Dr.

Ram Manohar Lohiya National Law University

Lucknow

Subject: Project of Law of Taxation

Topic: Valuation of Excisable Goods

Submitted to: Submitted by:

Mr.Bhanu Pratap Singh Lokesh Nigam

Assistant professor law Roll. No. 140101074

Section A

Semester VIII
 TABLE OF CONTENTS

1. INTRODUCTION

2. CLASSIFICATION OF GOODS

3. VALUATION UNDER CENTRAL EXCISE

4. WHAT IS ASSESSABLE VALUE?(AV)

5. VALUATION RULES TO DETERMINE ASSESSABLE VALUE

6. CONCLUSION

7. REFERENCES

INTRODUCTION
Central Excise duty is an indirect tax which is levied and collected on the goods/commodities
manufactured in India. Generally, manufacturer of commodities is responsible to pay duty to
the Government. This indirect taxation is administered through an enactment of the Central
Government viz., The Central Excise Act, 1944 and other connected rules- which provide for
levy, collection and connected procedures. The rates at which the excise duty is to be
collected are stipulated in the Central Excise Tariff Act, 1985. It is mandatory to pay Central
Excise duty payable on the goods manufactured, unless exempted e.g., duty is not payable on
the goods exported out of India. Further various other exemptions are also notified by the
Government from the payment of duty by the manufacturers.

Section 3 of Central Excise Act ( often called the 'Charging Section' ) states that 'There shall
be levied and collected in such manner as may be prescribed duties on all excisable goods
other than salt which are produced or manufactured in India - . - . -'. These words are same as
those used in Entry No 84 to list I. This definition of Central Excise duty is vital, because it
clearly signifies that there are four basic conditions for levy of Central Excise duty.
(1) The duty is on goods.
(2) The goods must be excisable.
(3) The goods must be manufactured or produced
(4) Such manufacture or production must be in India. Unless all of these conditions are
satisfied, Central Excise Duty cannot be levied.

CLASSIFICATION OF GOODS
There are thousands of varieties of manufactured goods and all goods cannot carry the same
rate or amount of duty. It is also not possible to identify all products individually. It is,
therefore, necessary to identify the numerous products through groups and sub-groups and
then to decide a rate of duty on each group/sub-group. This is called 'Classification' of a
product, which means determination of heading or sub-heading under which the particular
product will be covered. Excise is a duty on excisable goods manufactured or produced in
India. The liability of payment of excise is on the Manufacturer. Once the liability of
payment is established, the next question is what is the amount of duty payable. The two step
process is
 Correctly classify the goods
 Find its assessable value.
The Central Excise Tariff Act, 1985 (CETA) classifies all the goods under 91 chapters (in
fact 96 chapters out of which 5 are blank) and specific code is assigned to each item. There
are over 1,000 tariff headings and 2,000 sub-headings. This classification forms basis for
classifying the goods under particular Chapter head and Sub-head to prescribe duty to be
charged on that particular product. Salient features of the tariff are as follows.
1. CETA is Based on HSN - CETA is based on International convention of Harmonised
System of Nomenclature (HSN), called Harmonised Commodity Description and
Coding System. This is an International Nomenclature standard adopted by most of
the Countries to ensure uniformity in classification in International Trade. Though
CETA generally follows HSN pattern, it is not a copy of HSN. Often, there are wide
variations between HSN and CETA. The CETA also varies significantly from
Customs Tariff, though both are based on HSN.
2. CETA contains two schedules - CETA consists of two schedules - the first schedule
gives basic excise duties (i.e. Cenvat duty) leviable on various products, while second
schedule gives list of items on which special excise duty is payable. Second schedule
contains only few items. It has been clarified that the tariff headings given in second
schedule will be interpreted in the same way as those in first schedule. Items included
in second schedule are already covered and included in first schedule.
3. Sections and Chapters of CEA - Tariff is divided in 20 sections. Each of 20 sections is
related to a broader class of goods e.g. Section I is 'Animal Products', Section VII is
'Plastics and Articles thereof', Section XI is 'Textile and Textile Articles', Section
XVII is 'Vehicles, Aircrafts, Vessels and associated transport equipment, etc. Section
Notes are given at the beginning of each Section, which govern entries in that Section.
These notes are applicable to all Chapters in that section.

Section divided in Chapters - Each of the sections is divided into various Chapters and
each Chapter contains goods of one class. For example, Section XI relates to Textile
and Textile Articles and within that Section, Chapter 50 is Silk, Chapter 51 is Wool,
Chapter 52 is Cotton, Chapter 53 is other vegetable textile fabrics, Chapter 61 is
Articles of Apparel and so on. There are 96 chapters out of which five are blank.

