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Circular No. 223/57/96-Central Excise

dated 21/6/96
F. No. 332/86/94-TRU

Government of India

Ministry of Finance

Department of Revenue

(Tax Research Unit), New Delhi

Subject : Determination of Assessable value (AV) of Petroleum Products

I am directed to say that clarifications have been sought regarding com-putation of assessbed value (AV) on petroleum products attracting ad valorem rate. In the budget for 1994-95. excise duty on petroleum products was prescribed on ad valorem basis as against specific rates of duty existing prior to budget. As far as pricing of petroleum products is concerned, they can be divided into two categories, namely,

(a) Formula products; and

(b) Free pricing products

2. The prices of petroleum products falling under the category of “Formula Products” are determined by the Ministry of Petroleum & Natural Gas. The prices of petroleum products in the category of “Free Pricing Products” are examined by the individual oil companies. In the case of “free pricing petroleum products” generally ex-factory price is available and there may not be problem to determine the assessable value (AV) of such products. Selling price “Formula products” is determined taking into account number of factors. Moreover, number of petroleum products falling under this category are also generally transported from the refineries to the warehouses, known as storage points. The central excise duty is discharged at the time of removal from the storage points. It has been reported that in respect of petroleum products sold from the storage points, excise duty was paid on the assessable value declared as ex-storage point selling price. But the value declared for this purpose does not include certain amounts collected under various heads from the buyers. As a result, Show Cause Notices (SCNs) have been issued asking the oil companies to explain as to why the assessable value should not be determined in accordance with the provisions of Central Excise and Salt Act by including amounts collected by them under different heads. The oil companies have thus been asked to show cause as to why the amount collected by them but not included in the assessable value should not be included in the assessable value and duty on such differential amounts should not be collected. It is felt that the issue of inclusion or exclusion of various elements of price for the purpose of determining the assessable value for levy of excise duty on petroleum products need to be clarified to the field formations so as to ensure uniform practice of assessment of petroleum products.

3. The following elements of price are considered for inclusion or exclusion in the assessable value:

(i) State Surcharge

(ii) Retail Pump Outlet (RPO) Charge

(iii) RPO Surcharge

(iv) Railway Siding/ Shunting Charges

(v) Air Field charges

4. The matter has been considered and as regards determination of assessable value for petroleum products, where excise duty is paid at the ex-storage point, I am directed to clarify as follows:

4.1 State Surcharge

4.1.1 In addition to ex-storage point selling price declared to the Central Excise Department for the purpose of levy of excise duty, oil companies are also  collecting specified amount from the buyers under the head “State Surcharge”. The amount collected under this head is surrendered to the “Oil Pool Account”. Though this amount is collected as “State Surcharge”, it has not actually been remitted to the concerned Sales Tax Department. Sales Tax Act specifically prohibits the seller from collecting curcharge form the buyers. Surcharge is not recoverable from the buyers and it is required to be borne by the marketing companies. Basically, irrecoverable surcharge element is being collected by the oil companies under the specific head “State Surcharge”. These amounts having been transferred to the “Oil Pool Account” and it has been stated that whenever the oil companies required to pay the surcharge, they claim reimbursement of the same from the Oil Pool Account. According to Section-4 of Central Excise and Salt Act, assessable value does not include the amount of Sales Tax and other taxes, if any, payable on such goods. However, in the present context, State Surcharge is not a tax payable on sale of goods. Therefore, State Surcharge does not appear to fall under the category of taxes payable on goods. Moreover, this amount is being collected from the dealers without indicating anywhere that this is in lieu of tax on the said goods and the entire amount collected under this head also had not been paid to Sales Tax Departments of the respective States. There does not appear to be any nexus between the amount collected under this hand and the surcharge.

4.1.2 In view of the above, the amount collected under this head is liable to be included in the assessable value.

4.2  Retail Pump Outlet (RPO) Charge

4.2.1 The oil companies are collecting specified amounts under the head RPO charges. This reported to contain two elements:

(a) Transportation charges for delivering the product from the exstorage point to their dealers”  premises; and

(b) Operating cost of the RPO and return on investments.

