Central Excise Update

Cash Discount deductible from Transaction Value under new Section 4 also – Supreme Court in yesterday's judgement

The Supreme Court, on 25 August, 2015, has held that cash discount isdeductible from transaction value under new Section 4 of Central Excise Act, 1944 also as amended in the year 2000. [PurolatorIndiaLtd.vs.Commissionerof CentralExcise]

· According to the Supreme Court, for excisable goods, determination of price is only “at the time of removal” and this basic feature has not changed despite amendments in 1973 and 2000.

· The Supreme Court held that under Section 4, one needs to arrive at the assessable value based on transaction value as at the time of clearance of goods from the factory or depot. It held that basis for transaction value is the agreed contractual price and the term “whensold” does not indicate time at which goods are sold but goods are subject matter of an agreement of sale.

· The Apex Court held that cash discount is something known at or prior to clearance of goods as the same is contained in sale agreement and therefore, such cash discount must be deducted from sale price to arrive at value“at the time of removal”.

· The Supreme Court relied upon its own judgments in the cases of Union of India v. Bombay Tyre International and Government of India v. Madras Rubber Factory wherein the Supreme Court allowed deduction of trade discounts and year-end discounts & prompt payment discount respectively. The Court noted that ratio of these rulings will remain valid under amended Section 4 also.

· The Tribunal in its order had held if the buyer makes the prompt payment which entitles him to discount, the sale price will stand reduced by the amount of cash discount, whereas if payment is not made within the stipulated time, higher price recovered from the buyer will be considered as the assessable value. On this issue of cash discount, the Supreme Court set aside the order of the Tribunal.

· In this case, the Supreme Court was concerned with the period prior to as well as post 2000 i.e. both the normal price and the transaction value regimes. It distinguished the judgment rendered in the case of Commissioner of Central Excise v. Super Synotex wherein the Apex Court had dealt with amount of sales tax retained by the assessee on account of incentive scheme.

The conclusions emerging from this judgment are:

- Price at the time of removal is relevant under new Section 4 also.

- Cash discount is deductible from transaction value under new Section 4 also.

- Basis for transaction value is price as agreed or contracted as per sale agreement.

- Expression “actually paid or payable for the goods, when sold” in Section 4 means whatever is agreed to as the price whether such price has been paid or part paid or not paid at all.

- Price at the time of removal is not discounted or not determined is not fatal to deduction of cash discount

- CA Kasliwal Ambar