Valuation - Inclusion of Insurance & Transporation charges

PJ/Case Study/2011-12/37

CASE STUDY

Prepared By:
CA Pradeep Jain
Sukhvinder Kaur LLB [FYIC]
And Megha Jain, B. Com

Introduction:-

In the case under study, the issue raised was that whether the freight and insurance charges will be inclusive in the assessable value of goods, when the for transportation of goods there was a separate agreement and the charges for transportation of goods were not on actual basis. And the assessee was bound to transport the goods at the rates fixed in the tender. And the matter was raised before the Larger Bench of the Supreme Court.

Commissioner of Central Excise, Noida v/s M/s Accurate Meters Ltd
[2009-TIOL-31-SC-CX-LB]

Relevant Legal Provisions:-

- Section 4 (1) (a) of the Central Excise Act, 1944: -

4. Valuation of Excisable goods for purposes of charging of duty of excise.-

(1) Where under this Act, the duty of excise is chargeable on any excisable goods with reference to their value, then, on each removal of the goods, such value shall.

a. in a case where the goods are sold by the assessee, for delivery at the time and place of the removal, the assessee and the buyer of the goods are not related and the price is the sold consideration for the sale, be the transaction value;

- Definition of Place of Removal in Section 4: -

(c) "place of removal" means.

i. a factory or any other place or premises of production or manufacture of the excisable goods;

ii. a warehouse or any other place or premises wherein the excisable goods have been permitted to be deposited without payment of duty; from where such goods are removed;

(iii) a depot, premises of a consignment agent or any other place or premises from where the excisable goods are to be sold after their clearance from the factory,

- Rule 4 of Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000: -

The value of the excisable goods shall be based on the value of such goods sold by the assessee for delivery at any other time nearest to the time of the removal of goods under assessment, subject, if necessary, to such adjustment on account of the difference in the dates of delivery of such goods and of the excisable goods under assessment, as may appear reasonable.

- Rule 5 of Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000: -

Where any excisable goods are sold in the circumstances specified in clause (a) of sub-section (1) of section 4 of the Act except the circumstances in which the excisable goods are sold for delivery at a place other than the place of removal, then the value of such excisable goods shall be deemed to be the transaction value, excluding the cost of transportation from the place of removal upto the place of delivery of such excisable goods.

- Section 39 of the Sales of Goods Act, 1930: -

39. Delivery to carrier or wharfinger.-

(1) Where, in pursuance of a contract of sale, the seller is authorised or required to send the goods to he buyer, delivery of the goods to a carrier, whether named by the buyer or not, for the purpose of transmission to the buyer, or delivery of the goods to a wharfinger for safe custody, is prima facie deemed to be a delivery of the goods to the buyer.

(2) Unless otherwise authorised by the buyer, the seller shall makes such contract with the carrier or wharfinger on behalf of the buyer as may be reasonable having regard to the nature of the goods and the other circumstances of the case. If the seller omits so to do, and the goods are lost or damaged in course of transit or whilst in the custody of the wharfinger, the buyer made decline to treat the delivery to the carrier or wharfinger as a delivery to himself, or may hold the seller responsible in damages.

(3) Unless otherwise agreed, where goods are sent by the seller to the buyer by a route involving sea transit, in circumstances in which it is usual to insure, the seller shall give such notice to the buyer as may enable him to insure them during their sea transit and if the seller fails so to do, the goods shall be deemed to be at his risk during such sea transit.

Brief Facts:-

- Respondent is engaged in the manufacture of 'electric meters and parts thereof falling under Chapter sub-heading No. 9028.00 and 9033.00 of First Schedule to the Central Excise Tariff Act, 1985. Its customers, inter alia, are various State Electricity Boards constituted and incorporated under the Electricity (Supply) Act, 1948.

- The State Electricity Boards in terms of advertisements issued in this behalf called for quotation for supply of electric meters. The value of the electric meters was to be fixed as at the factory gate. Freight and the insurance charges, however, as stipulated therein, were to be charged on an average basis and not on actuals.

