Case for opinion

Query 1: Whether under the new concept of valuation effective from 1.7.2000 on the
basis of ” transaction value”, under Section 4 of The Central Excise Act, 1944, TAC/
Warranty discount is allowable as deduction from the assessable value.

Our client M/s “Birla Tyre” is following the under mentioned structure of sales to its
customers :

Tyres being manufactured in the factory, are removed after payment of excise duty, under
the cover of Excise Invoice, to the depot, from where they are ultimately sold to the
dealers. The valuation of goods at the time of removal from the factory is done after
deducting provisional Trade Discount. At the end of the year, total trade discount given
during the period is ascertained and excise duty if any paid in short, is paid to the
department.

Trade Discount includes turnover discount, discount to government and other

departments, year ending discounts, prompt payment or cash discount.

As mentioned earlier, the goods are ultimately sold to the dealer from the depot. If the
tyres are damaged within warranty period , claim of warranty discount is made by the
dealer against the Company. Claim tyres are sent to the depot by the dealers. The extent
of manufacturing defect is then ascertained by the Technical Engineers of the Company.
The Technical Engineers certifies the extent of manufacturing defects & recommends the
percentage of warranty discount which will be given to the dealer , on the new tyres sold
against the claim tyre. It is in the nature of a benefit given to the customers by way of
compensation for loss suffered by them in the previous sale.

Honourable Supreme Court in its judgement in the case of GOI vs MRF LTD. 1995(77)
E.L.T. 433 (S.C.), defined ‘trade discount’ as follows:

“ Discounts allowed in the trade (by whatever name such discount is described) should be
allowed to be deducted from the sale price having regard to the nature of goods, if
established under agreements or under terms of sale or by established practice, the
allowance and nature of discount being known at or prior to the removal of goods. Such
trade discounts shall not be disallowed only because they are not payable at the time of
each invoice or deducted from the invoice price.”

Based on the above definition the Apex Court allowed turnover discount, discount to
government and other departments, year ending discounts, prompt payment or cash
discount being in the nature of trade discount as per above definition of trade discount.

However Honourable Supreme Court disallowed the TAC/Warranty discount because the
warranty is not a discount on the tyre already sold, but relate to the goods which are being
subsequently sold to the same customers. Hence it cannot be strictly called as trade
discount on the tyre being sold.

However, the new concept does not have any concept for such deduction simply because
it is not required in the context of new definition. The new definition is based on the
concept of transaction value which means the price actually paid or payable for the goods
when sold. Since price paid or payable will exclude any amount which is not paid or
payable for whatsoever reasons they will be excluded from the assessable value.

It is necessary to understand the newly introduced concept of “Transaction Value”, to

determine assessable value for the purposes of charging of duty, to arrive at a conclusion
regarding allowability of TAC/Warranty discount as deduction from the assessable value.
Let us discuss the relevant portions of the provision of section 4 introduced w.e.f.
1.7.2000 relating to the valuation of excisable goods.

Section 4(1)(a) of the Central Excise Act, 1944 states that:

“ In a case where the goods are sold by the assessee, for delivery at the time and
place of removal, the assessee and the buyer of the goods are not related and the
price is the sole consideration for sale, be the transaction value.”

Further Section 4(2)(d) provides the definition of the term “transaction value” as follows

“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 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.

So it emerges from the analysis of the above provision that valuation of goods for the
purposes of charging of excise duty shall be done on the basis of transaction value if the
following conditions are satisfied:

i) goods are sold by the assessee for delivery at the time and place of
removal
ii) the assessee and buyer of goods are not related
iii) the price is the sole consideration for sale.

The above concept of valuation of excisable goods on the basis of transaction value came
into force from 1st day of July, 2000 by substituting the section 4 of the Central Excise
Act, with the erstwhile concept of valuation of goods on the basis of ‘Normal Wholesale
Price’.
The definition of transaction value needs to be very carefully taken note of as there is a
fundamental departure in concept of valuation that was essentially based on ‘Normal
wholesale price’. The concept of valuation on the basis of normal wholesale price means
that even though different transactions were effected at varying prices the normal
wholesale price will prevail for valuation of goods for excisable purpose.

The new section 4 essentially seeks to accept different transaction values that may be
charged by the assessee for different transactions provided buyer and seller are not related
and price is the sole consideration for sale.

Moreover one more very significant departure from erstwhile concept of valuation is that
earlier section 4 had the concept of “ trade discount” allowable as deduction from normal
wholesale price which is no more there in new section 4.

So even after considering the definition of TAC/ Warranty discount, as defined by the
apex court, as nothing but the benefit given to the customers by way of compensation for
loss suffered by them in the previous sale & not a discount, whether it should be available
as deduction from the assessable value because price paid or payable for the goods when
sold will obviously exclude any compensation also for whatever reasons.

Query 2. Whether Rule 7 & 2 of the Central Excise Valuation (Determination of

price Excisable Goods) Rules, 2000 is in conformity with the newly introduced
section 4 in the Central Excise Act, 1944.

One important condition for applicability of the concept of Transaction Value is that
goods must be sold by the assessee for delivery at the time and place of removal i.e.
factory or warehouse. The valuation will be done as per Rule 7 of the Central Excise
Valuation (Determination of price Excisable Goods) Rules, 2000 when the goods are not
sold from the factory or warehouse but are transferred to the depots or consignment
agents. It specifies that in such a case assessable value will be normal transaction value of
such goods sold from such place at or about the same time and, where such goods are not
sold at or about the same time, at the time nearest to the time of removal of goods under
assessment.

Rule 2(b) of the Central Excise Valuation (Determination of price Excisable Goods)
Rules, 2000 defines the term “ normal transaction value’ as the value at which the
greatest aggregate quantity of the goods are sold. The term transaction value of the
greatest aggregate quantity has been defined in the C.B.E.C. Circular No. 643/34/2002-
CX dated 1.7.2002 as the price at which the largest quantity of goods are sold on a
particular day, irrespective of the number of buyers.

In case, the valuation is done as per Rule 7 of Central Excise Valuation ( Determination
of price Excisable Goods ) Rules,2000 , assessable value will be normal transaction value
of such goods sold from such place at or about the same time and, where such goods are
not sold at or about the same time, at the time nearest to the time of removal of goods
under assessment. However this concept of normal transaction value does not appear to
be in agreement with the newly introduced section 4 with effect from 1.7.2000 which
allows each transaction to valued at separate prices.

Whether, let us assume, in case where it is known at the time of dispatch of the goods
from the factory that the goods will be sold at a special discount from the depot & is
dispatched from the factory at concessional price. Whether the excise duty can be paid at
such concessional price.