Chapter Notes - Chapter Notes are given at the beginning of each Chapter, which
govern entries in that Chapter.
4. Groups and Sub-groups within the Chapter - Each chapter is further divided into
various headings depending on different types of goods belonging to same class of
products. For instance, Chapter 50 relating to Silk is further divided into 5 headings.
50.01 relates to Silk worm cocoons, 50.02 relates to raw silk, 50.03 relates to silk
waste, 50.04 relates to silk yarn and 50.05 relates to woven fabric of silk. The
headings are sometimes divided into further sub-headings. For example 5004.11
means silk yarn containing 85% or more by weight of silk or silk waste, 5004.19
means containing less than 85% by weight of silk orsilkwaste.

Grouping of goods - The tariff is designed to group all goods relating to same industry
and all the goods obtained from the same raw material under one Chapter in a
progressive manner as far as possible. So far as practicable, Goods are classified
beginning with raw materials and ending with finished products within the same
chapter.

Six Digit classification - All excisable goods are classified using 4 digits system and 2
more digits are added for further sub-classification whenever required. In above
example, first two digits i.e. '50' related to the Chapter Number, next two digits e.g. 01
or 02 relate to heading of the goods in that chapter and last 2 digits indicate sub-
heading.
Coding of Single and Double dashes - Single dash (-) at the beginning of description
indicates a group, while two dashes (- -) at the beginning indicate a sub-group. The
single dash (-) indicates sub-classification of article covered by the heading, while
double dash (- - ) is the sub-classification of the preceding article which has single
dash (-) i.e. it is a sub-sub-classification.
5. Broad grouping in CETA - Following is broad grouping of goods in CETA:
a. Animal Products (Section I - Chapters 2 to 5)
b. Vegetable Products (Section II - Chapters 7 to 14)
c. Animal or vegetable fats (Section III - Chapter 15)
d. Prepared foodstuffs, beverages (Section IV - Chapters 16 to 24)
e. Mineral Products (Section V - Chapters 25 to 27)
f. Chemicals, Fertilisers, soap etc. (Section VI - Chapters 28 to 38)
g. Plastics and Rubber and their articles (Section VII - Chapters 39 and 40)
h. Leather and articles (Section VIII - Chapters 41 to 43)
 i. Wood, cork, straw and their articles (Section IX - Chapters 44 and 46)
j. Pulp, Paper, Paper-board and articles (Section X - Chapters 47 to 49)
k. Textile and Textile Products (Section XI - Chapters 50 to 63)
l. Footwear, Headgear, Umbrellas, Articles of human hair (Section XII -
Chapters 64 to 67).
m. Articles of stone, plaster, ceramic, glass (Section XIII - Chapters 68 to 70)
n. Pearls, precious metals (Section XIV - Chapter 71)
o. Base metals and articles of base metal (Iron, Steel, Copper, Nickel, Zinc, Tin
etc.). (Section XV - Chapters 72 to 83)
p. Machinery and mechanical appliances, electrical equipments, television etc.
(Section XVI - Chapters 84 and 85)
q. Vehicles, Aircrafts, vessels ( Section XVII - Chapters 86 to 89)
r. Optical, photographic, medical, surgical instruments, clocks, musical
instruments (Section XVIII - Chapters 90 to 92)
s. Arms and Ammunition (Section XIX - Chapter 93)

6. Steps of classification - Following are the steps of classification.

 Refer the heading and sub-heading. Read corresponding Section Notes and Chapter
Notes. If there is no ambiguity or confusion, the classification is final and you do not
have to look to classification rules or trade practice or dictionary meaning.

 If meaning of word is not clear, refer to trade practice. If trade understanding of a

product cannot be established, find technical or dictionary meaning of the term used
in the tariff. You may also refer to BIS or other standards, but trade parlance is most
important.
 If goods are incomplete or un-finished, but classification of finished product is
known, find if the un-finished item has essential characteristics of finished goods. If
so, classify in same heading.
 If ambiguity persists, find out which heading is specific and which heading is more
general. Prefer specific heading
 If problem is not resolved, find which material or component is giving 'essential
character' to the goods in question.
 If both are equally specific, find which comes last in the Tariff and take it –
  If you are unable to find any entry which matches the goods in question, find goods
which are most akin.