- Inter alia on the premise that the manufactured goods were actually delivered to the purchasers at their premises and not at the factory gate, a notice dated 6.2.2003 was issued to the assessee for recovery of excise duty amounting to Rs. 9,13,260/- which was not paid on freight and insurance under Section 11A of the Act along with interest as payable under Section 11AB thereof as also as for imposing penalty in terms of Rule 25 of Central Excise (No.2) Rules, 2001/Central Excise Rules 2002.

- Before the Adjudicating Authority, Respondent raised a plea that keeping in view the nature of transaction, freight and insurance charges were not to be included for the purpose of calculation of value of the goods. In support of the said contention, reliance was placed on M/s Escorts JCB Ltd. vs. CCE, Delhi [2002 (146) ELT 31 (SC)].

- Distinguishing the decision in Escorts JCB case, the Adjudicating Authority by an order dated 5.11.2003 opined that there were ample reasons to believe that the sale had taken place at the buyer's end. Accordingly, demand of duty was confirmed and penalty was imposed.

- Respondent preferred an appeal. The Commissioner (Appeals) allowed the appeal.

- Aggrieved by the same, Revenue filed an before the Tribunal which has been dismissed by holding that only contention raised by Revenue is that against the earlier order passed by the Tribunal, the appeal has been filed before the High Court. No order of the High Court staying the operation of earlier order passed by the Tribunal was produced by Revenue.

- Hence, revenue is in appeal before the Supreme Court.

Appellant’s Contention:-

Revenue urged that the finding of fact arrived at by the Original Authority that the delivery of manufactured goods were made by the assessee at the place of the buyer's end having not been overturned, Rule 5 of the Rules shall apply.

Issue: -

Whether 'freight' and 'insurance charges' constitute the value of the goods for the purpose of computation of Excise Duty in terms of Central Excise Act, 1944 and the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000?

Reasoning of the Supreme Court:-

- The Supreme Court observed that goods were supplied by the assessee to the State Electricity Boards in terms of the stipulations contained in the advertisements issued by them. Two separate contracts have been entered into by and between the respondent and State Electricity Boards therefore one in respect of the supply of the electric meters and another for transportation and transit insurance thereof.

- The provisions of Section 3 of the Act were perused and it was noted that Section 3 provides for levy and collection of duty in the manner as prescribed therein. Section 4 provides for valuation of excisable goods for purposes of charging of duty of excise. The meaning of “place of removal” defined in Section 4 (3) (c) was also perused.

- It was noted that indisputably, a place where excisable goods are sold can be a place of removal. The question, therefore, what would constitute a place of removal will depend upon the fact of each case. In the facts of instant case, the Assessing Officer has noted that “In invoices raised to Government buyers, mainly to Electric Boards, amount of freight and insurance which is to be recovered from such buyers is shown separately. It is at a fixed rate i.e. equalized freight. It indicates that if the goods are cleared to government buyers, the ‘freight and insurance’ amounts are borne by the supplier party but it is recovered from the buyer at a fixed rate irrespective of freight amount, which has been incurred by the supplier party on sending the goods to the buyers.”

- It was accepted that in the orders placed for supply of meters, contracted prices predetermined by the Electric Board inter alia been shown as under:

i. Computed prices or Ex-factory have been quoted.

ii. Prices have been quoted as firm are on F. O. R. destination.

iii. The Ex-Factory are quoted without the element of the Excise duty, sales Tax/Trade Tax and packing, Forwarding, average Freight and Insurance charges, which are paid separately.

iv. Packing, Forwarding average Freight and Insurance charges covered by supplementary orders wherein average charges as per meter are shown.

Purchase orders provided for ex-factory prices as Firm on F.O.R., destinations which are inclusive of excise duty, sales tax, packing, forwarding, freight and insurance charges. In the price and delivery schedule, average price was to be paid per meter as shown separately including freight charges. It was opined that the freight amount being collected was not on actual basis.

