Chapter 7 of Foreign Trade Policy 2015-2020 covers the Deemed Exports. Supplies by manufacturers to the following are considered as Deemed Exports:
- Supply of goods against Advance Authorisation / Advance Authorisation for annual requirement / DFIA;
- Supply of goods to EOU / STP / EHTP / BTP;
- Supply of capital goods against EPCG Authorisation;
- Supply of marine freight containers by 100% EOU (Domestic freight containers-manufacturers) provided said containers are exported out of India within 6 months or such further period as permitted by customs;
Such supplies are eligible for:
- Advance Authorisation / Advance Authorisation for annual requirement / DFIA.
- Deemed Export Drawback.
- Refund of terminal excise duty, if exemption is not available.
In other words, if supply has been made against above, those manufacturers are entitled to import duty free raw material, components, parts etc. etc. and do not pay import duty on such material. Thereby the price / transaction value is not the sole consideration of the value of goods supplied.
In view of the above:
Issue for consideration is as to whether it would constitute ‘additional consideration’ received by the assessee as per the definition of ‘transaction value’ contained in Section 4 of the Act read with Rule 6 of the Rules. We, therefore, shall reproduce the relevant portion of the provisions of Section 4 which existed at the material time, which read as under:
“4. Valuation of excisable goods for purposes of charging of duty of excise:
(1) Where under this Act, the duty of excise is chargeable on any excisable goods with reference to their value, then, on each removal of the goods, such value shall –
- in a case where the goods are sold by the assessee, for delivery at the time and place of the removal, the assessee and the buyer of the goods are not related and the price is the sole consideration for the sale, be the transaction value.
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- “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 at 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.”
As is clear from the reading of the aforesaid provision, the duty of excise is chargeable on the excisable goods with reference to the value of such goods. Generally, the price of the goods, i.e. the price at which such goods are ordinarily sold by the assessee to a buyer is to be the value of the goods. This value is called the ‘transaction value’. The Central Government has also framed the Rules which, inter alia, lay down the provisions for determination of value. Rule 6 thereof, with which we are specifically concerned, reads as under:
“RULE 6. Where the excisable goods are sold in the circumstances specified in clause (a) of sub section (1) of section 4 of the Act except the circumstance where the price is not the sole consideration for sale, the value of such goods shall be deemed to be the aggregate of such transaction value and the amount of money value of any additional consideration flowing directly or indirectly from the buyer to the assessee.
Explanation. – For removal of doubts, it is hereby clarified that the value, apportioned as appropriate, of the following goods and services, whether supplied directly or indirectly by the buyer free of charge or at reduced cost for use in connection with the production and sale of such goods, to the extent that such value has not been included in the price actually paid or payable, shall be treated to be the amount of money value of additional consideration flowing directly or indirectly from the buyer to the assessee in relation to sale of the goods being valued and aggregated accordingly, namely:
- value of materials, components, parts and similar items relatable to such goods;
- value of tools, dies, moulds, drawings, blue prints, technical maps and charts and similar items used in the production of such goods;
- value of material consumed, including packaging materials, in the production of such goods;
- value of engineering, development, art work, design work and plans and sketches undertaken elsewhere than in the factory of production and necessary for the production of such goods.” Even when these goods are sold by the assessee at different prices to different classes of buyers (not being related persons), each such price is to be deemed to be the normal price of such goods in relation to each class of buyers. However, as per the definition of ‘transaction value’ contained in this very section, i.e. Section 4(3)(d), certain charges can be added to the price at which the goods are actually sold, under certain circumstances.
These include the provision for advertising or publicity, marketing and selling organization expenses, storage, outward handling, servicing, warranty commission etc. However, Rule 6 of the Rules specifies that if the goods are sold in the circumstances specified in clause (a) of sub- section (1) of Section 4, then the value of such goods shall be deemed to be the aggregate of such transaction value plus the ‘amount of money value of any additional consideration flowing directly or indirectly from the buyer to the assessee’. The implication of this Rule is that any form of additional consideration which flows from the buyer to the assessee, monitory value thereof is to be included while arriving at the transaction value. It is not necessary that such an additional consideration is to flow directly and even indirect consideration is includible.
