Freight & other costs includable in value of goods where transfer of property takes place at buyer's premises

We are sharing with you an important judgment of the Hon’ble Supreme Court, in the case of Commissioner, Customs and Central Excise, Aurangabad Vs. Roofit Industries Ltd. [(2015) 57 taxmann.com 363 (SC)]on the following issue:

Issue:

Whether the freight and other costs would form part of value of goods where transfer of property takes place at buyer’s premises?

Facts:

Roofit Industries Ltd. (“the Respondent”) was engaged in manufacture of RCC and PSC pipes falling under Chapter Heading 6804/6807 of the First Schedule to the Central Excise Tariff Act, 1985. The Respondent entered into four agreements for designing, manufacturing, providing at site, laying, jointing and testing of PSC pipes of specified sizes.

After scrutiny of various records and documents of the Respondent, it was found that no sale took place till the goods reached the test of the projects. Accordingly, the Department alleged that the Respondent was indulging in evasion of Excise duty by not computing the assessable value of finished goods properly to the extent that the Respondent was deducting the amount of freight, insurance and unloading charges from the price of excisable goods though the place of removal of finished goods was different from the factory gate. The Department confirmed the demand of differential Excise duty along with imposition of penalty. On appeal being filed to the Hon’ble CESTAT, the matter was decided in favour of the Respondent.

Being aggrieved, the Department preferred an appeal before the Hon’ble Supreme Court.

Held:

The Hon’ble Apex Court held as under:

♣ Contextual examination of Section 4 of the Central Excise Act, 1944 (“the Excise Act”)would bring out the following pertinent aspects:

• The duty of Excise is chargeable on excisable goods with reference to the value of those goods;
• The value of the goods is deemed to be the normal price thereof, that is to say, the price at which such goods are ordinarily sold by the assessee to a buyer in the course of wholesale trade;
• The said normal price is to be seen at the time of delivery and place of removal;
• ‘Place of removal’ is specifically defined and it is to be a 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 a given case, become determinative factor for the purpose of valuation.

♣  If the goods are cleared at the factory gate, then the Excise duty has to be charged on the valuation of the goods to be arrived at the factory gate as that would be the place of removal of goods.

♣  It would mean that the expenses which are incurred after the removal of goods from the factory gate namely freight, insurance and unloading charges etc., are not to be included in the valuation of the goods for the purposes of Excise duty. The reason is that the sale of goods to the buyer is at the factory gate when the property passes to the buyer and the aforesaid expenditure are thereafter incurred by the buyer.

♣  The principle of law, thus, is crystal clear. It is to be seen as to what point of time sale is effected namely whether it is on factory gate or at a later point of time e. when the delivery of the goods is effected to the buyer at his premises. This aspect is to be seen in the light of provisions of the Sale of Goods Act, 1930 by applying the same to the facts of each case to determine as to when the ownership in the goods is transferred from the seller to the buyer;

♣  In the present case, as per the terms of the order, the goods were to be delivered at the place of the buyer and it is only at that place where the acceptance of supplies was to be effected. Further, as per the ‘terms of payment’ clause contained in the procurement order, 100% payment for the supplies was to be made by the purchaser after the receipt and verification of material. Hence, place of removal was buyer’s premises and not factory gate.

Therefore, the Hon’ble Apex Court set aside the Order of the Hon’ble CESTAT and held that the Respondent was not entitled to deduction of freight etc., from factory to buyer’s premises.

Download Full Text of the Supreme Court Judgment