Central Excise Circular No. 671 dated 9^th October 2002

I am directed to say that vide Sl. No 3(b) of Circular No. 643/ 34/ 2002 - CX dt.1.7.2002 it had, inter alia, been clarified that the amount of sales tax that could be deducted from the sale price of a commodity to arrive at the assessable value would be the net sales tax i.e. after deducting the set-off admissible. The manner of calculation was also illustrated in the Circular through an example.

2.     The practice in the field prior to the issue of the Circular dt.1.7.2002 was that the sales tax actually billed/payable as per the invoice was allowed as deduction from the sale price, ignoring any set-off available. This practice was in accordance with Board�s earlier Circular No. 2/ 94 - CX.1 dt.11.1.94. This circular of 1994 was issued after seeking the advice of the then Attorney General of India. The advice of the Attorney General was based on the wordings of Explanation to clause d (ii) of sub-section (4) of the erstwhile section 4. This Explanation stated that while calculating the effective duty of excise payable on any goods (for deduction from the normal sale price to arrive at the assessable value) set-off notifications were to be ignored, but other notifications were to be taken into consideration. Though this Explanation was in relation to determination of effective duty of excise only, the Attorney General had applied the logic to sales tax also.

3.     While framing the new section 4 effective from 1.7.2000, and introducing the concept of �transaction value�, the above Explanation was deleted, primarily on the consideration that it had become redundant since no central excise set-off notifications existed any longer in the Central Excise Tariff. In view of the deletion of this Explanation the Circular of 1994 issued on the basis of Attorney General�s opinion lost its relevance.

4.     The Board has received a number of representations from various Chambers of Commerce, Associations, assessees as well as field formations, on this issue.

5.     The matter has been examined in the Board. It is observed that assessees charge and collect sales tax from their buyers at rates notified by the State Government for different commodities. For manufacture of excisable goods, assessees procure raw materials, in some States, by paying sales tax/ purchase tax on them (in some States, like New Delhi, raw materials are purchased against forms ST-1/ ST-35 without paying any tax). While depositing sales tax with the Sales Tax Deptt. (On a monthly or quarterly basis), the assessee deposits only the net amount of sales tax after deducting set-off/rebate admissible, either in full or in part, on the sales tax/purchase tax paid on the raw materials during the said month/quarter. The sales tax set-off in such cases, therefore, does not work like the central excise set-off notifications where one-to-one relationship is to be established between the finished product and the raw materials and the assessee is allowed to charge only the net central excise duty from the buyer in the invoice. The difference between the set-off operating in respect of central excise duty and that for sales tax can be best illustrated through an example. If the sales tax on a product �A� of value Rs. 100/- is, say, 5% and the set off available in respect of the purchase tax/sales tax paid on inputs going into the manufacture of the product is, say, Re 1/-, then the sales tax law permits the assessee to recover sales tax of Rs.5/-. But, while paying to the sales tax deptt. he deposits an amount of Rs. 5 - 1= Rs. 4 only. On the central excise side, under similar circumstances, the central excise duty payable would have been Rs. 5 - 1 =Rs. 4, in view of the set-off notification, and the assessee would recover an amount of Rs 4 only from the buyer as Central excise duty. Thus, it is seen that the set-off scheme in respect of sales tax operates in these cases somewhat like the CENVAT scheme, which does not have the effect of changing the rate of duty payable on the finished product.

6.     Therefore, since the set-off scheme of sales tax does not change the rate of sales tax payable/ chargeable on the finished goods, the set-off is not to be taken into account for calculating the amount of sales tax permissible as abatement for arriving at the assessable value u/s.4. In other words only that amount of sales tax will be permissible as deduction under section 4 as is equal to the amount legally permissible under the local sales tax laws to be charged/ billed from the customer/ buyer.

7.     In case some States require the set-off to be adjusted consignment-wise, (on the lines of set-off notifications on the central excise side) the net sales tax (i.e. the amount permissible to be billed) will only be eligible for abatement as already clarified at Sl. No. 3 (b) of Board�s Circular dated 1.7.2002.

8.     Board�s Circular No. 643/ 34/ 2002 - CX dated 1.7.2002 may be considered as modified accordingly.

9.     Suitable Trade notices may be issued for the information of the Trade.

10.   Hindi version will follow.

11.   Receipt of these instructions may be acknowledged indicating the date of receipt.