Hon. Supreme Court have agreed with the views of Commissioner, Central Excise and which was upset by the Tribunal and not disputed by the assessee in the case of Commissioner of Central Excise, Nagpur-I Vs. M/s. Indorama Synthetics (India) Ltd. [Civil Appeal No. 1834 of 2006] that we would like to recall the following findings arrived at by the Commissioner, which are not upset by the Tribunal in the impugned decision or even disputed by the assessee:
- The assessee had supplied goods to a particular type of buyers at much lower price than the price charged from the general buyers in the normal course of trade as it had obtained the facility of invalidating of advance licences from such buyers and procured imported raw material (duty free) against such licences for manufacturing of finished goods. It is, therefore, alleged that the assessee and the buyers had mutuality of interest in the business of each other and there was a flow back and the price was not the sole consideration for sale in these cases in accordance with the provisions of Section 4(1)(a) of the Act.
- Therefore, they were related persons in terms of provisions of the erstwhile Section 4(4)(c), presently Section 4(3)(b)(iv) of the Act.
- It is observed that para 7.7 of the EXIM Policy on Advance Release Order speaks of mutuality of interest as the assessee had procured duty free imported raw materials against invalidation of advance licence of the consignees and in turn it sold the finished goods to the said consignees at lower prices as compared to other normal buyers. Thus, the price was not the only consideration.
- Once the advance licence is invalidated, the said clearance to the buyers who were earlier holding the said licences need not be treated as deemed export and rightly the assessee had cleared the said goods to such buyers on payment of excise duty, but at lower value than the clearance made to the normal buyers. Thus, the assessee appeared to have derived double benefits in these transactions, i.e.
- enhanced sale and paid less duty on lower value; and
- imported duty free raw materials.
- In this case, the right to procure duty free imported raw material is being transferred to supplier by the buyer. This indicates the flow back of additional considerations from the buyer of the said goods to the seller, which is the assessee. On the facts of this case, we are of the opinion that the Commissioner has rightly come to the conclusion with regard to the fact that additional monetary consideration, in addition to the price being paid for the goods, i.e. transfer of advance import licence in favour of the seller by the buyer enabling the seller of the goods to effect duty free import of the raw materials and bringing down the cost of production/procurement, is a consideration, the monetary value of which has to be considered under the provisions of the Rules, i.e. Rule 6 thereof.
To conclude, this judgement of Hon. Supreme Court have lot of impact in the following circumstances:
- Supply against CT-3 to EOU / EHTP / BTP / STP : Such EOU / EHTP / BTP / STP procures the goods duty free in accordance with notification no. 22/2003 CE Dtd. 31.03.2003 and debit in the B-17 Bond to the extent of duty forgone. The duty forgone is calculated based on the transaction value and rate of duty applicable. Supply to EOU / EHTP / BTP / STP is considered as Deemed Export and Manufacturer Supplier is entitled to obtain Advance Authorization, EPCG Authorization and avail the duty exemption. Such duty exemption will be considered as additional flow back in accordance with Rule 6 of Central Excise (Determination of Value of Excisable Goods) Rules 2000 and thereby bond amount is less debited which may unnecessarily lead to litigation even though CT-3 is issued by EOU unit and CT-3 covers only quantity and not the value but unnecessary litigations may arise.
- Supply against Advance Authorization / ARO: Para 7.04 of Foreign Trade Policy 2015-2020 provides benefits of Terminal Refund of Excise Duty only in the case where, there is no exemption under Central Excise. In the present case, supply is made against ARO, excise duty is payable and therefore valuation of such goods supplied against ARO will have the impact of the above decision and hence any custom duty benefit availed by such manufacturer should be considered as additional flow of consideration.
- Supply against DFIA : Para 7.04 of Foreign Trade Policy 2015-2020 provides benefits of Terminal Refund of Excise Duty only in the case where, there is no exemption under Central Excise. In the present case, supply is made against DFIA, excise duty is payable and therefore valuation of such goods supplied against DFIA will have the impact of the above decision and hence any custom duty benefit availed by such manufacturer should be considered as additional flow of consideration.
- EOU / STPI / BTP / EHTP Unit should include in the CT-3 value of custom duty forgone by the supplier, when goods are procured from supplier who is availing the benefit of Advance Authorization / DFIA / Deemed Exports Duty Drawback and such value of CT-3 to be enhanced and supplier should include the value of duty forgone in the goods supplied to the EOU and thereafter further reduce the said amount of duty forgone and B-17 Bond to be debited on the excise duty on the value inclusive of duty forgone.
- If goods are supplied against ARO, customs duty forgone should be added in the assessable value and thereafter duty has to be paid. However, the same can be obtained under refund from DGFT as per para 7.03 of the Foreign Trade Policy 2015-2020 or recipient can avail cenvat credit and there is no loss.
- If goods are supplied against ARO, customs duty forgone should be added in the assessable value and thereafter duty has to be paid. However, the recipient is eligible to avail cenvat credit or can take the drawback of Excise Duty paid.