimed towards such levies escaped payment of duty of Rs.67.29 lakh during the period from July 2000 to March 2002.

The Department accepted the objection and issued show cause notice in August 2002 and February 2003. Later it stated that the actual TOT was to be ascertained later on and was an admissible deduction. The fact, however, remains that equalised/average TOT was not a permissible deduction during the relevant period.

2.16.6    Abatement towards distress sale

The Supreme Court in the case of M/s. MRF Limited {1995 (77) ELT 433}, held that the abatement of discount claimed on the clearance of new tyres with reference to loss suffered by the dealers on account of defective nature of tyres cleared earlier is inadmissible.

M/s. TVS Motors, Hosur in Chennai III Commissionerate of Central Excise, manufacturing two wheeler motor vehicles directed their dealers to sell the stock held by them as on 1 March 2001 at reduced prices promising to compensate them for the loss suffered by way of ‘special trade discount’ on future clearances. The assessee in fact extended the above scheme in a phased manner to all his dealers in India restricting the ‘special trade discount’ to the actual loss suffered. On the analogy of the decision of the Apex court, such a deduction was not an eligible abatement. Incorrect abatement allowed to dealers in Tamilnadu, Pondicherry, Uttar Pradesh, and Karnataka amounted to Rs.1.55 crore resulting in short levy of duty of Rs.24.77 lakh during the period March and June 2001. Department was requested to ascertain the details for differential duty relating to dealers in other States.

The Department stated that a show cause notice had been issued to the assessee. But later stated that the judgement of MRF case would not be applicable in the instant case.

The assessee’s letter dated 14 June 2001 addressed to the Department, however, revealed that ‘special trade discount’ claimed by the assessee and allowed by the Department was only to compensate the loss suffered by dealers and hence, it could not be treated as normal trade discount.

2.17    Under valuation of goods consumed captively

Test check of records revealed that 83 assessees in 37 Commissionerates of Central Excise, cleared excisable goods to their other units/related persons/inter-connected undertakings for captive consumption on payment of duty on basis of transaction value or the value determined under rule 4 instead of under rule 8 of the Valuation Rules. Scrutiny of records revealed that even in these cases, the assessees committed irregularities in working out cost of production, thus undervaluing the goods which resulted in short payment of duty of Rs.145.48 crore on clearance during different periods between July 2000 and March 2003.

One of the interesting cases is given below: -

M/s. Reliance Industries Limited (RIL), Jamnagar, in Rajkot Commissionerate of Central Excise, cleared the goods on payment of duty based on transaction value to its four major complexes viz. RIL, Patalganga Complex, RIL, Naroda Complex, RIL, Hazira Complex and RIL, Jamnagar Complex, for manufacturing different products. A consolidated balance sheet/annual report was prepared showing therein inter divisional transfer of goods separately. On scrutiny of excise records it was noticed that inter divisional transfer of goods were valued at lower rate based on “transaction value” method instead of cost construction method i.e. 115 per cent of cost of production. Since the assessee did not provide the details of cost of production, same was worked out on the data available in the balance sheet for the year 2001-2002 on the line of Board’s instructions issued in October 1996. Between July 2000 and February 2003, the assessee had transferred 45.12 lakh tonne of their products (paraxylene and naptha) at an aggregate value of Rs.7391.36 crore instead of an aggregate value of Rs.7688.30 crore computed at 115 per cent of cost of production. This resulted in under valuation of goods by Rs.296.95 crore with short payment of duty of Rs.47.51 crore.

The Department stated that in case of inter unit transfers, valuation will have to be done under rule 4 and not under rule 8 of Valuation Rules, and the sale at normal price at factory gate including to their other unit was in accordance with the rules. The Department’s reply is neither relevant nor tenable as rule 4 of Valuation Rules, 2000 merely provides for adjustment of price at the time of delivery, if it is later than the time of removal.

