Notional Interest Forms Part Of Value Of Excisable Goods

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: Excise is a tax on production or manufacture of goods. Typically, it is collected at the time of removal of goods from the factory of production. However, the market for goods does not necessarily exist at the factory gate. At times, the goods are deposited in the warehouses and sold from there. More often, the manufacturers transfer the goods to their depots, branches, etc for sale and delivery from such places. In a situation when sale of goods is not effected at the factory gate, collection of excise (at ad valorem rates) at the time of removal of the goods from the factory of production poses difficulties. There is no sale price available at the time the goods are cleared from the factory of production. How best to attribute a “value” to such goods for assessment to excise duty at the time of clearance from the factory has been a challenging question to answer, both for the policy makers and legal experts. Lest the legal provisions be captive of procedural rigidity that would stall the process of an immediate amendment to meet an emergent situation, the government took recourse to making ‘flexible’ rules for this purpose. However, the interpretation of Valuation Rules led to deputes and litigation. In fact, some of the disputes have had a disturbing effect that prevailed for long.

Take rule 5 of the Central Excise (Valuation) Rules, 1975. All it said is simple to read. “Where the excisable goods are sold in the circumstances specified in clause (a) of sub-section (1) of section 4 of the Act except that the price is not the sole consideration, the value of such goods shall be based on the aggregate of such price and the amount of money value of any additional consideration flowing directly or indirectly from the buyer to the assessee.” In the context of this rule, one of the disputes that continued for years is the treatment to be given to the interest earned by the seller on any advance payment received from the buyer of the goods. Is it to be included in the assessable value by way of money value of additional consideration or not? See how this vexed question has eluded a clear answer for more than two decades.