Deduction of amount charged towards risk insurance

PJ/Case Laws/2011-12/1289

Deduction of amount charged towards risk insurance - whether permissible

Case: Collector of Central Excise, Meerut v/s Surya Roshni Ltd

Citation: 2002-TIOL-391-SC-CX

Issue:- Whether amount charged towards risk insurance can be claimed as deduction on account of equalised freight based on the elements of transportation charges, insurance charges, octroi and taxes?

Brief Facts:- Assessee manufactures electric bulbs and tubes which were sold FOR destination. The price charged included two per cent towards transit risk insurance and for the purposes of assessable value, they claimed a deduction on account of equalised freight based on the elements of transportation charges, insurance charges, octroi and taxes. They filed a statement of actual expenses for the year in question, namely, 1994-95, duly certified by a Cost Accountant in which it was shown that deduction on account of insurance charges was actually on account of “transit losses/breakages replenished to customers”. The deduction on this account was disallowed by the Assessing Authority and in appeal, by the Commissioner (Appeal).

The Tribunal, however, in a brief order, said that transit insurance was eligible for deduction while determining assessable value according to its earlier orders. It, therefore, allowed the appeal.

Hence, Revenue is before the Supreme Court.

Appellant’s Contention:- Revenue submitted that what was in question was actually compensation for breakages or losses sustained during transit paid by the respondent to its customers and it was, therefore, not an allowable deduction.

It further drew attention in this behalf to the two M.R.F. judgments, Assistant Collector of Central Excise & Ors. v. Madras Rubber Factory 1987 (27) E.L.T. 553 (S.C.) and Government of India & Ors. v. Madras Rubber Factory Ltd. & Ors. 1995 (77) E.L.T. 433 (S.C.), wherein it has been held that payments in the nature of compensation did not qualify for deduction.

Respondent’s Contention:- Assessee submitted that the cost of transit insurance was includible in the cost of transportation and in this behalf assessee relied upon the second MRF judgment.

Assessee submitted, in the first instance, that although the respondent had not insured with an insurance company the goods that it was transporting to its customers the effect was the same in that it was providing insurance to its customers and was charging two per cent from them.

In the alternative, assessee also submitted that if this submission was not accepted and the Court was of the view that it was compensation that was being paid to the customers, it was part of the cost of the transportation of the goods.

Reasoning of the Judgment:- The Supreme Court held that both the submissions are not acceptable. In the case of transportation what is includible is the cost of taking out insurance to cover the goods transported; in other words, to cover oneself against a possible loss by paying a premium to an insurance company. The payment made by the respondent to its customers for breakages and losses cannot tantamount to insurance. Nor can, by any means, such compensation be treated as a part of the cost of transportation; it is a clear case of making up to the customer by means of a credit note the monies that it has lost on account of breakages or losses in transit.

Decision:- Appeal allowed.

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PJ/Case Laws/2011-12/1289

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