Agarwal Shraff & Co.

Chartered Accountants
1) Whether Transportation cost can be claimed as deduction from assessable
value:

Transportation cost is excluded from the assessable value subject to the conditions that
it is shown separately in the invoice and goods are sold at the factory / Depot i.e. goods
are not sold at the place of delivery. The relevant provisions to exclude the
transportation cost from assessable value are discussed below in detail:

Section 4(1)(a) of the Central Excise Act, 1944 relating to the valuation of excisable
goods for the purposes of charging of duty 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.”

Section 4(2)(c) of the Central Excise Act, 1944 defines the term “place of removal” as
follows:

i) a factory or any other place or premises of production or manufacture

of 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,
from where such goods are removed.

Rule 5 of the Central Excise Valuation (Determination of price Excisable Goods) Rules,
2000 further states that where any excisable goods are sold in the circumstances
specified in Section 4(1)(a) except the circumstance in which the excisable goods are
sold for delivery at a place other than place of removal, then the value of such excisable
goods shall be deemed to be the transaction value, excluding the actual cost of
transportation from the place of removal upto the place of delivery of such excisable
goods provided the cost of transportation is charged to the buyer in addition to the price
for the goods and shown separately in the invoice for such excisable goods.

From the analysis of the above section 4 and Rule 5 it is clear that for exclusion of
transportation cost from assessable value two conditions must be satisfied:
1) Transportation must be separately shown in the invoice.
2) Goods must be sold at the place of removal i.e. the contract of sale must be such
that goods are not sold at the place of delivery.

If either of the two conditions are not satisfied then transportation cost will not be
excluded from the assessable value.

It then becomes necessary to understand what is a “sale” for central excise purposes.

Section 2(h) of The Central Excise Act, 1944 defines the term “sale” and “purchase” as
follows:
Agarwal Shraff & Co.
Chartered Accountants
Sale and purchase with their grammatical variations and cognate expressions, mean any
transfer of the possession of goods by one person to another in the ordinary course of
trade or business for cash or deferred payment or other valuable consideration.

Hence it emerges that for the central excise purposes, possession of the goods must be
transferred to the buyer, for a transaction to be treated as sale. Now the question arises
as to what constitutes transfer of possession.

It was decided in the case of M/s Prabhat Zarda Factory Ltd. Vs. CCE –
2000(119)E.L.T. 191(Tribunal-LB), New Delhi., that the transfer of the possession of
the goods is the essence of the sale. It was held that in the circumstances where the
goods are transported on account of the seller, the goods are stored on behalf of the
seller in the godown of the transport agency at the destination of the buyer, the goods
were insured in the name of the seller for covering the risk of loss / damage in the
transportation and at the godown of the transport agency then no legal title in goods can
be said to passed on to the buyer. Therefore it was held that goods in such cases are
actually sold at such places from where delivery was actually effected to the buyers.
Hence freight and insurance from the factory or warehouse to the place of delivery
cannot be allowed as deduction in such cases.

Similar views were also expressed in the case of Escorts JCB Ltd. V. CCE, New Delhi
– 2000(118) E.L.T. 650 (Tribunal)

However it was decided in the case of Frexton Cables (India) vs. CCE –
2002(142)E.L.T. 694 (Tri-Delhi) that as envisaged in Section 26 of the sale of Goods
Act in terms of agreement between the parties the seller can retain a risk which would
entitle him to have an insurable interest in the goods even when the property in the
goods are passed on to the buyer.

So it emerges from the analysis of the above provisions and case laws that in order to
claim transportation cost from the factory gate / warehouse to the place of buyer as
deduction from the assessable value they must be separately shown in the invoice and
the terms of agreement of sale should be such that seller transfers the property in goods
to the buyer at factory gate / warehouse itself but the terms of agreement can be drafted
in such a way that seller retains the insurable interest in the goods even though property
in the goods are passed on to the buyer.

Now the question arises as to how the valuation will be done in a case when the goods
are not sold from the factory or warehouse but are transferred to the depots or
consignment agent. Rule 7 of the Central Excise Valuation (Determination of price
Excisable Goods) Rules, 2000 states that in such a case assessable value will be normal
transaction value of such goods at 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.
Agarwal Shraff & Co.
Chartered Accountants
Thus it follows from the above rule that transportation cost from factory or warehouse
to the depots or consignment agent premises will not be deducted from the assessable
value. However as has been explained in the supplementary instructions to the Central
Excise Rules issued on 1.9.2001 transportation cost from the depot to the place of buyer
will be excluded from the assessable value and exclusion will be allowed on similar
lines as discussed earlier i.e. when sales are effected from factory gate / warehouse.

However there may be a situation where transportation cost is not known to the seller at
the time of removal of goods from the factory / warehouse. For removal of doubt it has
been specified in C.B.E.C. circular No. 643/34/2002-CX. issued on 1.7.2002 that in a
case where vehicle is owned by the manufacturer the cost of transportation can be
calculated through costing method following the accepted principles of costing. A cost
certificate from a certified Cost Accountant/Chartered Accountant /Company Secretary,
may be accepted. It has been further specified in the above circular that transit
insurance can be allowed as deduction as being part of cost of transportation.

So, in my opinion in a case where transportation cost is not known to the seller at the
time of removal of goods from the factory / warehouse similar cost certificate can be
obtained to claim exclusion of transportation cost.

Moreover as per Rule 7 of the Central Excise Rules, 2002 in a case assessee is unable
to determine the value of excisable goods he may request the AC or DC of CE in
writing giving reasons for payment of duty on provisional basis as because
transportation cost is not known to him at the time of removal.

Whether loss on claim can be claimed as deduction 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 loss of claim 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,
Agarwal Shraff & Co.
Chartered Accountants
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.

We have already discussed the provision of valuation of goods in a case where goods are
not sold by the assessee for delivery at the place of removal as per Rule 5 and 7 of the
Central Excise Valuation (Determination of price Excisable Goods) Rules, 2000. The
discussion regarding the assessment of goods in cases where the assessee and buyer of
goods are related & the price is not the sole consideration for sale is not relevant here.

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.

It will be relevant here to discuss the Term ‘Trade Discount’ which was very elaborately
dealt and defined by the Supreme Court in the case of GOI vs MRF LTD. 1995(77)
E.L.T. 433 (S.C.) as under :

“ 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
Agarwal Shraff & Co.
Chartered Accountants
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 the Court disallowed TAC /Warranty discount which in our case is loss on claim
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. It cannot be strictly
called as discount on the tyre being sold. 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”.

However the above concept of ‘Normal Wholesale Price’ and ‘trade discount’ is no more
there in the new concept of valuation on the basis of transaction value. So the ground on
the basis of which the apex court had disallowed the loss on claim discount, that it cannot
be called as discount on tyre being sold & is a benefit given to the customers by way of
compensation for loss suffered by them in the previous sale, is no more there in the new
concept of valuation under transaction value. The term transaction value to again reiterate
means the price actually paid or payable for the goods when sold. Since price paid or
payable will exclude any amount that is not paid or payable for whatsoever reasons they
will be excluded from the assessable value.

So even after considering the definition of loss of claim 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 it will 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.

Moreover it will be relevant here to note that an assessee is no more required to file
declaration regarding marketing pattern, discount structure as was required under
erstwhile Rule 173C(3A) of the Central Excise Rules, 1944.