2008 (9) TMI 98 - AT - Central Excise

Valuation of Physician's Samples: Rule 4 vs. Rule 8 Debate

CADILA PHARMACEUTICALS LTD. Versus COMMR. OF C. EX., AHMEDABAD-II

The majority opinion in the case held that Rule 4 should be applied for the valuation of physician's samples, utilizing the deemed value under Section 4A. ... Valuation of physician’s sample of medicines, which are supplied free of cost - notwithstanding the non-availability of the normal sale price u/s 4(1)(a), by reason of the goods being specified under S. 4A(1) making the retail sale price i.e. MRP as its deemed value, the appropriate rule governing the valuation of physician’s samples would continue to be R. 4 and the decision of LB in Blue Cross Laboratories Ltd. ‘s case continues to be good law - reference is answered in Revenue’s favour Issues Involved:1. Valuation of physician's samples of medicines supplied free of cost.2. Applicability of Rule 4 versus Rule 8 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000.3. Impact of Section 4A of the Central Excise Act on valuation post-January 2005.4. Interpretation and application of Rule 11 of the Valuation Rules, 2000.Issue-wise Detailed Analysis:1. Valuation of Physician's Samples of Medicines Supplied Free of Cost:The primary issue is the valuation method for physician's samples, which are supplied free of cost and not sold by the manufacturer. The referral Bench noted that the dispute had been previously decided by the Larger Bench in Blue Cross Laboratories v. C.C.E., Mumbai, which established that the assessment of free-supplied physician's samples should be based on the pro rata value of the regular sale pack of the medicines under Rule 6(b)(i) of the erstwhile Central Excise Valuation Rules, 1975.2. Applicability of Rule 4 versus Rule 8 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000:The dispute centers on which rule should be applied for determining the assessable value of physician's samples. Rule 4 deals with the value of excisable goods based on the value of such goods sold by the assessee at any other time nearest to the time of removal. Rule 8 applies when excisable goods are not sold but used for consumption in the production or manufacture of other articles, valuing them at 110% of the cost of production. The judgment discusses the inapplicability of Rule 4 due to the absence of a transaction value for physician's samples and the practical difficulties of determining a notional value under Section 4.3. Impact of Section 4A of the Central Excise Act on Valuation Post-January 2005:Post-January 2005, regular sale pack medicines were specified under Section 4A, which mandates duty on the basis of the maximum retail price (MRP). The judgment highlights that since physician's samples are not sold and do not require MRP under the Standards of Weights and Measures Act, Section 4A is not applicable. Consequently, the assessable value must be determined under Section 4, read with the relevant Valuation Rules, 2000.4. Interpretation and Application of Rule 11 of the Valuation Rules, 2000:Rule 11 is the residuary rule used when no other specific rule applies. It allows for the determination of the value using reasonable means consistent with the principles and general provisions of the rules and Section 4(1) of the Act. The judgment explores whether Rule 4 or Rule 8 should be used in conjunction with Rule 11 to arrive at a reasonable value. It concludes that Rule 4 is not applicable due to the lack of a transaction value under Section 4, and instead, Rule 8 should be applied, valuing the samples at 110% of the cost of production.Separate Judgments:Majority Opinion:The majority opinion, delivered by the President and Member (Technical), holds that Rule 4 is applicable for the valuation of physician's samples. They argue that the deemed value under Section 4A should be treated as the value for the purpose of Rule 4, consistent with the legal fiction created by Section 4A(2). They reference the Bombay High Court's decision in Indian Drugs Manufacturer's Association v. UOI, which supports the application of Rule 4 for physician's samples.Dissenting Opinion:The dissenting opinion, delivered by Member (Judicial), concludes that Rule 8 should be applied instead of Rule 4. The opinion emphasizes that Rule 4 cannot be used due to the absence of a transaction value and the impracticality of determining a notional value under Section 4. The opinion supports the use of Rule 8, valuing the samples at 110% of the cost of production, as a reasonable method consistent with the principles of valuation.Conclusion:The majority opinion prevails, establishing that the assessable value of physician's samples supplied free of cost should be determined under Rule 4, using the deemed value under Section 4A. The appeal is to be listed before the regular Division Bench for disposal on merits.