VALUATION UNDER CENTRAL EXCISE

After duty liability is established and after the product is correctly classified, the next
question is 'What is the Excise Duty payable ?' If you refer to CETA, you will find that some
rates are fixed on per Kg or per quintal basis, while some rates are based on '%' basis. This
percentage is the % of 'Assessable Value' of goods fixed as per section 4 of Central Excise
Act.
Excise duty is payable on one of the following basis
Specific duty
Duty as % of Tariff Value fixed under Section 3(2).
Duty based on Maximum Retail Price printed on carton after allowing deductions – section
4A of CEA (added w.e.f. 14.5.1997)
Duty as % based on Assessable Value fixed under Section 4 (ad valorem duty)

Specific Duty - It is the duty payable on the basis of certain unit like weight, length, volume,
thickness etc. For example, duty on Cigarette is payable on the basis of length of the
Cigarette, duty on sugar is based on per Kg basis etc. Presently, specific rates have been
announced for - (a) cigarettes (b) Matches (c) Marble slabs and tiles (d) Colour TV when
MRP is not marked on the package or when MRP is not the sole consideration.

Tariff value - In some cases, tariff value is fixed by Government from time to time. This is a
"Notional Value" for purpose of calculating the duty payable. Once 'tariff value for a
commodity is fixed, duty is payable as percentage of this 'tariff value' and not the Assessable
Value fixed u/s 4. This is fixed u/s 3(2) of Central Excise Act. Government can fix different
tariff values for different classes of goods or goods manufactured by different classes or sold
to different classes of buyers. Presently, tariff values have been fixed for pan masala packed
in retail packs of less than 10 gm per pack, vide notification No 16/98-CE(NT) dated 2nd
June 1998.
Value based on Retail Sale Price - Section 4A of CEA (inserted w.e.f. 14.5.1997)
empowers Central Government to specify goods on which duty will be payable based on
'retail sale price'. The provisions are as follows -
(a) The goods should be covered under provisions of Standards of Weights and Measures
Act

(b) Central Government can permit reasonable abatement (deductions) from the 'retail sale
price'. While allowing such abatement, Central government shall take into account excise
duty, sales tax and other taxes payable on the goods
(c) If more than one 'retail sale price' is printed on the same packing, the maximum of such
retail price will be considered
(d) The 'retail sale price' should be the maximum price at which excisable goods in packaged
forms are sold to ultimate consumer. It includes all taxes, freight, transport charges,
commission payable to dealers and all charges towards advertisement, delivery, packing,
forwarding charges etc.
(e) Central Government has to issue a notification in Official gazette specifying the
commodities for which the provision is applicable and the abatements permissible
.
Ad valorem Duty - Fixing specific duty or tariff value is possible only for few selected items
like Sugar, pan masala, consumer goods, Cigarette etc. Generally, it is not practicable to fix
specific duty or tariff value for numerous products produced. Similarly, paying duty on the
basis of MRP is possible only in respect of a few selected commodities. In other cases,
Central Excise is payable on the basis of value. This is called "ad valorem duty". The
'assessable value' is arrived at on the basis of Section 4 of the Central Excise Act and rules
made thereunder. Duty is payable on the basis of such value.

WHAT IS ASSESSABLE VALUE?(AV)

Assessable Value (AV) is the 'Value' on which duty is payable as a percentage. Generally, by
'Value', we understand the price as mentioned in Bill or Invoice. However, for excise
purposes, it is not possible to fully rely on such price as (a) Duty is payable even if goods are
not sold (b) It is desirable to have uniform policy in fixing the AV (c) Chances of
manipulation in such price should be minimum.

Background of changes in respect of valuation - The original section 4 of the Act provided
for a 'deemed value' for purpose of valuation. The duty was based on normal wholesale price
at factory gate. Section 4 was completely revamped in 1975. However, controversies
continued even after amendments to section 4 of the Act. The valuation mechanism was
made simple, user-friendly and also on commercially acceptable lines from 1st July, 2000,
The existing section 4 of Central Excise Act, which is based on concept of 'normal price', was
replaced by a new section based on 'transaction value' for assessment. This is a path breaking
departure from the traditional approach.

Concept of valuation is a radical departure from past - Practically, it may be true that new
section 4 is not radically different from old section 4. However, conceptually, the old section
4 and new section 4 are radically different. Old section 4 was based on 'normal whole at
which such goods are ordinarily sold at the factory gate to an unrelated buyer'. Thus, it was a
'deemed value', which may or may not tally with the Invoice price. However, new section 4
has scrapped that concept totally. The price in respect of each removal of goods will be
'transaction value'. Provisions in earlier section 4 in respect of packing charges, durable and
returnable packing, class of buyer and trade discount are completely absent in new section 4.
Thus, most of the case law under old section 4 has become of doubtful validity. Each item of
payment and expenditure will now be freshly scrutinised.