The oil companies supply Motor Spirit (petrol) and HSD oil at the RPOs without charging additional amount for transportation as long as the RPOs are situated within the limit known as free delivery zone. Actual cost of transportation incurred from warehouses to the delivery point is liable to be excluded form the assessable value subject to verification. As regards the portion of the amount collected under the head “Operating cost and return on investments” the fact remains that the buyer has got no option except to pay these amounts as determined by the oil companies and in the absence of any explicit arrangement and declaration by the oil companies it may not possible to exclude any amount collected from the buyer at the time of sale for sale of products. If this amount in independent of the sale price of the product, it should have been delinked and collected separately with explicit arrangements. The fact that this portion of the amount is not related to the actual cost of transportation and is collected uniformly from all buyers at the time of sale, makes it liable to be included in the assessable value as it should be treated as consideration for sale.

4.2.2 In view of the above, the amount of RPO charges, after deducting the amount relating to transportation charges, subject to verification is liable to be included in the assessable value. The amount relating to cost of transportation is liable to be excluded from the assessable value subject to verification.

4.3. Retail Pump Outlet (R.P.O). Surcharge

4.3.1 Specified amounts are collected from all buyers of Motor Spirit (petrol) and HSD oil under the head “RPO Surcharge”. This amount has not been included in the assessable value declared by the oil companies. It has been reported that this amount is being utilised subsequently for payment of discount or commission to dealers based on heir turnover. The amount under this head is being collected uniformly from all dealers irrespective of the fact that whether the dealer is eligible for turnover discount or not. The amount under this head is reported to be pooled together which in turn is used to meet the expenditure of this incentive scheme. Quantity discount discount is a discount  given uniformly to all the buyers based on the quantity. In the present case, the said amount is collected uniformly from all the dealers. How and for what purpose this amount is utilised may not be material to determine the inclusion of this in the assessable value. So long as the amount is collected from the buyer, such amount allowed to be deducted from the normal price and not the amount collected from the buyer for any specified purposes.

4.3.2. In view of the above, the amount collected under the head “RPO Surcharge” is liable to be included in the assessable value.

4.4  Railway siding Charges/ Shunting Charges

4.4.1 Some charges also incurred while handling petroleum products within the premises of warehouse. When duty is paid on warehouses all expenditures incurred within the warehouse premises  and before clearance are liable to be included in the assessable value. As these charges are incurred before clearance and within the warehouses, these amounts are liable to be included in the assessable value.

4.4.2 In view of the above, the charges incurred before clearances from the warehouses are liable to be included in the assessable value.

4.5  Air Field Charges

4.5.1 In the case of Aviation Turbine fuel (ATF) and aviation gasoline, certain specified amounts are included under the head air Field Charges. As in the case of RPO charges, this element also reportedly contain two aspects:

(a) Cost of transportation; and

(b) Operating cost and return on investment

The portion of cost relating to transport of goods from the warehouses to the point of delivery is liable to be excluded form the assessable value but the other portion which is collected from the buyers at the time of sale is liable to be included in the assessable value on the similar reasons explained in the case of RPO charges.

4.5.2 In view of the above, the charges collected from the buyers of Aviation Turbine fuel (ATF) and aviation gasoline relating to operating cost and return on investment, is liable to be included in the assessable value. Cost of transportation may be considered for exclusion subject to verification.

5. In view of the foregoing, it is hereby clarified that the following amounts collected by the oil companies from the buyers on the sale of petroleum products are liable to be included in the assessable value.

(a) State Surcharge;

(b) RPO Charge, excluding the amount relating to cost of transportation incurred for delivering the products from the warehouses to the storage point, subject to verification;

(c) RPO Surcharge;

(d) Railway siding charges/ shunting charges; and

(e) Air field charge, excluding the amount relating to cost to transportation incurred for delivering the product from the warehouses to the storage point, subject to verification,

6.  All pending assessments / disputes may be finalised in view of the above clarification. All field formation may be advised suitably.

Sd/-
(R.Sekar)
Deputy Secretary to the Govt. of India

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