In this whole article, I will be discussing about practical aspects of Rule 6 of CEVR, 2000. This Rule comes into play when Price is not the sole consideration. But before talking about Rule 6, I will be discussing with my readers, what is the general provisions.
General provisions of Valuation of Goods is dealt by Sec-4(1) of The Central Excise Act, 1944, which states that Assessable value for calculating Excise duty shall be equal to Transaction value. If following conditions are satisfied:
i. Excisable goods must be sold by the assessee;
ii. Excisable goods must be sold by the assessee for delivery at the time and place of removal;
iii. The assessee & the buyer of the goods must not be related persons; and
iv. The price must be the sole consideration for sale.
In case any of the above conditions is not satisfied then value will be determined in accordance with CEVR, 2000. If the condition of “The Price must be the sole consideration for sale” is not satisfied then Rule 6 of CEVR, 2002 will be used for determination of Assessable Value.
Rule 6 of CEVR states that, where the excisable goods are sold in the circumstances specified in section 4(1) (a) of the Act, except the circumstance where the price is not the sole consideration for sale, then the Assessable value = Transaction value + Amount of money value of any additional consideration flowing directly or indirectly from the buyer to the assessee. Following are the three situations where Rule 6 is to be used:
i. Customer is supplying some Raw material that are to be used in his goods i.e. goods being manufactured for selling to that customer at a reduced cost or free of charge.
ii. Customer has provided Tools for producing his goods.
iii. Advance received from customer which resulted in lowering of prices.
In the first case, the customer has supplied some goods at a lower value or free of charge. The Transaction value would have been higher in case the goods were purchased from market at fair value. In such a scenario the govt loses its revenue. For understanding why Rule 6 was introduced see below example where XYZ ltd is the customer & ABC ltd is the assessee.
Now, XYZ ltd sold goods to ABC ltd at zero value charging excise duty of Rs. 10 (Considering Assessable value = Rs.100, Excise duty charged because price is not the sole consideration. Valuation in this situation will be discussed afterwards). Here government’s revenue becomes Rs.10, but on the same time ABC ltd will take credit of Rs.10 resulting in govt’s revenue becoming Rs.0. Now the other cost of ABC ltd being Rs.50, Sold the goods to XYZ ltd at Rs.50 (Assumed to be at cost) charging excise duty of Rs.5. Total govt’s revenue here is only Rs.5. But if ABC ltd would have been purchased those goods at fair value then the sale price would have been Rs.150 and excise duty on same amounts to Rs.15. This results in total Govt’s revenue of Rs.15. From this example it is clearly evident that because of supply of goods at lower value or at free of charge by customer results in lowering the govt’s revenue. Thus Govt introduced this Rule 6 which states that Assessable value of ABC ltd will be Rs.150 (Rs.100, Fair value of Goods received from XYZ ltd + Rs.50, Transaction value).
Thus in such case the fair value of goods received from customer as reduced by amount charged will be added to the transaction value to compute Assessable value.
Similarly in the second case when Tool is provided by customer free of cost the assessee needs to add Tool part rate to the transaction value to calculate Assessable value. Now Tool part rate will be calculated by dividing fair value of tool by expected units that can be produced by that tool. Life of the Tools will be determined by the management itself.
Now before discussing the third main situation, I will discuss about the valuation of goods supplie by XYZ ltd to ABC ltd free of cost, here price is not the sole consideration and XYZ ltd will be receiving F.G at a lower value here we will not be able to calculate per unit money value of any additional consideration. So in this situation Assessable value will be determined by using Rule 11 of CEVR, 2000 according to which reasonable means are to be used for determining Assessable value. Here reasonable means will be fair value of Goods sold or if these items are generally sold by XYZ ltd then its normal Sale price as the case may be.
The above situations are situations that are frequently seen in practical working of many manufacturing companies. The third situation i.e. Advance received which resulted in lowering the price will be used only if Excise officer is able to prove that such advance has resulted into lowering the price of the Excisable good being sold. In such case Notional Interest will be added to the transaction value for calculating Assessable value.
However in situations where Price is not the sole consideration and assessee has sold goods at a price less than manufacturing cost and profit, and no additional consideration is flowing directly or indirectly from the buyer to such assessee, the value of such goods shall be deemed to be the transaction value, this is as per proviso to Rule 6 of CEVR, 2000.
In cases where price is not the sole consideration Assessable value shall be aggregate of:
i. Such transaction value; and
ii. The amount of money value of any additional consideration flowing directly or indirectly from the buyer of the assessee.
(Author is a CA Final Student from Delhi and can be reached at firstname.lastname@example.org)