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CX - Valuation - Section 4 - Liquidated damages not to form part of transaction value: CESTAT Larger Bench

By TIOL News Service

CHENNAI, DEC 02, 2013: THE assessee was engaged in manufacture of electrical transformers. During the relevant period, respondent supplied transformers to various Distribution Companies (discoms) of the Andhra Pradesh State Electricity Board (APSEB). Clause (2) of the purchase order provides for variation in the price, by way of revision (upward or downward) ab initio, to accommodate variations in prices of raw materials in terms delineated in the said clause. Clause (12) of the purchase order stipulates that for supplies made beyond the agreed delivery schedule, penalty shall be levied for an amount equivalent to ½% of the value of the material not delivered within the prescribed time limit for every week of delay or part thereof, subject to a maximum of 5% of the total contract value. This clause also contains a provision which enables the purchaser (APSEB) to purchase the balance quantity (undelivered within the delivery schedule) from the open market and recover the expenditure incurred thereof from the assessee.

The period in dispute is after 1.7.2000, when the new valuation provisions- transaction value - came into existence.

Section 4 (3) (d) of the Central Excise Act defines the expression "transaction value" as follows;

"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."

The issue before the Larger Bench is:

"Whether any deduction claimed by the buyer of excisable goods as compensation for the delay in the supply of the goods by its manufacturer (assessee) under the contract between them, during any period after 01.07.2000, is liable to be included in the assessable value of the goods under Section 4 of the Central Excise Act?"

The Larger Bench observed,

"In our considered view, post the amendment of Section 4 and the statutory definition of 'transaction value' in sub-section (3) (d) thereof, of the Act, the eventual value payable after factoring in any liquidated damages contractually stipulated for delayed supply would be the transaction value and this value would be the value relevant for levy of duty.

On the aforesaid analysis, we answer the reference by holding that wherever the assessee, as per the terms of the contract and on account of delay in delivery of manufactured goods is liable to pay a lesser amount than the generically agreed price as a result of a clause (in the agreement), stipulating variation in the price, on account a the liability to "liquidated damages", irrespective of whether the clause is titled "penalty" or "liquidated damages", the resultant price would be the “transaction value”; and such value shall be liable to levy of excise duty, at the applicable rate."

(See 2013-TIOL-1794-CESTAT-MAD-LB)


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