valuation of sample missiles

[Kavali Ramanjeneyulu]

clarification may please be provided on the following issue.

M/s BDL is manufacturing missiles and selling to Army based on agreement price. Before clearance of missiles , the assessee is removing the sample missiles ( ex. 5 for one lot) testing purpose and during the test fire, the sample missiles are consumed. The assessee is removing the sample missiles on payment of duty on the cost construction method( cost o production + 10% of the cost) . Now, the question is whether the sample missiles are assessable to duty on cost construction method or on the basis of comparable goods under rule 4 of Valuation rules.I request clarification on the above issue with any legal provisions/case laws/clarifications.

[Rajagopalan Ranganathan]

Sir,

In my opinion the samples are to be assessed on the basis of transaction value of comparable goods. According to rule 8 of CENTRAL EXCISE VALUATION (DETERMINATION OF PRICE OF EXCISABLE GOODS) RULES, 2000 "where whole or part of the excisable goods are not sold by the assessee but are used for consumption by him or on his behalf in the production or manufacture of other articles, the value of such goods that are consumed shall be one hundred and ten percent of the cost of production or manufacture of such goods. This method is applicable only when excisable goods maufactured are consumed internally in the manufacture of the excisable goods. Since you clearing the excisable goods as samples then assessment is to be made either on the basis of trasaction value or transaction value of comparable goods.

[YAGAY andSUN]

Valuation Rules are required to be opted in sequential manner. It is a settled legal provision.

[KASTURI SETHI]

Goods (whether it is sample or otherwise) stands sold. Liable to pay CE duty on transactional value. You are required to follow Section 4 (1)(a) of Central Excise Excise Act. Also peruse Circular No. 975/9/2013-CX, dated 25-11-2013 for further guidance.

[Kavali Ramanjeneyulu]

sir, in this case, missiles are consumed in the test firing outside the factory (in a different city actually) and nothing will remain to be sold after firing. when there is not sale in respect of clearance of missiles for test firing , can we adopt transaction value as it is applicable only in cases where sale exists. If the missile is test fired successfully, that particular lot of missiles will be sold at the rate as mentioned in the agreement. Hence, clarification requested for is Whether rule 4 or rule 8 or Section 4(1)(a) is applicable is applicable in this case.

[KASTURI SETHI]

First of all it is not free sample. Secondly, Valuation Rules are not to be resorted to. Go through the following case law : (emphasis is on para nos. 5.1 and 5.2)

2017 (5) G.S.T.L. 300 (Tri. - Mumbai) = 2017 (2) TMI 309 - CESTAT MUMBAI MEDISPRAY LABORATORIES PVT. LTD. Versus COMMISSIONER OF C. EX., GOA

[Kavali Ramanjeneyulu]

Sir, in this case, the assessee will take his goods ( say 10 Nos) to some other place for proof firing purpose on payment of duty on cost construction basis. If the proof firing is satisfied with firing 5 Nos , he will bring back remaining 5 Nos and account for in the Production register and re-credit the duty already paid on cost construction basis. And while clearing the whole lot to which the sample belonged to , he will pay duty on the transaction value on the remaining 5 Nos . In this case, he is not giving the samples to their customer for proof firing. In the view of the matter, it may please be clarified which provisioni i.e. rule 4 or rule 8 or section 4 is applicable here.

[KASTURI SETHI]

The phrase, "in sequential manner" used by M/s.Yagay and Sun is very crucial and it is in the fitness of the things. It is applicable from Section, sub-sections and, thereafter, Rules/sub-rules irrespective of the fact whether it is to be applied in CGST Act or Central Excise Act.

[Kavali Ramanjeneyulu]

Sir, can we call it a transaction when there is no involvement of sale, buyer, price actually paid or payable by the buyer as the sample goods are not sent to the buyer but to the other premises of the manufacturer for test firing and the goods are consumed in the firing . In this situation, can we apply section 4, or rule 4 ? Pleae clarify.

[KASTURI SETHI]

On transaction value under Section 4 of Central Excise Act. Price agreed with the Army is on safer side.

[KASTURI SETHI]

When contracted price/value is available under Section 4 (1) (a), how can you resort to Valuation Rules ? An assessee is to resort to Valuation Rules only in the event of non-availability of transaction value under Section 4 (1)(a) of Central Excise Act. Cost structure is irrelevant in view of transaction value available under Section 4.

Valuation Rules are meant for determination of value under Section 4 (1) (b) and NOT for determination of value under Section 4(1)(a).

AI Summary

Transaction value applies where a contractual price exists, overriding valuation rules for test-fired sample missiles. Where contractual price for missiles exists, the transaction value principle governs excise valuation and valuation rules are secondary. Rule 8 (cost plus margin) is said to apply only to goods consumed internally in manufacture and is inapt for externally cleared samples consumed in testing. A sequential valuation approach-apply transaction value first, then valuation rules if unavailable-is emphasised, with discussion of accounting for consumed samples and duty recrediting when unsampled items are later sold at the contract price.