The Court noted that the Adjudicating Authority had also noticed this fact in order dated 05.11.2003. It was stated by the Adjudicating Authority that as per the Central Excise Act, the valuation of the goods is governed by the provisions of Section 4 of the Central Excise Act, 1944, wherein it has been laid down that the value of the goods shall be price at which the goods are not sold at the time and place of removal, the value of such goods is to be determined as per the provisions of Central Excise Valuation Rules, 2000. Further, as per Rule 5 of the Valuation Rules, 2000, where any excisable goods are sold in the circumstances specified in clause (a) of sub-section (1) of Section 4 of the Act except in circumstances in which the excisable goods are sold for delivery at a place other than the place of removal, then the value of such excisable goods provided the cost of transportation is charged to the buyer in addition to the price for the goods and shown separately in the invoice for such excisable goods. If the assessee has a system, of pricing and sale at uniform prices inclusive of equated freight for delivery at factory gate or elsewhere, no deductions for freight element will be permissible.

The Court noted that despite the afore-said discussion, however, the Adjudicating Authority arrived at a conclusion that the sale had taken place at the end of the buyer on the premise that the legal ownership of the goods would pass to the buyer at the latter's place.

- The Court noted that the Commissioner (Appeal) had reversed the judgment by following the decision of the Tribunal in assessee’s case. It was held that the issue remains settled in favour of the assessee by the decision of the Tribunal in the case of Associated Strips (2002 (49) RLT 506).

- The Supreme Court perused the provisions of Rule 4 and 5 of the Valuation Rules and held that Rule 5 would apply in a case where clause (a) of sub-section (1) of Section 4 of the Act has no application.

- It was noticed hereinbefore that there were two separate contracts; one for sale of Electricity Meters which was governed by the provisions of the Sale of Goods Act, and the other governing transportation of the goods. The charges for transportation of the goods were not on actual basis. Respondent was bound to transport the goods from the factory gate to the place of the State Electricity Boards at the rates specified in the tender. Prior thereto, the State Electricity Board Authorities were to make inspection of the goods.

- The decision in case of Associated Strips Ltd v/s Commissioner of Central Excise, New Delhi [2002 (143) ELT 131] was noted wherein the Tribunal had distinguished its earlier decision in Commissioner v/s Prabhat Zarda Factory Ltd [2000 (119) ELT 191].

It was noticed that the said decision of the Tribunal has been approved by the Supreme Court in M/s Escorts JCB Ltd case. It was stated therein that the The contention is that the fact that the assessee arranged for the transit insurance would in no way lead to an inference that the ownership in the goods at the place of buyer. The terms and conditions of the sale are clear that the sale is Ex-works at Ballabgarh, Haryana. The payment is to be made before dispatch of the goods from the factory premises. The machinery, handed over to the carrier/transporter is as good as delivery to the buyer in terms of Section 39 of the Sales of Goods Act apart from terms and conditions of sale. It was held that the factual matrix of the present case is squarely applicable to the ratio of the decisions in M/s Associated Strips Ltd as alsoM/s Escorts JCB Ltd.

In that view of the matter and for the reasons stated hereinbefore, the Supreme Court has no doubt that the Authority in appeal as also the Tribunal were correct in their view that the amount claimed by way of transportation charges and insurance cannot be considered for determining the value of the electric meters supplied. No merit in appeal.

Decision of the Supreme Court:- Appeal dismissed.

Conclusion:-

When the delivery of goods were delivered to the carrier and for the transit of the goods although the buyer has paid for insurance charges and the freight but he will be paid according to the rates fixed by an agreement, then the place of removal will be when the goods were handed over to the carrier. Then the freight amount and transportation charges will not be included in the assessable value of goods. This is the judgment delivered by the Larger Bench of the Supreme Court.

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PJ/CASE STUDY/2011-12/37
21 December 2011

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PJ/CASE STUDY/2011-12/37 21 December 2011

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PJ/CASE STUDY/2011-12/37
21 December 2011