2008 (9) TMI 98 - AT - Central Excise

Majority holds Rule 4 requires pro rata MRP valuation for physician samples under Section 4A; dissent favoured Rule 8

A Division Bench of CESTAT split: by majority the Bench held Rule 4 governs valuation of physician's samples and their assessable value must be determined ... Valuation of physician’s sample of medicines - supplied free of cost, not being sold by the manufacturer - applicability of Rule 8 - determination of the value of excisable goods using reasonable means consistent with principles and general provisions of these Rules and sub-section (1) of Section 4 - Difference of opinion - Application of previously decided by the Larger Bench in Blue Cross Laboratories v. C.C.E., Mumbai [2006 (8) TMI 220 - CESTAT, 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 - Whether the said decision would be applicable in the context of the new Valuation Rules and especially for the period post January, 2005, when the normal assessable value of the regular sale packs, in terms of Section 4 of the Central Excise Act was not available, such medicines having been specified with effect from the said date under the provisions of Section 4A and attracting duty on the basis of the maximum retail sale price Order per: Archana Wadhwa, Member (J) - HELD THAT:- If the value is required to be first determined under Section 4, for determining the value of physician's samples, the entire legislative intent to avoid the valuation dispute, by specifying the medicines under Section 4A would get defeated. The same would also unnecessarily invite litigation between the Revenue and the assessee as regards the correct value of retail packs under Section 4, which otherwise is not required to be arrived at for the purpose of payment of duty on the said retail packs. This, in our view, does not seem to be reasonable concept and principle to be adopted in terms of Rule 11. Invocation of Rule 4 would mean that value of the physician's sample, whatever small percentage of the same may be, which is already included in the value of the retail sale pack, would again get included in the value of physician's samples. It may not be justifiable and reasonable. It can be safely observed and held that if there is no normal price of the retail packs (except MRP), there can be no value as per definition of value in terms of provisions of Rule 2(c) of the Valuation Rules, 2000 and if there is no value, the provisions of Rule 4 will not be attracted and hence cannot be applied. In the earlier decision of the Larger Bench of the Tribunal in the case of Blue Cross Laboratories [2006 (8) TMI 220 - CESTAT, MUMBAI], the basis for adoption of cost of production was not accepted, as contained in the erstwhile provisions of Rule 6(b)(ii) of the Central Excise Valuation Rules, Inasmuch as, the provisions as contained in Rule 6(b)(i) providing for adoption of comparable goods, price was found to be applicable. If that was so, the provisions of Rule 6(b)(ii) were held to be inapplicable, which were, later in seriatim. In new Central Excise Rules, we find that no Rule deals with determining the value on the basis of the value of comparable goods. Rule 8 only provides for arriving at the value on the basis of 110% of the cost of production. Apart from the fact that having ruled out the applicability of Rule 4, Rule 8 is the only left Rule required to be adopted, we note that adoption of the cost of manufacture with addition of margin of profit, which would have been normally earned by the manufacturer on such goods, has been adopted for arriving at the assessable value of the goods by various decisions as also by the Board's itself by way of issuance of various Circulars. As such, we are of the view that adoption of the assess able value of the physician's samples based upon the cost of production along with margin of profit, in terms of the said Rules (now quantified at 10%) is the reasonable method and consistent with the principles of valuation as reflected in Section 4 and various Rules. We accordingly hold that the assessable value of physician's samples supplied free of cost is to be arrived at in terms of the provisions of Rule 8 of Central Excise Valuation Rules, 2000. 'Reference is answered accordingly. The appeal papers may be transferred to the original Bench for disposal of the appeal. Order per: S.N. Jha, President - HELD THAT:- It is relevant to point out that under Section 4A of the Act, the Central Government may by notification specify goods, in relation to which there is a requirement under the Standard of Weights and Measures Act, 1976, or the rules made thereunder or und any other law for the time being in force, to declare the retail sale price of such goods on the package thereof. On issuance of such notification the provisions sub-section (2) of Section 4A become applicable to such goods. Under sub-section (2) of Section 4A, notwithstanding the provisions of Section 4, the retail sale price i.e. the maximum retail price (MRP) is deemed to be the value of said goods. Both sides, again, very fairly agreed that the provisions of Rules 5, 6, 7, 9 & 10 are not applicable and, therefore, the answer has to be found in either Rule 4 or Rule 8. According to the parties, Rules 4 and 8 are the competing rules applicability whereof is to be decided. The fact that medicines/medicaments are specified goods within the meaning of Section 4A of the Act since January, 2005, does not appear to have been brought to the notice of the Bombay High Court in the case of Indian Drugs Manufacturer's Association v. Union of India [2006 (9) TMI 94 - BOMBAY HIGH COURT], but this would hardly make any difference, for, the MRP is to be treated as value of the goods i.e. deemed value in place of the transaction value under Section 4(1) (a) and it does not take the goods out of the pale of Rule 4. Besides, it is to be kept in mind that the Bombay High Court was seized of a legal issue in the context of challenge to the validity of a circular issued on 25-4-2005, that is, in the aftermath of the notification under Section 4A(1). I am of the opinion that notwithstanding the non-availability of the normal sale price under Section 4(1)(a) of the Act, by reason of the goods being specified under Section 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 Rule 4 and the decision of the Larger Bench in Blue Cross Laboratories Ltd. 's case (supra) mutatis mutandis continues to be good law. The reference is accordingly answered in the affirmative in favour of the Revenue and against the appellant/assessee. Order per: B.S.V. Murthy, Member (T) - I agree with Hon'ble President. The appeal may now be listed before the regular Division Bench for disposal on merits. 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.