Central Excise Duty is one of the oldest tax in India having history of more than 70 years, but still we are finding it difficult to answer many questions. In this article, I am trying to discuss one of the fundamental questions regarding chargeability of central excise duty on outward freight and insurance cost when shown separately in the excise invoice or recovered separately by issuing Debit Notes.
As you are aware that excise duty is required to be paid on “Transaction Value” which is defined in clause (d) of Explanation VI to Section 4 of the Central Excise Act, 1944. However, from this definition, we do not get clarity on inclusions and exclusions of charges while calculating excise duty. The definition is reproduced below for your ready reference:
(d) “transaction value” means the price actually paid or payable for the goods, when sold, and includes in addition to the amount charged as price, any amount that the buyer is liable to pay to, or on behalf of, the assessee, by reason of, or in connection with the sale, whether payable at the time of the sale or at any other time, including, but not limited to, any amount charged for, or to make provision for, advertising or publicity, marketing and selling organization expenses, storage, outward handling, servicing, warranty, commission or any other matter; but does not include the amount of duty of excise, sales tax and other taxes, if any, actually paid or actually payable on such goods.
Now the practical question to answer is whether charges of outward freight and insurance are required to be included in the “Transaction Value”, when such charges are shown separately in the excise invoice or recovered separately by issuing Debit Notes. I have observed that in most of the excise audits (EA-2000), department auditors are raising this point and asking assessees to pay excise duty on charges of outward freight and insurance when shown separately in excise invoice or recovered separately by issuing Debit Notes.
In this connection, I wish to refer the most recent decision of the Hon’ble Supreme Court in the case of CCE, Mumbai-III v/s EMCO Ltd. reported in 2015-TIOL-163-SC-CX (matter was heard on July 31, 2015) wherein it is held that charges of outward freight and insurance are to be included only when such charges are incurred before the “place of removal”. Thus, if such charges are incurred after “place of removal” of manufactured goods, then in that case, such charges are to be excluded from “Transaction value”.
Thus, now it becomes very important to understand the meaning of the term “place of removal”. The term “place of removal” is defined in clause (c) of Explanation VI to Section 4 of the Central Excise Act, 1944. The definition is reproduced below for your ready reference:
(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;
[(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;
from where such goods are removed;
It can be seen from the above definition that “place of removal” is the place or premises from where the excisable goods are to be sold after their clearance from the factory and from where such goods are removed. Thus, ‘place of removal’, in any given case becomes a crucial determinative factor for the purpose of valuation. It may be noted that the Hon’ble Supreme Court in the above referred case has specifically mentioned that determination of “place of removal” depends on the facts of each case. Thus, in any given case, what is to be determined is the premises from where “sale” of manufactured goods is going to take place.
In this connection, I would like to refer the latest Circular No. 988/12/2014-CX dated October 20, 2014 and Circular No. 999/6/2015-CX dated February 28, 2015 wherein it has been clarified that one has to refer Section 19 to Section 24 of the Sale of Goods Act, 1930 in order to determine the place where “sale” has taken place.
Now, in order to give some guidelines for solving the practical difficulty in determining the “place of removal” in any given transaction, I would like to throw some light on the meaning and scope of Section 19 to Section 24 of the Sale of Goods Act, 1930. These Sections are discussed in the below table:
|Section No.||Provisions of Sections||Place of removal|
|Section 19||Property passes when intended to pass – in case of sale of specific or ascertained goods. Unless different intention appears, following sections should be considered for ascertaining the intention of the parties.||Parties to the contract can decide the place|
|Section 20||Specific goods in a deliverable state.—Where there is an unconditional contract for the sale of specific goods in a deliverable state, the property in the goods passes to the buyer when the contract is made, and it is immaterial whether the time of payment of the price or the time of delivery of the goods, or both, is postponed.||Factory/Depot/ Warehouse/ Consignment agent of the manufacturer|
|Example –||Mr. A enters in contract with Mr. B to sale specific machine which is available for sale. The machine is Specific goods and is in deliverable state. Then sale takes place when the contract is made.|
|Section 21||Specific goods to be put into a deliverable state.—Where there is a contract for the sale of specific goods and the seller is bound to do something to the goods for the purpose of putting them into a deliverable state, the property does not pass until such thing is done and the buyer has notice thereof.||Place of removal is the place where seller has completed its action on the goods. Hence it can be the buyers place also.|
|Example –||Mr. A enters into a contract with Mr. B to sale Fans. As per scope of the contract, Mr. A has to install the fans at buyers place. In such a case sale takes place when the fans are installed at buyers place.|
|Section 22||Specific goods in a deliverable state, when the seller has to do anything thereto in order to ascertain price.—Where there is a contract for the sale of specific goods in a deliverable state, but the seller is bound to weigh, measure, test or do some other act or thing with reference to the goods for the purpose of ascertaining the price, the property does not pass until such act or thing is done and the buyer has notice thereof.||Place of removal is the place where seller has completed its action on the goods.|
|Example –||Mr. A enters in contract with Mr. B to sale goods. But before delivery the seller has to weight the goods in order to determine the price since price is per kg. In such a case, sale will take place when weight of such goods is done.|
|Section 23||Sale of unascertained goods and appropriation.—(1) Where there is a contract for the sale of unascertained or future goods by description and goods of that description and in a deliverable state are unconditionally appropriated to the contract, either by the seller with the assent of the buyer or by the buyer with the assent of the seller, the property in the goods thereupon passes to the buyer. Such assent may be express or implied, and may be given either before or after the appropriation is made.||Factory/Depot/ Warehouse/ Consignment agent of the manufacturer|
|Example –||Mr. A enters in contract with Mr. B to sale 20 quantities of goods which are to be manufactured. Thus, the goods are unascertained and future goods. But both parties accept unconditionally and enter into contract. Out of 20, Mr. A delivers 15 quantities and manufactured remaining 5 quantities and get it ready for delivery. Mr. B promises to take delivery within 10 days. In such a case, sale of 5 quantities will take place when Mr. B promises to take the delivery.|
|Section 24||Goods sent on approval or “on sale or return”.—When goods are delivered to the buyer on approval or “on sale or return” or other similar terms, the property therein passes to the buyer—(a) when he signifies his approval or acceptance to the seller or does any other act adopting the transaction;
(b) if he does not signify his approval or acceptance to the seller but retains the goods without giving notice of rejection, then, if a time has been fixed for the return of the goods, on the expiration of such time, and, if no time has been fixed, on the expiration of a reasonable time.
|The place of removal here is the buyers premises.
|Example –||Mr. A supplied the goods to the premises of Mr. B and as per the contract, Mr. B will accept the delivery of goods only when goods are as per his standards. Mr. B checked the goods at his premises and signifies his acceptance for the goods and retains them with him. In such a case, property of goods has transferred to Mr. B at the premises of Mr. B.|
Now we are expecting implementation of GST in the year 2016. So let’s hope that GST law would not take another 70 years to answer such fundamental questions.
(Author Details -Mr. Manas Joshi, B.Com., DTL, LLB, CLM – Director at Proficient Partners Consultancy Pvt. Ltd.)