Basis of Assessable Value - As per new section 4 w.e.f. 1st July, 2000, excise duty is
payable on basis of 'transaction value', if the goods are sold at the factory gate to an unrelated
buyer when price is the sole consideration. If these requirements are not satisfied, valuation
will be done as per Valuation Rules. - section 4(1)(b)
The basic provisions of new Section 4(1)(a) state that 'assessable value' when duty of excise
is chargeable on excisable goods with reference to value will be 'transaction value' on each
removal of goods, if following conditions are satisfied –
The goods should be sold at the time and place of removal.
Buyer and assessee should not be related
Price should be the sole consideration for the sale.
 VALUATION RULES TO DETERMINE ASSESSABLE VALUE
Section 4(1)(b) of the Central Excise Act states that if Assessable Value' cannot be
determined u/s 4(1)(a), it shall be determined in such manner as may be prescribed by rules.
Under these powers, Central Excise Valuation (Determination of Price of Excisable Goods)
Rules 2000 have been made effective from 1-7-2000.
1. Value nearest to time of removal if goods not sold - If goods are not sold at the time
of removal, then value will be based on the value of such goods sold by assessee at
any other time nearest to the time of removal, subject to reasonable adjustments.
[Rule 4]. This rule applies when price at the time of removal is not available as the
goods are not sold by the assessee at the time of removal. Thus, this rule should apply
in case of removal of free samples or supply under warranty claims. In case of
removal of samples or free replacement under warranty claims, duty will be payable
on price of identical goods sold by assessee near about the time of removal of the
samples.

This rule should not apply in respect of depot transfer or branch transfer or in case of
sale to 'related person' as specific provisions have been made. This provision should
also not apply for 'job work' as indeed in case of 'job work' there is no 'sale' of goods.
2. Goods sold at different place - Some times, goods may be sold at place other than the
place of removal e.g. in case of FOR delivery contract. In such cases, actual cost of
transportation from place of removal upto place of delivery of the excisable goods
will be allowable as deduction, if these are charged separately in invoice on actual
basis. [rule 5]. - . - In short, if transport charges are collected separately in the Invoice
on actual basis, these will be allowed as deduction.
3. Provision when price is not the sole consideration - If price is not the sole
consideration for sale, the 'Assessable Value' will be the price charged by assessee,
plus money value of the additional consideration received. The buyer may supply any
of the following directly or indirectly, free or at reduced cost.
 Materials, components, parts and similar items
 Tools, dies, moulds, drawings, blue prints, technical maps and charts and
similar items used
 Material consumed, including packaging materials
  Engineering, development, art work, design work and plans and sketches
undertaken elsewhere than in the factory of production and necessary for the
production of the goods

4. Sale at depot / consignment agent - When goods are sold through depot, there is no
'sale' at the time of removal from factory. In such cases, price prevailing at depot (but
at the time of removal from factory) shall be the basis of Assessable Value. The value
should be 'normal transaction value' of such goods sold from the depot at the time of
removal or at the nearest time of removal from factory. [rule 7]
For example, if an assessee transfers a consignment of paper to his depot from Delhi
to Agra on 5.7.2000, and that variety and quality of paper is normally being sold at
the Agra depot on 5.7.2000 at transaction value of Rs. 15,000 per tonne to unrelated
buyers, where price is the sole consideration for sale, the consignment cleared from
the factory at Delhi on 5.7.2000 shall be assessed to duty on the basis of Rs. 15,000
per tonne as the assessable value. If assuming that on 5.7.2000 there were no sales of
that variety from Agra depot but the sales were effected on 1.7.2000, then the normal
transaction value on 1.7.2000 from the Agra depot to unrelated buyers, where price is
the sole consideration shall be the basis of assessment. [Illustration given in the
departmental circular dated 30-6-2000].
In short, price ruling at the depot, but at the time of removal from the factory will be
relevant. It does not matter if subsequently the goods are actually sold from depot at
higher or lower price.
At times, there are wide fluctuations in prices and depot prices may change
frequently. This eventuality is indeed not envisaged in 'stock transfer' as 'stock
transfer' or 'branch transfer' is envisaged only of standard products with fixed ex-
depot prices. However, fluctuations in prices at depot is a practical reality. In such
cases, assessee may resort to assessment on provisional basis.
Meaning of 'normal transaction value' - As per Valuation Rule 2(b), "normal
transaction value" means the transaction value at which the greatest aggregate
quantity of goods are sold. The term 'greatest aggregate quantity' is used in rule 7 of
Customs Valuation Rules. This rule states that while considering selling price of
imported goods in India, unit price at which greatest aggregate quantity of identical or
similar goods are sold to unrelated persons in India should be the basis. e.g. if 65 units
are sold @ Rs. 100, 55 units are sold @ Rs. 95 and 80 units are sold @ Rs. 90; then
 greatest aggregate quantity is 80 which is sold @ Rs. 90 per unit, which will be the
basis for valuation. This principle should apply in deciding 'normal transaction value'
under rule 2(b) also.