2.18    Short levy of duty due to undervaluation of goods cleared to or through interconnected undertakings

Test check of records of four assessees in three Commissionerates of Central Excise, revealed that incorrect determination of the assessable value of excisable goods cleared to the subsidiary/interconnected undertakings resulted in short levy of duty of Rs.48.52 lakh during the periods between July 2000 and March 2003. Valuation of excisable goods was not made as per rule 10 of the Valuation Rules.

The Department in one case admitted the irregularities and intimated recovery of Rs.3.38 lakh.

2.19    Short levy of duty on goods sold through depots/consignment agents

Test check of records of excisable goods transferred to depots/premises of consignment agents in the case of six assessees, in five Commissionerates of Central Excise, revealed that the transaction value of goods determined in many cases was lower than the normal transaction value. As per rule 7 of the Central Excise Valuation Rules, 2000 where the excisable goods are not sold by the assessee at the time and place of removal but are transferred to a depot, premises of a consignment agent or any other place, from where goods are to be sold, the value shall be the normal transaction value i.e., the value at which the greatest aggregate quantity of such goods were sold from the depots/premises of consignment agents at or about the same time or at the time nearest to the time of removal of goods. Non following of the rules resulted in incorrect valuation of goods with consequent short levy of duty of Rs.23.96 lakh for the periods between July 2000 and March 2003.

The Department, therefore, was requested to verify the necessary details in respect of all the depots for the period from July 2000 onwards and raise demands wherever warranted for differential duty based on the analogy of irregularities that came to light during test check. So, in September 2001 and February 2003, Rs.16.24 lakh was debited/paid by two assessees.

2.20    Other interesting cases

During test check of records of 43 assessees, in 25 Commissionerates of Central Excise, various other cases of short levy of duty of Rs.20.98 crore were noticed as discussed below: -

2.20.1    Undervaluation of inputs cleared as such

Thirty seven assessees in 21 Commissionerates of Central Excise, cleared inputs as such to their other units, under the same management, for further use in manufacture of excisable goods. The assessees discharged duty liability equivalent to credit taken which was contrary to rules 57AB(4) of the Central Excise Rules, 1944, as applicable for the period 1 July 2000 to 28 February 2001 and rule 3(4) of Cenvat Credit Rules, 2001 for the period from 1 July 2001 to 28 February 2003. Fifteen per cent was required to be added to the landed cost of inputs cleared as such for purpose of determining the value for payment of duty. Non-adoption of the value equivalent to 115 per cent of the total landed cost of these inputs resulted in undervaluation of goods involving short levy of duty of Rs.10.24 crore during different periods between July 2000 and February 2003.

The Department stated that the removal of inputs and payment of duty was in accordance with the Board’s circular. The reply is not tenable since the Board’s instructions were not in conformity with the rules and hence the amendment was introduced with effect from 1 March 2003 which established the fact that valuation was required to be done at 115 per cent of the cost of production till 28 February 2003.

2.20.2    Incorrect valuation of goods by adopting value under rule 8 instead of transaction value

M/s. Bharat Bijlee and M/s. Aluflex, in Belapur Commissionerate of Central Excise, inter alia manufactured lifts and curtain wall which were, after installation, declared to be immovable and non-excisable goods. Accordingly, both the assessees paid duty on their components and parts cleared to the site for commissioning of the said goods. The duty on these components and parts was paid at 115 per cent of the cost of production under rule 8, considering clearance to their own site as captive consumption. This was incorrect as there was no captive consumption as envisaged in rule 8 and also when the “transaction value” i.e. the price actually charged of the goods was available. The incorrect adoption of “value” under rule 8 (115 per cent of cost of production), instead of the “transaction value” under section 4(1)(a), resulted in short levy of duty of Rs.5.79 crore on clearances during the different periods between July 2000 and March 2003.