5. Buyer should not be known in stock transfer- It may be noted that 'stock transfer' or
'branch transfer' envisages despatch of goods of standard size and specifications to the
depots / branches. Goods should not be despatched or identified for a particular buyer.
If the buyer is known or identified before despatch of goods from the factory, it is a
sale and not a stock transfer. In short, stock transfer of tailor made goods is a bogus
stock transfer. (shown just to save sales tax).
6. Valuation in case of captive consumption - In case of captive consumption, valuation
shall be done on basis of cost of production plus 15%. (Rule 8 of Valuation Rules).
Captive consumption means goods are not sold but consumed within the factory.
In case goods are supplied to a 'related person' but consumed by the related person
and not sold, valuation will be done on the basis of cost of production plus 15%.
[Proviso to rule 9].The simplified provision has been probably made as in most of the
cases, the buyer will be able get Cenvat credit of duty paid on inputs and there is
hardly any incentive to avoid any payment of duty.Normally, certificate from Cost /
Chartered Accountant in respect of cost of production should be obtained. As per
normal costing principles, 'cost of production' should include production overheads
and proportionate share of administrative overheads. However, since the term used is
'cost of production', sales overheads should not be considered. As per department's
earlier circular No. 258/92-96-CX dated 30-10-1996, cost of production of goods
should be determined so as to include cost of material, labour cost and overheads
including administrative cost, advertising expenses, depreciation, interest etc. Board
had advised that CA certificate and profit and loss statement should be scrutinised
carefully and should not be accepted blindly or automatically. Other instructions in
the circular regarding calculation of profit margin have now become redundant. [In
the opinion of author, advertisement costs in relation to selling expenses should not
form part of 'cost of production']. Material Cost should be exclusive of duty paid on
inputs and cost of as material handling of inputs should be included in view of case
law discussed above. Thus, the formula for determining value is simple. If the cost of
production based upon general principles of costing of a commodity is Rs. 10,000 per
unit, the assessable value of the goods shall be Rs. 11,500 per unit.
 7. Goods sold solely through related person - If goods are sold solely through a 'related
person', price at which such related person makes onward sale to an independent
buyer will be the 'Assessable Value'. Definition of 'related person' as contained in
section 4(3)(b) covered 'inter connected undertakings' as defined under MRTP Act.
This would have affected many assessees. However, the definition has been made
almost ineffective in Valuation Rules. Provisions in respect of sale to related buyer
are covered in rules 9 and 10 of Central Excise Valuation Rules, 2000. For sake of
convenience, these are discussed under 'Related Person' and hence are not discussed
here.
8. Best judgment Assessment - If assessment is not possible under any of the foregoing
rules, assessment will be done by 'best judgment'. If the value of any excisable goods
cannot be determined under the foregoing rules, the value shall be determined using
reasonable means consistent with the principles and general provisions of these rules
and sub-section (1) of section 4 of the Act. [Rule 11]

CONCLUSION

Generally, the Central excise duty in respect of different goods is on ad-valorem basis (i.e.
the duty is fixed as a percentage of assessable value of a good). It thus becomes important to
find out as to how the value of a good is to be assessed. The Central Excise duty (CENVAT)
is chargeable at the rates specified in the schedule to the Central Excise Tariff Act, 1985. The
said schedule is divided into 20 sections and 96 Chapters. There are no Chapters
with numbers 1,6,10,12 and 77. As such effectively there are 91 Chapters. Each Chapter is
further divided into headings and sub-headings. In order to determine the applicable rate of
duty in respect of a particular item, the positioning of that item under a particular head or
sub-head is essential. The positioning of an item in the appropriate heading/sub-heading is
called classification. The classification of an item is generally decided as per the commercial
or trade parlance. However a deviation from this principle is made when the trade meaning or
commercial nomenclature does not fit into the scheme of the statute.

REFERENCES
Web Sources:
- http://220.227.161.86/18925sm_finalnew_idtl_excise_cp3.pdf
- http://www.advocatekhoj.com/library/bareacts/centralexcise.htm
- http://www.cag.gov.in/html/reports/indir_taxes/2009-10_12CA/chap3.pdf
- http://www.cag.gov.in/reports/indir_taxes/1999_book2/chapter5.htm
- http://www.legalserviceindia.com/articles/edt.htm
- http://taxguru.in/excise-duty/classification-valuation-central-excise-act-rules.html