  • Delayed/non-withdrawal of notifications

2.20.3    Iron and steel products

With the introduction of new section 4 of the Central Excise Act, 1944, and allied Valuation Rules thereon with effect from 1 July 2000, the transaction value for each removal should be the basis for assessment of central excise duty. In the case of stock transfer of iron and steel products from integrated steel plants to their stockyard, the valuation at factory gate is to be governed by rule 7 of Central Excise Valuation Rules, 2000. However, notification No.13/2000 CE dated 1 March 2000 which exempts iron and steel products cleared from the steel plants for further sale at stockyards, from so much of the duty of excise as was more than the duty leviable at the factory gate, remained operative till 28 February 2003. The said notification was, however, withdrawn vide notification 17/2003 CE dated 1 March 2003. As such during the period 1 July 2000 to 28 February 2003, due to overlapping of the provisions there was unintended benefit to the integrated steel plants selling their goods at stockyards.

M/s. Durgapur Steel Plant (a unit of Steel Authority of India Limited), at Durgapur, in Bolpur Commissionerate of Central Excise, engaged in manufacture of iron and steel products under chapter 72, while clearing the manufactured goods to its stockyards had charged “distribution charges” separately at Rs.400/Rs.200 per tonne but did not include the same in the value for the purpose of levy of excise duty availing exemption under notification No.13/2000 dated 1 March 2000. Due to non withdrawal of the notification, there was short-collection of duty of Rs.2.29 crore during the period from April 2001 and March 2002 (short levy relating to the period 1 July 2000 to March 2001 could not be calculated for want of details of clearances).

2.20.4    Motor vehicle parts

M/s. Ashok Leyland Limited, Ennore, in Chennai I Commissionerate of Central Excise, engaged in manufacture of motor vehicle components including internal combustion engines consumed the products captively in their factory and also stock transferred the goods to their other units. The assessee adopted either 115 per cent of cost of production or 60 per cent of spare parts price in terms of notification No.6/2000-CE dated 1 March 2000 and No.3/2001 CE (NT) dated 1 March 2001 for valuation of stock transferred goods whichever was found to be beneficial. Not rescinding the notification even after withdrawal of the concept of comparable price with effect from 1 July 2000 resulted in short levy of duty of Rs.2.09 crore for the period from December 2001 to December 2002.

The Department admitted that the observation pertained to policy decision of the government.

2.20.5    Incorrect valuation of goods based on MRP (section 4A) instead of transaction value (section 4)

Air conditioners of capacity upto 3 tonne falling under heading 84.15 are assessed to duty on the basis of maximum retail price (MRP) under section 4A. However, in case of supply of air conditioners against rate contract to the DGSD or government departments etc. where MRP is not required to be printed on the item, valuation is required to be done under section 4 (transaction value) and not under section 4A (MRP).

Two assessees in Delhi III and Delhi IV Commissionerates of Central Excise, sold air conditioners of 3 tonne capacity to various government departments/corporations and industrial customers etc. at prices as per rate contract/agreed price. The assessee, however, contrary to the Board’s clarification dated 28 February 2002 paid duty on the basis of MRP under section 4A as against the contract/agreed price (actually charged) which was more than the value on which duty was paid. Thus, incorrect valuation of goods resulted in short payment of duty of Rs.57.32 lakh.

2.21    Conclusion

The assessment on transaction value basis has failed to plug leakage in revenue due to lacunae in the provisions and inadequate internal control mechanism. Provisions need to take into consideration the subsidies received from the government by petroleum companies as indirect consideration. The practice of assessees entering into mutually agreed lower prices must be countered to protect revenue. Similarly, undervaluation by job workers and in case of contract agreements over invoicing of bought out items have a negative impact on revenue and suitable measures need to be taken to counter the same. Review revealed several instances of undervaluation due to non inclusion of various charges in assessable value as also incorrect deductions indicating weaknesses in administration. There is an urgent need to impose effective internal controls to check gross undervaluation of the excisable products and avoid leakage of revenue.

The above observations were pointed out in October 2003; reply of the Ministry had not been received (February 2004).